Enhanced Due Diligence

HAPPY CHRISTMAS!

Merry Christmas and Happy New Year! We wish you and your business flourish with success and happiness. We are also proud to inform that Zappy have received Quality in Business Certificate by the International Trade Council and been awarded India Startup 500 Awards by India 5000 Awards.

In this edition we will be seeing about Enhanced Due Diligence on DEMAT. Our usual Legal terms and News Bites related to notifications by MCA, SEBI, RBI, IT and GST will follow the article.

CS Saranya Deivasigamani,
CEO

ENHANCED DUE DILIGENCE ON DEMAT

Securities and Exchange Board of India (SEBI) has directed all listed companies to provide data of their members holding shares in physical mode including the name of shareholders, folio numbers, certificate numbers, distinctive numbers and PAN as on March 31, 2019 to the depositories, latest by December 31, 2019. On the other hand, depositories, are required to capture the relevant details from the static database, as well as validate any dematerialization request received after December 31, 2019.

In order to avoid fake certificates, forging transfer or losing the physical certificate, SEBI issued a circular on November 5, 2019 asking depositories, recognised stock exchanges, and all listed companies to conduct enhanced due diligence for dematerialization of physical shares.

Enhanced Due Diligence

In general context, Enhanced Due Diligence is a KYC process that provides a greater level of scrutiny of potential business partnerships and highlights risk that cannot be detected by regular Due Diligence.

Enhanced Due Diligence on DEMAT

Extinction of physical mode: In terms of Regulation 40 of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (IV Amendment) Regulations, 2018 (LODR), transfer of securities held in physical mode is not permitted w.e.f. April 01, 2019. Standardised norms with respect to documentation / procedure for transfer of physical securities were issued vide SEBI circular No. SEBI/HO/MIRSD/DOS3/CIR/P/2018/139 dated November 06, 2018.

Due Diligence Process:

To augment the integrity of the system in processing of dematerialization request in respect of the remaining physical shares, the Depositories and the listed companies / RTAs are directed to implement the following due diligence process:

I. All Listed companies or their RTAs shall provide data of their members holding shares in physical mode, viz the name of shareholders, folio numbers, certificate numbers, distinctive numbers and PAN etc. (hereinafter, static database) as on March 31, 2019, to the Depositories, latest by December 31, 2019.

The common format for this data shall be specified jointly by the Depositories and be communicated to Issuer companies / their RTAs.

II. Depositories shall capture the relevant details from the static database as per clause I above and put in place systems to validate any dematerialization request received after December 31, 2019. Accordingly, the depository system shall retrieve the shareholder name(s) recorded against the folio number and certificate number in Static Data for each DRN request received after this date and validate the same against the demat account holder(s) name as available in the records of the Depositories.

III. In case of mismatch of name on the share certificate(s) vis-à-vis name of the beneficial owner of demat account, the depository system shall generate flag / alert. In instances, where such flags / alerts have been generated, the following additional documents explaining the difference in name, as prescribed in paragraph 2 (b) of the cited SEBI circular of November 06, 2018, shall be sought, namely

i. Copy of Passport

ii. Copy of legally recognized marriage certificate

iii. Copy of gazette notification regarding change in name

iv. Copy of Aadhar Card

IV. In the case of complete mismatch of name on the share certificate(s) vis-à-vis name of the beneficial owner of demat account, the applicant may approach the

Issuer company / RTA for establishing his title / ownership.

Depositories Duties:

a) make necessary amendments to the relevant byelaws, rules and regulations for the implementation of the above directions, as may be applicable

b) bring the provisions of this circular to the notice of their participants and also disseminate the same on their websites; and

c) communicate to SEBI, the status of implementation of the provisions of this circular in their Monthly Report.

Today, holding shares in Demat form is not mandatory, but certain instances where trades falls under Group A and B shares under BSE are required compulsory to Demat for transfer and delivery. Also selling shares and purchasing IPO now require a Demat account. What’s more is that new company issuing shares (IPOs) are being issued in Demat mode only.

Legal Terms

Intestate

adv. Not having made a will before one dies.

MCA Updates

SEBI Updates

RBI Updates

IT Updates

GST Updates

Expert Section

The expert section will provide the articles written and submitted by other professionals to participate in Zappy News on the topics that were recently discussed here. This section will add on when and where an article is received.

This month contribution is from CS. Kunal Chauhan.

Independent Directors

Persistence Paid Off

I am glad to inform that I am an Associate Company Secretary w.e.f. November 15, 2019 and Zappy has been nominated for India 500 Startups Award, 2019 by India 5000 Awards.

In this edition we will be seeing about Nidhi Rules and Amendments thereof. Our usual Legal terms and News Bites related to notifications by MCA, SEBI, RBI, IT and GST will follow the article.

