Customer Care No.

91-1145562222

MCA revisits Share Capital

and Debenture Rules, 2014
favourably
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1. Introduction
With almost 2.5 years elapsed after enforcing several provisions of Companies Act, 2013
(Act, 2013) the Ministry of Corporate Affairs (MCA) is continuously revisiting and revamping
the rules issued thereunder in order to align with policy initiatives or as a corrective measure
in response to practical difficulties faced by corporate.
The latest amendment by MCA has been vide the Companies (Share Capital and Debentures)
Third Amendment Rules, 2016(Amendment Rules). In this article we have analyzed the
amendments by MCA.
2. Companies in default eligible to issue shares with differential rights after
cooling-off period
Rule 4(1) (g) of the Companies (Share Capital and Debentures) Rules, 2014 (Rules, 2014)
expressly prohibits companies in default of payment of the dividend on preference shares or
repayment of any tem loan from a public financial institution or State level financial
institution or scheduled Bank that has become repayable or interest payable thereon or dues
Customer
Care No.
91-11- payments relating to its employees to any authority
with respect
to statutory
or default in
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The amendment to Rule 4(1)(g) provides for acooling-off period of 5 yearsin case if the
default is made good by the company i.e. a company is permitted to issue such equity shares
with differential voting rights upon expiry of 5 years from which such default was made good.
A complete prohibition throughout for companies in default under the said rule to issue equity
shares with differential voting rights is now relaxed significantly with the grant of the coolingoff period.
3. Relaxation to Start-ups in issuing Sweat equity shares & ESOPs
Rule 8(4) of Rules, 2014 restricts companies from issuing sweat equity shares in excess of
25% of the paid up capital at any time and also limits the issuance of sweat equity shares per
year to 15% of the paid up capital or issue value of Rs.5 crores whichever is higher.
The amendment expressly allows notifiedStart-ups to issue sweat equity shares not
exceeding50%of its paid up capital up to5 yearsfrom the date of its incorporation or
registration.However, the yearly limits of 15% of paid up capital or Rs.5 crores whichever is
higher has to be complied with.
Further, in case of ESOPs, Rule 12 of Rules, 2014 read with Section 62 (1)(b) of Act, 2013
regulates the issuance of ESOPsby companies. The question of eligibility is well settled by the
below Explanation provided under Rule 12(1) for the term 'Employee' as mentioned in Section
Customer
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Explanation:
For the purposes of clause (b) of sub-section (1) of section 62 and this rule ''Employee'' means(a) a permanent employee of the company who has been working in India or outside India; or
(b) a director of the company, whether a whole time director or not but excluding an
independent director; or
(c) an employee as defined in clauses (a) or (b) of a subsidiary, in India or outside India, or of a
holding company of the company but does not includei. an employee who is a promoter or a person belonging to the promoter group; or
ii. a director who either himself or through his relative or through any body corporate, directly
or indirectly, holds more than ten percent of the outstanding equity shares of the company.
The sub-clauses (i) and (ii) of clause (c) provides for the exclusion of promoter or a person
belonging to the promoter group and a director holding more than 10% of outstanding equity
shares directly or indirectly through his relative or through any body corporate from the ambit
of the term 'Employees' while issuing ESOPs.
The amendment
for the notified
Customer
Care No. exempts
91-11- the application of the above sub-clauses (i) and (ii) www.taxmann.com

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