icsiconsultant, infosys ltd. addressed the queries over telephone. the institute observed csbf week...

December, 2014 3 NIRC-ICSI Newsletter

Regional Council Writes

Further, in order to resolve the queries

regarding technical issues in filing of

various e-forms. NIRC-ICSI organized "Ask

the Senior'' programme on 24th Nov 2014,

CS S Bhasker Subramanian, Principal

Consultant, Infosys Ltd. addressed the

queries over telephone.

The Institute observed CSBF week from

24th November to 29th November, 2014.

Membership of the Company Secretaries

Benevolent Fund is a noble cause. It is the

corpus from which Institute provides

immediate financial support to the family

of the deceased members who are dire need

of financial help.

On 29th November, 2014, NIRC-ICSI

organized a seminar on the theme

"Contemporary Issues under FEMA, SEBI &

Companies Act 2013" at Hotel Le Meridien,

New Delhi. We take this opportunity to

express our gratitude to CS S Sudhakar, Vice

President (Corporate Secretarial), Reliance

Industries Ltd., CS P K Mittal, Council

Member, ICSI, CS Pavan Kumar Vijay, Past

President ICSI, Managing Director,

Corporate Professionals Capital Pvt. Ltd.,

Shri Prashant Vig, Associate Director,

KPMG, Guest speakers for sparing their

valuable time and sharing their rich

knowledge with the participants.

You are aware that the polling for election

to Council and Regional Councils will be

held on Friday, 12th December, 2014 and

Saturday, 13th December, 2014 in Delhi/

New Delhi and Mumbai and on Friday, 12th

December, 2014 at other places. Polling will

be held on 20th December, 2014 for

Elections to the Managing Committee of the

various Chapters.

Friends, we appeal to all the eligible

members to cast their votes in order to have

true representatives of the profession and

the Institute, who can serve the profession

with full dedication and commitment.

The political process does not end on

Election Day. All members need to stay

involved in the process by continuously

paying attention to the conversation and

holding their leaders accountable for the

decisions they make.

With best regards,

NIRC-ICSI


The Companies Act, 2013 ("Act of 2013") notified insome parts on 12th September 2013, and then in majorproportions on 1st April 2014, has changed thecorporate landscape of Indian law, and the corporateindustry in India. While many still debate itsrelevance and appropriateness as to applicability,the industry has been seen to create uproar as to thesupposed pitfalls in the Act and the rules enactedthereunder, while the legislation in itself, has takenwings and can be seen to be adopted in letter andspirit by companies across sectors.

A debenture has been defined under the Act of 2013as including debenture stock, bonds or any otherinstrument of a company evidencing a debt, whetherconstituting a charge on the assets of the companyor not. In general parlance, a debenture can beunderstood as one of the commonest methods ofborrowing by a company. It is like a certificate of loanor a loan bond given under the seal of the companyand evidencing the fact that the company is liable topay specified amount with interest, usually chargingthe company's assets for repayment of the loan.

Debentures issued by a company may or may not beconvertible into shares of the issuing company at afuture date. Further, debentures may be compulsorilyor optionally convertible into shares. Thus, threecategories of debentures may be identified:

• Compulsorily Convertible Debentures ("CCDs");• Optionally Convertible Debentures ("OCDs");• Non - Convertible Debentures ("NCDs")

In terms of section 71 of the Companies Act, 2013, acompany may issue debentures with an option toconvert such debentures into shares, either whollyor partly at the time of redemption.

'Optionally convertible debentures' are debtsecurities which allow an issuer to raise capital andin return the issuer pays interest to the investor andthe investor of such debentures has a right to convertthe debt into equities of the issuing company at aprice and within a period which is normally decidedat the time of the issue. In contrast to this,'compulsorily convertible debentures' are debtsecurities compulsorily converted into equity sharesafter a specified time at an agreed price. The

DEBENTURES AS DEPOSITS- A DISCUSSION VIS-À-VIS THE COMPANIES ACT, 2013

debentures which cannot be converted into sharesor equities are called 'non-convertible debentures'.

Sections 42, 62, and 71 of the Companies Act, 2013and the Companies (Acceptance of Deposits) Rules,2014, are applicable on the issue and allotment ofdebentures under the Companies Act, 2013.

DEBENTURES AS "SECURITIES" UNDER THECOMPANIES ACT, 2013

'Securities' has been defined under section 2(81)under the Act, as the securities as defined in clause(h) of section 2 of the Securities Contracts(Regulation) Act, 1956 (42 of 1956) . Thus, debenturescan be issued under the Act under section 42 readwith the Companies (Prospectus and Allotment ofSecurities) Rules, 2014, which relates to the issue ofsecurities by way of private placement, i.e. offer ofsecurities to a selected group of persons throughissue of a private placement offer letter, in compliancewith the procedural requirements and compliancesprovided therein. Broadly, the process includes theoffering of securities to a selected group of personsby sending an application form along with theprivate placement offer letter in Form PAS-4 to everyperson to whom the offer is being made. Filings arerequired to be made with the Registrar of Companies,wherever prescribed, and a return of allotment is tobe filed with a list of security holders within thirtydays of allotment.

Further, Section 62(1)(c) of the Companies Act, 2013,read with rule 13 of the Companies (Share Capitaland Debentures) Rules, 2014 contain the provisionsrelating to preferential allotment of securities underthe Companies Act, 2013. In terms of the definitionprovided in rule 13, the expression 'preferential offer'means an issue of shares or other securities, by acompany to any select person or group of personson a preferential basis and does not include sharesor other securities offered through a public issue,rights issue, employee stock option scheme,employee stock purchase scheme or an issue of sweatequity shares or bonus shares or depository receiptsissued in a country outside India or foreignsecurities.

The Rule defines the expression "shares or othersecurities" as equity shares, fully convertible

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–Adv. Abhishek Bansal & Adv. Stuti Bansal

*Views expressed by the Author are solely his own view and the Firm, NIRC of ICSI does not accept any responsibility.


debentures, partly convertible debentures or anyother securities, which would be convertible into orexchanged with equity shares at a later date. Thusthis will not include non- convertible debentures inits scope.

The provisions of section 62(1)(c) of the Act, relatingto preferential allotment of shares or other securitiesare applicable on only the following classes ofsecurities:

• Equity shares• Fully convertible debentures• Partly convertible debentures; or• Any other securities which would beconvertible into or exchanged with equity shares atas later date.

DEBENTURES AS DEPOSITS UNDER THE ACT OF1956

The Act of 1956 provided for detailed provisionsregarding the terms and conditions for the issue ofdebentures by a company, as well as the rights itmay carry under law.

Deposits, as understood in general parlance, are thefunds procured by any company in the form of a loanetc. for repayment with interest at a future date. TheCompanies Act, 1956 and the Rules thereunderprovide for specific conditions subject to which acompany may accept deposits. Rule 2(1)(c) of theCompanies (Acceptance of Deposits) Rules, 1975 (the'Deposits Rules, 1975'), notified under Section 58AV of the Companies Act, 1956, provides a detaileddefinition of 'deposits', and for specific exclusionsfrom the definition thereof.

Section 2(12) of the Companies Act, 2013 defines a'debenture' as follows:

"(12) "debenture" includes debenture stock, bondsand any other securities of a company, whetherconstituting a charge on the assets of the companyor not;"

Rule 2(b)(x) of the Companies (Acceptance ofDeposits) Rules, 1975, which provides for anexemption reads thus:

"(b)"deposit" means any deposit of money with, andincludes any amount borrowed by, a company, butdoes not include-

any amount raised by the issue of bonds ordebentures secured by the mortgage of any

immovable property of the company or with anoption to convert them into shares in the companyprovided that in the case of such bonds ordebentures secured by the mortgage of anyimmovable property the amount of such bonds ordebentures shall not exceed the market value of suchimmovable property."

