Important Deadline — Form filing for loans and deposits — June 30

If your company has taken loans or deposits, this form filing requirement applies to you!

Every company having outstanding money/loan received shareholders or directors or any other person has to file Form DPT-3 by June 30, 2019 with respect to deposits/exempted deposits accepted by the Company and the amount of loan/money outstanding as on March 31, 2019.

In case, no amount/loan has been received by the Company which can be considered a deposit or exempted deposit, the filing of form DPT-3 with ROC is not applicable.

Also, in case there are deposits accepted by the Company, you also require a certificate from the statutory auditor certifying the details of the same.

In case of default in filing of form, the Company shall be liable to pay a penalty of Rs. 5,000 and Rs. 500 per day in case of a continuing default. If the Company is non-compliant then it shall be chargeable with fine of Rs. 1 Crore to Rs. 10 Crore. Every officer who is in default shall be chargeable with fine of Rs. 25,000 to Rs. 2 Crore and imprisonment up to 7 years.

LexGyaan Series on ESOPs – Part 1: How do Employee Stock Options Plan (ESOPs) work?

CREATING AN ESOP POLICY

In our experience of having assisted several entrepreneurs with execution of ESOPs for their startups, we have observed that most entrepreneurs are under the impression that by just mentioning the number of ESOPs on their cap table, or in offer letters to their employees, the startup has fulfilled its obligation to grant ESOPs to its employees. This is actually incorrect.

Mentioning ESOP pool on your cap table actually just makes your investors happy. Why? Well when an investor invests in your startup, they want to ensure that they do not get diluted for any reason except in case of future rounds of fundraising by your startup (even for that they have the right to maintain valuation aka pre-emptive right). It is important for investors that their shareholding does not get diluted in order to give shares to your employees, mentors or all those well-wishers of yours, whose help and guidance you took in the initial days of starting up and promised equity to. Only you the founder should get diluted to give these promised equity shares to your mentors and advisors, not the investors. This is the reason why investors require a startup to create an ESOP pool/advisory stock option pool, as a condition precedent to their investment in a startup. This is also the reason why investors require you to convert all loans from friends and family, and conversion of convertible notes, if any.

Related reading: Understand how valuations work and how a founder’s shareholding gets diluted when an investor invests in a startup in our blog titled ” The Valuation Game.. What Does It Mean Exactly? , by our co-founder, Karthik Chandrasekar.  

Therefore, all you have achieved by mentioning a “ESOP Pool” on your cap table and inserting a number against it is (a) carving out the maximum number / percentage up to which your investors won’t get diluted, and (b) demonstrating to your investors, your intention to give ESOPs some day to your employees.

At this stage, where your startup’s ESOPs are only on the cap table, your ESOPs are only a virtual pool. How do you convert the ESOPs in to reality? Well, that’s easy, you will just have to create an actual ESOP pool. In order to do that, you will have to take the following steps:

Step 1

Draft an ESOP Policy in compliance with the Indian Companies Act, 2013. The ESOP Policy will have to set out in detail the terms of ESOPs, cliff period, vesting schedule, exercise price/strike price, exercise period, consequences of employee leaving the startup, consequences of the startup getting acquired, etc.

Sign up here to request a free Demo

Step 2

Once the draft ESOP policy has been finalized and if you have investors in your startup, then check your Shareholders’ Agreement and Articles of Association, to verify if the approval of investors for a ESOP policy will be required. Lost? Well, just look for a clause that is titled either as “reserved matter right” or “affirmative voting matter” or  “affirmative voting right” or “investor protection matter”. Once you find this clause, then look through the several items and check if creating a stock option, ESOP etc is listed therein. If it is, then you would have to send an email to your investor alongwith copy of the ESOP policy for your startup, requesting the investor for its approval to the ESOP policy.

LexGyaan: Most VCs get their respective legal team to also review the ESOP policy. Therefore, be prepared for few iterations and discussions.

 Step 3

Where you don’t have any investors in your startup, you can skip step 2 and directly proceed with step 3, i.e., convene a Board Meeting for approval of the ESOP Policy. How to convene a board meeting properly under Companies Act, 2013?

Step 4

Convene a meeting of Shareholders (aka EGM) of your startup, for approval of the ESOP Policy.

