Origin & the Recent Changes to the ‘Amendment Rules’

On 5 May, 2022 the Ministry of Corporate Affairs notified the Companies (Prospectus and Allotment of Securities) Amendment Rules, 2022 to further amend the Companies (Prospectus and Allotment of Securities) Rules, 2014. (“Amendment Rules”)

Now let’s understand:

(a) the origin of the above Amendment Rules, as per the existing corporate laws of India; and

(b) exactly what change(s) these Amendment Rules seek to make to the Companies (Prospectus and Allotment of Securities) Rules, 2014.

The main law in India governing companies/corporates is called ‘The Companies Act 2013’ (“Act”).

Under the said Act, the Central Government has the power to issue rules for certain specific provisions under the Act.

The Central Government on 31 March, 2014 had notified the Companies (Prospectus and Allotment of Securities) Rules, 2014 (“Allotment Rules”).

The said Allotment Rules came into effect on 1^st April 2014 and prescribed rules to be followed by companies for inter alia sharing of information and matters to be stated in the prospectus for allotment of shares, variation in terms of the contracts referred to in the prospectus, offer of sale of shares by members, dematerialisation of securities, Refund of application money, method to be followed for return of allotment of shares; private placement procedure, formats for forms like PAS-3 and PAS -4 etc.

• The Amendment Rules first amendment is to Rule 14, sub-rule 1 of the Allotment Rules adds another sub-rule:

Rule 14 under the Allotment Rules provides for the procedure for Private Placement and the new rule added is as follows:

“Provided that no offer or invitation of any securities under this rule shall be made to a body corporate incorporated in, or a national of, a country which shares a land border with India, unless such body corporate or the national, as the case may be, have obtained Government approval under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and attach the same with the private placement offer cum application letter”

• Further, the Form PAS-4 i.e., the Private Placement Offer Letter has also been modified to reflect the said additional change to the Allotment Rules.

As mentioned, time and again in many of our SLP’s previous posts, the Government of India has increased compliance in the recent past to curb unscrupulous activities and to protect Indian business dysphoria from complicated structures for start-up transactions, especially from Chinese investors, wherein either value creation is outside of India or the value is taken out of India, during investor exits.

Companies and start-ups should now especially ensure that if they are receiving any investments from investors in and/or the investment is wired through China and/or any nominee director is appointed, they would be subjected to, and will need to comply with the Amendment Rules to the Allotment Rules, wherein they will another approval for their investment from the RBI under the FEMA laws.