Ankush GoyalPartner
Rohan KohliSenior Associate
Key Developments
-
Disclosure regime for significant beneficial ownership strengthened; requirements for companies and limited liability partnerships streamlined
The Ministry of Corporate Affairs (MCA) amended the Companies (Management and Administration) Rules, 2014 and the Limited Liability Partnership Rules, 2009 (LLP Rules) on 27 October 2023 to include requirements for: (i) every company to designate the company secretary (CS), any key managerial personnel (KMP), or a director (in case there is no CS or KMP); and (ii) every Limited Liability Partnership (LLP) to designate a partner – for furnishing information regarding beneficial interest in the shares of the company/contribution in the LLP (as applicable) to the Registrar of Companies (ROC). This amendment comes on the heels of reports highlighting various email advisories sent by the ROC to certain companies requiring them to ascertain the applicability of the Companies (Significant Beneficial Owners) Rules, 2018 (SBO Rules), and take appropriate steps for compliance.
The amendments to the LLP Rules have also mandated declaration by persons registered as partners but not holding any beneficial interest in an LLP and by persons holding a beneficial interest but not registered as partners of the LLPs.
Further, MCA also notified the Limited Liability Partnership (Significant Beneficial Owners) Rules, 2023 (LLP SBO Rules) on 9 November 2023. Although the provisions under these rules are similar to the provisions under the SBO Rules and the Companies Act, 2013 (Companies Act), a key difference is the manner of determination of significant beneficial owners (SBO) for LLPs. Under the LLP SBO Rules, SBOs of an LLP are determined basis:
- direct/indirect holding of not less than 10% capital contribution or 10% voting rights in respect of management or policy decisions;
- the right to receive or participate in not less than 10% distributable profits or any other distribution; or
- the right to exercise control or significantly influence in any manner other than direct holdings.
All individuals fulfilling any of the conditions above are required to make relevant declarations within 90 days from the date of the notification of the LLP SBO Rules. For any individual who subsequently becomes an SBO, the relevant filing has to be completed within a 30-day period. Previously, MCA had extended the ambit of the SBO-related provisions under the Companies Act to LLPs through a notification dated 11 February 2022, which has now been statutorily aligned through the LLP SBO Rules.
These developments point to a concerted effort by the ROC and MCA to strengthen the disclosure regime for significant beneficial ownership as well as streamline these requirements for companies and LLPs alike.
-
New scale-based regulatory regime for non-banking financial companies
RBI issued a Master Direction that introduces a ‘scale-based’ regulatory framework for non-banking financial companies (NBFC), superseding existing regulations that had drawn distinctions between systemically important and non-systemically important NBFCs for the purposes of regulation. Effective from October 2023, a new classification system has been implemented based on a tiered structure, which takes into account different factors such as asset size, scale of activity and risk perception. The categories are as follows:
-
Base Layer
The Base Layer comprises non-deposit taking NBFCs with assets below INR 1,000 crore and NBFCs that are peer-to-peer lending platforms, account aggregators, non-operative financial holding companies, and NBFCs without public funds and not having any customer interface.
-
Middle Layer
The Middle Layer comprises all deposit-taking NBFCs (regardless of their asset size), non-deposit taking NBFCs with assets of INR 1,000 crore and above, and NBFCs that are standalone primary dealers, infrastructure debt fund-NBFCs, core investment companies, housing finance companies, and NBFC-infrastructure finance companies.
-
Upper Layer
The Upper Layer comprises NBFCs specifically identified by RBI for warranting enhanced regulatory requirements. This identification is based on predefined parameters and scoring methodology. Further, the top ten eligible NBFCs by asset size (irrespective of any other factor) fall within this category.
-
Top Layer
This category is ideally to remain empty. It serves as a buffer and may be populated when, for instance, RBI deems certain NBFCs (in the Upper Layer) to pose a substantial systemic risk.
A key concept introduced by the Master Direction is that NBFCs that are part of a common group or are floated by a common set of promoters will not be viewed on a standalone basis. Instead, the total assets of all the NBFCs in the group will be consolidated to determine whether or not they exceed the INR 1,000 crore threshold for classification in the Middle Layer. In case the group exceeds the threshold, regulations that apply to the Middle Layer will apply to the NBFC as well as each NBFC within the group registered as an investment and credit company, micro finance institution, and factor and mortgage guarantee company. However, this methodology will not apply for classifying NBFCs in the Upper Layer.
The notification of this Master Direction is a welcome step as it removes uncertainties in the applicable regulatory framework for NBFCs that arose since the scale-based regulation framework (SBR Framework) came into force. For instance, certain categories of NBFCs such as those having assets greater than INR 500 crore and INR 1,000 crore were subject to a dual regulatory regime (being systemically important as well as falling in the Middle Layer under the SBR Framework) – which dichotomy has now been resolved.
-
-
Mandatory dematerialisation of securities of private companies
Every private company (other than a small company and a government company, as defined in the Companies Act, 2013) is required to facilitate the dematerialisation of all its securities by 30 September 2024 (Applicable Date), and henceforth issue securities only in dematerialised form. From the Applicable Date onward, before undertaking any issue, buyback, bonus issue or rights issue, private companies must also ensure that all securities currently held by any promoters, directors, or KMP have been dematerialised. Every security holder would also need to get their securities dematerialised before undertaking any transfer or subscribing to any securities under any private placement or bonus issue, or rights issue after the Applicable Date.
These requirements were previously only applicable to public companies until the notification of the Companies (Prospectus and Allotment of Securities) Second Amendment Rules, 2023 on 27 October 2023. This is a positive measure for corporate governance in India, aimed at enhancing transparency and ensuring digitisation of legacy corporate instruments and records. While a glide path until 30 September 2024 has been given for compliance with the provisions on dematerialisation of securities of private companies, it will involve significant efforts on the part of companies, depositories, shareholders, and the ROC alike to ensure overall compliance with these changes.
-
Proposed changes to the corporate insolvency resolution process – clarifying minimum entitlements for dissenting creditors and streamlining processes for real estate projects
Two discussion papers were floated by the Insolvency and Bankruptcy Board of India (IBBI) on 1 November and 6 November 2023, respectively, proposing certain (a) changes to the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations); and (b) measures to address issues faced in corporate insolvency resolution processes (CIRP) of real estate projects.
The key changes proposed to the CIRP Regulations include:
- mandatory monthly meetings for committee of creditors (CoC);
- disclosure of fair value of the corporate debtor to resolution applicants in the information memorandum; and
- further clarifications to the minimum entitlements for dissenting financial creditors under a resolution plan.
The key changes proposed for streamlining CIRPs of real estate projects are:
- allowing resolution professionals to hand over the ownership of a plot/apartment/ building to the allottees through transfer during the CIRP, including on an as-is-where-is basis, with CoC approval; and
- allowing CoCs to direct resolution professionals to invite separate resolution plans for each real estate project.
These changes will help streamline various procedural aspects involved in CIRP, ensure greater transparency, and enforce discipline in the overall conduct of various stakeholders. The real estate-specific changes will serve as legislative recognition of various judicial pronouncements and market practices that evolved over the last few years, and will likely be welcomed by market practitioners.
