Corporate Restructuring – Position under the Companies Bill, 2012

As with any new
Legislation, there is a great deal of fascination amongst the business
fraternity and professionals to see whether the Bill is a turbo-charged
version of the old Act or is it merely “Old Wine in a New Bottle”, does
it continue with the “Old Whine with New Throttle”? While there have
been several new concepts which are sought to be introduced by the Bill,
one area which sees a lot of upheaval is that of corporate
restructuring, i.e., mergers, takeovers, slump sales, shareholders’
agreements, etc. Corporate India has always desired a code which
facilitates corporate restructuring. While one can understand the
Regulator’s desire of protecting interest of all stakeholders, it should
not be at the cost of stifling the transaction itself. The words of
Justice D. Y. Chandrachud in the case of Ion Exchange (India) Ltd., 105
Comp. Cases 115 (Bom) in this context are very apt:

“The basic
assumptions which were the foundation of a closely regulated and
controlled economy have altered in the present day society where
corporate enterprise has to gear itself up to a free form of competition
and an open interface with market forces. The fortunes of corporate
enterprise are liable to fluctuate with recessionary cycles. Changes in
economic policy and economic changes affect the fortunes of business as
assumptions and conditions in which corporate enterprises function are
altered. Corporate enterprise must be armed with the ability to be
efficient and to meet the requirements of a rapidly evolving business
reality. Corporate restructuring is one of the means that can be
employed to meet the challenges and problems which confront business.
The law should be slow to retard or impede the discretion of corporate
enterprise to adapt itself to the needs of changing times and to meet
the demands of increasing competition

Let us examine whether the
Bill lives up to the expectations and whether it impedes or expedites
corporate restructuring? We look at some of the key features in this
respect.

Schemes of Arrangement
We may first consider
the provisions which would impact all Schemes of Arrangement, i.e.,
mergers, demergers, reconstruction, etc. Clause 230 of Chapter XV of the
Bill deals with these provisions. Some of the new features of this
Clause as compared to the provisions of the Act are as follows:

(a) Tribunal:
The National Company Law Tribunal (“Tribunal”) would have power to
sanction all Schemes. Thus, instead of the High Court the Tribunal would
be vested with these powers. An Appeal would lie against the order of
the Tribunal to the National Company Law Appellate Tribunal (“NCLAT”)
and against the Order of the NCLAT to the Supreme Court. One important
feature of both the Tribunal and the NCLAT is that Chartered Accountants
can appear before them to plead Schemes of Arrangement. Currently, this
is the exclusive domain of Advocates.

 (b) Corporate Debt Restructuring:
Any scheme of corporate debt restructuring (CDR) which is a part of a
Scheme must be consented to by not less than 75% of the secured
creditors in value. There must be safeguards for the protection of other
secured and unsecured creditors. The auditor must report that the fund
requirements of the company after the CDR shall conform to the liquidity
test based upon the estimates provided to them by the Board of
Directors. Here the auditor would be well advised to remember the CA
Institute’s warning that he should not become a party to preparing
estimates. One important facet of the CDR is that the Scheme should
include, a valuation report in respect of the shares and the property
and all assets, tangible and intangible, movable and immovable, of the company of a Registered Valuer.

(c)
Valuation Report: Every Notice of a meeting for the Scheme of
Arrangement which is sent to creditors and members shall be accompanied
by a copy of the valuation report, if any, and explaining its effect on
creditors, key managerial personnel, promoters and non-promoter members,
and the debenture-holders and the effect of the Scheme on any material
interests of the directors of the company or the debenture trustees.
Currently, the valuation report is only available for inspection at the
company’s office. An overwhelming majority of the shareholders do not go
to the registered office to inspect the valuation report. Now the
valuation report would come home since it needs to be sent to the
members and creditors. The Bill is silent as to whether the valuation
workings also need to be sent to them? In this context the following
decisions would throw some light:

• Hindustan Lever Ltd., 83
Comp. Cases 30 (SC)/ Miheer Mafatlal vs. Mafatlal Industries, 87 Comp.
Cases 792 (SC): Valuation is a specialised subject best left to experts
and Courts would not interfere in the same.

• Asian Coffee Ltd., 103 Comp. Cases 17 (AP): Shareholders need not be given detailed calculations of share exchange ratios.