Now you have an ESOP policy and can formally start granting ESOPs. Click here to download a free template of a ESOP grant letter!

Click here to read FAQs on ESOPs.

LexStart makes ESOP creation a breeze. Click here to learn more. Request a Demo.

 

LexStart’s LexGyaan Series: Can I grant ESOPs to a Co-Founder?

Granting ESOPs to Promoters/Co-Founders

I often get asked this question – “Can I grant ESOPs to a Co-Founder who I recently brought on board my Startup?”. Well the answer is both yes and no!

The Companies Act, 2013 prohibits grant of ESOPs to the Promoter of a company. The term “Promoter” does not necessarily refer to only a person who is named as a Promoter at the time of incorporation of the company. A Promoter is defined broadly and includes, the following:

  • Any person who has been named as such in a prospectus or is identified by the company in its annual return; or
  • Any person who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or
  • Any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act. Provided that such person is not someone who is acting merely in a professional capacity.

Therefore, typically a Co-Founder who you bring on board at a later stage, may not be a Promoter as stated in the Charter Documents (Memorandum and Articles of Association of your Startup) but still can be considered a “Promoter”, thus restricting him from receiving ESOPs in the company.

ESOPs to Promoters/Co-Founders of recognized Startups

The Companies Act, 2013 has made an exception to the above rule, by allowing Startups that are recognized by Govt. of India to grant ESOPs to founders, as long as the grant of such ESOPs is within 5 years from their incorporation. This means if your Startup has a Certificate of Recognition from DPIT, Govt. of India, then you can grant ESOPs to Promoters/Co-founders.

Related Readings : How to Get Startup India Registration

FAQs on ESOPs

 

Issue of Shares with Differential Voting Rights

What is Differential Voting Rights?

Shares with Differential Voting Rights (DVRs) means shares that give the holder differential rights as to voting (either more or less voting right) as against the Ordinary shareholders of the company.

Types of DVR    

  • Shares that have superior voting rights
  • Shares that have inferior voting rights

Eligibility/Condition for issue of shares with DVR*

  • AOA of the Company should authorize issue of DVR;
  • Consistent track record of distributable profits for the last three years;
  • No default in filing annual return for last 3 Financial Years;
  • No default in payment of declared dividend or repayment of deposit or loan borrowed;
  • the shares with differential rights shall not exceed twenty-six percent of the total post-issue paid up equity share capital;
  • No penalty by court or tribunal for any offense for the last 3 Financial Years; and
  • The shares issued with DVR cannot be changed later.

*This provisions shall not apply to private companies in case MOA and AOA of the company provide otherwise.

Procedure for issue of shares with differential voting rights

  • Check AOA of the Company;
  • Obtain valuation certificate from registered valuer;
  • Open a separate bank account;
  • The terms of issue of shares should be finalized;
  • Conduct board meeting for issue of shares with DVR;
  • In case issue of DVR affects the rights of existing class of shares then obtain consent from 3/4th of the shareholders of that class;
  • Filing form MGT-14 with ROC within 30 days of EGM;
  • Circulate offer letter along with the share application form to the investors;
  • Receive share application money along with the application form ;
  • Conduct board meeting for allotment of shares;
  • File form PAS-3 within 15 days of allotment of shares;
  • Pay stamp duty and issue share certificates; and
  • Make entry in register of members.

Difference between DVR shares and Ordinary Shares

DVR shares
  • Provide few or higher voting right to shareholders.
  • Rate of dividend is low or higher.
  • DVR shares are ideal for small shareholders or promoters.
  • Issued at a discount in comparison with ordinary shares.
Ordinary Shares
  • One share One Vote.
  • Rate of dividend is fixed for class of shareholders.
  • Ideal for large shareholders.
  • Issue at FMV.

Advantages of Issuing shares with DVR

From Issuer Perspective
  • To raise more capital without diluting its ownership structure.
  • Get control in decision making process.
  • A tool to avoid hostile take over.
  • To fund large Project.
From Investor Perspective
  • Benefit to investors since share are issued at discount & also for incremental dividend.
  • Better for investors who are looking for good quick return rather than voting rights.
  • Institutional Investors can invest in private companies without any limit and making it a subsidiary.

