Regulations
All charges, pledges require registration under new Rules

The entire list of charges requiring registration has been done away with the issuance of final Rules on Chapter VI of the Companies Act. In the absence of the list, all charges and pledges would now require registration with the Registrar

With 283 sections of the Companies Act, 2013 getting notified and due to be enforced with effect from 1 April 2014, all minds are overflowing with probable effects it will have on the affairs of the company, the compliances required under the new regime, the new prohibitions and exemptions granted and the like. Every now and then corporates and company law enthusiasts are coming up with something new to keep our senses excited and moving.

One such impact which drew our attention is Chapter VI pertaining to charges, the definition of which has been left open ended. This has led to the requirement for registration of all types to charges. This might prove to be an additional compliance burden that companies have to bear.

Definition of 'charge' under Companies Act, 1956

Section 124 of the Companies Act, 1956 ('Act, 1956') provides that the expression "charge" includes a mortgage.

Section 125 (4) of the Act, 1956 provides a list of charges requiring registration. The same is reproduced below:

"(a) a charge for the purpose of securing any issue of debentures;
(b) a charge on uncalled share capital of the company;
(c) a charge on any immovable property, wherever situate, or any interest therein;
(d) a charge on any book debts of the company;
(e) a charge, not being a pledge, on any movable property of the company;
(f) a floating charge on the undertaking or any property of the company including stock-in-trade;
(g) a charge on calls made but not paid;
(h) a charge on a ship or any share in a ship;
(i) a charge on goodwill, on a patent or a licence under a patent, on a trade mark, or on a copyright or a licence under a copyright."

A reading of the above section makes it clear that a pledge did not require registration by the companies as is brought out under sub-clause (e) above.

Definition of Pledge

Section 172 of the Indian Contracts Act, 1872 defines a pledge as:

"The bailment of goods as security for payment of a debt or performance of a promise is called "pledge"."

In simple terms a pledge is a security created on movable goods of the borrower or pledgor for the payment of a debt wherein the lender or pledgee takes actual possession of the goods until the entire debt amount is repaid by the borrower. The pledgee may retain the goods pledged, not only for payment of the debt or the performance of the promise, but for the interests of the debt, and all necessary expenses incurred by him in respect to the possession or for the preservation of the goods pledged.

Stance under the Companies Act, 2013

Unlike the Act, 1956, the Companies Act, 2013 ('Act, 2013') does not go on to define the term 'charge' or the charges that required registration under the Act. Section 77 (1) of the Act, 2013 provides that:

"It shall be the duty of every company creating a charge within or outside India, on its property or assets or any of its undertakings, whether tangible or otherwise, and situated in or outside India, to register the particulars of the charge signed by the company and the charge-holder together with the instruments, if any, creating such charge in such form, on payment of such fees and in such manner as may be prescribed, with the Registrar within thirty days of its creation"

As per Draft Rules

It was expected that the Ministry of Corporate Affairs ('MCA') would come out with such a list by way of Rules to the Act. And the MCA did not disappoint. The draft rules on charges laid down the charges requiring registration, as follows:

"(a) a charge created for the purpose of securing any issue of debentures or deposits;
(b) a charge on uncalled share capital of the company;
(c) a charge on any immovable property, wherever situate, or any interest therein;
(d) a charge on any book debt of the company;
(e) a charge, not being a pledge, on any movable property of the company;
(f) a floating charge on the undertaking or any property of the company including stock-in-trade;
(g) a charge on calls made but not paid;
(h) a charge on a ship or any share in a ship;
(i) a charge on intangible assets, including goodwill, patent, a licence under a patent, trade mark, copyright or a licence under a copyright.

The list was the same as provided under the Act, 1956. Additionally the draft rules also provided that a charge by way of hypothecation of a motor vehicle shall not require registration unless the financier so required. The text of the rule is given below:

(4) No charge by way of hypothecation of a motor vehicle shall require registration unless the financier, so requires. Provided the disclosures shall be given in the Balance Sheet regarding all such charges created by way of hypothecation of motor vehicles and the fact that charge has not been registered and the financiers have not required so."

This was a new proposed exemption to the registration requirement in addition to pledges, which provides that hypothecated motor vehicles of a company would no longer require registration unless forced upon by the financier, provided that the same was disclosed in the balance sheet.

The trend of hypothecation of motor vehicles with the financier for the repayment of the loan taken was common and the requirement of registration of each such charge was a cumbersome burden on the company. Though the not many corporates were into the practice of registering such charges, it was a welcome relief as their acts would no longer be non-compliant.

