Corporate Laws Newsletter: Conversion of One Person Company into Private or Public company-March 2021
The Ministry of Corporate Affairs (MCA) has introduced significant changes1 in the process for conversion of one person company (OPC) into private or public company
(a) The definition of One Person Company under Rule 3 has been amended to replace the requirement of a natural person to be resident of India to either be a resident of India or otherwise;
(b) Residency requirement in India has been revised from 182 days to 120 days;
(c) Requirement of a one person company to have completed two years since incorporation (unless the paid up share capital of the company has increased beyond fifty lakhs or its average annual turnover during the relevant period exceeds two crore rupees) of the company for its conversion has been done away with;
(d) Requirement of filing E-form No.INC-5 related to “One person company – Intimation of exceeding threshold” has been omitted;
(e) In order to get converted into a private or public company, other than a Nidhi Company, the company needs to increase the minimum threshold of members and directors to two or seven members and to two or three directors, respectively. Amendments introduced in the conversion process of OPC to private company or public company would prove to be extremely beneficial.
National Stock Exchange Trading Halt vis-à-vis the Interoperability Function
The National Stock Exchange (NSE) on February 24, 2021, abruptly halted trading across cash and future segments citing technical glitches witnessed at its telecom services providers’ end. The cash and F&O markets were closed at 11:40 AM and 11:43 AM respectively with no prior warnings, leaving the market participants baffled and restless. The situation turned more daunting with passing time as there was no communication from NSE regarding re-opening or an extended session until 3:30 PM. Given the uncertainty and the extraordinary circumstances, the market participants were constrained to undertake risk mitigation measures, including squaring-off executed positions on the Bombay Stock Exchange (BSE).
What is Interoperability Function?
The Securities and Exchange Board of India (SEBI) vide its circular dated November 27, 2018 notified guidelines for operationalizing the interoperability framework which necessitates linking of Clearing Corporations (CCPs) through establishing a peer-to-peer link to allow market participants to consolidate their clearing and settlement functions at a single CCP, irrespective of the stock exchange on which the trade is executed. The interoperability function operates through special arrangements among CCPs based on bilaterally approved framework that inter alia covers inter-CCP exposures. In simple terms, interoperability among CCPs allows clearing and settlement of trades across CCPs seamlessly. Prior to interoperability, trades executed on stock exchanges were cleared and settled via their respective clearing corporations, viz. NSE Clearing Limited (NCL) for NSE, Indian Clearing Corporation Limited (ICCL) for BSE, and Metropolitan Clearing Corporation of India for Metropolitan Stock Exchange of India (MSEI). The shift from the erstwhile fragmented market structure to the interoperability framework has resulted in better utilization of capital resources for market participants, reduced trading disruptions, reduced clearing costs, and reduced operational complexity.
Did Interoperability work?
SEBI vide its press release dated February 25, 2021 has claimed that interoperability facilitated the market participants to continue their transactions on other stock exchanges, allowing them to trade/square-off their existing positions. To establish its claim, SEBI cited a spike in trading turnover of BSE in equity segment which jumped to INR 40,600 crores on February 24, 2021 as compared to an average daily trading turnover of approximately INR 5,200 crores during the previous 30 days. However, there is a difference of opinion in the market with participants claiming that NCL was also affected by virtue of trading disruptions at BSE, which led to majority of the participants being unable to place orders on BSE. A clarification published by leading broker Zerodha also confirmed that since almost all stocks that trade on NSE are available on BSE, there were no issues for participants wanting to take fresh trades in equity; however, participants trading via F&O and equity using intra-day products could not exit their positions. Resultantly, many brokerage firms had to square-off F&O and equity intra-day positions by taking counter-positions on BSE. It has also been claimed that the spike in volumes on BSE is attributable to block deals that took place on BSE as opposed to interoperability function. Some brokers also claimed that they were unable to place orders on BSE owing to their margins hitting the 90% threshold prescribed by SEBI, when their actual margin utilization on a net basis was under 30% to 40%. Thus, it appears that disruptions at the NCL may have affected the fungibility of margins and collaterals across CCPs.
Is Interoperability infallible?
Regardless of anything, the existent issues appear to be far more than what interoperability can resolve at present, considering market dynamics and the limitations that they impose on the framework. All stocks/products available on one stock exchange are not available on the others. For instance, index derivatives traded on NSE are not traded on BSE and all stocks listed on BSE are not listed on NSE. Therefore, interoperability would not work in such cases as market participants would be unable to exit their positions or take counter-positions on another bourse. Another aspect to be evaluated is the capability of stock exchanges to handle the added traffic that will be witnessed in the event of disruption at one exchange. Contextually, NSE emerged as the world’s largest derivative exchange in terms of volume and accounts for majority of the trading volume in India. Thus, in case of a disruption at NSE, the effectiveness of interoperability would largely depend on the capability of the infrastructure of BSE to handle sudden escalation in trading activity and volume.
What went wrong?
There is no clarity yet regarding failure of NSE to switch to its disaster recovery site (DRS), which was prescribed by SEBI for stock exchanges as well as CCPs pursuant to its circular dated March 26, 2019. DRS is purported to act as a fall-back option in event of disruptions and, thus, failure of NSE to transition from its primary data centre to DRS raises several questions, especially because DRS undergoes periodic testing on a quarterly basis as part of SEBI mandates. Besides, NSE failed to maintain active communication with the stakeholders which worsened the situation and intensified fear among the market participants. It was only at 3:30 PM that NSE abruptly notified brokers about a pre-opening and extended trading session from 3:45 PM to 5:00 PM, by when several participants had squared-off existing positions on BSE. The extended session was a massive relief for many F&O traders as they were able to exit their positions but proved to be a costly affair for the participants who were constrained to square-off their positions prior to notification of trade resumption. The consequences of non-resumption, being a different tangent of the story altogether, would have proved disastrous in terms of losses due to leveraged positions, short deliveries, and auction penalties.
Are technical disruptions with stock exchanges unprecedented and can they be avoided?
No, technical glitches with stock exchanges have been witnessed across the globe in the past and continue to be witnessed from time to time with varying magnitude and consequences. Technical disruptions at the London Stock Exchange in 2019, the Tokyo Stock Exchange, the Australian Securities Exchange and the Deutsche Bourse in 2020 are a few recent instances. Besides, a possibility of trading halts due to technical disruptions can never be ruled out, even with the best of fall-back options.
The road ahead?
While SEBI has sought a report from NSE containing a detailed root cause analysis regarding the trading halt and subsequent failure to switch to DRS, it remains to be seen whether any liability is affixed by SEBI pursuant to the report. Although there is no provision or mechanism currently in place for compensating market participants aggrieved by such an outage, the annual report of SEBI for the year 2019-20 states that SEBI is actively considering a proposal to introduce a framework for ascertaining incidents of technical glitches where compensation needs to be paid to the investors and to devise a methodology for calculation of the compensation. Given that interoperability has its own limitations, a framework for compensating investors for technical outages is quintessential to fill the gap. At the least, what seems to be lacking is some guidelines/directives setting out action plan(s) to be employed in distress situations and accountability for non-compliance to ensure that investors are not subjected to arbitrary and irresponsible acts of the brokers or stock exchanges.