In this blog post, Mrinal Litoria, a student pursuing his BA LLB from the Rajiv Gandhi National University of Law, Patiala and a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyses the amendments made to Clause 49 of the Listing Agreement of SEBI.

In this blog post, Meghana Balan, a Bangalore-based Lawyer with an Independent Practice and a student pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, compulsorily convertible debentures and non- convertible debentures.

Introduction

Debentures are debt instruments that are not secured by physical collateral but rather by the creditworthiness of the business that issues the debenture. It is a means of raising capital, one of the most common forms of long-term loans. These instruments are for a fixed period and pay out interest at a fixed rate; the interest paid on debentures takes preference over the dividends paid to the company’s shareholders.

There are two types of debentures, convertible and non-convertible debentures. As the names suggest, convertible debentures are instruments that convert into equity shares of the issuing company after a set period, in a sense, it is a kind of secured loan, due to which convertible debentures are issued at a lower rate of interest than non-convertible debentures and is preferred mode of investment by many investors. Non-convertible debentures are debt instruments that cannot be converted into equity shares and are usually issued at a higher rate of interest compared to convertible debentures.

Governing laws

1. Companies Act, 2013
2. Companies (Share Capital and Debentures) Rules, 2014
3. Companies (Acceptance of Deposits) Rules, 2014
4. Companies (Acceptance of Deposits) Amendment Rules, 2016
5. SEBI (Debenture Trustees) Regulations, 1993 and
6. SEBI (Issue and Listing of Debt Securities) Regulation, 2008

Discussion

The term debenture is defined in the Companies Act, 2013 under Section 2(30), debenture includes debenture stock, bonds or any other instrument of the company evidencing a debt, whether constituting a charge on the assets of the company or not.

Section 71 of the Companies Act, 2013 along with Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014 deals with debentures.

Compulsorily Convertible Debenture

Compulsorily convertible debenture also known as CCD is a type of debenture in which the whole value of the debenture must be converted into equity by a specified time. The issuing company decides the compulsory convertible debentures’ ratio of conversion  at the time of issue. CCD is a type of hybrid instrument, meaning it is neither considered a pure debit nor pure equity.

Section 71(1) permits companies to issue debentures with an option to convert such debenture into shares, either wholly or partly at the time of redemption, provided that it shall be approved by a special resolution passed at a general meeting. Companies issue CCDs through a private placement offer.[1]

No Debenture Redemption Reserve is required to be created in case of CCDs.[2] Further a company issuing compulsory convertible debentures, need not execute debenture trust deed or appoint a debenture trustee as it is not securing anything and no payment is to be made at the time of maturity of the CCD converts into equity and not redeemed.

However it is important to keep in mind the Companies (Acceptance of Deposits) Rules, 2014 which excludes as per clause ix of Rule 2(1)(c), any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking pari-passu with the first charge on any assets referred to in Schedule III of the Act excluding intangible assets of the Company or bonds or debentures compulsorily convertible into shares of the company within ten years[3].

Therefore all CCD have to convert within ten years, else it will be considered a deposit under the Companies Act, 2013 and therefore, the provisions relating to deposits will be applicable. This term was previously five years but has been amended to ten years with effect from 29^th June 2016.

As per Reserve Bank of India guidelines, CCDs are considered as equity for all the reporting purposes and under financial statements, however, until the time of conversion into equity, CCDs are not considered as part of the share capital of a company.

Non-Convertible Debentures

Non-convertible debentures are debentures that do not convert into equity on maturity. Non-convertible debentures, also known as NCD, are used as means to raise long-term funds for companies through a public issue. Since they do not convert into equity, they are usually given a higher rate of interest compared to convertible debentures. NCDs offer various other benefits to the holder including high liquidity through stock market listing and safety since they can be issued by companies which have a good credit rating as specified in the norms laid down by RBI for the issue of NCDs.

There are two kinds of NCDs, secured non-convertible debentures, those that are secured by assets that can be liquidated at the time of redemption in the event the issuing company is unable to pay. Therefore, usually, the returns on secured NCDs are lower than unsecured NCDs.

Unsecured NCDs are NCDs not secured by any assets and like any unsecured debt will only receive payment after payments are made to entities that are secured. Therefore unsecured NCD’s have high-interest rates.

Secured NCDs are issued by companies subject to Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014, SEBI (Debenture Trustees) Regulations, 1993 and SEBI (Issue and Listing of Debt Securities) Regulation, 2008.