The Companies (Acceptance of Deposits) Rules,1975 thus provided that the following shall not betreated as a deposit under the Act:

i. any amount raised by the issue of secured bondsor debentures, secured by the mortgage of anyimmovable property of the company. The amountof such bonds or debentures shall not exceed themarket value of such immovable property; orii. any bonds or debentures issued with an optionto convert them into shares in the company.

DEBENTURES AS DEPOSITS UNDER THE ACT OF2013

The Act of 2013 provides detailed provisionsregarding the terms and conditions for the issue ofdebentures by a company, as well as the rights itmay carry under law. Secured debentures issuedunder the Act shall be redeemable within ten yearsfrom the date of issue, except in case of issue ofdebentures by a company engaged in the setting upof infrastructure projects, which may issue secureddebentures for a period extending to thirty years.

The Companies Act, 2013 and the Rules thereunderprovide for specific conditions subject to which acompany may accept deposits. Rule 2(1)(c) of theCompanies (Acceptance of Deposits) Rules, 2014(the 'Deposits Rules, 2014'), notified under ChapterV of the Companies Act, 2013 (the "Act"/ "Act of2013"), provides a detailed definition of 'deposits',and for specific exclusions from the definitionthereof.

Section 2(30) of the Companies Act, 2013 defines a'debenture' as follows:

"(30) "debenture" includes debenture stock, bondsor any other instrument of a company evidencing adebt, whether constituting a charge on the assets ofthe company or not;"

Rule 2(1)(c)(ix) of the Companies (Acceptance ofDeposits) Rules, 2014, which provides for anexemption reads thus:

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(c) "deposit includes any receipt of money by way ofdeposit or loan or in any other form, by a company,but does not include:

(ix) any amount raised by the issue of bonds ordebentures secured by a first charge or a chargeranking pari passu with the first charge on any ofthe assets referred to in Schedule III of the Actexcluding intangible assets of the company or bondsor debentures compulsorily convertible into sharesof the company within five years:

Provided that if such bonds or debentures aresecured by the charge of any assets referred to inSchedule III of the Act, excluding intangible assets,the amount of such bonds or debentures shall notexceed the market value of such assets as assessedby a registered valuer;"

The Companies (Acceptance of Deposits) Rules, 2014thus provide that the following shall not be treatedas a deposit under the Act:

• any amount raised by the issue of secured bondsor debentures, secured by a first charge or a chargeranking pari passu with the first charge on assetsreferred in Schedule III of the Act (excludingintangible assets of the company). The amount ofsuch bonds or debentures shall not exceed the marketvalue of the assets as provided in Schedule III, asassessed by a registered valuer; or• bonds or debentures compulsorily convertibleinto shares of the company within five years.Thus, following are the qualifications for thedebentures issued by a company to an individual,to be exempt from being considered a deposit underthe Act:I. The amount should have been raised by way ofissue of secured bonds or secured debentures; andII. The bonds or debentures should be secured bya first charge or charge ranking pari passu with thefirst charge on any of the assets in Schedule III ofthe Act; andIII. The amount of such bonds or debentures not toexceed the market value of the assets as assessed bya registered valuer.ORI. The bonds or debentures must be compulsorilyconvertible into shares of the company; andII. They should be convertible within five years.

Further, the Companies (Acceptance of Deposits)Rules, 2014 provide that the only the bonds anddebentures in the nature of 'secured' shall not betreated as deposits. Secured debentures are exemptedfrom being considered as "deposits" under the law,as long as they are secured by a first charge or a chargeranking pari passu with the first charge on the assetsof the company (excluding the intangible assets)mentioned in Schedule III of the Act and their amountshall not exceed the market value of the assets asassessed by a registered valuer. It is to be noted thata company is not to issue debentures by merelycreating subsequent subordinate charges on the sameproperty, since the requirement of the law is to createa first charge or a charge ranking pari passu withthe first charge to be exempted from the definition ofdeposits.

However, it is to be noted that each category of thedebentures shall be treated in a different manner,depending to whom such debenture is being issued.Thus, in accordance with Rule 2(1)(c)(vi) of theCompanies (Acceptance of Deposits) Rules,2014,where any amount received by a company fromany other company, the same shall not be consideredas a deposit. Amounts accepted by the Company fromanother company, on the issue of debentures, shallbe exempt from being considered 'deposits' under theCompanies Act, 2013.Other ceilings and limitationson issue of debentures shall include compliance withthe provisions contained in Section 179 and 180(1)(c)of the Act of 2013, being the provisions governingthe powers of the board and restrictions on powersof the board with respect to borrowings by a company.

CONCLUSION

The provisions relating to deposits as contained inthe Companies Act, 2013 incorporate many changes,also including new requirements such as that for theappointment of debenture trustees and the companybeing required to obtain deposit insurance. Makingthe activity of accepting deposits more safe andtransparent for investors, the Act now alters theprovisions relating to this method of capital raising,nonetheless leaving some other ambiguities, andconfusions due to issues of interpretation, such aswhether amounts accepted before 1st April 2014, notqualifying as deposits under the Act of 1956, but soqualifying as deposits under the Act of 2013, will betreated as deposits under the new Act.

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"Dyutam chalayatam asmi"|"jayo 'smi vyavasayo'smi"|"sattvam sattvavatam aham"|"tejastejasvinam aham" Bhagavad-Gita

1. INTRODUCTION

The 21st century global economy brings cheapersources of supply and huge new markets, but alsoexposes companies to much greater risks andconsequences of fraud and corruption. As a result ofgreater enforcement around the world, global mediaattention and changing attitudes of consumers, fraudand corruption can now cost companies billions anddestroy or severely damage their reputation.

There are numerous types of fraud that can beperpetrated by any stakeholder against the corporateor vice versa. Depending on the nature of businessand the products and services offered, fraudstersmay have many opportunities to commit fraud. Eachbusiness and organisation will have its ownparticular risks and threats and there are furtherthreats that arise in relation to circumstances,position and opportunity. Fraudulent activity canrange from compromising customer or payroll datato straightforward theft or the submission of inflatedexpenses. Fraud can have an 'opportunistic' elementin that it's generally undertaken on an unplannedbasis by an individual for the purpose of personalfinancial gain, or can be linked to a serious andorganised criminal network or terrorist financing. Allorganisations are vulnerable and all organisationshave some level of risk.

According to the 2012 Report to the Nation onOccupational Fraud & Abuse published by theAssociation of Certified Fraud Examiners (ACFE)estimates that typical organizations lose anestimated five percent of their revenues to fraud.According to the report, in Year 2011, this figuretranslates to a potential projected global fraud lossof more than $3.5 trillion. The median loss caused bythe occupational fraud cases in our study was$140,000. More than one-fifth of these cases causedlosses of at least $1 million.

As per KPMG 's India Fraud Survey Report 2012,with close to 55 percent of the chief executivessurveyed having indicated that their organizationshave experienced fraud in the last two years whichexhibits that fraud is definitely a reality today. Allorganizations, irrespective of size and sector ofoperations, can face fraud risks. It is a major concernthat can have a devastating impact on an

FRAUD RISK MANAGEMENT-A CRITICAL ANALYSIS

organization's bottom line, its reputation and evenits continuity.

As per the survey reported above, 94 percent ofrespondents agreed that frauds have become moresophisticated over the last two years and it is difficultto detect them. 71 percent of the respondents thinkof fraud as an inevitable cost of doing business.

This is dangerous as it could lead to organizationshaving a tolerant approach towards fraud andsubsequently not investing enough in theappropriate fraud risk management controls andframework. It also translates into a culture of merelyreacting to fraud and not proactively taking steps tomitigate it. Like other business risks, fraud risks toocan be mitigated if appropriate fraud riskmanagement strategies are implemented.