CS Saranya Deivasigamani,
CEO

Independent Directors

Independent director is someone who do not have any material or pecuniary relationship with the Board of Directors of a Company. According to Section 149 (4) of the Companies Act, 2013, Every listed public company shall have at least one-third of the total number of directors as independent directors and the Central Government may prescribe the minimum number of independent directors in case of any class or classes of public companies.

The Act also prescribes that an independent director may be selected from a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors, maintained by any body, institute or association, as may by notified by the Central Government, having expertise in creation and maintenance of such data bank and put on their website for the use by the company making the appointment of such directors. To facilitate the data bank, the Central Government has authorised Indian Institute of Corporate Affairs to maintain the data bank and conduct eligibility test to the independent directors.

On October 22, 2019, the Central Government further amended the Companies (Appointment and Qualification of Directors) Rules, 2014, namely that details the procedures and qualification required for appointment of Independent Directors. These rules will be effective from 1st day of December, 2019.

In the Companies (Appointment and Qualification of Directors) Rules, 2014 (hereinafter referred to as the principal rules), for rule 6 that described about the creation and maintenance of databank of independent directors has been replaced with more specific rules, namely: –

Compliances required by a person eligible and willing to be appointed as an independent director.─

(1) Every individual –

(a) who has been appointed as an independent director in a company, on the date of commencement of the Companies (Appointment and Qualification of Directors) Fifth Amendment Rules, 2019, shall within a period of three months from such commencement; or

(b) who intends to get appointed as an independent director in a company after such commencement, shall before such appointment,

apply online to the institute for inclusion of his name in the data bank for a period of one year or five years or for his life-time, and from time to time take steps as specified in sub-rule (2), till he continues to hold the office of an independent director in any company:

Provided that any individual, including an individual not having DIN, may voluntarily apply to the institute for inclusion of his name in the data bank.

(2) Every individual whose name has been so included in the data bank shall file an application for renewal for a further period of one year or five years or for his life-time, within a period of thirty days from the date of expiry of the period upto which the name of the individual was applied for inclusion in the data bank, failing which, the name of such individual shall stand removed from the data bank of the institute:

Provided that no application for renewal shall be filed by an individual who has paid life-time fees for inclusion of his name in the data bank.

(3) Every independent director shall submit a declaration of compliance of sub-rule (1) and sub-rule (2) to the Board, each time he submits the declaration required under sub-section (7) of section 149 of the Act.

(4) Every individual whose name is so included in the data bank under sub-rule (1) shall pass an online proficiency self-assessment test conducted by the institute within a period of one year from the date of inclusion of his name in the data bank, failing which, his name shall stand removed from the databank of the institute:

Provided that the individual who has served for a period of not less than ten years as on the date of inclusion of his name in the databank as director or key managerial personnel in a listed public company or in an unlisted public company having a paid-up share capital of rupees ten crore or more shall not be required to pass the online proficiency self-assessment test:

Provided further that for the purpose of calculation of the period of ten years referred to in the first proviso, any period during which an individual was acting as a director or as a key managerial personnel in two or more companies at the same time shall be counted only once.

Explanation: For the purposes of this rule,-

(a) the expression “institute” means the ‘Indian Institute of Corporate Affairs at Manesar’ notified under sub-section (1) of section 150 of the Companies Act, 2013 as the institute for the creation and maintenance of data bank of Independent Directors;

(b) an individual who has obtained a score of not less than sixty percent. in aggregate in the online proficiency self-assessment test shall be deemed to have passed such test;

(c) there shall be no limit on the number of attempts an individual may take for passing the online proficiency self-assessment test.”

It is no more easy to become an Independent Director of a Public Company. The existing Independent Directors or the new aspirants have to be aware of not only their responsibilities but also have a little internet proficiency to complete the online examination.

Legal Term

Canonical

adv. Authoritative or standard; conforming to an accepted rule or procedure.

MCA Updates

Notification – Section 396 dt 30.10.2019 for ROC Jammu -Jurisdiction of UT of JK and UT of Ladakh
Notification dt 30.10.2019-ROC Jammu-Jurisdiction of Adjudication of Penalties-UT of JK and UT
Notification dt 30.10.2019-Jurisidiction of RD, New Delhi -UT of JK and UT of Ladakh.

SEBI Updates

RBI Updates

Compensation of Whole Time Directors/ Chief Executive Officers/ Material Risk Takers and Control Function staff.

IT Updates

No Major Updates.

GST Updates

GST Practitioner Examination.