A company shall not issue secured debentures unless it complies with the following conditions:

1. An issue of secured debentures may be made, provided the date of its redemption shall not exceed 10 years from the date of issue.[4] This term is extended up to 30 years in the case of companies engaged in the setting up of infrastructure projects.
2. An issue of debentures shall be secured by the creation of a charge, on the properties or assets of the company, having a value which is sufficient for the due repayment of some debentures and interest thereon.[5]
3. The company shall appoint a debenture trustee before the issue of prospectus or letter of offer for subscription of its debentures and not later than 60 days after the allotment of the debentures, execute a debenture trust deed to protect the interest of the debenture holders.[6]
4. The security for the debentures by way of a charge or mortgage shall be created for the debenture trustee on-

• Any specific movable property of the company (not being like pledge); or
• Any specific immovable property wherever situate, or any interest therein.

5. The company shall appoint debenture trustees under sub-section (5) of section 71, after complying with the following conditions, namely-[7]
6. the names of the debenture trustees shall be stated in letter of offer inviting subscription for debentures and also in all the subsequent notices or other communications sent to the debenture holders;
7. before the appointment of debenture trustee or trustees, a written consent shall be obtained from such debenture trustee or trustees proposed to be appointed, and a statement to that effect shall appear in the letter of offer issued for inviting the subscription of the debentures;
8. A person shall not be appointed as a debenture trustee if he-

• Beneficially holdsshares in the company;
• Is a promoter, director or KMP or any other officer or an employee of the company or its holding, subsidiary or associate company;
• Is beneficially entitled to money which is to be paid by the company otherwise than as remuneration payable to the debenture trustee;
• Is indebted to the company, or its subsidiary or its holding or associate company or a subsidiary of such holding company;
• Has furnished any guarantee in respect of the principal debts secured by the debentures or interest thereon;
• Has any pecuniary relationship with the company amounting to two percent or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;
• Is a relative of any promoter or any person who is in the employment of the company as a director or KMP.

9. The Board may fill any casual vacancy in the office of the trusteebut while any such vacancy continues, the remaining trustee or trustees, if any, may act. Provided that where such vacancy is caused by the resignation of the debenture trustee, the vacancy shall only be filled with the written consent of the majority of the debenture holders.

10. Any debenture trustee may be removed from office before the expiryof his term only if it is approved by the holders of not less three-fourth in value of the debentures outstanding, at their meeting.

The duties of the debenture trustee are enumerated in Rule 18(3) of the Companies (Share Capital and Debentures) Rules, 2014 and the details of the procedure for debenture holders meeting under Rule 18(4) of the Companies (Share Capital and Debentures) Rules, 2014.

The company shall create a Debenture Redemption Reserve for the purpose of redemption of debentures, in accordance with the conditions given in Rule 18(7) below:

1. the Debenture Redemption Reserve shall be created out of the profits of the company available for payment of dividend;
2. the company shall create Debenture Redemption Reserve equivalent to at least twenty-five percent of the amount raised through the debenture issue before debenture redemption commences[8]
3. every company required to create Debenture Redemption Reserve shall on or before the 30th day of April in each year, invest or deposit, as the case may be, a sum which shall not be less than fifteen percent of the amount of its debentures maturing during the year ending on the 31st day of March of the next year, in any one or more of the following methods, namely:-

• in deposits with any scheduled bank, free of any charge or lien;
• in unencumbered securities of the Central Government or of any State Government;
• in unencumbered securities mentioned in Sub-clauses (a) to (d) and (ee) of section 20 of the Indian Trusts Act, 1882;
• in unencumbered bonds issued by any other company which is notified under sub-clause (f) of section 20 of the Indian Trusts Act, 1882;
• the amount invested or deposited as above shall not be used for any purpose other than for redemption of debentures maturing during the year referred above:

Provided, that the amount remaining invested or deposited, as the case may be, shall not at any time fall below fifteen percent of the amount of the debentures maturing during the year ending on the 31st day of March of that year.

1. In the case of partly convertible debentures, Debenture Redemption Reserve shall be created in respect of the non-convertible portion of debenture issue in accordance with this sub-rule.
2. The company shall not utilize the amount credited to the Debenture Redemption Reserve except for the purpose of redemption of debentures.