Before implementing, fraud risk management, it isimportant to understand the reasons of fraud,consequences of fraud and fraud detectiontechniques.

WHAT IS FRAUD?

Fraud is a type of criminal activity, defined as'abuse of position, or false representation, orprejudicing someone's rights for personal gain'.

The term 'fraud' commonly includes activities sucha theft, corruption, conspiracy, embezzlement,money laundering, bribery and extortion. The legaldefinition varies from country to country, and in year2006, the introduction of the Fraud Act in 2006, theword Fraud was defined in England and Wales.Fraud essentially involves using deception todishonestly make a personal gain for oneself and/or create a loss for another. Although definitionsvary, most are based around these general themes.

Put simply, fraud is an act of deception intended forpersonal gain or to cause a loss to another party.

Types of Fraud

Fraud can mean many things and result from manyvaried relationships between offenders and victims.

Examples of fraud include:

1. Crimes by individuals against consumers,clients or other business people, e.g.misrepresentation of the quality of goods; pyramidtrading schemes

–Surya Narayan Mishra, Deputy Director, The ICSICMA Jaiprakash Agarwal



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2. Employee fraud against employers, e.g. payrollfraud; falsifying expense claims; thefts of cash, assetsor intellectual property (IP); false accounting3. Crimes by businesses against investors,consumers and employees, e.g. financial statementfraud; selling counterfeit goods as genuine ones; notpaying over tax or National Insurance contributionspaid by staff4. Crimes against financial institutions, e.g. usinglost and stolen credit cards; cheque frauds;fraudulent insurance claims5. Crimes by individuals or businesses againstgovernment, e.g. grant fraud; social security benefitclaim frauds; tax evasion6. Crimes by professional criminals against majororganisations, e.g. major counterfeiting rings;mortgage frauds; 'advance fee' frauds; corporateidentity fraud; money laundering7. Crime by people using computers andtechnology to commit crimes, e.g. phishing;spamming; copyright crimes; hacking; socialengineering frauds.

According to the Association of Certified FraudExaminers (ACFE), there are three main categories offraud that affect organisations.

The first of these is asset misappropriations, whichinvolves the theft or misuse of an organisation'sassets. Examples include theft of plant, inventory orcash, false invoicing, accounts receivable fraud, andpayroll fraud.

The second category of fraud is fraudulent statements.This is usually in the form of falsification of financialstatements in order to obtain some form of improperbenefit. It also includes falsifying documents such asemployee credentials.

The final of the three fraud categories is corruption.This includes activities such as the use of bribes oracceptance of 'kickbacks', improper use of confidentialinformation, conflicts of interest and collusivetendering.

In the Arthashastra, stress has been given both onfraud prevention as well as fraud detection. Kautilyahad listed several ways by which funds aremisappropriated. Some of these frauds relevant intoday's corporate environment are as follows:

(a) Falsification with a motive of personal profit.

(b) Misrepresentation (of income received or expenseincurred) with a motive of personal profit:

(c) Discrepancies (arising out of willful fraud) in: (i)Personally supervised work ,(ii) Account heads , (iii)

Labour and overhead charges ,(iv)Work measurement(R1)

Kautilya was aware that ethical values encompassmuch more than the social values codified in rulesand regulations. He believed that even the mostcomprehensive set of rules and regulations wasinsufficient for checking greed and eliminating thepotential for fraudulent practice.(R2)

Kautilya admitted that some degree of corruptionwould always exist , and cannot be scrutinizedperfectly, ' It is possible to mark the movements ofbirds flying high up in the sky; but not so is it possibleto ascertain the movement of personnel of hiddenpurpose'. However, Kautilya conceded that it is justas difficult to detect an appointed official 'sdishonesty, as it is to detect how much water theswimming fish drinks. He therefore recommendsstrictest punishment, both material and corporal, asa disincentive to cheat.

These types of internal fraud are summarized inFigure listed below:

Why People Commit Fraud

It is important to understand what motivates peopleto commit fraud so that suitable fraud risksmanagement techniques i.e. preventive and detectivemay be implemented. One element common to mostoccupational fraud offenders, from the CEO to therank-and-file employee, is that almost none of themtook their jobs for the purpose of committing fraud-they are typically first-time offenders

Considering the above fact that most of the fraudsterscommit the fraud first time, it is a logical questionthat why people commit the fraud first? An obviousanswer is greed. But many so-called greedy peopledo not lie, cheat and steal to get what they want. There

Internal Frauds

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are various reasons for committing fraud, which maybe presented in form of fraud triangle.

Pressure

Most pressure comes from a significant financial needor problem. Pressure is frequently what causes aperson to commit fraud. Pressure can be caused byalmost anything including family situations, medicalbills, expensive tastes, or addiction problems. Often,the person believes, for whatever reason, that theirproblem must be solved in secret. However, somefrauds are committed simply out of greed. Anotherreason is the person honestly admitting somethingand the management asking to repay him. Supposeone officer sent one staff for buying one item costingRs. 1000/- , the staff come with the material but theinvoice missed. The officer has to bring a false bill oradjust in some other way as the Finance departmentneeds bill and without it they will not clear the billamount. This type unintentional matter may be areason for fraud.

Opportunity

Opportunity facilitates the ability to commit fraud.Because employees who commit fraud do not wish tobe caught, they must believe that their activities willnot be detected. Opportunity is created by a weakinternal control environment, poor managementoversight, and/or the misuse of position or authority.

Failure to establish adequate procedures to detectfraudulent activity also increases the opportunity forfraud to occur. Of the three components of the fraudtriangle, opportunity is the part over whichorganizations have the most control. It is essentialthat organizations build processes, procedures, andcontrols that do not needlessly put employees in aposition to commit fraud and that effectively detectfraudulent activity if it occurs.

Rationalization

Rationalization is a crucial component in mostfrauds. Rationalization involves a person reconcilinghis/her fraudulent behavior with the commonlyaccepted notions of decency and trust. Some commonrationalizations for committing fraud are:

1. The person believes committing the fraud isjustified to save a family member or loved one.2. The person believes that they will loseeverything-family, home, car-if they do not committhe fraud.3. The person believes that no help is available.4. The person labels the theft as "borrowing" andfully intends to pay the stolen money back at somepoint.

5. The person, because of job dissatisfaction(salaries, job environment, treatment by managers),believes that something is owed to him/her.6. The person is unable to understand or does notcare about the consequences of their actions or ofaccepted notions of decency and trust.

