COMPLIANCE MANAGEMENT AND DUE DILIGENCE

26
PP-SACM & DD
It is necessary to look at the important prohibitions contained in Section 77B of the Act. There should not be
a buy back through any back door arrangement. This calls for a detailed look at the people who agree to the
offer made by the company for buyback. There should not have been certain subsisting defaults when the
proposal for buyback is under consideration. There should not be a default in compliance of Sections 159,
207 and 211 of the Act. A perusal of Section 207 would reveal that it is basically a section levying a fine or
penalty upon companies that have defaulted in payment of declared dividend except in certain exceptional
circumstances. Sub-section (2) of Section 77B should be understood to mean whether the company has
defaulted to comply with any order of any court awarding punishment as per Section 207 of the Act.
Whether the company had defaulted the provisions of Section 211 of the Act would require close monitoring.
Most of the requirements such as the following pertain to accounts and financial statements of the company:
– Whether the financial statements show a true and fair view
– Whether the company has complied with the accounting standards
– Whether the company has drawn up its financial statements in accordance with Schedule VI of the
Act.
While complying one has to ascertain whether the private/unlisted public company has complied with the
provisions of the Sections 77A, 77AA and 77B of the Act and the Rules thereunder with regard to buyback of
shares and other specified securities. Therefore, one has to ensure that –
(a) the company has ensured buyback within the ceiling in relation to percentage of paid up capital and
free reserves
(b) the company has followed the prescribed offer procedure and has paid all the persons for the
bought back shares or other specified securities
(c) the company has filed with the Registrar of Companies the letter offer declaration of solvency,
certificate from a company secretary in practice of compliance of the Rules including extinguishment
and destroying of certificates of shares or other specified securities bought back, the return of
buyback
(d) the company has maintained the register of buyback and Register of securities destroyed/cancelled
(e) the company has complied with the provisions of Section 77AA of the Act with regard to creation of
Capital Redemption Reserve Fund .
Further issue of Shares (Section 81)
Section 81 mainly deals with three requirements:
– Issue of shares on rights basis.
– Further issue of shares to persons who may or may not include existing members.
– Conversion of loans into equity.
All the above things may apply to an unlisted company or a listed company, though the provisions of this
Section will not apply to private companies. Taking up one by one, it will be possible to analyse the important
requirements of this section. With regard to issue of shares on rights basis, several questions normally arise.
They are explained below:
In exercise of the powers conferred by sub-section (1A) of section 81 of the Companies Act, 1956 read with
section 642 of the said Act, the Central Government hereby makes the rules, namely Unlisted Public
Companies (Preferential Allotment) Amendment Rules 2011.