A trust deed for securing any issue of debentures shall be open for inspection by any member or debenture holder of the company, in the same manner, to the same extent and on the payment of the same fees, as if it were the register of members of the company.[9]

A copy of the trust deed shall be forwarded to any member or debenture holder of the company, at his request, within 7 days of the making thereof, on payment of a fee.[10]

Summary

Compulsorily Convertible Debentures are:

1. Are issued under private placement.
2. Can be issued by both private and public companies.
3. Have a prefixed conversion date (however cannot exceed 10 years).
4. Have a fixed rate of interest which is lower than that of non-convertible debenture secured or otherwise and
5. The issuer determines the conversion ratio at the time of issue.

Non-Convertible Debentures are:

1. Are issued either under private placement or by public offer
2. Can be issued by public companies, private companies can issue only secured non-convertible debentures.
3. Redemption date cannot exceed 30 years for companies engaging in infrastructure projects and not more than 10 years for all others.
4. Rate of interest is higher than CCDs
5. Debenture Redemption Reserve is required to be created for secured NCDs.
6. Debenture trust deed is to be executed and debenture trustee appointed to ensure compliance.

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Footnotes:

[1]Under the provisions of Section 42 of the Companies Act, 2013

[2]Section 71(4), Companies Act, 2013

[3]Companies (Acceptance of Deposit) Amendment Rules, 2016

[4]Rule 18(1)(a)

[5]Rule 18(1)(b)

[6]Rule 18(1)(c)

[7]Rule 18(2)

[8]SEBI (Issue and Listing of Debt Securities) Regulation, 2008

[9]Rule 18(8)(a)

[10]Rule 18(8)(b)

In this blog post, Rahul Ranjan, a Third Year student studying at Vinoba Bhave University, Hazaribagh, Jharkhand and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, lists and describes the provisions provided under the Companies Act, 2013 for the protection of the investor. 

In this blog post, Tresa Ajay, a student of National University of Advanced Legal Studies, Kochi, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses in detail the Doctrine of Indoor Management in a Company. 

In this blog post, Mamta Ramaswamy, an Associate at Doraswamy Law Chambers (DLC), Bangalore and a student pursuing her Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the concept of compounding of offences under Companies Act, 2013.

Introduction

The word ‘compound’ is not defined under the Companies Act, 2013 or the Companies Act, 1956. According to the Law Commission report on Compounding of (IPC) Offence, Compounding in the context of criminal law means forbearance from the prosecution as a result of an amicable settlement between the parties[1].

Compounding under the Companies Act, 2013

Section 441 of the Companies Act, 2013 (the Act) deals with the compounding of offenses which came into effect on 1^st June 2016. According to section 441, any offence punishable under the Act, whether committed by a company or by any of its officer, with fine only, may either before or after institution of any prosecution, be compounded by the Tribunal or where the maximum amount of fine which may be imposed for such offence does not exceed five lakhs rupees, by regional director or any officer authorised by the Central Government on payment of such sum as may be prescribed by that Tribunal or regional director or such offer authorised by the Central Government. Also, any offense which is punishable under the Act, with imprisonment or fine or both shall be compounded with the permission of the Special Court, established under section 435 of the Act.

The section further states that offenses shall not be compounded under the following conditions:

1. if investigation against such officer or company is pending under the Act;
2. if a company or the officer commits the offense within 3 years from the date a similar offense committed by such officer or company was compounded or,
3. if the offenses are punishable with imprisonment only or with imprisonment and also with fine.

Therefore, an offense under the Companies Act, 2013 is compoundable, i.e., the offender can pay a fine for an offense if such offense is punishable by fine or imprisonment and not with just imprisonment.

Issue with this section

According to section 24(1) of the Act, Securities and Exchange Board of India (SEBI) shall administer, issue and transfer of securities and non-payment of dividend by the listed companies or those companies which intend to get their securities listed on any recognized stock exchanges in India by making regulations in this behalf.

Therefore, from the provisions as mentioned above, it can be deduced that an unlisted company intending to get listed can come under the purview of SEBI, i.e., an unlisted public company. So, there seems to be a conflict of the provisions as mentioned above, i.e., if an unlisted public company intends to get listed on the stock exchanges then compounding of offenses will be regulated by section of 24A of the Securities and Exchange Board of India, Act 1992. Therefore, according to the Sahara case[2] intending to get listed would mean any company offering its securities to more than 49 persons, which would entail that such offer is a public offer and thus shall be governed by SEBI.