CORPORATE FRAUD RISK MANAGEMENT

Corporate frauds are of numerous types and can bemade from or by any source known or unknown. Thefraud risk may be manifold and to manage such risk,diverse techniques are adopted. The major aspects ofthe fraud risks management are fraud prevention,fraud detection and fraud response. The commonelements in all these means are fraud deterrence. Thegraphical presentation of fraud risk management isillustrated as under:

Fraud Risk Management Model


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'Corporate Fraud Risk Management' is a proactiveapproach towards fraud and aims at preventing anddetecting fraud early on. Fraud Risk Management isnot a single ended process. It comprises of varioussteps namely-

A. CARRYING OUT A FRAUD RISKASSESSMENT

Effective fraud risk management begins withassessing the risk your organization faces. Thisassessment must be tailored to the organization's size,complexity and industry. It can be developed andperformed by an organization's internal auditor, butin most cases because of the level of expertise needed,an external auditor or certified fraud examiner is usedto ensure best practices. It is important to recognizethat a well developed fraud risk assessment should:

1. Identify inherent fraud risks within existinginternal controls. There may be inherent risks ofparticular frauds occurring in the absence of internalcontrols designed to mitigate those risks.For example, Assets Misappropriation, FinancialStatement Fraud schemes were the most commonbusiness fraud schemes reported by the AFCE in2012. This usually occurs because proper internalcontrols were not initiated while designing thestandard operating procedures.2. Evaluate the organization's compliance.Review of historical information, known fraudschemes and interviews with staff at all levels in theorganization should take place to ascertain therelative likelihood and potential significance ofparticular kinds fraud risks.The ACFE noted in its 2012 survey that an internalAudit system only detected 15 percent of fraudcommitted while Tips, which usually are obtainedfrom staff interviews or with use of an establishedcompany "hotline," uncovered more than 50 percentof the discovered schemes.3. Development of a fraud risk response. A planshould be created to address what the responseshould be to any identified risks. This should includea cost-benefit analysis of fraud risks for which theorganization wants to implement controls or specificfraud detection procedures.A fraud risk assessment should be performedperiodically to identify potential schemes and eventsthat need to be mitigated. Functions and services thatneed to be included in the assessment are financeand accounting, human resources management(payroll), purchasing and contracting, andinformation technology.4. Establish a Risk assessment team: Teammembers should be selected from all levels in theorganization, including senior management, toparticipate in the risk assessment. A risk assessmentteam in place should keep the risk of management's

override of controls in mind when evaluating thecontrols' effectiveness.

B. EDUCATE THE ORGANISATION ABOUTSPECIFIC FRAUD RISKS

The fraud risk management process requires anunderstanding of the risks specific to theorganization. As already elaborated above, Fraud istypically classified into three broad areas: assetmisappropriation, fraudulent financial statementsand corruption.

C. SELECTION OF FRAUD RISKMANAGEMENT STRATEGIES

Aside from an organisation's own desire to managefraud risk, there is increasing pressure from nationaland international legislative bodies for organisationsto implement a fraud risk management strategy. FraudRisk management can be possible by implementationof an appropriate Fraud Risk management strategy.

Manager wishing to implement a strategy is to lookat any previous cases of fraud, both internal andexternal to the organisation, and draw up a list of themajor elements which should be in place to reducerisks of similar events recurrence. Few major outcomeof the analysis of the incidents of fraud happened inrecent past are: The fraud risks were not fullyunderstood; management supervision was poor;weaknesses in internal controls were not identified;red flags and fraud warnings were ignored; honestand innocent people had closed their minds to thepossibility of fraud. An effective fraud riskmanagement strategy should consider all of thesefactors and treat the identification and reduction offraud as a separate part of an organisation's overallrisk management strategy. The fraud risk managementstrategy should consist of six elements as shown inFigure below

All these elements together are designed to managethe risk of fraud across the whole organisation -starting at the top, with the Board, which has thebroad picture of where the high-level risks are likelyto be, down to individual operating units, whichshould be able to produce detailed fraud profiles.


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Some organisations may already have a fraud riskmanagement strategy in place. The objective of FraudRisk Management strategy is not necessarily to reduceevery fraud risk to zero; just being in business carriesa risk of fraud. The aim is to prevent high-impactfrauds and reduce the hidden costs of fraud, whilstimplementing a minimum number of controls toenable the business to function efficiently. Someorganisations may choose to accept or tolerate somelow-impact fraud risks because it is neither cost-effective nor practical to eliminate the risk completely.At the same time, it is possible to design andimplement procedures to deter potential fraudsters,including methods to spot those frauds which dooccur and policies for dealing with perpetrators. Forexample, some organisations have a 'zero tolerance'approach, which means they will take action againstanyone who has committed a fraud, regardless of thefinancial loss involved or the position of that personwithin the organisation.

A fraud risk management strategy is designed toassist executives in developing a fraud resistantorganisation - in ways that can be more readilymeasured and compared to other organisations.

To ensure that the Board fully supports the strategy,there are three main issues which they shouldunderstand and accept. These are:

1. The real cost of fraud;2. The 'changeable' nature of honesty, and the needto draw a line for employees;3. How the motivation to commit fraud varies bothfrom person to person, and is influenced by time andcircumstances.

If the Board has a poor understanding of these issues,it can adversely influence the way they perceive fraudrisks and hence the support they provide forimplementing the strategy.

The fraud risk management strategies may includeAppointment of fraud control officer, frauddeterrence, Fraud control responsibilities, Fraud riskmanagement (including fraud risk assessment), Fraudawareness, Fraud detection, Fraud reporting,Investigation of fraud and other improper conduct,Internal control review following discovery of fraud,Fidelity guarantee. In Kautilya's Arthasastramentioned about 40 ways of embezzlement by officersin authority, explained clear Internal Controls/Hierarchy of command, Transfer policy in place toprevent frauds, More than 1 officer (at lower levels)to avoid frauds, Award for discovering fraud - 1/6thof fraud amount (Whistle Blower Policy), SecretAgents to track such officers, Penalty up to death ordeath with torture.

D. MAKE FRAUD RISK MANAGEMENT ANONGOING PROCESS

It is important to understand the fraud riskassessment is not a one-time exercise. Suchassessments must be a dynamic, continuous process.Fraud is a constantly evolving crime; opportunitiesfor fraud will change as you hire new employees,revise your accounting systems and add newproducts. The development of a broad-ranging fraudrisk management program is an important step indealing with this challenge. By first identifyingknown risks and existing weak controls anorganization can go on to prioritize activities thatwill help with development of a company specificantifraud program. Such a program will help yourorganization comply with regulatory mandates,improve performance and protect assets. Mr. PhilipRobinson, Financial Crime Sector Leader said whilethe larger firms have been forced to wake up to fraud,those that have so far remained outside the fraudsters'radar is not as developed. Fraud threats are dynamicand fraudsters constantly devise new techniques toexploit the easiest target. Firms need to continue toinvest in systems and controls and manage theirresponses to fraud in order to avoid being targeted asthe weakest link.

E. SYSTEM TO BE IMPLEMENTED

Due to the diverse nature of businesses andorganisations, implementing a fully standardizedapproach to fraud would not be feasible or practicable.There are, however, a number of key best- practicepolicies and procedures that all organisations shouldconsider following:

Anti-Fraud Internal Culture: Organisations shouldaim to create a rigorous anti-fraud internal culturethat promotes honesty,openness, integrity andvigilance throughout the workforce and management.Businesses should seek to create an environmentwhere those approached by criminals feel comfortablereporting this and feel confident and consideratemanner.

Specilised Fraud Detecting Units: Organisationsshould establish dedicated units to specialise inproactively targeting and reactively investigatingcases of fraud.

Vetting and Security Screening: Vetting and securityscreening is the first line of staff or board memberssusceptible or vulnerable to collusion or opportunisticfrauds. Employers should verify candidate identities,personal details and references as well asundertaking further background checks on allprospective employees and board members.

Training: The growing threat from staff or from boardmember is such that all staff and the board members


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should now receive specific awareness training.Training should communicate to recipients whatearly- warning signs exist with respect to staff fraud,what to do if approached, personal safety issues andhow to report staff fraud.

Control and Monitoring: There is a balance betweenmonitoring staff , having effective controls andproviding a quality customer service. The level ofcontrol needs to be balanced against the potential riskand stress-tested to identify potential weaknesses.Organisations or departments where staff fraud posesa huge risk and which have suffered from numerousattacks should introduce stringent controls and toughanti-staff-fraud measures.

Restricted Access: Individuals access to systems,databases and communication channels should berestricted to a level appropriate to their individualrole. For example, access to email, the Internet andcertain computer and database systems should bedriven by job responsibilities. No single individualshould have access to a customer's complete set ofsecurity data.