Dis-advantages of DVR

From companies Perspective
  • Lack of investor awareness about such issue of shares.
  • Issue shares at discount.
  • Minority shareholders can lose faith in the Company.
From investor Perspective
  • Lack of investor awareness about such issue of shares.
  • Possible misuse of voting power
  • by the promoters & hence act
  • against the interest of the shareholders.
  • Lack of liquidity may hamper return.
  • Not beneficial for Institutional
  • Investors as they are
  • interested in voting rights and long term capital gains both.

Case of Tata Motors

  • In 2008, issued DVR shares.
  • It was the first company in India to issue DVR shares and amongst the very few in Asia.
  • Issued at Rs 305 a share which was about 10% lower than the issue of normal rights at Rs.340.
  • Will offer 5% of more dividends.
  • Gives an additional 10.3% discount.
  • But carry one-tenth the voting rights of ordinary shares. This means 10 DVR shares = 1 ordinary share as far as voting rights is concerned.

Amazon caps voting rights in Witzig Advisory Services at 17%

  • Amazon has bought 17% stake in the company through Class A shares and the rest 32% through Class B shares having differential voting rights (DVR).
  • Each Class A share shall have one vote, while the Class B shares shall not carry any voting rights. This effectively caps Amazon’s voting rights in Witzig at 17%.
  • Amazon appears to have made use of DVR shares to comply with the new ecommerce FDI norms that came into force from February 1, and also to ensure that More can continue selling on its Indian marketplace.
  • The new ecommerce FDI guidelines had forced Amazon to reduce its stake from 49% to 24% in Cloudtail and Appario, the two top sellers on its marketplace. The American etailer had also evaluated the idea of limiting its holding in Witzig to less than 26%, and not acquiring 49% in the company as was originally planned.
  • By capping its voting rights in Witzig at less than 17%, Amazon will be able to continue with More as a seller. Samara Capital will hold 51% in Witzig, making the latter an Indian owned-and-controlled company.

Conclusion

  • For an investor, who wants to be in the company’s decision processes, DVR  shares is not an attractive proposition due to limited voting rights.
  • But if an investor isn’t concerned much with voting rights, then investing in the DVR would certainly be an attractive option.

Issue sweat equity shares to retain employees

  1. What is Sweat Equity Shares?

 Sweat equity shares refers to equity shares given to the company’s employees on favorable terms, in recognition of their work.  Sweat equity shares is one of the modes of making share based payments to employees of the company. The issue of sweat equity shares allows the company to retain the employees by rewarding them for their services. Sweat equity shares rewards the beneficiaries by giving them incentives in lieu of their contribution towards the development of the company. Further, Sweat equity shares enables greater employee stake and interest in the growth of an organization as it encourages the employees to contribute more towards the company in which they feel they have a stake.

As per Section 2(88) of the Companies Act, 2013 “sweat equity shares” means equity shares issued by a company to its directors or employees at a discount or for consideration, other than cash, for providing their know-how or making available rights in the nature of intellectual property rights or value additions, by whatever name called.

  1. Definition of Employee for the purpose of issue of Sweat Equity Shares?

As per Explanation (i) to Rule 8(1) of the, “Employee” means:

(a) a permanent employee of the company who has been working in India or outside India, for at least last one year; or

(b) a director of the company, whether a whole time director or not; or

(c) an employee or a director as defined in sub-clauses (a) or (b) above of a subsidiary, in India or outside India, or of a holding company of the company.

  1. What is Value addition for the purpose of issue of Sweat Equity Shares?

As per Explanation (ii) to Rule 8(1) of the, “Value Addition” means actual or anticipated economic benefits derived or to be derived by the company from an expert or a professional for providing know-how or making available rights in the nature of intellectual property rights, by such person to whom sweat equity is being issued for which the consideration is not paid or included in the normal remuneration payable under the contract of employment, in the case of an employee.

  1. What are the Conditions to be fulfilled for issue of Sweat Equity Shares?

1) Not less than one year has, at the date of such issue, elapsed since the date on which the company had commenced business;

2) The issue is authorized by a special resolution passed by the company;

3) The resolution specifies the number of shares, the current market price, consideration, if any, and the class or classes of directors or employees to whom such equity shares are to be issued;

4) The special resolution authorizing the issue of sweat equity shares shall be valid for making the allotment within a period of not more than twelve months from the date of passing of the special resolution.