(d) Notice to Regulators:
Every notice shall also be sent to the Central Government, Income-tax
authorities, the Reserve Bank of India, the Securities and Exchange
Board, the RoC, stock exchanges, Official Liquidator, the Competition
Commission of India (CCI) and such other sectoral regulators or
authorities which are likely to be affected by the compromise or
arrangement (e.g., Telecom Regulatory Authority of India for telecom
companies).

Under the Bill, the authorities, to whom Notice has
been sent, can make representations, within 30 days or else it shall be
presumed that they have no representations to make on the proposals.
However, this period of 30 days should be read subject to the time
allowed under any other Statute for approving such Schemes. For
instance, the Competition Act, 2002 allows the CCI a time period of 210
days for passing an order. Therefore, it stands to reason that the
timeline of 30 days will not be applicable to the CCI.

(e) Objection Threshold:
An objection to the Scheme can now be made only by persons holding at
least 10% of the shareholding or having outstanding debt amounting to at
least 5%. This is a welcome move which would prevent frivolous
challenges which lead to undue delays.

(f) Approval: The
resolution for approving the Scheme requires 3/4th majority in value and
can be passed in person, by proxy or through postal ballot. Postal
Ballot has been made applicable to both listed as well as
unlisted/private companies, unlike s.192A of the Act where it applies
only to listed companies.

(g) Accounting Standards: The Scheme shall be sanctioned by the Tribunal only if there is a certificate by the Auditor that the accounting treatment in the Scheme is in conformity with the prescribed accounting standards. Currently, the Listing Agreement contains a similar provision in the case of Listed Companies. The decision in the case of Hindalco Industries Ltd., 94 SCL 1 (Bom) is pertinent in this respect. In this case, the company proposed to write-off the impairment losses and ammortisation loss against the balance standing in the Securities Premium Account by a Scheme of Arrangement. The Scheme was objected to on the grounds that this treatment was in violation of para 58 of AS-28 on “Impairment” since the loss was not routed through the P&L A/c. The High Court over-ruled this objection and held that section 211(3B) of the Act expressly permitted deviation from accounting standards subject to certain disclosures.

The current Accounting Standards are woefully inadequate to address all forms of corporate restructuring, for instance, there are no standards dealing with demergers, reconstruction, reduction of capital, etc. Hence, unless new Accounting Standards are introduced, this would remain an empty formality. In this context Accounting Standard Interpretation (ASI) 11 on AS-14 issued by the ICAI on 1-4-2004 is relevant since it prescribes the stand to be taken in case the accounting treatment specified under the Scheme deviates from the treatment specified from AS-14. Some instances of cases where accounting disputes have been the subject matter of objection to Schemes of Amalgamation/Arrangement, include the following, Gallops Realty, 150 Comp. Cases 596 (Guj); Cairns India Ltd, 101 SCL 435 (Bom); Mphasis Ltd., 102 SCL 411 (Kar); Sutlej Industries Limited, 135 Comp. Cases 394 (Raj),Paramount Centrispun, 150 Comp. Cases 790 (Guj), etc.

(h)    Buy-back: A Scheme in respect of any buy-back of securities shall be sanctioned only if the buy-back is in accordance with the provisions of the Bill. For instance, the decisions in the cases of SEBI vs. Sterlite Industries Ltd., (2004) 6 CLJ 34 (Bom); Gujarat Ambuja Exports Ltd (2004) 6 CLJ 117 (Guj) have held that Schemes of Arrangement need not be in compliance with the buyback provisions of the Act since they operate in different fields. The Court held that the s.77A is merely an enabling provision and the Court’s powers u/ss. 100-104 and 391-394 are not in any way affected. The conditions u/s.77A are applicable only to buyback under that section and the conditions applicable u/ss. 100-104 and 391 cannot be made applicable or imported into a buyback of shares u/s. 77A. There is no reason why a cancellation of shares and consequent reduction cannot be made u/s. 391 read with section 100 merely because a shareholder is given an option to cancel or retain his shares. This position would now be modified by the Bill.

(i)    Takeover: Any Scheme which includes a Takeover Offer in the case of listed companies, shall be as per the SEBI Regulations. In Larsen & Toubro Ltd, 121 Com. Cases 523 (Bom) a takeover of shares by Grasim avoided the provisions of the SEBI Takeover Code since it was done under a Scheme of Arrangement. Grasim acquired around a 30% equity stake in Ultra Tech Cement Company Ltd from the public shareholders under the Scheme of Arrangement, around 4.5% stake from L&T. Further, it also sold its holding in L&T to an Employee Trust of L&T. As a result of the Scheme, Grasim ended up owning a 51.1% stake in Ultra Tech without triggering the open offer provisions under the SEBI Takeover Regulations. The Bill aims to plug this method of acquisition of shares€.