Therefore, any company which is not a listed company but undertakes actions like a listed company shall be governed by SEBI laws and thus the decision of compounding the offenses will also lie with SEBI.

Conclusion

Compounding of offences is an important concept because if an officer or a company admits to commission of an offence, then in such case, it must be given a chance of making a payment in terms of fine to the concerned authority and reduce its punishment with respect to such offence when punishment for such offence is not severe.

Footnotes:

[1]http://lawcommissionofindia.nic.in/reports/report237.pdf

[2] Sahara India Real Estate Corporation Limited and Ors vs. Securities and Exchange Board of India CIVIL APPEAL NO. 9813 OF 2011

In this blog post, Sonia Shinde, the Senior Manager of Operations at Pcura Consulting Pvt. Ltd. who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, writes about the integral areas of corporate reporting in narrative responsibility.

Integrated Reporting is about communication between companies and capital markets. Financial reports alone don’t provide sufficient insight about business performance. The investors and shareholders look for a holistic view of how an organization creates value, how external drivers impact business model in short – medium – longer term.

Integrated Reporting gives the opportunity for business reporting about organizational strategy and how they create value. They demonstrate how business uses capital. This allows us to understand risks around achieving the performance measure and the sustainability of the business in long run. Helps investors to extend they should continue in the business.

The International Integrated Reporting Councils (IIRC) framework provides the company with a starting point for driving integrated thinking and reporting.

IIRC has set out 5 guiding principles and 6 content elements for an Integrated Reporting:-

Guiding principles

1. Strategic Focus
2. Future Organization
3. Connectivity of Information
4. Responsiveness and Stakeholder Inclusiveness
5. Conciseness, Reliability, and Materiality

Content elements

1. Organizational overview and business model
2. Operating context, including risks and opportunities
3. Strategic objectives
4. Governance and Remuneration
5. Performance
6. Future outlook

IIRC also helps the organization to understand how Integrated Reporting differs from traditional corporate reporting. For this, it has contrasting difference between Current and Integrated Reporting. The main aspects of Integrated Reporting are to address resources (capital) which the business consumes and how it creates finance, human, manufactures, intellectual, social, positive and profitable impact. It gives a clear opportunity for the company to experiment and to explore the potential benefits in future.

In this blog post, Gopalakrishnan Arjun, a student of the National University of Advanced Legal Studies, Kochi, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, writes about the liability of Sharekhan if shares fraud is committed using their portal.

Sharekhan is an Online Share Trading Centre. It provides a portal for individuals to trade on shares.

The SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations, 2003 prohibits certain kinds of activities which are fraudulent[1]. These regulations prohibit[2] the buying, selling or dealing in securities in a fraudulent manner. A prohibition has been placed on the use of any manipulative practice, in contravention of the provisions of the Act, to facilitate the issue, purchase or sale of security. Further, the regulations prohibit the employment of any method to defraud someone in relation to the issue of securities that are listed or are proposed to be listed.There also exists a prohibition regarding any act, in violation of the provisions of the Act, operating as deceit on a person regarding the issue of securities that are again, listed or proposed to be listed on a recognized stock exchange.

The section also stipulates that no person shall be allowed to do any of these either directly or indirectly. Indirectly would mean, through something else. The act could be through an online trading portal like Sharekhan. Hence, any fraudulent activity committed through Sharekhan is also prohibited. Sharekhan in such a situation will be the intermediary.

SEBI has the power to issue a warning or censure against an intermediary and suspend or even cancel his registration. The reasons will have to be recorded in writing, and the steps taken would have to be in the interest of investors and securities market[3]

SEBI, on August 1, 2015, fined the broking firm, Sharekhan and some other individuals. The fine was by allegations of front-running activities, indulged in by these entities. The Regulator computed the unlawful gains made by Sharekhan and the 15 entities. Eventually, the total fine imposed was Rs 14.7 crore. The fine was also based on the investigations conducted, which revealed that for the period of March 1, 2009, to March 31, 2011, some clients of Sharekhan were front-running the orders of the Sterling group. This was affirmed by the fact that the subsequent orders placed by the front-runners matched almost completely with the orders placed by the Sterling Group.[4]

Hence, it can be concluded that when a fraud is committed through Sharekhan, Sharekhan will be held liable and will be fined for the same.

