1 SHAREHOLDERS RIGHTS AND OBLIGATIONS UNDER THE COMPANIES ACT, 2013 ANIND THOMAS February 14, 2014

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 2

3 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:  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 4

5 MINORITY PROTECTION (contd.)  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  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 6

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 7

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 8

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 9

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 10

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 11

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 12

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 13

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 14

CURRENT STATUS SectionsNotified Minority Protection27 (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 195Yes Fixed deposit holders and other stakeholders 73-76No Entrenchment5(3)No 15

CURRENT STATUS Sections Notified Raise an objection to a compromise or arrangement Proviso to S.230(4)No Differential voting rightsS.43(a)(ii)No 16

THANK YOU 17

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, Anind Thomas, 18