5) The sweat equity shares issued to directors or employees shall be locked in/nontransferable for a period of three years from the date of allotment and the fact that the share certificates are under lock-in and the period of expiry of lock in shall be stamped in bold or mentioned in any other prominent manner on the share certificate.

6) Where the equity shares of the company are  listed on a recognized stock exchange, the sweat equity shares are  issued in accordance with the regulations made by the Securities and Exchange Board in this behalf and if they are  not so listed, the sweat equity shares are  issued in accordance with the .

7) The company shall not issue sweat equity shares for more than fifteen percent of the existing paid up equity share capital in a year or shares of the issue value of rupees five crores, whichever is higher.

8) The issuance of sweat equity shares in the Company shall not exceed twenty five percent, of the paid up equity capital of the Company at any time.

A startup company, as defined in notification number GSR 180(E) dated 17th February, 2016  issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India, may  issue sweat equity shares not exceeding fifty percent of its paid  up capital upto five years from the date of its incorporation or registration.

5. What is the Procedure to be followed for Issue of Sweat Equity Shares as per Companies Act, 2013?

For issue of sweat equity shares, the following procedure needs to be followed:

  • The Company has to take a valuation certificate from the Registered Valuer for determining the value of shares.

 

  • Convene and hold a board meeting to consider the proposal of issue of sweat equity shares and to fix up the date, time, place and agenda for general meeting and to pass a special resolution for the same.

 

  • Issue notices in writing to Shareholders for general meeting along with     explanatory statement. The explanatory statement to be annexed to the notice for the general meeting pursuant to section 102 of the Act must contain the following particulars:

(a) the date of the Board meeting at which the proposal for issue of sweat equity shares was approved;

(b) the reasons or justification for the issue;

(c) the class of shares under which  sweat equity shares are  intended to be issued;

(d) the total number of shares to be issued as sweat equity;

(e) the class or classes of directors or employees to whom such equity shares are to be issued;

(f) the principal terms and conditions on which sweat equity shares are  to be issued, including basis of valuation;

(g) the time period of association of such person with the company;

(h) the names of the directors or employees to whom the sweat equity shares will be issued and their relationship with the promoter or/and Key Managerial Personnel;

(i) the price  at which  the sweat equity shares are  proposed to be issued;

(j) the consideration including consideration other than cash, if any to be received for the sweat equity;

(k) the ceiling on managerial remuneration, if any, be breached by issuance of such sweat equity and how  it is proposed to be dealt with;

(l) a statement to the effect that the company shall  conform to the applicable accounting standards; and

(m) diluted Earning Per Share pursuant to the issue of sweat equity shares , calculated in accordance with the applicable accounting standards.

4) Convene an Extra-General Meeting and pass a special resolution

5) File the resolution with MCA in Form  No. MGT-14 within 30 days of passing the special resolution;

6) Call the Board Meeting and allot sweat equity shares to the Employees in the meeting.

7) File Form No. PAS-3 within 30 days of passing of the Board resolution for allotting sweat equity shares;

8) The Company has to pay the Stamp duty on issuance of share certificate as per the prevailing relevant state law;

9) The Company has to issue Share Certificates to the allottees within 2 months of allotment.

10) The company shall maintain a Register of Sweat Equity Shares in Form No. SH-3 and shall forthwith enter therein the particulars of Sweat Equity Shares issued.

11) The entries in the register shall be authenticated by the Company Secretary of the company or by any other person authorized by the Board for the purpose.

 

  1. What are the Disclosures in the Directors Report in respect of Sweat Equity Shares?

The Board of Directors shall, inter alia, disclose in the Directors’ Report for the year  in which such shares are  issued, the following details of issue of sweat equity shares namely:‑

1) the class  of director or employee to whom sweat equity shares were issued;

2) the class  of shares issued as Sweat Equity Shares;

3) the number of sweat equity shares issued to the directors, key managerial personnel or other employees showing separately the number of such shares issued to them , if any, for consideration other than cash and the individual names of allottees holding one percent or more of the issued share capital;

4) the reasons or justification for the issue;

5) the principal terms and conditions for issue of sweat equity shares, including pricing formula;

6) the total number of shares arising as a result of issue of sweat equity shares; the percentage of the sweat equity shares of the total post issued and paid  up share capital;

7) the consideration (including consideration other than cash)  received or benefit accrued to the company from the issue of sweat equity share.

