The following information must be mandatorily disclosed in the Director’s Report filed by the Board of Directors:
|1||Dividend, if declared & amount, if any, carried forwarded to reserves|
|2||Details of ESOPs:
a. Options granted
b. Options vested
c. Options exercised, and
d. Total number of Options in force, if any
|3||Information about the financial performance / financial position and details of the subsidiaries / associates/ JV|
|4||Details of loans, investments and guarantees by the company|
|5||Details relating to deposits, covering the following:
Accepted during the year;
|7||Disclosures under the Sexual Harassment of Women at Workplace (Prevention, Prohibition & Redressal) Act, 2013|
|8||Borrowing by the company|
|9||Details of rent paid|
|11||Director remuneration (for each director)|
|12||Details of transfer of shares during the financia year|
|13||Break up of related party transaction (1. Name of related party and nature of relationship and 2. Duration of the agreement)|
What does Issue of Shares through Differential Voting Rights means?
The issue of 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.
As per Section 43(a)(ii) of the Companies Act, 2013, a company incorporated in India and limited by shares is permitted to have equity shares with differential voting rights as part of its share capital. The differential rights appended to such equity shares may be with respect to dividend, voting or otherwise. Such equity shares may be issued by a company as per Rule 4 of the Companies (Share Capital & Debentures) Rules, 2014 prescribed under the Companies Act, 2013. Private companies can issue shares with differential voting rights in the manner prescribed under their Articles of Association, provided the Articles exempt the applicability of the Section 43 and 47 of the Companies Act, 2013 read with rule 4 of the Companies (Share Capital & Debentures) Rules 2014.
Section 47 of The Companies Act, 2013, provides for every shareholder of a company to have a right to vote on every resolution presented before the company. However, in the event that the memorandum and articles of association of the company so provide, a private company may opt to not accord every member with such right to vote.
What are the benefits of issuing shares with differential voting rights?
A company may choose to issue shares with differential voting rights for obtaining investments without offering voting rights to the investor and thereby avoiding any attempts at a hostile takeover. Similarly, the promoters can get investment without diluting the control on decision making capabilities. Shares with differential voting rights are favorable to private companies which do not have abundance of dispensable funds or distributable profits and are susceptible to a hostile takeover. Issuance of shares with differential voting rights affords an opportunity to such private companies to broaden their capital base without having to lose control over or management of the company.
What is the Procedure for issue of issue of shares with DVR?*
1) No company limited by shares shall issue equity shares with differential rights as to dividend, voting or otherwise, unless it complies with the following conditions, namely:-
(a) the articles of association of the company should authorizes the issue of shares with differential rights;
(b) The Company should call board meeting and shareholders meeting for passing ordinary resolution for issue of shares with DVR;
Provided that where the equity shares of a company are listed on a recognized stock exchange, the issue of such shares shall be approved by the shareholders through postal ballot;
(c) the voting power in respect of shares with differential rights of the company shall not exceed seventy four per cent. of total voting power including voting power in respect of equity shares with differential rights issued at any point of time;
(d) the company has not defaulted in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares;
(e) the company has no subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such deposits or debentures or payment of dividend;
(f) the company has not defaulted in payment of the dividend on preference shares or repayment of any term loan from a public financial institution or State level financial institution or scheduled Bank that has become repayable or interest payable thereon or dues with respect to statutory payments relating to its employees to any authority or default in crediting the amount in Investor Education and Protection Fund to the Central Government;
Provided that a company may issue equity shares with differential rights upon expiry of five years from the end of the financial Year in which such default was made good.”]
(g) the company has not been penalized by Court or Tribunal during the last three years of any offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Securities Contracts Regulation Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act, under which such companies being regulated by sectoral regulators.
