MCA update dated 28.06.2024

The MCA is launching the third set of Company Forms covering MSME, BEN-2, MGT-6, IEPF-1, IEPF-1A, IEPF-2, IEPF-4, IEPF-5, and the IEPF-5 e-verification report on 15.07.2024 at 12:00 AM. To facilitate the implementation of these forms on the V3 portal, MCA has decided to disable the V3 portal from 13.07.2024 at 12:00 AM to 14.07.2024 at 11:59 pm. Further, MCA advised stakeholders to ensure that there are no pending SRNs in payment/pending for investor details upload/Resubmission status.

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Circular No. SEBI/HO/AFD/AFD-POD-2/P/CIR/2024/89, Dated: 27.06.2024

Earlier, SEBI (FPI) Regulations, 2019 were amended to provide flexibility of having up to 100 % aggregate contribution by NRIs, OCIs & RI individuals in corpus of FPIs based in IFSCs. Now, SEBI has prescribed conditions for NRI, OCIs & RI individual participation in FPIs based in IFSCs. It states that at the time of registration, the applicant must submit a declaration stating its intent to have aggregate contribution of NRIs, OCIs & RI individuals of 50 % or more in its corpus to DDPs.

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On June 27, 2024, the Securities and Exchange Board of India, the capital market regulator, introduced significant regulatory changes encompassing voluntary delisting regulations, and tailored rules for investment and holding companies. These decisions represent a substantial shift towards improving transparency and governance in India’s financial markets. The key highlights of the Press Release are as follows:

(a) SEBI prohibits unauthorized associations for ‘securities advice and claims’

The Board approved measures aimed at regulating associations between regulated entities and individuals/entities offering securities advice or making claims. Now, SEBI-regulated entities and agents are prohibited from associating directly or indirectly with individuals or entities providing securities advice, recommendations, or claims on returns or performance unless permitted by SEBI.

(b) SEBI grants disclosure exemptions to simplify operations for ‘Category I FPIs’

The Board has approved a proposal for exempting University Funds and University-related Endowments, registered or eligible as Category I FPI, from additional disclosure requirements as prescribed under SEBI’s August 24, 2023 circular, subject to certain specified conditions.

(c) Streamlining public issue process for debt securities and Non-Convertible Redeemable Preference Shares

The Board has approved a proposal to streamline the public issue process for debt securities and Non-Convertible Redeemable Preference Shares (NCRPS). The key changes include reducing the timelines for public comments on draft offer documents to one day for listed issuers and five days for others, and shortening the minimum subscription period to 2 working days.

Additionally, SEBI has mandated the use of UPI for individual investors for investments up to Rs 5 lakhs, aligning the procedure with that of specified securities.

(d) Enhanced operational flexibility and tenure restrictions for AIFs

The Board has approved measures to enhance operational flexibility for Alternative Investment Funds (AIFs). Category I and II AIFs can now borrow for up to 30 days to cover temporary shortfalls in investor drawdowns, with costs borne by the affected investors. Additionally, Large Value Funds for Accredited Investors (LVFs) are now restricted to a maximum tenure of five years, with any extensions requiring approval from two-thirds of unit holders.

(e) SEBI introduces performance evaluation framework for stock exchanges and related entities

The Board has approved minimum criteria for evaluating the performance of stock exchanges, clearing corporations, and depositories. External evaluators will assess these entities every three years, starting within 12 months of implementing this mechanism. The aim is to ensure compliance and enhance performance transparency in the financial markets.

(f) SEBI proposes to remove financial disincentives for MDs and Chief Technology Officers of MIIs

SEBI proposes to eliminate automatic financial disincentives imposed on Managing Directors (MD) and Chief Technology Officers (CTO) of Market Infrastructure Institutions (MIIs) following technical disasters. Advisory committees recommended this change, noting that these disincentives hinder recruiting and retaining qualified talent within MIIs.

(g) Revised eligibility criteria for entry/exit of stocks in derivatives segment

The Board has approved a revision in eligibility criteria for the entry and exit of stocks in the derivatives segment of exchanges, aiming to ensure investor protection. These criteria, updated for the first time since 2018, reflect changes in market dynamics. Stocks must complete at least six months in the derivatives segment before exit criteria apply.

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Notification No. SEBI/LAD-NRO/GN/2024/185, Dated: 26.06.2024

SEBI has notified an amendment to Regulation 4 of SEBI (FPI) Regulations, 2019, w.r.t eligibility criteria of foreign portfolio investors (FPI). SEBI has now notified the conditions for non-resident Indians, overseas citizens of India, or resident Indian individuals to be the constituents of the FPI applicant. Now, the contribution of a single non-resident Indian, overseas citizen of India or resident Indian individual must be below 25% of the total contribution in the corpus of the FPI applicant.

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Consultation Paper; Dated: 26.06.2024

SEBI has released a Consultation Paper to facilitate ease of business under LODR and ICDR Norms. The objective is to seek comments from the public on the expert committee’s recommendation regarding the ease of doing business under these norms. The expert committee’s report is divided into three parts. The first and second parts deal with recommendations for ease of doing business under LODR and ICDR norms. The third part deals with harmonising provisions of ICDR and LODR norms.

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Case Details: V. Ramalingam v. Reserve Bank of India - [2024] 163 taxmann.com 705 (HC-Madras)

Judiciary and Counsel Details

• G.K. Ilanthiraiyan, J.
• K. Bijai Sundar for the Petitioner.
• C. Mohan & S.R. Sundar for the Respondent.