Merchant Banker or CA, who to get Valuation Report from?

As per the recent Ministry of Corporate Affairs (“MCA”) notification with respect to Companies (Registered Valuers and Valuation) Rules, 2017, has notified Registration of Valuers for conducting the valuation under the Companies Act, 2013. It provides for registration of different category of valuers including eligibility requirements for qualifications and experience.

The valuers, who may be individuals or partnership entities or companies, would be required to be registered with the authority specified by the Central Government, i.e. Registered Valuers Organisations (RVOs) recognised by the authority under the Rules (RVO are Section 8 companies or Professional Institutes registered with Insolvency and Bankruptcy Board of India (IBBI).

Who can do valuation for Companies as per the Companies Act, 2013?

The following registered valuer can do valuation:

  1. Practicing Company Secretaries registered with IBBI;
  2. Practicing Chartered Accountant registered with IBBI;
  3. Practicing Cost Accountant registered with IBBI; and
  4. Any other person recognized for specific valuation as registered valuer by IBBI.

The eligibility norms for RVOs to be recognised have also been provided in the Rules.The functions of RVO includes internal governance structure which should provide for enforcement of a code of conduct on the registered valuers, training and conduct of educational courses for the valuation of specific asset classes for which the RVO concerned is recognised.

Valuation of specific asset classes includes:

  1. Land and Building;
  2. Plant and Machinery;and
  3. Securities or Financial Assets.

Before section 247 of the Companies Act, 2013 I.e. registered valuer came into effect, valuation was done by Independent Merchant Banker registered with SEBI or Independent Chartered Accountant in practice having minimum experience of 10 years.

As per recent MCA notification as on 23rd October, 2018 the powers of Central Government has been delegated to IBBI and it has been notified that the person who has been registered with IBBI as Register Valuer can only give Valuation Certificate.

Deadline until which valuation services are permitted to be rendered without registration with IBBI is 31st January, 2019.

Hence, the Valuation Report after 1st February, 2019 has to be obtained from Registered Valuer registered with IBBI only, however, if a valuation assignment has been accepted before 31st January 2019, it can be completed up to 30th April 2019.

Mandatory Compliance for Private Limited Companies

Every company should hold its meeting of board of directors for the fourth quarter on or before March 31, 2019 if the meeting is not conducted yet, please ensure the same is convened before the March 31, 2019.
Penalty for non-compliance: The Company and every officer of the company who is in default or such other person shall be punishable with fine which may extend to ten thousand rupees, and where the contravention is continuing one, with a further fine which may extend to one thousand rupees for every day after the first during which the contravention continues.

COMPANY INCORPORATED ON OR BEFORE DECEMBER 31, 2017? IMPORTANT MCA NOTIFICATION

However, the Companies which have not filed Financial Statements or Annual Returns or both (except case recorded under management dispute) shall not be able to file the said e-Form ACTIVE.

Companies Excluded from the requirement of filing the said e-Form:

  • Struck off Companies
  • Companies under the process of Strike off
  • Companies under Liquidation
  • Companies Amalgamated
  • Companies Dissolved

Failure to File the said e-Form ACTIVE (INC-22A):

1) If the Company fails to file the said e-Form ACTIVE on or before the due date then such Company shall be marked as “ACTIVE-NON-COMPLIANT” and shall be liable for action under Section 12(9) of the Companies Act, 2013.

2) The following e-Forms shall be barred from taken on record:-

  • SH-7 (Change in Authorized Capital)
  • PAS-3 (Change in paid-up Capital)
  • DIR-12 (Change in Director except cessation)
  • INC-22 (Change in Registered Office)
  • INC-28 (Amalgamation, de-merger)

3) Penalty of INR 10,000/- after due date.

FILING FEES:

On or before June 15, 2019 – Nil

After June 15, 2019 – INR 10,000/-

Mandatory Attachment to e-Form ACTIVE (INC-22A):

Photograph of Regd. Office showing the external building and inside office and also showing therein at least one Director/KMP who has affixed his/her DSC to the said e-Form.