Implementation Issues of Compulsory Demat for Wholly-owned Subsidiaries
With just 10 days left for the timeline set by the ministry of corporate affairs (MCA) to expire, companies have initiated steps for facilitating the transfer of securities in demat. The first step is the obtaining of the International Securities Identification Number (ISIN) for each of the securities issued and, thereafter, intimating the shareholders about it to facilitate transfer on and after 2 October 2018. This article discusses the implementation difficulty being faced by holding companies that are complying with the requirement for its wholly-owned subsidiaries (WOS).
 
The typical shareholding structure in case of WOS is a under:
 
a. Nominee shareholder holding jointly with the holding company
 
  • Nominee shareholder submits declaration in Form MGT-4 declaring that it holds shares on behalf of the beneficial owner being the holding company;
  • The company, being the beneficial owner as well as registered owner (joint-holder) is not required to submit Form MGT-5 as the name reflects in the register of members;
 
b. Nominee shareholder holding singly on behalf of the holding company
 
  • Nominee shareholder submits declaration in Form MGT-4 declaring that it holds shares on behalf of the beneficial owner being the holding company.
  • The holding company submits declaration in Form MGT-5 declaring that it beneficially holds the shares registered in the name of the nominee shareholder.
  • The WOS files eForm MGT-6 with the registrar  of companies (RoC) on receipt of the aforesaid declaration.
 
In case of private companies, there is at least one nominee shareholder and, in case of public companies, there are six nominee shareholders for the purpose of complying with the requirement of the minimum number of shareholders.
 
The nominee shareholders holding the shares on behalf of the holding company are employees of the holding company or of the WOS. Most commonly, these shares are held in physical form and the share certificates of the nominee shareholders are also with the holding company for safekeeping. In the event where the nominee shareholder ceases to be the employee, the shares are transferred in the name of the new employee, and the aforesaid forms are re-submitted.
 
Mandatory demat neither adds value nor provides further transparency in the case of WOS.
 
Practical Issues
 
The following practical issues are likely to be faced:
 
In case of a nominee shareholder holding jointly with the holding company:
 
  • The company as well as the nominee shareholder must be having their respective demat accounts. However, for the purpose of joint holding in demat, both the company and the nominee shareholder will have to jointly open a demat account. Where the employee ceases to be nominee, the account may have to be closed or modified to have the new nominee shareholder as the first-holder.
 
In case of nominee shareholder holding singly, on behalf of holding company:
 
  • The shares will have to be credited in the personal demat account of the nominee shareholder. In that case, the holding company will not have any control on the shares. Where the employee resigns and the holding company intends to have new a nominee shareholder, the transfer can be effected in the demat account of the new shareholder only where the delivery instruction slip (DIS) is signed by the transferor nominee. Therefore, it is prudent to have the DIS signed beforehand to avoid any difficulty while effecting the transfer later.
  • Additionally, the depositories should also have a mechanism to mark/ lock such securities in the manner done in case of pledge, in order to disable the nominee from transferring shares without the consent of the holding company. The declaration furnished in Form MGT-4 and MGT-5 may also be given. 
 
In case the holding company holds the shares entirely in its demat account:
 
  • In that case, the company cannot be said to have the minimum number of members in view of the definition of members under Section 2 (55) of Companies Act, 2013 ( reproduced hereunder):
 
“(55) ‘member’‖, in relation to a company, means—xxxxx 
(iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository;
 
  • In case the holding company holds shares entirety in its account, the beneficiary position will only show the name of the holding company and not the remaining nominee shareholders.
 
Conclusion
 
There is an urgent need for MCA to exempt several provisions, including the current one, in case of WOS, as these will be perfunctory compliance given the shareholding pattern of the WOS. A WOS is similar to a one person company the only difference being that the member is a company instead of a natural person. Accordingly, the requirement to hold an annual general meeting (AGM), passing of special resolutions and holding shares in demat adds no further transparency. The holding is entirely reported in the balance sheet of the holding company. Corporates may appropriately represent this issue before the MCA to be implemented appropriately.
 
(CS Vinita Nair Dedhia is Partner at Vinod Kothari & Co).
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    COMMENTS

    B. Yerram Raju

    12 months ago

    We face one more problem: Our share holders are micro and small enterprises or their owners. These are not so digitally literate. They are learning alphabets of accounts and digital initiatives. To make them open demat accounts is proving a big problem despite engaging very competent Company Secretary firm.