Definition of Hypothecation

Section 3 (n) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) defines 'hypothecation as:

"Hypothecation" means a charge in or upon any movable property, existing  or future, created by a borrower in favour of a secured creditor without  delivery of possession of the movable property to such creditor, as a security  for financial assistance and includes floating charge and crystallisation of  such charge into fixed charge on movable property;

As per the Final Rules

However the final Rules on Chapter VI of the Act, 2013 notified by the MCA on 28 March 2014 tells another story. The entire list of charges requiring registration, as provided under the draft rules has been done away with. In the absence of the list, all charges would now require registration with the Registrar.

This means that now pledges, which were earlier exempted from registration requirements under the Act, 1956, would now be required to be registered with the Registrar. All procedures thereafter relating to entry in the register of charges and modification and / or satisfaction of charges would also need to be complied.

Also the proposed exemption to hypothecated motor vehicles from registration under the draft rules as above, has also been withdrawn under these Final Rules. Form CHG. 1 for creation or modification of charges explicitly provides for the registration of hypothecated motor vehicles.

Accordingly, all NBFCs should now ensure that their corporate clients register the hypothecation of motor vehicles with the Registrar of Companies in addition to the registration under the Motor Vehicles Act, 1988.

(Shampita Das  works as an Associate in Corporate Law Group at Vinod Kothari & Company)
 

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COMMENTS

Dev

3 years ago

Definition of 'Charge' under Transfer of Property Act

Section 100: Charges:-

Where immovable property of one person is by act of parties or operation of law made security for the payment of money to another, and the transaction does not amount to mortgage, the latter person is said to have a charge on the property; and all provisions hereinbefore contained which apply to a simple mortgage shall, so far as may be, apply to such charge.

Important decision regarding ‘charge’ - 1997 AIR SC 2905

Indira Gandhi's Tryst with Power by Nayantara Sahgal: Book Review

Narendra Modi may turn out be an autocrat, but he will have a tough time surpassing Indira Gandhi’s record of nastiness, as this books has documented

In late March 2014, as the election fever started rising, Narendra Modi, the prime ministerial candidate, started asserting himself more and more, pushing the ‘Old Guard’ of BJP aside. The billboards exhorted Ab ki baar, Modi sarkaar. His detractors, who have always said that Modi is ‘divisive’, decried that this is unprecedented: Is he bigger than the Party? Rajmohan Gandhi tweeted: “One person has complete answer to every Indian problem! Even Indira Gandhi was not marketed thus.”

While we hold no brief for Mr Modi, the fact is that Indian politics has always been about personalities. And the benchmark—of a politician’s interests being equated with national interest—is not being set by Narendra Modi. He is yet to come anywhere near the lows we witnessed when Indira Gandhi was the prime minister. Only a small part of this was captured in the detestable slogan coined by Indira acolyte, Dev Kant Barooah: “India is Indira, Indira is India”.

Rahul Gandhi, the fifth-generation leader starting with Motilal Nehru, and grandson of Indira, leads the Congress Party in this year’s elections. He tries to present a humane face, highlighting the pro-poor policies of the Congress. He derides the aggressive and ‘divisive’ style of Mr Modi. For perspective, this is the right time to read a bit of recent history, especially about India under Indira. Public memory is short and contemporary history has often been whitewashed; so public awareness of the economic and political strife under Indira Gandhi has receded far back in collective in memory.

This is why we have forgotten that the main events of Indira’s life—the decimation of the ‘Old Guard’ in Congress, the atrocities under Emergency, pushing her sons into power, stifling the economy and keeping people poor with regressive notions such as ‘socialistic pattern of society’, the storming of the Golden Temple and, ultimately, getting killed in a ghastly fashion—she led a life centred only around herself.

One of the best assessments of that period, and Indira, one can think of, is by Indira’s cousin, Nayantara Sahgal, daughter of Vijaylaxmi Pandit, sister of Jawaharlal Nehru. She has written an interesting assessment of Indira, the person, in her book, Indira Gandhi: Tryst with Power. This is not a new book but has been reprinted in India recently.This is the right time to read the book when we are close to the most critical general elections in India’s history.

One of the shrillest battle cries of Mr Modi and his supporters is that we need to throw out the dynasty that has ruled the country for the past 65 years. How did this dynasty come about? Pandit Nehru died in 1964. Indira was still unnoticed in her own right, and “not seriously considered a candidate for the succession to Nehru. She had had no training in a profession and no experience in government.” Of course, she was present on the working committee of the Congress Party and this indicated some status in the Party; she had worked for the organisation behind the scenes and remained in the background, by choice.