Facts of the Case

In the instant case, the petitioner used to avail loans from respondent no. 2 bank against immovable properties. Due to various reasons, the petitioner ran into a severe financial crisis. Therefore, he approached nationalised banks to meet his financial requirements.

However, nationalised banks refused to extend any working capital facility to the petitioner. Later, the petitioner found CIBIL records that explained the reason for the refusal of the loan. According to the petitioner, respondent no. 2 failed to record the closure of previous loans availed by the petitioner and update the credit score of the petitioner.

The failure to update credit scores and the delay in updating the petitioner’s credit scores caused significant loss and hardship for the petitioner. Consequently, the petitioner suffered financially and economically and was subjected to mental trauma and loss.

It was noted that since, respondent no. 1 was empowered to permit credit information companies to register under itself, the petitioner requested respondent no 1 to invoke the provisions of section 18(1) of the Credit Information Companies (Regulation) Act, 2005, for disputes and differences that had arisen between the petitioner and respondent no. 2 and to refer same to arbitration and request for an arbitrator to be appointed by respondent no 1 in terms of section 18(2) of the Act. However, there was no reply. Hence, the instant writ.

High Court Held

The High Court held that the dispute between the borrower and credit institution is not covered under section 18 of the Act. Such a grievance is specifically covered under section 21(3), which mandates credit institutions or credit information companies, as the case may be, to take appropriate steps to update credit information within 30 days of being requested.

Further, the High Court held that the petitioner’s grievance had already been addressed to the Ombudsman of NBFC by way of complaint, and the same was resolved upon receipt of a reply from respondent no. 2. Further, apart from the petitioner’s allegation, a remedy had been provided under section 21(3) and rule 22 of the Credit Information Companies Rules, 2006.

Therefore, the instant case did not fall under any category to entertain a writ petition under Article 226 of the Constitution of India. Hence, the instant writ was not maintainable and, thus, was to be dismissed.

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Notification No. SEBI/LAD-NRO/GN/2024/184, Dated 25.06.2024

SEBI has notified the SEBI (Prohibition of Insider Trading) (Second Amendment) Regulations, 2024. As per the amended norms, the compliance officer must approve or reject the trading plan within 2 trading days of receiving it. Further, the compliance officer must notify the approved plan to the stock exchanges on which the securities are listed, on the day of approval. These regulations are effective from the 90th day of publication in the Official Gazette.

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1. Introduction

It has been an issue in the discussion of corporate professionals whether a Society registered under the Societies Registration Act 1860 or a Cooperative Society registered under the relevant law meant for Cooperative Societies can become a member of a company. Many companies have admitted the Societies as their members based on views provided by their advisors that a Society can become a member of the company. However, it is imperative to take an intense look into the issue without getting swayed by such recorded views.

2. What does the Law say about Membership?

2.1. Definition of a Member

Section (2)(55) of the Companies Act, 2013 has laid down the definition of the term member as follows:

“(55) “member”, in relation to a company, means—

(i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become a member of the company, and on its registration, shall be entered as a member in its register of members;

(ii) every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company;

(iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository.”

In each of the three categories, the pivotal term is ‘person’. As per the definition, the fundamental criterion for membership eligibility is that one must qualify as a ‘person’. Put differently, membership is restricted to individuals who are considered persons.

In the Companies Act 2013 no definition of the word ‘person’ is provided. However, in section 3(42) of the General Clauses Act, 1897, it is provided that expression ‘person’ includes ‘any company or association or body of individuals, whether incorporated or not.’

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Circular No. SEBI/HO/MRD/MRD-PoD-3/P/CIR/2024/85, Dated 20.06.2024

SEBI observed that during the call auction in the pre-open session, orders were placed at higher prices in large volumes and a significant portion of such orders were cancelled just before the closure of the session. This may have created false demand and supply, possibly manipulating the price of scrips to the detriment of common investors.

To prevent misuse of the call auction session, SEBI has decided to modify the current provisions related to call auction sessions for IPOs and relisted scrips and introduced additional surveillance measures at stock exchanges.

As per the modification, the pre-open session for IPOs must be for a duration of 60 minutes, i.e. from 09:00 am to 10:00 am, out of which 45 minutes must be allowed for order entry, order modification, and order cancellation and 10 minutes for order matching and trade confirmation.

Further, the remaining 5 minutes must be the buffer period to facilitate the transition from the pre-open session to the normal trading session. The session must close randomly during the last 10 minutes of order entry, i.e. anytime between the 35th and 45th minute of the order entry window. Such random closure must be system-driven.

Also, in order to enhance transparency in the pre-open call auction session, details of the number and quantity of cancelled orders must be displayed on the website of the stock exchange and terminals of Trading Members on a real-time basis for investors to make informed decisions on the pricing of such stocks. The circular shall be applicable from the 90th day of issuance of the circular.

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Circular No. SEBI/HO/MRD/TPD/P/CIR/2024/84; Dated: 20.06.2024

SEBI has established a new framework for the system audit of professional clearing members (PCMs). As per the framework, PCMs must submit information regarding major and minor non-compliances observed in the system audit in the prescribed format.

Further, PCMs must maintain a list of all relevant SEBI and clearing corporations (CCs) circulars and directions regarding technology and compliance in the prescribed format. The formats are attached as an annexure to the circular. The framework shall be effective immediately, and the first audit must be conducted for FY 2023-24.

Also, the Systems Audit report, including compliance with SEBI/CCs circulars/guidelines and exceptional observation format along with compliance status of previous year observations, must be placed before the Governing Board of the PCM. Subsequently, the report, along with the comments of the management of the PCM, must be communicated to CCs within one month of the completion of the audit.

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