INTRODUCTION
This newsletter covers recent key updates in Indian laws
relating to banking law, company law, and securities laws.
In particular, we have covered:
- Banking law: Reserve Bank of India
(“RBI“) circular allowing access for
non-banks to centralized payment systems; - Companies law: (a) Notification issued by Ministry of Corporate
Affairs (“MCA“) on the Companies
(Incorporation) Fifth Amendment Rules, 2021 and (b) General
circular regarding clarification on spending Corporate Social
Responsibility (“CSR“) Funds on account
of COVID-19 vaccination; - Securities law: (a) Discussion paper by the Securities and
Exchange Board of India (“SEBI“) on
review of the SEBI (Share Based Employee Benefits) Regulations,
2014 and SEBI (Issue of Sweat Equity) Regulations, 2002; and (b)
Supreme Court judgment upholding constitutional validity of the
SEBI (Mutual Fund) Regulations, 1996.
1. BANKING LAW
1.1. RBI Circular Allowing Access for Non-banks to
Centralised Payment Systems
1.1.1. RBI has released a circular on 28 July 2021 giving direct
access for non-bank entities like pre-paid payment instrument
issuers, card networks and white label ATM operators to the
centralised payment systems of RBI i.e., real time gross settlement
(“RTGS“) and national electronic fund
transfer (“NEFT“).
1.1.2. As per the circular, direct access to centralized
payments systems means (a) allotment of separate IFSC, (b) opening
a current account with RBI in its core banking system, (c)
maintaining a settlement account with RBI, and (d) membership of
Indian financial network and use of structured financial messaging
system. By allowing direct access, RBI aims to (a) enhance
efficiency as the risk of failure or delay in executing fund
transfer gets reduced, (b) improve competition as non-banks will
actively offer financial services which were the sole domain of
banks, (c) improve risk management, and (d) ensure data
protection.
1.1.3. As per the circular, in order to be eligible to access
centralized payments systems, the non-bank entity is required to
obtain a certificate of authorisation from RBI under the Payment
and Settlement Systems Act, 2007. Further, the non-bank is required
to be incorporated as a company under the Companies Act, 1956 or
2013, with a net-worth of at least INR 250 million. Entities
incorporated outside India may empower their local offices to carry
out all operations in this regard. The entity will also be required
to adhere to RTGS system regulations, NEFT procedural guidelines
and other instructions prescribed by RBI.
1.1.4. Please click here to read the circular.
2. COMPANIES LAW
Please see below the summary of the key company law updates for
July 2021.
2.1. MCA notification on the Companies (Incorporation)
Fifth Amendment Rules, 2021
2.1.1. The MCA vide its notification dated 22 July 2021 has
notified the Companies (Incorporation) Fifth Amendment Rules, 2021.
These rules shall come into effect from 01 September 2021.
2.1.2. A new rule, Rule 33A has been inserted in the Companies
(Incorporation) Rules 2014 which provides for allocation of new
name to a company on failure by the company to comply with
direction issued by the Central Government under section 16 of the
Companies Act, 2013 (“Companies Act“).
Section 16 of the Companies Act provides that that the Central
Government may issue necessary directions to the company to change
its name, if the name of the company is identical to a company
already registered under the Companies Act or is identical to a
registered trademark under the Trade Marks Act, 1999.
2.1.3. According to the new Rule 33A, if a company does not
comply with the direction issued by the Central Government within 3
months the letters ‘ORDNC’ (“Order of Regional
Director Not Complied“) along with the year of
passing of the direction, the serial number and the existing
corporate identity number will become the new name of the Company.
Further a new certificate of incorporation shall be issued by the
Registrar of Companies. Further, on change of the name, the company
will have to mention ORDNC brackets below the name of the company,
wherever its name is printed, affixed or engraved.
2.1.4. However, the new Rule 33A shall not be applicable to
company where an application under e-form INC-24 is pending for
disposal before the Central Government.
Please see below the summary of the key banking law updates for
July 2021
2.1.5. Please click here to read the notification.
2.2. General Circular regarding clarification on
spending CSR Funds on account of COVID-19 vaccination
2.2.1 The MCA vide circular dated 30 July 2021 has clarified
that spending of CSR funds for vaccination for persons other than
employees and their families is an eligible CSR activity under
Schedule VII to the Companies Act relating to promotion of
healthcare (including preventing healthcare) and disaster
management respectively.
2.2.2 Please click here to read the circular.
3. SECURITIES LAW
Please see below the summary of the key securities law updates
for July 2021.