Specialist in-house software: Specialist in-housesoftware exists and should be used to monitor, flagup and identify suspicious activity by staff or boardmember and create exception reports after analysingvariables from employee, customer, vendors,management members and transactional information.

Effective Communication: When any fraud isidentified, an effective communication policy isessential to prevent disruption and a negative impacton morale by dispelling any speculation,misinformation, unsubstantiated rumours or gossipcirculating within departments.

Deterrence: Those proved to be involved in fraudshould be 'named and shamed' as a deterrent. Thisshould take place in an appropriate forum or usingan appropriate medium to minimise disruption to therest of the workforce, for example, an intranet,circulars, conferences, training, and so on.

Zero-Tolerance Policy: A true zero-tolerance policyshould be implemented in which all cases of fraudwith sufficient burden of proof are reported to thepolice to facilitate a prosecution.

CONCLUSION

With organizations losing an estimated five percentof their annual revenues to fraud, the need for a stronganti-fraud stance and proactive, comprehensiveapproach to combating fraud is the need of the hour.As organizations increase their focus on risk, theyshould take the opportunity to consider, enact andimprove measures to detect, deter and prevent fraud.Minimising regulatory enquiries, fraud and business

disputes through carefully planned preventivemeasures is far more cost-effective than remediation.As per one survey of PWC, globally, 7% of frauds weredetected through formal whistle-blowing procedures.This may suggest that the leadership should takewhistle-blowing seriously. The organisations needsreview their fraud policies and procedures to ensurethey effectively reduce risk, improve process, and arein compliance with prevailing laws and regulations.This involves identifying the company's specificfraud risks and then developing and implementingcontrols, procedures and operational changes tomitigate these risks. Corporate not only face fraudrisks from within, but also when entering intobusiness relationships with new parties, investingin capital projects, or when acquiring another existingbusiness entity, in particular those operating indifferent jurisdictions where local regulations maynot be as explicit or tangible.

The corporate shall design pro-active Fraud RiskAssessments to assess and manage such risks beforeproblems surface. This shall include identifying fraudrisks and the factors that influence them, analyzingexisting risk management frameworks and how theypertain to managing fraud risk, developing andimplementing the necessary components of asuccessful fraud risk management program,identifying the elements of a strong ethical corporateculture and promote fraud awareness to all internalstakeholders at all levels of the organization.

References

1. ASSOCIATION OF CERTIFIED FRAUDEXAMINERS (ACFE), REPORT TO THE NATIONON OCCUPATIONAL FRAUD & ABUSE 2012

2. TACKLING STAFF FRAUD ANDDISHONESTY: MANAGING AND MITIGATINGTHE RISKS, CIPD GUIDE

3. KPMG 'S INDIA FRAUD SURVEY REPORT 2012

4. SIHAG BALBIR S. KAUTILYA ON THE SCOPEAND METHODOLOGY OF ACCOUNTING,ORGANIZATIONAL DESIGN AND THE ROLE OFETHICS IN ANCIENT INDIA ACCOUNTINGHISTORIANS JOURNAL VOL. 31, NO. 2DECEMBER 2004 UNIVERSITY OFMASSACHUSETTS LOWELL

5. SOOD SANJEEV, FRAUD RISKMANAGEMENT, DEVELOPING A STRATEGY FORPREVENTION, DETECTION AND RESPONSE

6. VARKEY CHITRANKA DALAKOTI,FINANCIAL MANAGEMENT LESSONS FROMKAUTILYA'S ARTHASHASTRA INSTITUTE OFMARKETING & MANAGEMENT (IMM)


Article

The provisions relating to issue of ESOPs arecommon for all the unlisted Companies Irrespectiveof their status being private or public.

Employee Stock Option Plans are one of the mostimportant tools to attract, encourage and retainingemployees. Nowadays, these ESOP's are being

increasingly used asa compensation toolby the CorporateHouse with thebasic premise ofcreating wealth forthe employees, onone hand andm o t i v a t i n g

employees to have long-term career aspiration in theOrganization, on the other.

BENEFITS OF ESOP:

• To improve the financial performance ofcompany, which will ultimately contribute to thesuccess of company.• Enhance job satisfaction of the employee due toownership incentive.• ESOP proves to be a good retirement benefit planfor employee.• ESOP is primarily a kind of incentive to holdthe employee to the company's fold.• Promote employee ownership culture andreduce attrition.

EMPLOYEE STOCK OPTION MEANING:

Bare Act Language: As per Sub-Section- 37 ofSection- 2 of Companies Act, 2013 "employees' stockoption" means the option given to the

• Directors, Officers or Employees of a companyor

ESOPS- A NEW GENES UNDER COMPANIES ACT, 2013

• Directors, Officers or Employees of its HoldingCompany or• Directors, Officers or Employees of ItsSubsidiary Company or companies, if any,

Which gives such directors, officers or employees,the benefit or right to purchase, or to subscribe for,the shares of the company at a future date at a pre-determined price;

EMPLOYEE STOCK OPTION:

Bare Act Language: As per Clause-b, Sub-Section- 1of Section- 62 of Companies Act, 2013, Where at anytime, a company having a share capital proposes toincrease its subscribed capital by the issue of furthershares, such shares shall be offered to employeesunder a scheme of employees' stock option, subjectto Special Resolution passed by company and subjectto rule-12 of The Companies (Share Capital andDebentures) Rules, 2014.

Bare Act Language: As per rule- 12 of The Companies(Share Capital and Debentures) Rules, 2014 ofCompanies Act- 2013: A company, other than a listedcompany, which is not required to comply withSecurities and Exchange Board of India EmployeeStock Option Scheme Guidelines shall not offershares to its employees under a scheme of employees'stock option (hereinafter referred to as "EmployeesStock Option Scheme"), unless it complies with theserules.

EMPLOYEE MEANING:

Bare Act Language: As per Explanation of sub-rule-1 of rule- 12 of The Companies (Share Capital andDebentures) Rules, 2014 of Companies Act- 2013:

"Employee Meaning"

• (a) A permanent employee of the company whohas been working in India or outside India; or• (b) A director of the company, whether a wholetime director or not but excluding an Independent director; or

– CS Divesh Goyal


OWNER EMPLOYEESTOCK


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• An employee of a subsidiary as defined inclauses (a) or (b), in India or outside India, or• An employee of a holding company of thecompany as defined in clauses (a) or (b) or• An employee of an associate company as definedin clauses (a) or (b) or

As per clause 2A of SEBI (Employee Stock OptionScheme and Employee Stock Purchase Scheme)Guidelines, 1999 "employee stock option" has beendefined as-"the option given to the whole-timeDirectors, Officers or employees of a company whichgives such Directors, Officers or employees, the benefitor right to purchase or subscribe at a future date, thesecurities offered by the company at a predeterminedprice."

As per Securities and Exchange Board Of India(Employee Stock Option Scheme And Employee StockPurchase Scheme) Guidelines, 1999, Rule-13

"Promoter Group" means

(a) An immediate relative of the promoter (i.e. spouseof that person, or any parent, brother, sister or childof the person or of the spouse);(b) Persons whose shareholding is aggregated forthe purpose of disclosing in the offer document"shareholding of the promoter group".

Who will NOT INCLUDE in the term of 'EMPLOYEE'for Employee Stock Option Scheme?

As per Explanation of sub-rule-1 of rule- 12 of TheCompanies (Share Capital and Debentures) Rules,2014 of Companies Act- 2013:

Employee doesn't include:

• An employee who is a promoter or• An employee is a person belonging to thepromoter group; or• A director who either himself holds more than10% (ten percent) of the outstanding equity shares ofthe company or• A director who through his relative holds morethan 10% (ten percent) of the outstanding equityshares of the company or• A director who through any body corporate,directly or indirectly, holds more than 10% (ten

percent) of the outstanding equity shares of thecompany.• Independent Directors of company,

Can ESOPs be issued to the Directors under the NewCompanies Act, 2013?