Depository Receipts

Don’t Rush in Peek Hours

Don’t rush in peek hours and stuck up with system congestion. Act quick and complete all the Annual Filings in time without postponing it to the last date. Though it is practically un-imaginable, let us try to do our best and complete them soon.

In this edition we will be seeing about issue and transfer of Depository receipts as amended on 10th October, 2019. Our usual Legal terms and News Bites related to notifications by MCA, SEBI, RBI, IT and GST will follow the article.

Saranya Deivasigamani,
CEO

Framework for issue of Depository Receipts

The Stock Exchange Board of India (SEBI) take and initiative followed by the budget announcement, that the Board will allow listed Indian companies to issue either equity, or debt, to investors on the overseas stock exchanges such as NYSE, Nasdaq and Hong Kong Stock Exchange.

The Board has drawn a framework for issue of Depository Receipt in reference with Section 41 of the Companies Act, 2013, Companies (Issue of Global Depository Receipts) Rules, 2014 (‘GDR Rules’), the Depository Receipts Scheme, 2014 (‘DR Scheme’), Reserve Bank of India (‘RBI’) notification dated December 15, 2014, Central Government notification dated September 18, 2019 and Central Government notification dated October 07, 2019.

SEBI allows only Listed Company to issue or transfer Permissible Securities, for the purpose of issue of Depository Receipts (‘DRs’), subject to compliance with certain requirements.

Depository Receipt

As per Section 2(44) of the Companies Act, 2013, Depository Receipts (‘DRs’) means a foreign currency denominated instrument, listed on an international exchange, issued by a foreign depository in a permissible jurisdiction on the back of permissible securities issued or transferred to a domestic custodian and includes ‘global depository receipt’.

Foreign Depository

Foreign Depository (’FD’) means a person which:

(a) is not prohibited from acquiring permissible securities;

(b) is regulated in any of the Permissible Jurisdiction; and

Eligibility

1. The Company should have been complied with SEBI (LODR), 2015.

2. Listed Company shall be eligible to issue or transfer Permissible Securities, for the purpose of issue of DRs, only if:

the Listed Company, any of its promoters, promoter group or directors or selling or transferring shareholders and their associates are not debarred from accessing the capital market by SEBI, not a wilful defaulter, not a fugitive economic offender.

Provided that, these restrictions above shall not apply to the persons or entities whose period of debarment is already over as on the date of filing of the document.

‘Transfer of permissible securities by existing holders’ means deposit of existing Permissible Securities of the Listed Company with a Domestic Custodian, for the purpose of issue of DRs, pursuant to formal agreement(s) among the Listed Company and the Foreign Depository.

The equity shareholders of the Listed Company shall tender their shares for participation in such listing of DRs.

Subsequent issue and listing of DRs, shall be done by passing a special resolution in terms of GDR Rules.

The Listed Company may seek in-principle and final approval from Recognized Stock Exchange as well as International Exchange. However, such issue or transfer of Permissible Securities for the purpose of issue of DRs shall be subsequent to, the receipt of trading approval from the Recognized Stock Exchange for the public offer.

Permissible Jurisdictions and International Exchanges
Permissible Jurisdiction shall mean jurisdictions as may be notified by the Central Government from time to time, pursuant to notification no. G.S.R. 669(E) dated September 18, 2019 in respect of sub-rule 1 of rule 9 of Prevention of Money-Laundering (Maintenance of Records) Rules, 2005.

International Exchange(s) shall mean exchange(s) as may be notified by SEBI from time to time.

Obligation of the Listed Company

The obligation of the Listed Company is to:

Comply with extant laws relating to issuance of DRs, including, the Companies Act, 2013, the Foreign Exchange Management Act, 1999 (‘FEMA’), Prevention of Money-Laundering Act, 2002, and rules and regulations made thereunder.
Ensure that the DRs are issued only with underlying Permissible Securities.
Ensure that aggregate of the Permissible Securities is in compliance with the limits mentioned in FEMA.
Ensure that the agreement made with Foreign Depository is in compliance with limits mentioned in FEMA.
Through an intermediary, file a copy of the initial document with SEBI and Recognized Stock Exchange, receive comments within 7 days and deemed to have no comments if not received any response from SEBI. Also the Stock Exchange shall take into consideration of the SEBI’s comments and pass in-principle approval within 15 working days.
Ensure the public disclosure is made within 24 hours of date of filing.

Obligation of Indian Depository, Foreign Depository and Domestic Custodian

Indian Depositories, shall develop a system to ensure that aggregate holding of DR holders along with their holding, if any, through offshore derivative instruments and holding as a Foreign Portfolio Investor belonging to same investor group shall not exceed the limit on foreign holding under the FEMA and applicable SEBI Regulations.