    Ramesh Bajaj

    12 months ago

    There are too many issues in case of compulsory demat. More time for thinking and rethinking to think of problems and solutions is the need of the hour.

    Competition Commission Penalises 18 Sugar Mills for Rigging Bids
    Fair trade regulator Competition Commission of India (CCI) has imposed a total penalty of Rs38 crore on 18 sugar mills and two associations for unfairly fixing the bids of a joint tender floated by state-run oil marketing companies in 2013, the government said on Tuesday.
     
    A finance ministry release said that the joint tender in question was floated by Indian Oil Corp (IOCL), Hindustan Petroleum Corp (HPCL) and Bharat Petroleum Corp (BPCL) in January 2013 for procurement of ethanol for blending with petrol.
     
    "The CCI has imposed penalties upon 18 sugar mills and 2 associations—Indian Sugar Mills Association (ISMA) and Ethanol Manufacturers Association of India (EMAI)—for rigging the bids in respect of a joint tender floated by Oil Marketing Companies (HPCL/ BPCL/ IOCL) for procurement of ethanol for blending with petrol," it said.
     
    The five complainant firms led by India Glycol Ltd accused ISMA and EMAI of persuading the oil marketers to float a joint tender for procurement of ethanol.
     
    The firms alleged that the joint tendering was an agreement among horizontal players to procure ethanol from various suppliers in breach of the competition laws, the statement said.
     
    The complainants also alleged that the sugar manufacturers, who had taken part in the tender, manipulated the bids by quoting similar rates, and in some cases identical rates, through an understanding and collective action, in violation of the domestic competition laws.
     
    The CCI, in its order, said that the bidders acted in collusion to eliminate competition and also manipulated the bidding process, the statement added.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    No Settlement for a Wilful Defaulter or Fugitive Economic Offender: SEBI
    Market regulator Securities and Exchange Board of India (SEBI) has decided not to not settle any proceedings against a wilful defaulter, a fugitive economic offender or someone who has defaulted in payment of any fees due or penalty imposed under securities laws. In addition, SEBI said it will issue settlement orders which will include monetary terms and may also include non-monetary terms. 
     
    "The (SEBI) board may not settle any proceeding where the applicant is a wilful defaulter, a fugitive economic offender or has defaulted in payment of any fees due or penalty imposed under securities laws. The board may not settle any proceeding if it is of the opinion that the alleged default has market wide impact, loss to investors or affects the integrity of the market," it says. 
     
    The market regulator had constituted a high-level committee under the chairmanship of Justice AR Dave to review its existing settlement mechanism. After due consideration of public comments and suggestions received, SEBI says its board approved framing of the Securities and Exchange Board of India (Settlement Proceedings) Regulations 2018.
     
    Additionally, SEBI says, there would be a new provision to deal with ‘settlement with confidentiality’ for any person that provides material assistance to its board in its fact-finding process and proceedings has been specified.
     
    Here are the other features of SEBI’s settlements approach:
     
    • The board shall not consider an application for settlement, if an earlier application for the same alleged default has been rejected, or if the audit or investigation or inspection or inquiry is not complete (except in case of applications for confidentiality) or if recovery proceedings have been initiated. 
    • Compounding applications shall be processed along the lines of settlement applications.
    • The board may provide for issuance of a notice of settlement prior to issuance of a show cause notice for other defaults (other than in case of summary settlement).
    • In the event of a settlement order being revoked on account of non-compliance with the terms of the order or not making full and true disclosures, the settlement amount paid shall not be refunded to the applicant. 
    • Procedure has been specified for the quorum of the meeting of the high powered advisory committee. 
    • In case the recommendations of the high powered advisory committee are rejected, the panel of whole-time members shall record the reasons for rejection of the recommendations.  
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    COMMENTS

    Vasant Kulkarni

    1 year ago

    DELAYED STEP BUT NOT DENIED ANYWAY.

    Sunil Rebello

    1 year ago

    GOOD CALL
    Also a prepare a updated public list of willful defaulters, fugitive economic offender / someone who has defaulted in payment of any fees due or penalty imposed under securities laws- on their site.

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