Legasee – Corporate Laws Newsletter: Extension for holding Annual General Meetings–Sep 2020

In an attempt to provide relaxation to the various stakeholders in view of the COVID-19 outbreak and to promote ease of doing business, the Ministry of Corporate Affairs (MCA) has granted an extension of 3 (three) months to companies for holding their annual general meetings (AGM) for the financial year 2019-201 . As per the Companies Act, 2013 (CA 2013), companies are required to hold their annual general meetings within 6 (six) months from the end of financial year i.e. by September 30, 2020 for the financial year 2019-20.

However, as per the recent relaxation provided by MCA, companies have now been granted an extension of 3 (three) months for holding annual general meetings beyond the due date on which the AGM ought to have been held in terms of the CA 2013. The extension of AGM up to 3 (three) months from the due date of AGM is deemed to have been granted to all companies by the registrar of companies , within whose jurisdiction registered office of the company is situated. In view of the hardships faced by the companies due to the lockdown and other restrictions due to Covid-19, in the orders, the jurisdictional registrar of companies have clarified that the extension will also be applicable for all the companies which have made an application seeking approval extension of timelines for holding of AGM.

By this order companies which were required to hold AGM by September 30, 2020 can now hold AGM on or before December 31, 2020 without filing applications for seeking specific approval from the registrar of companies for extension of AGM. This clarification from MCA is issued in addition to the relaxation provided by MCA to companies permitting them to hold AGMs through video conferencing or other audio-visual means for the calendar year 2020. Companies which have not been able to complete the audit of their financial statements due to various restrictions imposed by the Government of India and local authorities on account of Covid-19 and companies which are yet to conduct board meetings for approval of financial statements can take the benefit of this relaxation granted by MCA and immediately take steps to make application for seeking extension of AGM. The compliance officers need to be mindful of the timelines for the relaxations granted by MCA in order to ensure compliance with all applicable provisions of the CA 2013 read with the relevant rules.

While this relaxation is the need of the hour, the challenges faced by companies do not seem to stop, as the relaxation by MCA issued earlier which permitted approval of financial statements in board meetings through video conference facility is valid till September 30, 2020. If this relaxation is not extended by MCA, the companies will have to conduct physical meetings for approval of financial statements beyond September 30, 2020 in order to ensure compliance with the provisions of the CA 2013.

Amendments in Companies (Acceptance of Deposit) Rules, 2014- Impact on start-ups

Under the CA 2013, a ‘deposit’ includes any receipt of money by way of a deposit or loan or in any other form by a company but does not include such categories of amounts as prescribed in consultation with the Reserve Bank of India2 .

Except for the specific exclusions provided under the Companies (Acceptance of Deposit) Rules, 2014 (“Deposit Rules”), all other receipts of money by companies are treated as deposits. Any acceptance of deposits in contravention to Section 73-76A and Deposit Rules is prohibited under the CA 2013. The Ministry of Corporate Affairs has recently notified the Companies (Acceptance of Deposits) Amendment Rules, 2020 dated 7th September 2020 amending the following provisions of the Deposit Rules granting further relaxations to start-up companies to promote ease of doing business:

(a) Definition of ‘start-up’ provided in the explanation to Rule 2 (1) (c) (xvii) has been aligned with the definition of start-up as provided under the notification dated February 19, 2019 issued by the Department of Promotion of Industry and Internal Trade (DPIIT) (“DPIIT Notification”). This amendment will be relevant in terms of regulating start-up companies in India. Earlier the definition merely referred to private company incorporated in India. The DPIIT Notification states that an entity shall be considered a start-up, up to a period of 10 years from its date of incorporation and if the turnover of the entity exceeds INR 100 Crores. The amendment in the explanation aligns the definition of the start-up under the Deposit Rules and the DPIIT Notification;

(b) Rule 2 (1) (c) (xvii) excludes an amount of INR 25 Lakh or more received by a start-up company in form of a convertible note, not exceeding 5 years from the date of issue in a single tranche, from a person, from the ambit of deposits. The amendment now has substituted the term of 5 years with 10 years thereby extending the period for repayment. This amendment will provide flexibility to start-up companies to raise money for a longer period within such funds being categorised as deposits.

(c) In terms of amendment in Rule 3(3) of the Deposit Rules, a private company which is a start-up company can accept deposits from its members without any limit for a period of 10 years as opposed to 5 years (prior to the amendment).

While Covid-19 has adversely impacted the operations and business activities of many start-up companies, the amendments in the Deposit Rules will immensely benefit start-up companies in the fund-raising activities by providing greater flexibility in terms of manner of fund raising. With the amendment in Deposit Rules, the start-up companies can initiate fund raising activities without it being treated as deposit under the CA 2013 and Deposit Rules and without the requirement of compliance with the CA 2013 read with the Deposit Rules. These amendments will contribute to reviving the start-up ecosystem in the unlock phase of the Covid-19.