(j)    Minority Squeeze-out: Provisions have been enacted for minority squeeze-out by majority. Majority shareholders (holding 90% of the equity shares capital) who have acquired the majority stake through amalgamation, share exchange, conversion of securities, any other reason, etc., should notify the company of their intention to buy out the remaining shareholders. The purchase price would be ascertained on the basis of the valuation done by a registered valuer.

Merger Schemes

In addition to the above provisions, which are applicable to all Schemes of Arrangement, the following additional requirements which are applicable to a Scheme of amalgamation/ merger are provided in Cl. 232 of the Bill:

(a)    A notice for Merger Schemes must also include a supplementary accounting statement if the last annual accounts of any of the merging companies are more than 6 months old.

(b)    A transferee company should not, as result of the Scheme hold any shares in its own name or under a Trust for the benefit of the transferee company or its subsidiary company or associate company. Such treasury shares shall be cancelled or extinguished. In other words, the Bill prohibits creation of treasury stocks. This supersedes the decision in the case of Himachal Telematics Ltd, 86 Comp. Cases 325 (Del) which upheld the creation of treasury stock arising on a merger. Several mergers, such as, ICICI-ICICI Bank, Reliance Petroleum-Reliance Industries, Mahindra & Mahindra, etc., had followed this route of creating treasury stock. In fact, ICICI Bank sold its treasury stock on the floor of the stock exchange for a handsome amount.

(c)    In case of a merger of a listed company into an unlisted company the transferee company shall remain an unlisted company until it becomes a listed company. If the shareholders of the transferor company decide to opt out of the transferee company, provision shall be made for payment of the value of shares held by them as per a pre-determined price formula or after a valuation is made.

Thus, this provision negates the back-door/reverse merger route of SEBI under which a listed company can merge into an unlisted company and the unlisted company gets automatic listing. This provision is also available for demerger of a listed company into an unlisted company and listing of the shares of the resulting unlisted company. For instance, Cinemax India Ltd, a listed company demerged its theatre exhibition business into an unlisted company. Subsequently, the shares of the unlisted company got listed without an IPO.

The unlisted company gets the gains of listing without the pains of listing. It also bypasses the requirements of Section 72A of the Income-tax Act if the transferee company is a loss-making/sick company. Thus, the unabsorbed depreciation and carried forward losses of the loss-making company are available as a set-off to the healthy company without complying with the requirements of section 72A and Rule 9C since the transferee company is the loss making company. This route is currently available by virtue of Rule 19(2)(b) of Securities Contract (Regulation) Rules, 1957 read with the SEBI’s Circulars CIR/ CFD/DIL/5/2013 and the earlier SEBI/ CFD/SCRR/01/2009/03/09.

Under the Bill, the shareholders of the transferor company have to be provided with a mandatory exit option in the form of a cash payment. It would be interesting to see what happens if more than 25% of the shareholders of the transferor opt out? In such a situation the conditions of Section 2(1B) of the Income-tax Act, 1961 are not met since the section requires that at least 3/4th of the share-holders of the amalgamating company become share-holders of the amalgamated company. How would this condition now be met? As a consequence, the merger would cease to be a tax-neutral amalgamation under the Income-tax Act and as held by the Supreme Court in the case of Grace Collis, 248 ITR 323 (SC), an amalgamation involves a transfer of capital asset. You can join the dots to understand what happens next.

(d)    The Scheme should clearly indicate an Appointed Date from which it shall be effective and the scheme shall be deemed to be effective from such date and not at a date subsequent to the appointed date. Currently, there is no express requirement in the Act but the decision in the case of Marshall Sons & Co. (I) Ltd., 223 ITR 809 (SC) has held that every Scheme of merger must necessarily provide a date with effect from which the transfer will take place and such a date would either be the date specified in the Scheme or the date so specified/modified by the Court while sanctioning the Scheme. An Appointed Date is also relevant from an income-tax perspective. The decisions in the case of Ambalal Sarabhai Enterprises Ltd, 147 ITR 294 (Guj); Amerzinc Products, 105 SCL 682 (Guj), etc. are also relevant in this respect.