Remember, she was married and a mother occupied with caring for her two sons. According to Sahgal, Indira was devoted and imaginative about their upbringing, always torn between domestic and public responsibilities. She even described herself as a ‘private’ person, so private, indeed, that no one knew her intimately. “Her griefs were well sheltered, her joys restrained. There was almost a pathos about her personality for those who tried to break through to it. It was a personality that would not step out.”

Although she was inevitably involved in politics, it must be remembered that even until then “she had hung back from the ultimate political trial—an election.” She even declined to stand for the by-election to Lok Sabha from Nehru’s constituency, Phulpur, in Uttar Pradesh after his death.

She had been elected unopposed to the Rajya Sahba after she was appointed as a minister. Interestingly, as Sahgal writes, Indira was so private that “though she had taken part in election campaigns, she had never faced the electorate herself and did not do so until 1967, more than a year after she became prime minister, when the trial could no longer be postponed.”

Indeed, Indira herself wrote to Ms Pandit on 7 December 1965: “It may seem strange that a person in politics should be wholly without political ambition but I am afraid that I am that sort of a freak… I did not want to come either to parliament or to be in Government. However, there were certain compelling reasons at the time for my acceptance of this portfolio. Now there are so many crises one after another that every time seems to be the wrong time for getting out…”

According to Sahgal, she had been only an observer, albeit close to the fount of power, during her father’s lifetime. “The party presidentship, like her earlier appointment to the Working Committee and its subsidiary bodies, had been bestowed on ‘Nehru’s daughter’.”

In other words, “these were not positions she had earned through the rough apprenticeship of state politics with its numerous considerations of region, faction and caste. She had not had to work her way up through the vast organization, or show outstanding talent, in order to be singled out. And she had shown no desire to stand out as (a) political or public personality… Her predominant image was one of retreat and extreme reserve. The country knew her as her father’s companion and the mother of two boys. If her father was grooming her for prime ministership, there was not enough evidence of it…”

Within a few years, of course, an altogether different Indira emerged. One that smashed the pillars of democracy—executive, legislature, press and the judiciary. Her means of subverting the legislature was through rigging elections, imposing President’s rule on the states at her whims and, later, putting the opposition leaders behind bars. She staffed the ministries with officials who would further her agenda. She gagged the press not only during Emergency but even earlier. Hardly anybody knows that, as early as in 1971, she tried to suffocate the Indian press through a draconian system (see Excerpt).

The radical transformation of a shy, reticent woman, about whom Nehru worried constantly, into a combative and egotistic personality that leaned heavily on Soviet power, forms the main theme of the book. Sahgal describes the Jayprakash Narayan-led movement and the mysterious case of Sanjay’s small car project Maruti in detail too.

Those who feel passionate about the future of India must know about the wasted years of the 1970s and early 1980s when a toxic mix of poor economics and self-serving politics set the country back by decades.

EXCERPT: How Indira Tried To Muzzle the Media

During the summer of 1971, the government made its first move toward control of the press when Mrs Gandhi’s own ministry of information and broadcasting prepared a draft scheme to ‘diffuse’ ownership of newspapers with a circulation of more than 15,000. This climaxed Mrs Gandhi’s bias, faithfully reflected in her minister of state’s (Nandini Sathpathy) pronouncements about the  ‘monopoly’ press. The draft scheme proposed that 95 per cent of a newspaper’s shares would be offered to journalists and other employees, and 5 per cent to existing shareholders. But each shareholder would exercise only half a vote per share, their combined voting rights amounting to 50 per cent. The remaining 50 per cent of voting rights on the management would go to a government appointee. The management would thus bear the final imprint of government authority and decisions. 

 

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Fixed-income Savers: Think Differently


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In her Different Strokes section, Sucheta describes in detail the role played by the Reserve Bank of India (RBI), Securities & Exchange Board of India (SEBI) and Moneylife Foundation (MLF) to secure justice for Suchitra Krishnamoorthi who was looted by Hong Kong & Shanghai Banking Corporation. While MLF is willing to help anyone with a genuine case—whether a celebrity, or an average person—not everyone would be as lucky as Ms Krishnamoorthi to benefit from a combined effort of MLF, a deputy governor of RBI like Dr KC Chakrabarty and the support from senior officers at RBI and SEBI. Fittingly, in the Crosshairs section, Sucheta highlights the important role played by Dr Chakrabarty, one of the most effective RBI deputy governors in decades, who is leaving by the end of April.

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