(2) The explanatory statement to be annexed to the notice of the general meeting in pursuance of section 102 or of a postal ballot in pursuance of section 110 shall contain the following particulars, namely:-
(a) the total number of shares to be issued with differential rights;
(b) the details of the differential rights ;
(c) the percentage of the shares with differential rights to the total post issue paid up equity share capital including equity shares with differential rights issued at any point of time;
(d) the reasons or justification for the issue;
(e) the price at which such shares are proposed to be issued either at par or at premium;
(f) the basis on which the price has been arrived at;
(g) (i) in case of private placement or preferential issue-
(a) details of total number of shares proposed to be allotted to promoters, directors and key managerial personnel;
(b) details of total number of shares proposed to be allotted to persons other than promoters, directors and key managerial personnel and their relationship if any with any promoter, director or key managerial personnel;
(ii) in case of public issue – reservation, if any, for different classes of applicants including promoters, directors or key managerial personnel;
(h) the percentage of voting right which the equity share capital with differential voting right shall carry to the total voting right of the aggregate equity share capital;
(i) the scale or proportion in which the voting rights of such class or type of shares shall vary;
(j) the change in control, if any, in the company that may occur consequent to the issue of equity shares with differential voting rights;
(k) the diluted Earning Per Share pursuant to the issue of such shares, calculated in accordance with the applicable accounting standards;
(l) the pre and post issue shareholding pattern along with voting rights as per clause 35 of the listing agreement issued by Security Exchange Board of India from time to time.
(3) The company shall not convert its existing equity share capital with voting rights into equity share capital carrying differential voting rights and vice–versa.
(4) The Board of Directors shall, inter alia, disclose in the Board’s Report for the financial year in which the issue of equity shares with differential rights was completed, the following details, namely:-
(a) the total number of shares allotted with differential rights;
(b) the details of the differential rights relating to voting rights and dividends;
(c) the percentage of the shares with differential rights to the total post issue equity share capital with differential rights issued at any point of time and percentage of voting rights which the equity share capital with differential voting right shall carry to the total voting right of the aggregate equity share capital;
(d) the price at which such shares have been issued;
(e) the particulars of promoters, directors or key managerial personnel to whom such shares are issued;
(f) the change in control, if any, in the company consequent to the issue of equity shares with differential voting rights;
(g) the diluted Earning Per Share pursuant to the issue of each class of shares, calculated in accordance with the applicable accounting standards;
(h) the pre and post issue shareholding pattern along with voting rights in the format specified under sub-rule (2) of rule 4.
(5) The holders of the equity shares with differential rights shall enjoy all other rights such as bonus shares, rights shares etc., which the holders of equity shares are entitled to, subject to the differential rights with which such shares have been issued.
(6) In case issue of DVR affects the rights of existing class of shares then obtain consent form that class shares (3/4th) or by passing special resolution by having meeting of separate class of shares and file form MGT-14 with ROC;
(7) Where a company issues equity shares with differential rights, the Register of Members maintained under section 88 shall contain all the relevant particulars of the shares so issued along with details of the shareholders.
*The provisions of Section 43 and Section 47 of the Companies Act, 2013 shall not apply to private companies in case MOA and AOA of the company provide otherwise.
July 26, 2019: Master Class on Convertible Notes (Webinar)
Timing: 4 p.m to 5.30 p.m.
Join LexStart for a detailed analysis of Convertible Notes as instruments for fundraising. This Master Class on Convertible Notes will answer the following questions:
- What is a Convertible Note?
- How is it different from CCDs and CCPS?
- How does valuation work in a Convertible Note? How do the concepts of floor and cap work?
- Is Convertible Note the right instrument for you?
Convertible Notes are a relatively new instrument in the Indian startup ecosystem and this Master Class will help both startups and investors understand how these instruments work. Convertible Notes are a cheaper and faster route of fundraising available to registered startups and this Master Class will help startups understand how to use them.
Click here to register
- July 30, 2019: Term Sheets 101 (Webinar)
Timing: 4.30 p.m to 5.30 p.m.
Join LexStart for a detailed discussion on investment term sheets, which will help you:
- Understand fundraising jargon typically used in investment term sheets and how to negotiate them
- Learn more about different investor rights like pre-emptive rights, tag rights, drag rights and liquidation preference typically found in investment term sheets
- Learn more about company/promoter obligations typically included in investment term sheets
Click here to register
- July 31, 2019: Corporate Governance – Key Compliances for Stakeholders (Webinar)
Timing: 4 p.m to 5 p.m.
Join LexStart for a detailed discussion on the key compliances that stakeholders in startups should be aware of. In this session, we will cover the following:
- Thinking of taking a Board seat? Understand the Director obligations & liabilities
- Running a startup? Understand important corporate compliances
- Investing in a company, or fundraising from a VC? Understand the compliances involved
Click here to register
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.
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
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.