(1) A knowing misrepresentation of the truth or concealment of material fact so that another person may act to his  detriment;

(2) A suggestion as to a fact which is not true by one who does not believe it to be true;

(3) An active concealment of a fact by a person having   knowledge or belief of the fact;

(4) A promise made without any intention of performing it;

(5) A representation made in a reckless and careless manner whether it be true or false;

(6) Any such act or omission as any other law specifically declares to be fraudulent,

(7) Deceptive behavior by a person depriving another of informed consent or full participation,

(8) A false statement made without reasonable ground for believing it to be true.

(9) The act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price.

Footnotes:

[1] “fraud” includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall   also include-

[2]Reg 3, SEBI (Prohibition Of Fraudulent And Unfair Trade Practices Relating To Securities Market) Regulations, 2003.

[3]Reg 12, SEBI (Prohibition Of Fraudulent And Unfair Trade Practices Relating To Securities Market) Regulations, 2003.

[4]Http://articles.economictimes.indiatimes.com/2015-08-01/news/65074524_1_sharekhan-unlawful-gains-sebi, Last visited, 30.07.2016

In this blog post, Vyoma Mehta, a student of NMIMS, School of Law, who is currently pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, writes about the liability of e-wallets in credit card frauds.

An online wallet can popularly be defined as a place where a prepaid account is created online, where one can stock money, and the same money can be used as and when required by the person. The requirement of the system of e-wallets was seen with the rapid and unprecedented increase in the e-commerce sector in India. As the buying and selling increased in an online medium, mode of payments through online mediums also had to emerge, and thus the concept of e-wallets has been established which further helps in completing transactions. Through e-wallets, understood as a pre-loaded facility, consumers will be able to buy a variety of products that range from airline tickets to grocery without always having to swipe their debit or credit card, as the details which will be required to make the payment and complete the transactions will always be stored in the online wallets. This method of payment through online wallets has emerged as another payment option amongst the various other ways in which payments can be made for online shopping. Companies which usually offer e-commerce and telecom services such as Paytm or Vodafone for example, also offer a system of payment in which consumers can preload money and use to pay for their services which are popularly known as e-wallets.

Types of e-wallets in the market

According to the Reserve Bank of India, there are three kinds of wallets[1]:

Closed wallet

A company issues an online wallet to a consumer for buying goods and services exclusively from the company issuing the wallet, which is known as a closed online wallet. It is imperative to note that cash withdrawal is not permitted from these online wallets. An example of companies which offer closed online wallets is MakeMyTrip, Flipkart, Jabong, etc.

Semi-closed wallets

In a semi-closed online wallet, goods and services can be bought including financial services at identified merchant locations or establishments which are clearly defined and which have a specific contract with the issuer to accept the payment instrument. These types of wallets also do not permit cash withdrawal or redemption of the cash by the holder. Companies which offer such semi-closed wallets are Citrus Payment Solutions, Paytm.

Open wallets

In the case of open wallets, goods and services including financial services can be purchased at merchant locations or point of sale terminals that accept cards. In the case of open wallets, cash withdrawal is possible at automated teller machines or business correspondents. Banks can only issue these kinds of wallets. An example of the open wallet is M-pesa by Vodafone India Ltd. in partnership with ICICI Bank Ltd.

Intermediary liability

The Information Technology Act provides the definition of intermediary in which it is stated that “with respect to any particular electronic records, means any person who on behalf of another person receives, stores or transmits that record or provides any service with respect to that record and includes telecom service providers, network service providers, internet service providers, web hosting service providers, search engines, online payment sites, online auction sites, online market places and cyber cafes”^[2]

An intermediary according to the current standards is barred from being held liable for any third party information, data or communication link hosted by him or her in certain cases. It is to be noted that if an intermediary is merely providing access to a system  over which information can only be made available to be accessed by third parties or a system in which such information is temporarily stored or a mode where the intermediary is only hosting certain information on behalf of somebody else and the intermediary has not done any act which would amount to the initiation, modification of the content and has not specifically selected any receiver then the intermediary will not be held liable. If the intermediary has only played the role of general observance and general due diligence as a part of discharging his duties, then the intermediary cannot be brought to any liability for such content. This exemption, however, will not apply if the intermediary has actively played any role in the commission of an unlawful act by abetting, conspiring, inducing or otherwise or had any knowledge of the said unlawful information, and has failed to remove it or block access to such unlawful information expeditiously. Third party information as understood from above means any information which is dealt with by an intermediary in his or her capacity as an intermediary. This would amount to any information which is not developed by the intermediary but only used by the intermediary to provide to people viewing their content online.[3]

