Birbal’s Update
March 2019
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Key Updates


Recent Judgements


Arraigning a Company as an accused is essential for prosecuting authorized signatory – Hon’ble Supreme Court in Himanshu v. B Shivamurthy & Anr.


The Hon’ble Supreme Court has clarified that only when a company is arraigned as an accused can the persons mentioned in the other categories be vicariously prosecuted for the offence under Section 138 of Negotiable Instrument Act,1881.

The Appellant in the present appeal, raised issue under the provision of section 138 of Negotiable Instrument Act, 1881, as ‘Whether an authorized signatory of a company would be liable for prosecution under Section 138 of the Negotiable Instruments Act, 1881 without the company being arraigned as an accused?’

It was further observed by the Hon’ble Court that the words "as well as the company" appearing in the Section 141 of Negotiable Instrument Act, 1881 make it absolutely & unmistakably clear that, only when the company can be prosecuted, can the persons mentioned in the other categories be held vicariously liable for the offence subject to the averments in the petition and proof thereof. Thus, in the absence of the company being arraigned as an accused, a complaint against the appellant was held to be not maintainable.


Former CEO cannot espouse writ jurisdiction for allegations regarding affairs of the Company - Hon’ble Supreme Court of India in Ramesh Sanka v. Union Of India


In a writ petition moved by former CEO seeking a direction for a CBI investigation into the affairs of the Company, the Hon’ble Supreme Court of India while dismissing the said writ petition, held that there was no personal relief sought for by the Petitioner qua the said Company and in the absence of the same the writ was not maintainable under Article 32 of the Constitution.

That facts in the case were such that the Petitioner after having worked in the capacity of CEO of the said Company, had preferred the writ petition praying for CBI to investigate into the matter and examine allegations put forth by Petitioner, i.e., the manner and modus operandi of the Company as well other persons managing the affairs of or dealing with the company, who also had been impleaded therein. The Petitioner had claimed that the business and financial operations of the Company were being conducted in contravention of provisions of several laws and as such the persons engaged in such activities were required to face prosecution.

The Hon’ble Court in its findings noted that the grievances of the Petitioner ought to be espoused in a civil action as writ jurisdiction is not the appropriate remedy for agitating such grievance.

Policy Updates



AMENMENTS TO COMPANIES(SIGNIFICANT BENEFICIAL OWNERSHIP) AMENDMENTS RULES, 2018



The Ministry of Corporate Affairs on 8th February 2019 issued the Companies (Significant Beneficial Ownership) Amendment Rules, 2019. As per Significant Beneficial Owner Amendment Rules, 2019 Significant Beneficial Owner is an individual who:

i. Holds indirectly, or along with any direct holdings, at least 10% per cent of the shares of the company.

ii. Holds indirectly, or along with any direct holdings, at least 10% of the voting rights in the shares of the company.

iii. Has right to receive or participate in at least 10% of the total distributable dividend, or any other distribution in a financial year solely through indirect holdings, or along with any direct holdings.

iv. Has right of exercising significant influence or control through direct-holdings and other means.

When an individual does not hold any right or entitlement indirectly under above head (i), (ii) & (iii) he shall not be considered to be a significant beneficial owner.

When an individual holds a right or entitlement directly in the reporting company, he has to satisfy any of the following credentials:

i. The shares in the reporting company are held in name of the individual.

ii. The declaration has to be done by the individual in the reporting company if he is holding or acquiring a beneficial interest in the shares of the reporting company.
If an individual as a member of the reporting company satisfies any of the following credentials he shall be considered to hold a right or entitlement indirectly in the reporting company. If member is:

Body Corporate (whether registered in India or abroad) i. Individual holding majority stake in that member ii. Holding majority stake in the ultimate holding company of that member

Hindu Undivided Family (HUF) through Karta Individual is a Karta

Partnership Entity i. Individual is a Partner ii. Individual holding majority stake in the body corporate which is the partner of the partnership entity. iii. Individual holding company of the body corporate which is the partner of the partnership entity.

Trust i. Individual is the trustee – in discretionary or charitable trust. ii. Individual is the beneficiaries – in a specific trust. iii. Individual is the author or the settler – in a revocable trust

Duties of Reporting Company

• Required to identify the existence of a Significant Beneficial Owner associated with the reporting company and necessitate him/her to file a declaration in Form Ben-1.

• Member seeking information under Form BEN-4 holding 10% of the former’s share, voting rights or right to receive or partake in the dividend or any other distribution payable in a financial year must be served with a notice by Reporting Company.

• File a return in Form BEN-2 with the Registrar with respect to any declaration made by a Significant Beneficial Owner and any changes in the Significant Beneficial Ownership.

• Maintain a register of Significant Beneficial Owners in Form BEN-3. The register must include their respective names, addresses, date of birth and details of ownership.

• Issue notice to all its non-individual members who are holding more than 10% of the shares requiring them to disclose information of the Significant Beneficial Owner of such member (in Form BEN-4).

• File an application to the National Company Law Tribunal (NCLT) to impose restrictions on the shares if a person doesn’t provide the required information.

Filing of Declaration

• Filing of a declaration in Form BEN-1 to the reporting company must be within a time frame of 30 days of becoming Significant Beneficial Owner. Further Significant Beneficial Owners are necessitated to file the same within 90 days of introducing the amended rules.

Penalties

• Significant Beneficial Owners who are not filing Form BEN-1 would be imposed a fine ranging between Rs.1,00,000 to Rs. 10,00,000 lakhs; and for a continuing offence, an additional fine of Rs. 1000 would be imposed for every day of default.

• Companies which are not compliant with the respective norms would be penalized with a sum of Rs. 10,00,000 to Rs. 50,00,000 (also applies to the people in-charge); and for continued offences, an additional fine of Rs. 1000 would be imposed for every day of default.



DISCUSSION PAPER ON PROPOSED GUIDELINES FOR COMPENSATION OF WHOLE TIME DIRECTORS/ CHIEF EXECUTIVE OFFICERS/ MATERIAL RISK TAKERS AND CONTROL FUNCTION STAFF, ETC.



The RBI has published the above discussion paper to review the guidelines with the objective to better align the same with Financial Stability Board (FSB) Principles and Implementation Standards. The proposed principles are intended to reduce incentives towards excessive risk taking that may arise from the structure of compensation schemes.

The major guidelines as proposed are presented hereinbelow–

1. Minimum 50% of the compensation will be Variable comprising of cash, stock linked instruments or a mix of both. There should be a proper balance between the cash and stock/share linked components.

2. Where compensation by way of share linked instruments is not permitted then a minimum 50% of the Variable Pay should be via non-cash compensation, such as Employees Stock Option Plans (ESOPs).

3. There should also be a proper balance between fixed pay and variable pay. The total Variable pay shall be limited to a maximum of 200% of the Fixed Pay.

4. For senior executives, deferral arrangements in adherence to the FSB implementation standards must invariably exist for the Variable Pay, regardless of the quantum of pay. The period of Deferral arrangement should be three years should be applicable to both cash and non-cash portions of the Variable Pay.

5. Imposition of Malus in case of divergence in NPA/ provisioning beyond RBI prescribed threshold for public disclosures is mandated. The banks has to identify a representative sets of situations, in their Compensation Policies, which require them to invoke malus and clawback clauses which may be applicable on entire Variable Pay.

6. The banks are expected to identify their Material Risk Takers (MRTs), whose actions have a material impact on the risk exposure of the bank based on Quantitative and Qualitative criteria.


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