THE DEPOSITORIES ACT 1996

WHAT A DEPOSITORY IS:

A “Depository” is an institution that receives deposits and holds them in trust for the public, with the condition that it exercises reasonable care and restores it to the person on demand. It holds securities of investors in an electronic form, and it is of paramount importance in the current market scenario where is has been held mandatory to hold securities in demat form. Demat (Dematerialized) format of securities means that these are held in electronic form, and without any actual paper document involved, and the details of trading are all entered on the electronic document. The Depositories Act was passed by the SEBI in 1996, and it deals with the regulation of d\Depositories and incidental matters.

KEY FEATURES OF THE ACT:

·         The Depository must be a company registered under the Companies Act, and a Certificate of Registration by SEBI.

·         Commencement of business only after obtaining Certificate from SEBI

·         Requires “Participants” registered under the SEBI Act

·         Depository and Participant must enter into an Agreement, and a person wising to avail Depository services must enter into the necessary agreement through a Participant

·         Certificate of Security to be surrendered to Issuer, and the same to be cancelled; and the Depository to be substituted as the registered owner, in records; the person will become Beneficial Owner in the Depository’s records

·         Transfer of securities to be registered with the Depository

·         Every subscriber to a security has an option to receive the Certificate or maintain it with Depository

·         Rights and liabilities of demat securities also lie with the Beneficial Owner

·         Securities held in Depository can be pledged or hypothecated

·         Information of transfer of securities, to be communicated between the Depository and Issuer

·         Beneficial Owner has option to opt out of depository

·         Liability to indemnify loss to Beneficial Owner, by negligence of Depository

·         SEBI has power of enquiry over securities held in Depositories, to give directions.

·         Specifies Penalties to persons or companies contravening provisions of the Act

·         Central Govt has the power to grant immunity from prosecution to any person, for violation of provisions of the Act

·         Provision to appeal to the Central Govt and the Securities Appellate Tribunal, and to the Supreme Court

·         Depositories can make their own bye-laws with the previous approval of the Board

BENEFITS OF DEPOSITORIES                                                                                                                          

·         Less risk of loss or wear and tear

·         Easier for safekeeping

·         Easier transfer

·         Better monitoring by SEBI

·         Reduced transaction costs, etc.

MAJOR CASE LAWS (INDIAN KANOON)

·         Probir Kumar Misra v. Ramani Ramaswamy

·         Northern Projects Ltd. v. Blue Coast Hotels and Resorts Ltd

THE COMPANIES ACT 2013

It is the primary legislation relating to the incorporation, composition, functioning, and compliance requirements of companies in India. The previous Companies Act of 1956 had to undergo numerous amendments over the past several decades, especially after the post-liberalization era that came after the 1990s. The Central Govt subsequently enacted the new Companies Act in 2013, to replace the old one and with an object to consolidate and amend the relating to companies. It is the primary legislation that you have to refer to, if you are planning to incorporate a company in India.

A SUMMARY OF THE KEY PROVISIONS

Ø  The Act has 29 Chapters, divided into 464 Sections, and 7 Schedules.

Ø  A company comes into being by way of its incorporation, and it has to follow the requirements and mandates under the Act, such as the application to be made to the Registrar of Companies (RoC), the creation of the Memorandum of Association and Articles of Association, the issue of certificate of Incorporation by the RoC, setting up of a Registered Office, etc. before it can commence its business.

Ø  Once it is all set to commence business, the company now has to raise capital, and the Act provides for this to be done by offering its securities either to the public, or through private placements. The general public are entitled to purchase shares of a Public Ltd Co. only, and a Pvt Ltd Co. cannot offer its securities to the public. The Act lays down strict provisions regarding the manner and eligibility to make an offer to the public, such as a number of detailed disclosure to be made in the Prospectus, the regulatory requirements to be satisfied to make such issue, etc. (also refer ICDR Regulations, 2009). On the other hand, a Private Placement is an offer of securities to certain specified persons only, without making it open for the general public, and the regulatory controls are less stringent here.

Ø  The raising of capital can be done by issuing either Shares or Debentures of the company. A Share in a company gives a certain membership status to the purchasers, and they pay money in return for the Shares. Shares are further divided into Equity Shares and Preference Shares, and the equity shareholders get dividends out of the profits made by the company, and not any fixed amount of payment; while preference shareholders get a fixed dividend from time to time. Debentures are instruments wherein a creditor lends money to the company, and receives in return, a Certificate acknowledging the debt, and on the stipulated time, the debt will be paid back with interest. The Act provides for the different requirements and procedures under each of these.