My view:

For Director: As per definition of ESOP given undersection 2(37) of Companies Act, 2013 and as perclause 2A of SEBI (Employee Stock Option Schemeand Employee Stock Purchase Scheme) Guidelines,1999 above it is very clear that directors can be entitledto ESOP.

Can ESOPs be issued to the Promoters under the NewCompanies Act, 2013?

For Promoter: As per definition of ESOP given undersection 2(37) of Companies Act, 2013 and as perclause 2A of SEBI (Employee Stock Option Schemeand Employee Stock Purchase Scheme) Guidelines,1999 above nowhere is word Promoter mention,therefore It is very clear that promoters can't entitledto ESOP. Most importantly, as per Clause 4.1 of theaforementioned SEBI Guidelines- "an employee whois a promoter or belongs to the promoter group shallnot be eligible to participate in the ESOS."

IMPORTANT POINTS TO BE KEPT IN MIND FORESOP

There are many things we should keep in mind forEmployee Stock Option Scheme. Some of them givenbelow:

A. Special Resolution: The issue of employee StockOption Scheme has been approved by theshareholders of the company by "SPECIALRESOLUTION" in the General Meeting ofCompany.[As per Rule-12 sub-rule- 1 of theCompanies (Share Capital and Debentures) Rules,2014.B. Separate General Meeting Resolution: Theapproval of shareholders by way of separateresolution (Ordinary Resolution) shall be obtainedby the company in case of:

• To grant of option to employees of subsidiarycompany or• To grant of option to employees of holdingcompany; or


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• To grant of option to identified employees,during any one year, equal to or exceeding onepercent of the issued capital (excludingoutstanding warrants and conversions) of thecompany at the time of grant of option.

Note: It means if a company wants to give ESOPoptions to above mentions then company can do thesame by passing of a Ordinary Resolution for such.Meaning of term "Separate" Company first PassSpecial Resolution for ESOP scheme than anOrdinary Resolution to give option to above mention.(Special Resolution + Ordinary Resolution)C. Company can vary the term of ESOP: Thecompany may by special resolution, vary the termsof Employees Stock Option Scheme not yet exercisedby the employees.Note: It means if a company wants to change theterms relating to shares not yet exercised by theemployees of company, the company can vary(change) such terms by passing of Special Resolutionin the General Meeting of company.)Provided such variation is not prejudicial to theinterests of the option holders.Note: It means such variation should not affect theinterest of the Shareholders who will exercise thisoption).Condition: For variation in the term of ESOP schemefollowing below mention conditions:

• The Notice for calling of General Meetingfor passing of Special Resolution shall disclose:• Full about variation in the term of ESOP.• The rational thereof• the details of the employees who arebeneficiaries of such variation.

D. Freedom to Determine Price: The Company hasfreedom to determine the exercise price in conformitywith the applicable accounting policies, if any.Note: The Companies Act-2013 and Rules made thereunder doesn't put any restrictions on the companyrelating to price of Shares.E. Minimum Period: There shall be a minimum gapof 1 (one) year between the grant of options andvesting of option.Note: Employees have 1 (one) year minimum timeperiod for exercise of option.

F. Lock in Period: The Company shall have thefreedom to specify the lock-in period for the sharesissued pursuant to exercise of option.Note: Under ESOP scheme under Companies Act-2013 the company have full right to decide the Lockin Period. (Lock in period mean period till theemployee who exercise option can't sale such shares.)G. Right of Dividend and Vote: The Employeesshall not have right to receive any dividend or tovote till shares are issued on exercise of option.Note: Employees will get right of Dividend and Voteonly after shares are issued to them on exercise ofoption.H. Benefit as Shareholder: The Employees shall nothave right to enjoy the benefits of a shareholder inrespect of option granted to them, till shares are issuedon exercise of option by them.Note: Employees will get right of Shareholder onlyafter shares are issued to them on exercise of optionby them.

I. Condition for forfeiture of amount payable: Theamount, if any, payable by the employees, at the timeof grant of option, may be forfeited by the company ifthe option is not exercised by the employees withinthe exercise period; orNote: If employees will pay any amount at the time ofgrant of option by them, but will not be exercise theoption within the exercise period than the companycan forfeit the amount payable by them at the time ofgrant of option.

J. Condition for refund of amount payable: Theamount, if any, payable by the employees, at the timeof grant of option, may be refund to the employees ifthe options are not vested due to non-fulfillment ofconditions relating to vesting of option as per theEmployees Stock Option Scheme.Note: If employees will pay any amount at the time ofgrant of option by them, but fails to fulfill conditionsof Employee Stock of Scheme regarding vesting ofshares than the company can refund the amountpayable by them at the time of grant of option.

K. Conditions relating to the ESOP scheme:I. Transfer of option: The option granted toemployees shall not be transferable to any otherperson. Employee can't transfer option to exerciseshares under ESOP scheme to any other person.


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II. Pledge and Mortgage of option: T h eoption granted to employees shall not be pledged,hypothecated, mortgaged.III. Encumbered and Alienated of option: Theoption granted to employees shall not beencumbered or alienated in any other manner.IV. Option can be execercised by person otherthan employee: The option granted to employeesshall be exercised by other person only In theevent of the death of employee while inemployment. In the case of death all the optionsgranted to employee till such date shall vest inthe legal heirs or nominees of the deceasedemployee.V. In case of termination: In the event ofresignation or termination of employee from theemployment, all options not vested in theemployee as on that day shall expire.VI. In case of permanent incapacity: In case theemployee suffers a permanent incapacity whilein employment, all the options granted to him ason the date of permanent incapacitation, shallvest in him on that.

L. Register of ESOP: The Company shallmaintain a Register of Employee Stock Options inForm SH-6 and shall forthwith enter therein theparticulars of option granted.

(The company shall mention in the register detailsgiven as per clause (b) of sub-section (1) of section 62of the Companies Act 2013).

M. Place to Keep Register: The Register ofEmployee Stock Options shall be maintained at theregistered office of the company. OR The Board ofDirectors of the Company may decide to keep registersof ESOP at any place other then Registered office ofcompany.

N. Authentication of entry of Register: Theentries in the register of ESOP shall be authenticatedby the company secretary of the company. OR TheBoard of Directors of Company authorizes any otherperson to authenticate the entries in the register ofESOP.

CHAPTERS OF NIRC-ICSIAgra, Ajmer, Allahabad, Alwar, Amritsar, Bareilly, Bhilwara, Chandigarh, Dehradun,Faridabad, Ghaziabad, Gurgaon, Jaipur, Jalandhar, Jammu, Jodhpur, Kanpur, Karnal-Panipat,Kota, Lucknow, Ludhiana, Meerut, Modinagar, Noida, Shimla, Sonepat, Srinagar, Udaipur,Varanasi & Yamuna Nagar.

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The Companies Act, 2013 (2013 Act) was assentedby the President of India on 29 August 2013 andpublished in the Official Gazette on 30 August 2013.The New Act is expected to facilitate more businessfriendly corporate regulations, improve corporategovernance norms, enhance accountability on thepart of corporate and auditors, raise levels oftransparency and protect interests of investors,particularly small investors.

Companies need more and more funds for expandingtheir business activities due to competitive businessenvironment, which led them to borrow funds frombanks and financial institutions. However, sourcingof funds from banks and financial institutions putsthe Company under management & control of thosefinancial institutions. The alternative sources offinance available for the Companies are equity andpreference shares, debentures and other debtsecurities etc., this has induced companies to call fordeposits from the public. Such deposits are unsecureddebts and neither management control nor theformalities of charge on assets are putting anyhindrances for availing of such amount.