The Foreign Depository shall not issue or pre-release the DRs unless the Domestic Custodian as confirmed the receipt of underlying Permissible Securities.

Domestic Custodian shall maintain records in respect of, and report to, Indian depositories all transactions in the nature of issue and cancellation of depository receipts, for the purpose of monitoring limits.

While working on DRs, we should not only check the laws of India, but also the jurisdiction where the Foreign Depository is registered.

Legal Terms

in pari delicto

adv. Latin for “in equal fault,” which means that two (or more) people are all at fault or are all guilty of a crime.

MCA Updates

Companies (Meetings of Board and its Powers) Amendment Rules 2019.

SEBI Updates

RBI Updates

No major updates,

IT Updates

GST Updates

The Nidhi (Amendment) Rules, 2019

4 Successful Years of ZappyNews

We hope that 4 years of Zappy News provided you various insights on latest notifications and amendments in Companies Act, Income Tax, SEBI and RBI. We promise to provide you valid updates that will help you improve your knowledge bank and excel in the market.

In this edition we will be seeing about another amendment made effective on the Independence day that is the Nidhi (Amendment) Rules 2019 . Our usual Legal terms and News Bites related to notifications by MCA, SEBI, RBI, IT and GST will follow the article.

Saranya Deivasigamani,
CEO

The Nidhi (Amendment) Rules, 2019

The Central Government in its notification dated 1st July 2019 come up with the Nidhi (Amendment) Rules 2019 which are made effective from 15th August 2019.

Key Highlights of the Amendments

Definition of the term ‘Nidhi’

The Nidhi (Amendment) Rules 2019, has inserted a new sub-rule under rule 3 as sub-rule (da) to provide definition of the term ‘Nidhi’ which was not defined anywhere earlier. As per rule 3 (da), ‘Nidhi’ means a company which fulfils the rules made by the Central Government and which has been incorporated as Nidhi with the following objects:

Cultivating/educating the habit of thrift and savings among the members; and
Receiving deposits from and lending to its members only for their mutual benefits.

Rule 3A – Declaration of Nidhis

Another new rule 3A has been inserted that provides a declaration for the public company. If the public company wants to declare it as Nidhi Company, then it can make an application in Form NDH-4. The Central Government, after being satisfied that the company has met all the requirements, shall notify it as Nidhi company in the official Gazette.

The Nidhi company incorporated under the Act on or after the commencement of Nidhi Amendment Rules 2019 shall file an application in Form NDH-4 within a period of 60 days from the date of:

One year from the date of incorporation; or
The period up to which the Regional Directors have granted the extension of time.

However, in case the company doesn’t comply with the requirement of filing of Form NDH-4, then, the company shall not be allowed to file the following forms:

Form No. SH-7 – Notice to the Registrar of any alteration of the share capital
Form No. PAS-3 – Return of allotment

Rule 23A

Rule 23A stipulates the following categories of the company to file a declaration in Form NDH-4:

Category of the company referred at rule 2(b) i.e., the company functioning on the lines of Nidhi company who has either not applied for or has applied and is awaiting Nidhi status; and
Every Nidhi company incorporated under the Companies Act 2013 before the commencement of the Nidhi Amendment Rules 2019.

The above-referred companies are required to file a declaration in Form NDH-4 within later of the following dates:

One year from the date of incorporation of the Nidhi company; or
6 months from the date of commencement of the Nidhi Amendment Rules 2019.

If in case the above-referred companies fail to file the declaration in due time, the defaulting company shall not be allowed to file the following forms:

Form No. SH-7 – Notice to the Registrar of any alteration of the share capital
Form No. PAS-3 – Return of allotment.

Rule 23B

In order to update its status, every company which has been declared as Nidhi under the previous company law is also required to file the declaration in Form NDH-4. Such companies are required to file the declaration within a period of 6 months from the date of commencement of Nidhi Amendment Rules 2019.
If the company files the declaration after the above referred period, then, the company is required to pay appropriate fees as per the Companies (Registration Offices and Fees) Rules 2014.
If the company fails to file the declaration, then, the company shall not be allowed to file the following forms:
Form No. SH-7– Notice to the Registrar of any alteration of the share capital
Form No. PAS-3 – Return of allotment.

Legal Terms

Dereliction

n. 1) abandoning possession, which is sometimes used in the phrase “dereliction of duty.” It includes abandoning a ship, which then becomes a “derelict” which salvagers can board.

MCA Updates

No major updates.

SEBI Updates

RBI Updates

Foreign Exchange Management (Deposit) (Amendment) Regulations, 2019 – Acceptance of Deposits by issue of Commercial Papers.

IT Updates

GST Updates

Steps to be taken by taxpayers to file Form GSTR 9C.