The Information Technology Rules provide for specific measures which the intermediaries must comply with not to be held liable, which includes that the intermediaries must comply with the due diligence standards as laid down by the Act. [4]Publication of the privacy policy, rules and regulations of the intermediary should be made available along with the user agreement if necessary, stating that the contravention of the same could lead to the termination of user’s right to access. Further certain kind of information which is harmful, libelous and violative of any intellectual property or contains certain kind of virus must not be hosted, transmitted or shared. When an intermediary is intimated through notice by any affected person that his or her computer system is storing or hosting any information which is not lawful, then he or she must remove such information within thirty six hours of receiving such notice, or render such information inaccessible so that there is no access and spread of information which is not lawful.[5]

A rather dangerous position was adopted by the Delhi High Court in a case when it assumed that an intermediary held a reasonable ground of belief in respect of the infringing activity on his/her site. While such an assumption holds true in the physical world, it breaks down in virtual space; intermediaries have little monitory control over the dissemination of information on their site. However, the High Court used this faulty line of reasoning to hold the defendant liable for running a website that facilitated the sharing of media content by users/subscribers.[6]

As the explanation of the definition and types of e-wallets and intermediaries are exhaustively given above, it can be inferred from the same that e- wallets act as intermediaries as they help to store information regarding the credit or debit card details or any other details which support electronic payment for buying of goods and services. However, if there is any discrepancy or a hack that has been made for which some other party has made payment in the name of the owner, then the intermediary by the rules will have to intimate the banks as well as the customers. The intermediary cannot be held liable for the frauds that are committed and according to Reserve Bank of India, the customers’ liability arising out of fraudulent electronic transactions will be capped, and has warned banks that they should plug the loophole leading to mis-selling of insurance products, failing which they would be penalized. Thus in cases of credit card frauds, the banks will be responsible for making good the loss for the customers. There, however, is no codified law to back the same but the Reserve Bank of India considering the same and plans to come up with guidelines regarding the liability when any electronic transactions fail.

Footnotes:

[1] http://www.financialexpress.com/personal-finance/e-wallets-money-on-the-move/28571/

[2]  http://articles.economictimes.indiatimes.com/2013-06-14/news/39976342_1_e-wallet-facility-airtel-money-flipkart

[3] Section 79, Information Technology Act, 2008

[4] Rule 3, Information Technology(Intermediary Guidelines, 2011).

[5] Section 79(2), Information Technology Act, 2008

[6] Super Cassettes v. Myspace (2011) 48 PTC 49. (Del)

In this blog post, Sudarshan Mohta, a law graduate, writes about the differences between a One Person Company and a Sole Proprietorship.

Introduction

India is a land of opportunities, trade, business and commerce. Through this article, we will learn about two types of business entities, both of which can be established by only one person, namely Sole Proprietorship and One Person Company, and are recognized under the laws of India.

Sole Proprietorship

i. What is a Sole Proprietorship?

The word ‘sole’ means single and ‘proprietorship’ means ownership. Sole proprietorship is known to be the oldest, simplest and most common form of business entity. Sole proprietorship is a kind of business entity which is owned and controlled by one person only, who assumes the title of ‘sole proprietor’ or a ‘sole trader’.

The two main features of a sole proprietorship are:

• The sole proprietor receives all the profits; and
• The sole proprietorship is subject to unlimited liability

The following table is a summary of the advantages and disadvantages of a sole proprietorship:

ii. Advantage of a Sole Proprietorship

Sole proprietorship is a popular form of doing business, and comes with the following advantages:

• Easy to form and wind up: A sole proprietorship is easy to form and wind up; it doesn’t require formal registration except for those businesses which are required to have necessary licenses issued by the local authorities. The sole trader is at absolute discretion to form or wind up the business at any time.
• No formal registration: It is not mandatory for sole proprietors to register their business. However, an exception to the same can be made for certain tax related and business specific registrations.
• Quick decision taking power: The ownership of the business is in the hands of one person i.e. the sole proprietor. Therefore, he has absolute control and can make quick and flexible decisions. A sole proprietor is free to consult others (professionals) before taking a decision.
• Close personal relations: Close personal relations are maintained by the sole proprietor with his employees and his customers. This ensures a smooth flow in the business.
• Safety of business secrets: Since management and control are in the hands of the sole proprietor, keeping business secrets is easy. It is essential to keep secrets and technicalities away from competitors and outsiders.
•  No sharing of profits: As the name suggests, a sole proprietor is the sole owner of the business, hence all profits are retained by him.
•  Direct motivation: There is a direct link between efforts and reward, therefore, the sole proprietor would be inclined to work harder to secure higher profits and make minimal losses.
•  Provides employment: Sole proprietorship provides employment to the sole proprietor as well as those subordinate to him.