An attempt has been made for brief analysis ofprovisions relating to acceptance of deposits byCompanies under new Companies Act 2013 readwith draft rules framed there under. After thecommencement of present Act of 2013, or morecorrectly, on issue of Notification by Government ofIndia making Section 73 effective? No Company shallinvite, accept or renew deposits from the publicexcept in a manner provided under Chapter V of theAct. The chapter V has been divided into four Sectionsi.e. Section 73 to 76 (both inclusive).

Applicability of the provision:

1. Provision of Section 73 to 76 of the New Actshall come into force from the date of publish in theGazette Notification.2. The provisions of the Sections shall not applyto (i) a banking Company and (ii) a non bankingfinancial Company (as defined in the Reserve Bankof India Act, 1934) registered with the Reserve Bankof India.

SOURCING FUND THROUGH DEPOSITS IN THE COMPANIES, NOT SO EASY

Important definitions:

In order to have more clarity on the issue kindattention is drawn towards the following statutorydefinitions, which read as under:

Following shall not be considered as Deposits(Exemptions):`

• Any amount received from Central Government/State Government/ local authority/statutoryauthority constituted under an Act of Parliament orState legislature /any other source whose repaymentis guaranteed by Central Government or StateGovernment.• Any amount received from Foreign orinternational banks / multilateral financialinstitutions/Foreign Government owneddevelopment financial institutions / foreign exportcredit agencies / foreign collaborators/ foreign bodycorporate /foreign citizens / foreign authorities /person resident outside India subject to theprovisions of Foreign Exchange Management Act,1999.• Any amount received as a loan from a BankingInstitution including co-operative banks notifiedunder Banking Regulation Act.• Any amount received as a loan from PublicFinancial Institution /Regional FinancialInstitutions / Insurance Companies / ScheduledBanks.• Any amount received against commercial paperor any other instruments issued in accordance withthe guidelines of Reserve Bank of India.


–CS Akshi Gandhi


• Any amount received from any other Company.• Any amount received against subscription to anysecurities including share application moneyprovided the securities are allotted within 60 daysfrom the date of receipt of the application money oradvance.• If the securities are not allotted within 60 daysthen the same should be refunded within 15 dayselse the same shall be treated as deposit aftercompletion of 15 days.• Any amount received from a person who at thetime of receipt was a director provided the directorfurnishes a declaration that the amount given is notout of borrowed funds.• Any amount raised by issue of bonds ordebentures secured by first charge on any assetsreferred to in Schedule III of the Act excludingintangible assets.• Any amount received from an employee of thecompany not exceeding his annual salary in thenature of non interest bearing security.• Any amount received as a Non- interest bearingamount received or held in trust.• Any amount received in the course of or thepurpose of the business for the following :-

a. As advance for the supply of goods or provisionof services provided such advance isappropriated against supply of goods orprovision of service within 365 days from thereceipt of such amount,b. As advance received in connection withconsideration for property under an agreementor arrangement,c. As security deposit for the performance of thecontract for supply of goods or provision ofservices.d. As advance received under long term projectsfor supply of capital goods.If any amount received under clause (a),(b) and(d) becomes refundable due to the reasons thatthe company accepting money does not havenecessary permission or approval to deal withthe goods or services then the amount receivedshall be deemed to be a deposit after the expiry of15 days from the date they become due for refund.

• Any amount brought in by the promotersthemselves or their relatives by way of unsecured

loan in pursuance of a stipulation of any lendinginstitution on the promoters. Such exemption shallbe available only till the loans of the FinancialInstitutions are not repaid and not thereafter• Any amount accepted by a Nidhi Company inaccordance with rules made u/s 406 of the Act.

Let us understand the Concept of Acceptance ofDeposits under Companies Act 2013 with the help of apractical example:

EXAMPLE

On 1st April 2014, following loans are standingoutstanding in the books of M/s ABC Pvt Ltd. TheCompanies Act 2013, states that in case any Depositis outstanding in the books of accounts of companythen same has to be reported to the ROC by 30th June2014 and has to be repaid by 31st March 2015. Here,the deposits are to be checked under the definition ofDeposits as defined under Companies Act 1956instead of Companies Act 2013.

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Repayment of deposits, accepted beforeCommencement of 2013 Act.

1. As per Section 74, any deposit accepted prior tonew act and interest due thereon if remains unpaidor becomes due at any time on or after commencementof the new Act, then

a. file, within a period of three months fromsuch commencement or from the date on whichsuch payments, are due, with the Registrar astatement of all the deposits accepted by theCompany and sums remaining unpaid on suchamount with the interest payable thereon alongwith the arrangements made for such repayment,and

b. Repay within one year from suchcommencement i.e. 31.03.2015 or from the dateon which such payments are due, whichever isearlier. Or {Section 74 (1)(b)}c. Make an application to the Tribunal forallowing further time to the Company to repaythe deposit.

2. However as per Rule 30, the provisions of Section74(1) (b) of the Act shall be deemed to have been becomplied, if the Company has had already acceptedor invited deposit under the relevant provisions ofthe Old Act and rules made there under and hasbeen repaying such deposits and interest thereontimely as per the terms and conditions of the Contract.But the provisions of the New Act shall be applicableimmediately if the Company fails to repay the depositand interest due thereon timely.3. Before any invitation to public for acceptance ofdeposit take prior consent of the shareholder througha general meeting by means of a special resolutionand also file the said resolution with the Registrar ofCompanies and where applicable, with the ReserveBank of India.

Interest on deposit:

a. Interest on deposit and payment of brokerage toauthorized person shall not exceed the maximumrate prescribed by the Reserve Bank of India.b. If at any time the Depositor request for repaymentafter expiry of a period of six months from the date ofdeposit but before the maturity period, the rate ofinterest payable by the Company on such depositshall be reduced by one per cent from the contractedrate.c. Where a Company permits a depositor to renewhis deposit, before the expiry of the contract period,for availing of a higher rate of interest, the Companyshall pay interest to such depositor at the higher rateif such deposit is renewed in accordance with theother provisions of these rules and for a period longerthan the unexpired period of the deposit.

Penal Interest - A penal rate of interest of eighteenper cent per annum shall be payable for the overdueperiod in case of deposits, whether secured orunsecured, matured and claimed but remainingunpaid.

Brokerage on deposit - Only the authorized personwill solicit deposits on behalf of the Company andwill be entitled to the brokerage.

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Form and particulars of advertisements/circulars toinvite deposit.

1. Deposits shall be invited by issue of Circulars/Advertisements.2. Every Company (including Eligible Company)intending to invite deposit from its members shallissue a circular to all its members by registered postwith acknowledgement due or speed post or byelectronic mode or publish the circular in the form ofan advertisement in Form No. 1 (English andVernacular).3. Every Eligible Company intending to invitedeposits from public shall issue an advertisement inForm No. 1 (English and Vernacular) and upload acopy of the circular on its website, if any.4. The draft Circular/Form of Advertisementshould be approved by Board and must be signed bymajority of the directors of the Company. A copy ofCircular/Form of Advertisement should be deliveredto the Registrar of Companies for registration (At least30 days before issue of Circular/Form ofAdvertisement, approved by Board).5. The Circulars/ Form of Advertisement shall bevalid until the expiry of six months from the date ofclosure of the financial year in which it is issued oruntil the date on which the financial statement islaid before the Company in general meeting or, wherethe annual general meeting for any year has not beenheld, the latest day on which that meeting shouldhave been held in accordance with the provisions ofthe Act, whichever is earlier.6. Effective date of issue of circular shall be the dateof dispatch of the circular but not from the date ofAdvertisement in news paper.7. No alternation in the term and conditions ofdeposit/deposit insurance/deposit trust deed shallbe allowed after advertisement/circular is issued anddeposits are accepted.