Ø  The Company may also accept deposits from its members, or take a loan from a credit by creating a charge on the assets of the company, in accordance with the provisions of the Act.

Ø  The mode of management of the company, including the requirement to file Annual Returns, need to file declaration of any beneficial interest of any member in any Shares, maintenance of Records, Voting Rights and its procedure, kinds of Resolutions passed in meetings, etc. are also enumerated in the Act.

Ø  The manner in which dividends are to be declared and paid to the shareholders.

Ø  The mandates regarding maintenance of accounts of the company; and the appointment of auditors and manner of audit are given in the Act.

Ø  The company must have a Board of Directors, and their appointment, qualifications, duties, and prohibitions are enumerated in the Act. The Board of Directors must hold meetings from time to time, and pass resolutions on certain matters; the Cat provides for the powers of Directors, Related Party Transactions, etc. The appointment and remuneration of managerial personnel is also provided in the Act.

Ø  A company is liable to be under an inspection of document or an inquiry/investigation by the authorities.

Ø  After having dealt with the manner of functioning of companies too, the Act lays down detailed Chapters on the winding up (voluntary or by Tribunal); compromise/arrangement/amalgamation with another company; revival and rehabilitation of sick companies, etc.

Ø  Special provisions regarding Govt companies and Companies incorporated outside India. The Act also provides for the setting up of NCLT, Appellate Tribunal, and Special Courts.

HIGHLIGHTS OF THE 2013 ACT

·      Maintenance of documents in electric form allowed

·      Corporate Social Responsibility made mandatory

·      One Person Company allowed

·      Independent Directors and Women Directors made mandatory in some cases

·      Whistle-Blower policy facilitated; ethical corporate behaviour promoted

·      Better protection to minority shareholders – Exit option made available

·      NCLT established to hear company related matters; replaced the Company Law Board

RELATED STATUTORY REFERENCES (for company compliances) (INDIAN KANOON)

·      ICDR, 2009 by SEBI

·      SEBI ACT

·      LODR by SEBI

·      SCRA

·      Depositories Act

·      SAST Regulations, 2011 by SEBI

PROCEDURE OF ISSUE OF SHARES

The Companies Act 2013 define shares, ‘a share in the share capital of a company and includes stock’. Shares is a type of security and in layman’s definition it “one of the equal parts into which a company's capital is divided, entitling the holder to a proportion of the profits” The Companies Act gives a set procedure for issuing of shares under the act.  There are four ways in which shares can be issued :

1. Public Issue

2. Private Placement

3. Rights Issue

4. Bonus Issue

PROCEDURE FOR ISSUING OF SHARES:

A Public company can issue shares by way of public issue, rights issue or bonus issue and private placement. For public issuing of shares, the following steps are required to be fulfilled:

1.   The company must be a registered company with the registrar.

2.   Prospectus bearing the invitation for buying of shares of the company to the public.

3.   The prospectus must be submitted to the registrar (SEBI) before publishing.

4.   The prospectus should have the required information about the company like:

❖    Name of the Directors

❖    Terms of issue

❖    Minimum subscription

❖    Type of investment

❖    Previous years performance

❖    Opening and closing dates

❖    Application form and requisite fees

❖    Allotment

❖    Call-on dates

❖    Bank details for deposit.

5.   The Registrar after confirming amenability publishes the prospectus

6.   After selecting the applicants for allotment of shares, a regret letter is sent to everyone else and share certificate is issued after the share allotment is done.

7.   The remaining shares are then allocated on call on dates. Depending on the number of shares, the calls are made for the remaining shares.

STATUTORY LAW REFERENCE (INDIAN KANOON):

▪     Section 2(84), Section 23, Section 26, Section 42 and Section 60(1) of Companies Act

2013.

▪     Companies (Prospectus and Allotment of Securities) Rules, 2014.

▪     Securities and Exchange Board of India Act, 1992.

LANDMARK JUDGEMENTS:

▪     I.T Cube India (P) Ltd vs. I.T Cube Inc (2006) 69 SCL 319 (kar)

▪     Khoday Distilleries v. CIT, Civil Appeal 6654/2008

▪     Vodafone India Services Private Limited v. UOI (WP No.871 of 2014, Bombay HC

IMPORTANT DO (S) AND DON’T (S):

▪     Always deal with the market intermediaries registered with SEBI / stock exchanges.

▪     Collect photocopies of all documents executed for registration as a client, immediately

on its execution. Ensure that the documents or forms for registration are fully filled in.

▪     Always mention all the details clearly in the prospectus and certificate

▪     Mention clearly what is the mode of issue of shares.

▪     That the requisite procedure mentioned in the act is followed.