iii. Disadvantages of a Sole Proprietorship

Sole proprietorship like any other type of business is not free of encumbrances; following are the disadvantages of a sole proprietorship:

• Limited Capital: The owner of a sole proprietorship is responsible to arrange funds to ensure the business starts, sustains and succeeds. This can get difficult as an individual can only source a limited amount of funds from outside investors, banks and other financial institutions. The insufficiency of smooth flowing capital can curb the growth of the business or even put it to a standstill.
•  Unlimited Liability: If a sole proprietor fails to meet the business debts, his personal assets may be used to meet such liabilities. All his personal wealth is linked to the business. This limits the sole proprietor from taking risks and makes him extra cautious about starting or expanding the business.
• Lack of continuity: A sole proprietorship is closely tied to the life of the sole proprietor. The business may not be able to survive the death of an owner. Hence, it is safe to say that death of the owner brings an end to the business.
• Limited expansion: The sole proprietor cannot be an expert in every facet of business management; therefore expansion limits itself at the peak of the sole proprietor’s potential.
• Lack of expertise: A sole proprietor maybe knowledgeable, but he cannot be an expert at every aspect of business. Also, a lack of additional disposable income makes hiring professionals a restricted activity. This in turn hampers the growth of a sole proprietorship.
• Limited size: A sole proprietorship can only expand up to a certain point, beyond which a sole person cannot manage all the professional activities alone due to the sheer vastness of the activities and meeting the impossibility of being physically present everywhere at the same time.

iv. Legal Requirements

A sole proprietorship is the most preferred form of doing business because no formal/separate registration is required for conducting such business. A sole proprietorship can be run from a residential establishment or from a commercial establishment. If the owner chooses the latter, he must comply with certain provisions of the Shop & Establishments Act, the provisions of which differ across different states. A sole proprietor must possess a Permanent Account Number (PAN) card as tax returns are filed in the name of the proprietor. If the sole proprietor wants to engage in international trade, he must obtain an Importer and Exporter Code from the Director General of Foreign Trade.

One Person Company

i. What is a One Person Company?

A One Person Company (OPC) is defined under Section 2(62) of The Companies Act, 2013 as under:

‘A company which has only one person as a member.’

Two main features of a One Person Company are:

• The entrepreneur founding the OPC is subject to limited liabilities
• The OPC is taxed at the same level as any other company

The following table is a summary of the advantages and disadvantages of a One Person Company:

ii. Advantages of a One Person Company

A One Person Company comes with the following benefits:

• Ease in management:
• Perpetual Succession: A One Person Company is an incorporated entity and therefore also has the feature of perpetual succession. This makes it easier for entrepreneurs to raise capital for the business.
• Legal Status: One Person Company business enjoys a corporate status in society, this helps attract quality workforce. One Person Company is a Private Limited Structure.
• Limited liability protection to directors and shareholders: This is the most desirable reason why many individuals are opting to incorporate a One Person Company. If the business is unable to pay its liabilities or meet its obligations, the liability of the entrepreneur is limited to the extent of the unpaid subscription money. Unlike a sole proprietorship, the individual’s personal assets will not be used to make payments once the unpaid subscription amount has been met.
• Ease in management:

No requirement to hold annual or extra ordinary general meetings: The resolution should be communicated by the member and entered in the minutes book. The date on which the entry is made shall be deemed to be the date of the meeting.

 Quorum: The provisions of Section 174[1] of The Companies Act, 2013 will not be applicable to One Person Company

•  Easy Loans: Financial institutions and banks prefer to lend money to a company rather than a proprietary firm.
• Registrar Of Companies filing: Very few ROC filings are required to be made with the Registrar of Companies (ROC). The provisions of Section 98 and Section 100 to 111 (both inclusive) of The Companies Act, 2013 shall not apply to a One Person Company.[2]
• Minimum Requirements:

1. 1 shareholder
2. 1 director
3. Director and shareholder can be one and the same
4. 1 nominee
5. Share Capital shall be Rs. 1,00,000/- (INR One Lac only)

iii. Disadvantages of a One Person Company

An OPC is not all good and devoid of vices, below are the demerits of an OPC entity:

• Only one member:

1. An OPC can have a minimum or maximum of 1 member
2. A minor shall not be eligible to become a member/nominee of an OPC
3. A natural person who is an Indian Citizen and resident in India shall be eligible to incorporate an OPC.