Form of application for deposits and deposit receipt toDepositor.

1. Deposit is to be accepted only in the prescribedform.2. The application shall contain a declaration fromthe depositor to the effect that the deposit is not beingmade out of any money borrowed by him from anyother person.3. A depositor may, at any time, make anomination.

4. Deposit receipt shall be issued in the prescribedformat and shall be signed by an officer dulyAuthorized by Board, within a period of 21 days fromthe date of receipt of money or realization of cheques.

Deposit insurance.

1. At least 30 days before issue of Circular/Form ofAdvertisement enter into a contract providing fordeposit insurance to cover both principal and interestthereon.2. If the deposit amount is less than Rs.25000/theinsurance coverage will be full amount of depositamount and if the deposit amount is more thanRs.25000/then minimum coverage is not lessthanRs.25000/.3. As deposit can be accepted/ matured at regularintervals, the total deposit insurance coverage shallbe updated from time to time.4. The Insurance Premium shall be borne by theCompany.5. Fresh insurance coverage to be taken if at anytime terms and conditions of the deposit insurancecontract which makes the insurance cover ineffective.

Creation of security.

1. Company inviting secured deposits shallprovide for security by way of a charge on its assetsas referred to in Schedule III of the Act excludingintangible assets of the Company and the marketvalue of assets charged must be assessed by aregistered valuer.2. The security (not being in the nature of a pledge)for deposits shall be created in favor of a trustee forthe deposit holders on specific moveable andimmovable property of the Company.

Appointment of deposit trustees.

1. Before issue of Circular/Form of Advertisement,appoint one or more deposit trustees for creatingsecurity for the deposits.2. The Company shall execute a deposit trust deedin Form No. 2 at least 7 days before issuing thecircular or circular in the form of advertisement.3. The Circular/Form of Advertisement shouldcontain a statement that the Deposit Trustee(s) havegiven their consent to act as Deposit Trustee.4. The Deposit trustee (s) shall not be removed fromoffice after the issue of circular or advertisement andbefore the expiry of his term except with the consentof all the directors present at a meeting of the board.

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LIGHTER SIDE OF THE PROFESSION

"Where is Paramjeet Singh, I didn't find him in the office today?""He has been sent for a one week Training Programme.""What training he requires at this age?""He is too soft and thus sent at the launching of one week Insensitive Training Programme."

"Why you love your colleague Paramjeet Singh very much?""Because of his Sincerity and Dedication?""How?""Sincerity is that he also does my job sincerely and dedication is that till date he has not taken away my job."

"How come the job of Private Secretary of your ED remains vacant?'"Because the nature of job is very difficult to perform.""What is the nature of job?""She has to hear all evils and listen to all evils against the ED and then convey it to the ED immediately."

"Why he is so agitated of his seat being shifted outside the office of the Chairman?""Due to the conspiracy of some of his colleagues.""What is their conspiracy?""To expose how much work he does in the office."

"Are there any special occasions these days in the life of Paramjeet Singh?""Why?""Because for the last one week I see him everyday in the office with a new dress.""Oh that is because even this year he has survived the Annual Survival Report."

—CS PARAMJEET SINGH, [email protected]

Members may send their contribution for this column at e-mail [email protected] for publication in theNIRC Newsletter-Insight. Decision of the Editorial Board of Newsletter in this regard will be final.

Maintenance of liquid assets and creation of DepositRepayment Reserve Account.

1. Every Company (on or before 30th April of eachyear) has to create a deposit repayment reserveaccount and deposit a sum not less than 15% of thedeposit amount matured during the currentfinancial year with any schedule bank. The amountdeposited shall not at any time fall below fifteenper cent of the amount of deposits maturing untilthe current financial year and the next financialyear.2. The amount deposited in deposit repaymentreserve account shall not be utilized for any purposeother than for the repayment of deposits:

Registers /Returns of deposits.

1. Make entries in the register (information to beentered as per rules) within seven days from thedate of issuance of the deposit receipt and suchentries shall be authenticated by a director orsecretary of the Company or by any other officerauthorized by the Board for this purpose.2. The registers shall be preserved in good orderfor a period of not less than eight years from thefinancial year in which the latest entry is made inthe register.3. File Deposit return in Form No- DPT -3 byfurnishing information contained therein as on31st day of March duly audited by auditors before30th June every year.

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LEGAL UPDATES

CASE LAW

Whether Company Law Board has the authorityto relax the provisions of buy-back of shares insection 77A by exercising its rights and powersunder section 402???

The above captioned Company Petition has beenfiled by the Petitioners invoking the provisionscontained in Section 397 and 398 read with Section402 of the Companies Act, 1956 (Shri. Nitin MukundSahasrabhojanee & Anr..Petitioners V.s M/s VenusAutomation Pvt. Ltd. & Ors.. Respondents C.P No.107 of 2013 DOJ 26-03-2014)

• The Petitioners, Shri. Nitin MukundSahasrabhojanee & Anr have filed a CompanyApplication praying therein to pass an orderdirecting M/s Venus Automation Pvt. Ltd.Company to file Form No.32 relating to theremoval of the Petitioner (Nitin Mukund)asDirector at the earliest possible time to avoidany further damage to the interest of theCompany's stake holder• In the course of trial, the Parties negotiatedand they reached at a mutual settlement. Theyhave accordingly filed a Company Applicationalong with the Consent Sheet containing theConsent Terms therein

• In the aforesaid Company Application, theParties have interalia sought relaxation in therules and procedure prescribed under Section77A of the Act to allow buyback of shares heldby the Petitioners as contemplated in theSettlement Agreement irrespective of the factthat such buy-back would be:- 1)In excess of25% of total paid-up capital and frees reservesof the company. 2) Completed in next one yearirrespective of the debt equity ratio. 3) Withoutpassing the special resolution. 4) Withoutdepositing immediately after the date of closureof the offer in the special bank A/c, such sumas would make up the entire sum due andpayable as consideration for the buy-back interms of rules. 5) Without complying the rulethat within 7 days of the time specified in sub

rule (4) of rule 6 of Private Limited Companyand Unlisted Public Limited Company. 6) (buy-back of Securities) Rules 1999 company to makepayment of consideration in cash or bankdraft/ pay order to those shareholders whoseoffer has been accepted or return the sharecertificates to the shareholders forthwith.

A query was raised from the Ld. Counselsappearing for both the sides as to whether the Benchin the exercise of its rights and powers conferredupon it by virtue of the provisions contained inSection 402 of the Act is empowered to pass anorder to relax the compliance of the provisionscontained in section 77A of the said Act.

Petitioners submitted that the CLB in the exerciseof its rights and powers conferred upon it by virtueof the provisions contained in Section 402 of theAct, is empowered to exempt the Company frommaking any compliance of the conditions laid downin Section 77A relating to buyback of shares asprovided therein and the rules made there under.

JUDGEMENT

Upon a critical examination of all aspects, CLBMumbai bench directed that if exemption as soughtby the Parties is granted, nobody's interest is goingto be prejudicially affected. It is pertinent tomention here that, the Company does not have anyembargo in reducing the capital as it does not haveterm loan facility from any Bank. Thus, the reliefswhereby the Petitioners and Respondents haverequested exemption to 'open a separate bankaccount and deposit the whole considerationtherein' and 'to file return of buy back' may beallowed. It is, however, directed that theRespondent Company shall deposit all the chequestowards the consideration of buy-back of shareswithin 7 days of the receipt of this order with theescrow. C.P thus, stands disposed off as per theConsent Terms as contained in the Consent Sheetwhich shall form part of the order.

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