Compliance Checklist for a Rights Issue Under the Companies Act, 2013, and the Appointment of a Nominee Director

Posted On - 9 December, 2024 • By - Vatsal Gaur

Introduction

The Companies Act, 2013 provides the legal backbone for various corporate activities, including the rights issue of shares and the appointment of nominee directors. These processes are vital for ensuring transparency, corporate governance, and equitable distribution of resources within a company. A rights issue, by offering existing shareholders the opportunity to purchase additional shares, allows companies to raise capital while maintaining the proportional ownership of shareholders. Meanwhile, the appointment of nominee directors plays an important role in stakeholder representation, particularly when companies are backed by investors, lenders, or government bodies. Given their importance in corporate finance and governance, both processes are strictly regulated, requiring compliance with detailed provisions under the Companies Act, 2013, as well as other relevant legal frameworks.

1. Compliance Checklist for a Rights Issue

A rights issue under Section 62(1)(a) of the Companies Act, 2013, allows a company to issue additional shares to its existing shareholders proportionately, ensuring transparency and shareholder equity.

Key Compliance Steps

  1. Board Approval:
    • Convene a Board Meeting to approve the rights issue.
    • Determine:
      • The offer price, ratio, and timeline.
      • The record date for eligible shareholders.
    • Pass a Board Resolution approving the issuance.
  2. Drafting and Issuance of Offer Letter:
    • Prepare the offer letter in Form PAS-4 as per Rule 12 of the Companies (Share Capital and Debentures) Rules, 2014.
    • The offer must include:
      • Terms of the issue, the number of shares offered, and the renunciation rights.
      • Details of the application process and timelines.
  3. Dispatch of Offer Letter:
    • Ensure the offer letter is dispatched to eligible shareholders through registered post, speed post, or email.
    • Dispatch must occur at least three days before the offer opens, as per Section 62(2).
  4. Offer Period:
    • The offer must remain open for a minimum of 15 days and a maximum of 30 days unless 90% of shareholders consent to a shorter duration.
  5. Renunciation Rights:
    • Shareholders have the right to renounce their shares in favor of another person unless restricted by the company’s Articles of Association.
  6. Allotment and Filing:
    • Approve allotments through a Board Meeting.
    • File Form PAS-3 (Return of Allotment) with the Registrar of Companies (ROC) within 30 days of allotment.
  7. Valuation Compliance:
    • Listed companies must comply with SEBI (ICDR) Regulations, 2018, which mandate fair pricing and valuation norms.
    • For unlisted companies, valuation reports from registered valuers are advisable for transparency.
  • SEBI has simplified procedural norms for listed companies, focusing on quicker fund-raising timelines.
  • An increasing number of companies prefer rights issues over public offers for cost and procedural efficiency.

Penalties for Non-Compliance

  • Non-compliance with the provisions attracts penalties under Section 450, with fines of up to ₹10,000 and ₹1,000 per day for continued default.

2. Compliance Checklist for Appointment of a Nominee Director

A nominee director is typically appointed to represent a particular stakeholder, such as a lender, investor, or government entity. This process is governed under Section 161(3) of the Companies Act, 2013.

Key Compliance Steps

  1. Enablement in Articles of Association (AOA):
    • Ensure the AOA permits the appointment of nominee directors. If not, amend the AOA through a special resolution as per Section 14.
  2. Approval and Consent:
    • Obtain the nominee director’s consent in Form DIR-2.
    • Ensure the nominee is not disqualified under Section 164.
  3. Board Meeting:
    • Conduct a Board Meeting to approve the appointment.
    • Pass a Board Resolution referencing the terms of the shareholder or financing agreement, if applicable.
  4. Filing with ROC:
    • File the appointment details in Form DIR-12 with the Registrar of Companies within 30 days of the appointment.
  5. Disclosure Obligations:
    • The nominee director must disclose their interest in any contract or arrangement involving the company as per Section 184.
  6. Listed Company Regulations:
    • For listed companies, ensure compliance with SEBI LODR Regulations, which include governance requirements, qualifications for independent directors (if applicable), and periodic disclosures.
  • SEBI has tightened regulations concerning nominee directors to ensure they act in the company’s best interests rather than solely representing their appointing entities.
  • The focus has shifted towards improved accountability and transparency in decision-making processes.

Penalties for Non-Compliance

  • Any non-compliance in the appointment process or related disclosures attracts penalties under Section 172, imposing fines on the company and its officers.

Conclusion

Compliance with the provisions of the Companies Act, 2013, for rights issues and the appointment of nominee directors is crucial to ensuring transparency, fairness, and adherence to corporate governance principles. A rights issue serves as a vital mechanism for raising capital while safeguarding the rights of existing shareholders, whereas the appointment of nominee directors reflects the balance of stakeholder representation within a company. Both processes involve intricate compliance steps, from drafting offer letters and obtaining consents to making statutory filings and adhering to SEBI regulations for listed entities.

Recent updates and regulatory trends, such as simplified SEBI norms for rights issues and enhanced accountability measures for nominee directors, highlight the dynamic nature of corporate compliance. By adhering to these legal frameworks and implementing the compliance mechanisms, companies can effectively mitigate risks, enhance stakeholder trust, and align with evolving governance standards. Staying proactive in understanding and applying the latest amendments ensures not only legal conformity but also strengthens a company’s reputation and operational integrity.

King Stubb & Kasiva,
Advocates & Attorneys

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