SHAREHOLDERS RIGHTS AND
OBLIGATIONS UNDER THE
COMPANIES ACT, 2013
ANIND THOMAS
February 14, 2014
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COMPANIES ACT, 2013

The Companies Act, 1956 is in the process of being replaced by the
Companies Act, 2013 (“2013 Act”) (which was passed by the Indian
Parliament on August 8, 2013 and received presidential approval on August
29, 2013). The enforcement of the 2013 Act is being implemented in phases
and the first set of provisions came into effect on September 12, 2013

The implementation of the 2013 Act will depend on the draft rules being
notified

98 sections of the 2013 Act have been notified

Currently, companies are required to comply with provisions of the
Companies Act as well as the newly notified provisions of the 2013 Act
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MINORITY PROTECTION
Minority shareholders have been given greater powers under the 2013 Act. The
normal principle of majority binds the minority has been diluted. Most notable
provisions are as below:
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
Majority shareholders who by virtue of amalgamation, share exchange,
conversion or any other reason have come to hold 90% or more of the
equity share capital have been mandated to make an offer to minority
shareholders for buying their equity shares. The price for the shares will be
determined by a registered valuer

Specific obligations have been imposed on the promoters of a company to
provide dissenting shareholders an exit opportunity if they do not agree to
vary the terms of contracts or objects referred to in the prospectus
MINORITY PROTECTION (contd.)

If the share capital of a company is divided into different classes of shares
and a variation in the rights of the shareholders is proposed, the holders of
not less than 10% of the issued shares of a class who do not consent to
such variation may apply to the tribunal to have the variation cancelled

Dissenting shareholders in respect of resolution seeking approval for a
scheme of arrangement or compromise involving any class of creditors or
members may be granted exit offers if recommended by the relevant
authority
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MINORITY PROTECTION (contd.)
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
For any resolution requiring special notice, notice must be given to the
company by members holding not less than 1% of the total voting power or
those holding paid up shares of an aggregate sum not exceeding
INR 500,000

Members holding shares of nominal value not exceeding INR 20,000 shall be
entitled to collectively nominate one director on the board of a listed
company

During the preparation of consolidated financial statements, profit or loss
attributable to “minority interest” and to owners of the parent in the
statement of profit and loss shall be presented as allocation for the period.
Further “minority interests” in the balance sheet within equity shall be
presented separately from the equity of the owners of the parent

Code for Independent Directors specifically requires that independent
directors shall particularly safeguard the interests of minority shareholders
ENFORCEABILITY OF RESTRICTIONS ON
TRANSFERABILITY
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
The principle that shareholders in a public company can contractually
agree to restrictions on free transferability of shares has now been
statutorily recognized. Consequently investors in a public company can
enforce share transfer restrictions, such as right of first offer or refusal, tag
along rights against the other contracting shareholders

Recognised the principle laid down in the decision of the Bombay High
Court in Messer Holdings Ltd. v. Shyam Madanmohan Ruia & Ors. [2010]
159 Comp Cas 29 (Bom), where it was held that an agreement between
shareholders restricting the transfer of shares in a public company is not in
violation of the law mandating free transferability of shares of a public
company

The contract cannot be enforced against the company itself. An aggrieved
party would only have a right to claim damages for breach of contract
against the defaulting seller in cases of sale in breach of transfer
restrictions
ENFORCEABILITY OF RESTRICTIONS ON
TRANSFERABILITY (CONTD.)

SEBI had vide a notification dated October 3, 2013 expressly permitted put
and call options in relation to shares of public limited companies. However
it also prescribed a lock-in of 1 year before the put option could be
exercised

RBI released its circular dated January 9, 2014 which also recognized put
and call options. However RBI’s circular further states that securities
carrying “optionality” rights which provide assured returns cannot be
subscribed to by foreign investors and will not be regarded as eligible
security. There is a lock-in of 1 year before the options maybe exercised
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PROHIBITION OF INSIDER TRADING AND
FORWARD CONTRACTS

The prohibition on insider trading and forward contracts has been
extended to unlisted public companies and private companies

The 2013 Act has introduced a prohibition on forward dealings and insider
trading on directors and Key Managerial Personnel (“KMP”) which includes
the CEO, CFO, company secretary and a whole time director

Directors and KMP have been prohibited from purchasing call and put
options of shares of the company. Offence punishable with imprisonment
of up to 2 years and/or fine up to INR 500,000

Provision is in contradiction with the SEBI notification which liberalises
forward transactions by allowing put and call options

Provision appears to apply only if the option transaction is for
a specified price, within a specified time and for a specified number of
relevant shares or specified amount of relevant debentures
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PROHIBITION OF INSIDER TRADING AND
FORWARD CONTRACTS (CONTD.)