3.1. Discussion paper by SEBI on review of the SEBI
(Share Based Employee Benefits) Regulations, 2014 and SEBI (Issue
of Sweat Equity) Regulations, 2002 3.1.1. SEBI has
released a discussion paper seeking public comments on the review
of two regulations, i.e., the SEBI (Share Based Employee Benefits)
Regulations, 2014 (“SBEB Regulations“)
and the SEBI (Issue of Sweat Equity) Regulations, 2002
(“Sweat Equity Regulations“). The
discussion paper has been released by SEBI, pursuant to a report
submitted by an expert group constituted for the review of these
regulations.
3.1.2. Please see below a few key recommendations of the expert
group and under the discussion paper:
- The discussion paper has analysed the definition of employees
under the SBEB Regulations and recommended that companies be given
the flexibility to determine the persons that may be categorized as
“employees”. Further, the discussion paper has also
recommended an amendment in the definition of the term
’employees’, and to delete the word “permanent”
from the definition, keeping in mind the employment practices of
engaging non-permanent employees. Pursuant to this proposed
amendment, non-permanent employees as well as non-executive
directors may also be considered eligible to receive share based
employee benefits under the SBEB Regulations. - The discussion paper also recommends that the purposes for
which sweat equity shares or employee stock option plans
(“ESOPs“) may be issued should be listed
out in the SBEB Regulations and the Sweat Equity Regulations.
Further, the maximum limit on such issuances should also be
provided in the regulations. - An ESOP scheme can currently be implemented by a company under
the trust route or the direct route. The discussion paper has
recommended that flexibility may be given to companies to switch
from a direct route to a trust route or vice versa, even after the
ESOP plan has been approved by the shareholders of the company.
Provided however, that the switch from one route to another must be
approved by a special resolution of the shareholders and must not
be prejudicial to the interests of the employees. - The discussion paper also recommended that the lock-in period
and the pricing formula for the issuance of sweat equity shares to
employees of a company must be brought in line with the
requirements under the SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2018. - The discussion paper has also recommended that the SBEB
Regulations and the Sweat Equity Regulations be combined into a
single set of regulations and has recommended a draft of the
combined regulations titled SEBI (Share Based Employee Benefits and
Sweat Equity) Regulations, 2021.
3.1.3. Please click here to read the SEBI discussion paper.
3.2. Supreme Court judgment upholding constitutional
validity of the SEBI (Mutual Fund) Regulations, 1996.
3.2.1. The Supreme Court of India has passed a judgment in the
matter of Franklin Templeton Trustee Services Private Limited and
another vs. Amruta Garg and others on 14 July 2021, in which the
Supreme Court has upheld the constitutional validity of the SEBI
(Mutual Fund) Regulations, 1996 (“Mutual Fund
Regulations“) and laid down certain additional
guidelines in relation to winding up of mutual fund schemes.
3.2.2. While considering the constitutional validity of the
Mutual Fund Regulations, the Supreme Court looked into whether
Regulation 39 (2) (a) and Regulation 39 (3) of the Mutual Fund
Regulations suffered from the vice of excessive delegation and
whether the regulations gave unbridled power to the trustees of a
mutual fund scheme to wind up any scheme. The Supreme Court looked
into the powers of SEBI under the SEBI Act, 1992 and held that SEBI
had the powers to issue directions under Section 11B of the SEBI
Act, if any of the actions of the trustees under Regulation 39 (2)
or 39(3) were not in compliance with applicable laws. The Supreme
Court held that the trustees did not have absolute and unbridled
power in relation to the winding of a scheme, and accordingly,
upheld the constitutional validity of the specific provisions of
the Mutual Fund Regulations.
3.2.3. The Supreme Court also considered the interplay between
Regulations 39 to 42 and Regulation 18 (15) (c) of the Mutual Fund
Regulations. The Supreme Court upheld the decision of the Karnataka
High Court where the court had held that a mutual fund scheme could
only be wound up by the trustees once the consent of a majority of
the unitholders had been obtained as per Regulation 18 (15) (c).
The Supreme Court while applying the principal of harmonious
construction held that, while the opinion of the trustees was
relevant, the consent of the unitholders is a pre-requisite for
winding up of a scheme. Further, the Supreme Court laid down an
additional guideline that the consent of the unitholders is not
required to be obtained before publication of the public notices,
and that the consent may be obtained after the publication of the
notice and once the reasons for winding up have been disclosed to
the public.
3.2.4. Please click here to read the Supreme Court judgment.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
