Loans/Investments, Acceptance of Deposits & SFIO - under Companies Act, 2013 CA Jayant Thakur 27th April 2014, WIRC, ICAI

Outline Provisions covered:- ◦ Acceptance of Deposits ◦ Loans and investments by companies ◦ Serious Frauds Investigation Office – new provisions Summary of existing provisions Analysis of new provisions/comparison with earlier provisions CA Jayant Thakur, 27th April

General points Transitional issues ◦ At times, relief given, but generally not Wider coverage ◦ Public/private/OPCs Absolute prohibition/requirements ◦ No exemption by taking Central Government/shareholders approval More serious punishment ◦ Mandatory imprisonment/no compounding CA Jayant Thakur, 27th April

Acceptance of Deposits Existing provisions ◦ Principal provisions  Section 58A & related provisions  Acceptance of deposits Rules ◦ NBFCs, non-NBFCs not covered by Section 58A and those covered by Section 58A CA Jayant Thakur, 27th April

Acceptance of Deposits Salient features:- ◦ Wide definition of “deposits” ◦ Numerous exclusions ◦ Regulation of acceptance of deposits  Acceptance from:-  Public  Shareholders  Limits on deposits  Interest/brokerage  Returns/credit rating, etc. ◦ CA Jayant Thakur, 27th April

Acceptance of Deposits Consequences of:- ◦ Acceptance of deposits in violation of law ◦ Non-repayment of deposits CA Jayant Thakur, 27th April

Acceptance of Deposits New provisions – acceptance of deposits ◦ Broadly similar in structure  Definition of deposits  Restrictions – limits, credit rating, interest, etc. ◦ Several changes, new provisions CA Jayant Thakur, 27th April

Acceptance of Deposits Wide definition of deposits ◦ Deposits from directors ◦ Deposits from shareholders ◦ Inter corporate deposits ◦ Deposits from non-residents ◦ Loans from banks, etc. ◦ Share application monies ◦ Debentures ◦ Security deposits from employees CA Jayant Thakur, 27th April

Acceptance of Deposits Advances for supply of goods/services/capital goods ◦ Sahara ◦ CISs ◦ Gold Investment Schemes  Interest/returns/”bonus” CA Jayant Thakur, 27th April

Acceptance of Deposits Existing deposits ◦ Transitional period ◦ Old overdue deposits ◦ Existing deposits becoming overdue ◦ Existing loans that are not deposits? ◦ Consequences non-repayment CA Jayant Thakur, 27th April

Acceptance of Deposits Punishment for non-repayment/ fraudulent acceptance/ fraudulent use/mis-statements, etc. Credit Rating Insurance Secured Deposits CA Jayant Thakur, 27th April

Loans and Investments Existing provision – Section 295 ◦ Loans to directors and certain entities in which directors are interested Existing provision – Section 372A ◦ Restricts inter corporate loans and investments ◦ Permits upto a certain percentage ◦ Thereafter, a special resolution. Exemption to private companies/NBFCs etc. CA Jayant Thakur, 27th April

Loans to directors/specified persons (Section 185) Loans to directors ◦ And certain specified entities Applies to all type of companies Absolute prohibition Loans, guarantees, securities Holding/subsidiary companies CA Jayant Thakur, 27th April

Loans to directors/specified persons Punishment ◦ Rs lakhs fine for the company ◦ Rs lakhs fine or six months imprisonment for officers in default. CA Jayant Thakur, 27th April

Restrictions on inter-corporate and other loans/investments (Section 186) Who are covered? ◦ Public/Private/OPC? What is covered? ◦ Loans/guarantees/securities/ “investments” What are restrictions? ◦ Without Board Meeting ◦ Without approval of lenders ◦ Without approval of shareholders CA Jayant Thakur, 27th April

Restrictions on inter-corporate and other loans/investments Absolute prohibitions ◦ Layers of investment companies  What are investment companies?  Investment subsidiaries  What does “layer” mean?  How many are allowed?  Which are exempted? CA Jayant Thakur, 27th April

Restrictions on inter-corporate and other loans/investments Loans, etc. to whom are covered? ◦ “other” body corporates ◦ “Persons” Limits beyond which shareholders’ approval required – higher of:- ◦ 60% of paid up capital+free reserves ◦ 100% of free reserves ◦ Definition of free reserves – 2(43) CA Jayant Thakur, 27th April

Restrictions on inter-corporate and other loans/investments Unanimous Board resolution ◦ At a meeting ◦ Dissenting directors? Interest rate on loans CA Jayant Thakur, 27th April

Restrictions on inter-corporate and other loans/investments Exemption for:- ◦ Holding/subsidiary transactions ◦ Holding/WOS transactions ◦ NBFCs ◦ Companies engaged in business of providing finance SEBI registered intermediaries Rights issues CA Jayant Thakur, 27th April

Restrictions on inter-corporate and other loans/investments Punishment/consequences of violations ◦ lakhs for the Company  lakh for officers in default and imprisonment upto 2 years  Non-compoundable? ◦ Size of company/size of loans/investments? CA Jayant Thakur, 27th April

Serious Fraud Investigation Office Existing provisions SFIO ◦ Multi-disciplinary body ◦ Investigation vs. prosecution When can act? Bar on other agencies What is “serious”? CA Jayant Thakur, 27th April

Serious Fraud Investigation Office New definition/consequences of fraud Section 447 ◦ Deemed Section 447 provisions Who are covered? ◦ Company ◦ Directors/Officers ◦ Auditors, etc. CA Jayant Thakur, 27th April

Serious Fraud Investigation Office Fraud on whom? ◦ Company ◦ Shareholders ◦ Creditors ◦ Or any other person What fraud? ◦ Act/omission/concealment, etc. ◦ Whether or not resulting in gain/loss CA Jayant Thakur, 27th April

Serious Fraud Investigation Office Amount of fraud? ◦ Materiality ◦ Relation with punishment? Other frauds ◦ False statement/omissions in returns, reports, certificates, prospectus, etc. ◦ Several other acts/omissions deemed as Section 447 frauds Giving of false evidence CA Jayant Thakur, 27th April

Serious Fraud Investigation Office Punishment ◦ Imprisonment - six months to seven years  In case of fraud involving public interest – 3-7 years ◦ Fine – % of amount of fraud CA Jayant Thakur, 27th April

Serious Fraud Investigation Office Powers ◦ To investigate/collect information ◦ To obtain documents ◦ To stop other investigations ◦ Power of arrest ◦ Power of prosecution CA Jayant Thakur, 27th April

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