• Suitable only for small business: An OPC can have a maximum paid up share capital of Rs. 50 lac or a turnover of Rs. 2 crore[3].
• Tax Liability: The IT Act puts an OPC under the same tax slab as other private companies for taxation purposes. Private Companies are placed under the tax bracket of 30% on total income. On the other hand, an individual running a sole proprietorship concern is subjected to income tax slab rates of an individual (I.e. 10% to 30%).
• Compliance Costs: An OPC would have recurring costs such as annual filing with the ROC, hiring a Chartered Accountant, Company Secretary, Lawyer, and other professionals as opposed to a proprietorship concern. An OPC will need to get its accounts audited and file yearly returns with the ROC.
• Incorporation Costs: An OPC needs to be registered with the ROC under The Companies Act, 2013. An OPC would be required to hire professionals such as a Chartered Accountant or a Company Secretary for complying with such formalities.

iv. Legal Requirements

• An OPC can be formed only by a natural person, who is an Indian citizen and resident in India.
• The shareholder shall nominate another person who shall become the shareholder in case of death/incapacity of the original shareholder.
• Exemptions available to an OPC:

1. Signatures on Annual Returns – In the absence of a company secretary, the annual returns can be signed by the director of the company
2. Holding Annual General Meetings – The provisions of Sections 100 to 111 (both inclusive) of The Companies Act, 2013 shall not apply to a One Person Company.

• A person shall not be eligible to incorporate more than a One Person Company or become nominee in more than one such company.

Difference between ‘Sole Proprietorship’ and ‘One Person Company’

Ideal for Business

Sole Proprietorship

A sole proprietorship concern is suitable for businesses that involve taking foreseeable risks, requires limited capital and a reasonable degree of expertise. A sole proprietorship is usually favoured when the business is small in size and the owner wants to maintain full control and be the sole decision maker.

Example- A grocery, garments, stationary, and book store.

One Person Company

An OPC is suitable for small businesses as it allows the founder to take risks as it doesn’t dig into his personal assets to compensate on failing to meet business debts.

Example- weavers, traders, artisans, small to mid-sized entrepreneurs, etc.

Conclusion

One Person Company has existed globally for years now, while it still remains to be a fresh phenomenon in India as it was only introduced in 2013. An OPC creates a separate legal entity as opposed to the sole proprietorship way of doing business. A sole proprietorship extends the liability to the proprietor, whereas in an OPC the entrepreneur is only liable to the extent of unpaid subscriptions. An OPC also enjoys certain exemptions from compliances that need to be adhered to by bigger companies, making an OPC more desirable. However, the biggest deterrent in choosing an OPC over a sole proprietorship is that an OPC is taxed at 30% as opposed to sole proprietorship business which is taxed along with the individual. One key benefit India would enjoy through the establishment of OPC’s is that it will help organize the unorganized sector of proprietorship.

In conclusion, an OPC or an SP would be the choice of an individual depending on his requirements, business plan, market conditions, etc. One could see small changes in the tax structure after implementation of the Goods and Service Tax (GST) which was passed in 2016 and will be implemented from 2017.

Footnotes:

[1] S.174 of The Companies Act, 2013, Quorum for meetings of Board

[2] S. 122(1) of The Companies Act, 2013, Applicability of this chapter to one person company

[3] S. 2(85) of the Companies Act, 2013 provides for the definition of a small company

‘‘small company’’ means a company, other than a public company,—

• paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or
• (ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:

Provided that nothing in this clause shall apply to—

(A) a holding company or a subsidiary company;

(B) a company registered under section 8; or

(C) a company or body corporate governed by any special Act;

[4]Second proviso to S.12(3)(d) of the Companies Act, 2013

In this blog post, Vineet Kumar from National Law University of Odisha, and Mahelaka Abrar from Aligarh Muslim University provide a brief analysis of consumer protection laws in India and discusses in detail the Consumer Protection Act of 1986. It also discusses the recent consumer protection amendment act.