Officers, directors and KMPs have been prohibited from subscribing,
buying, selling or dealing in securities if such person is reasonably
expected to have access to price-sensitive information. The prohibition
also extends to counseling about procuring or communicating non public
price sensitive information to any person

As an exception, if any communication is required to be made in the
ordinary course of business or profession or employment or under any law,
it will not fall under the ambit of insider trading

Contravention of these provisions is punishable with imprisonment of up to
5 years and fine up to INR 250 million and three times the amount of profits
made by the defaulter

This restriction will impact deal structuring since almost every deal in the
unlisted company space involves sharing of information by directors or key
managerial personnel or subscription or sale of shares by promoters who
are normally in an executive capacity within the company
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FIXED DEPOSIT HOLDERS AND OTHER
STAKEHOLDERS

The 2013 Act provides greater protection to deposit holders. Only those
public companies which meet the prescribed net worth or turnover criteria
and meet the conditions below may accept deposits from persons other than
its members. Other companies will be able to accept deposits only from its
members

Note: Draft Rules define eligible company as having a net worth of not less
than INR 100crore or a turnover of not less than 500crore

Additional conditions have been prescribed for acceptance of deposits
– Issuance of a circular showing the financial position, credit rating etc
– Deposit of not less than 15% of the amount of maturing deposit amount
with a scheduled bank in a separate bank account to be called as
deposit repayment reserve account
– Deposit insurance
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FIXED DEPOSIT HOLDERS AND OTHER
STAKEHOLDERS (contd.)

Deposits accepted before the 2013 Act comes into force will need to be
repaid within one year from the date of commencement

Significant financial impact on companies which have currently accepted
deposits and will not meet the eligibility criteria under the 2013 Act

Acceptance of deposits by banking companies and NBFCs shall be
separately regulated by RBI

New provisions regarding fraud have been introduced pursuant to which all
officers of the company responsible for collection of deposits shall now be
personally liable for any loss
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ENTRENCHMENT

Concept of entrenchment has been recognised with regard to alteration of
articles of association of a company

An entrenchment provision enables a company to follow a more restrictive
procedure than passing a special resolution for altering a specific clause of
articles of association

Entrenchment is permissible only during formation of company or in the
case of a private company, if agreed to by all members, or in the case of a
public company, by special resolution

This will ensure that amending specific clauses of articles becomes more
difficult and restrictive. It will protect minority shareholders by providing
them a right to consent to amendments to clauses of the articles
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ABILITY TO RAISE AN OBJECTION

Any objection to a compromise or arrangement can be made only by
persons holding not less than 10% of the shareholding. Not specified
whether it needs to be equity or preference shareholders or both.

Introduced to speed up the process for a compromise or arrangement.
Earlier any shareholder or debtor could raise an objection and delay the
process
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DIFFERENTIAL RIGHTS

Public and private companies are now treated at par in relation to issuing
shares with differential rights

In the 1956 Act, only public companies had to comply with a prescribed set
of rules in order to be able to issue shares with differential rights. Private
companies had the flexibility to structure their capital to contain shares of
various classes carrying differential rights particularly relating to voting
and dividend rights. This right has now been taken away

Validity of differential rights attached to shares of private companies issued
under the 1956 Act is unclear
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CURRENT STATUS
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Sections
Notified
Minority Protection
27 (2), S.48(2), 115, 151,
S.235, 236
No
Enforceability of
restrictions on
transferability
58(2)
Yes
Prohibition of forward
contracts and insider
trading
194 and 195
Yes
Fixed deposit holders
and other stakeholders
73-76
No
Entrenchment
5(3)
No
CURRENT STATUS
Sections
Notified
Raise an objection to a
compromise or
arrangement
Proviso to S.230(4)
No
Differential voting rights
S.43(a)(ii)
No
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THANK YOU
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DISCLAIMER
This presentation is academic in nature and is not intended as legal advice. No
client attorney relationship is created by the circulation of this presentation.
Readers are requested to take legal advice relating to their specific situations.
The Companies Act, 2013 is a new legislation that is not entirely in force as on
the date of the presentation. The Ministry of Company Affairs and / or courts in
India may not agree with our interpretation of its provisions.
For any queries please contact:
Aditya Vikram Bhat, aditya.bhat@azbpartners.com
Anind Thomas, anind.thomas@azbpartners.com
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