(e)    The fee paid by the transferor company on its authorised capital shall be available for set-off against any fees payable by the transferee company on its authorised capital enhanced subsequent to the merger. This express provision sets to rest the constant objection of the Regional Director on this issue. Several decisions have supported clubbing of the authorised capital – Hotline HOL Celdings, 121 Comp. Cases 165 (Del); Cavin Plastics, 129 Comp. Cases 915 (Mad); Areva T&D, 144 Comp. Cases 34 (Cal), etc.

(f)    Every company in relation to which the Tribunal makes an Order, shall, until the completion of the
Scheme, file a statement in such form and within such time as may be prescribed with the RoC every year duly certified by a CA/CS/CMA indicating whether or not the Scheme is being complied with in accordance with the Orders of the Tribunal.

Fast-track Mergers

Clause 233 provides a new concept of fast-track mergers:

(a)    A new concept of fast-track mergers has been introduced for mergers between small companies or between a holding company and its wholly owned subsidiary without going through the Tribunal Process.

(b)    A Small Company is defined to mean a ‘private company’ meeting either of the following requirements:

•    Paid up capital does not exceed the sum prescribed which may range from Rs. 50 lakh – Rs. 5 crores.

•    Turnover does not exceed the sum prescribed which may range from Rs. 20 lakh – Rs. 2 crore.

It may be noted that a merger between a holding and a 100% subsidiary could also opt for the fast-track route even though the companies are not small companies.

(c)    This route is optional and if the companies desire to adopt the conventional route i.e., the Tribunal-approved Route, then they may adopt the same.

Cross-Border Mergers

(a)    The Bill provides that a merger of a foreign company incorporated in the jurisdictions of such countries as may be notified from time to time by the Central government into an Indian company is permissible. For instance, Corus Group Plc (now Tata Steel Europe Ltd), UK merging into Tata Steel and Tata Steel issuing its Indian shares to the shareholders of Corus, wherever they may be located. Currently also, mergers of a foreign company into an Indian company is permissible. Any merger involving an Indian Company would be governed by the Companies Act, 1956. Sections 391 to 394 of the Act deal with Mergers of companies. Section 394 of the Act provides for facilitating amalgamation of companies. Section a.394 states that the section only applies to a Transferee Company which is a company within the meaning of the Act, i.e., an Indian Company. However, the Transferor Company is defined to include any Company, whether Indian or Foreign. Hence, the transferor company can be a foreign company. The decisions in the cases of Bombay Gas Co., 89 Comp. Cases 195 (Bom), Moschip Semiconductor Technology Ltd., 120 Comp. Cases 108 (AP), Adani Enterprises Ltd., 103 SCL 135 (Guj); Essar Oil Ltd, Company Petition No. 280 of 2008 (Guj), etc., clearly support this point.

However, Cl. 234 of the Bill now provides that only companies from specified jurisdictions would be permissible. This restriction is not there currently. Probably, the Government wants to limit the scope to those countries which either have a DTAA or a TIEA with India.

(b)    Cl. 234 of the Bill also provides for a merger of an Indian company into a foreign company which is currently not possible. S.394 states that the section only applies to a Transferee Company which is a company within the meaning of the Act, i.e., an Indian Company. However, the Transferor Company is defined to include any Company, whether Indian or Foreign. Thus, currently an Indian company cannot merge into a Foreign Company.

The consideration for the merger may be discharged by the foreign company in the form of cash or its Indian Depository Receipts. Thus, the foreign company cannot issue its shares to the Indian shareholders of the transferor company. For instance, if ACC were to merge into Holcim of Switzerland, Holcim cannot issue its shares to the Indian shareholders of ACC. It must issue IDRs or pay cash. Currently, Standard Chartered Bank Plc, UK, is the only foreign company to have issued IDRs in India. One possible reason for this embargo is that under the FEMA Regulations, Indian residents can acquire shares of a foreign company

only under the Liberalised Remittance Scheme, i.e., by paying consideration in cash. There is no provision for a stock swap in the case of an outbound in-vestment by resident individuals. This is one area which could be liberalised by permitting the consideration to be in the form of shares also.

The Bill provides that the prior approval of the RBI would be required for such a merger of an Indian company with a foreign company.

Registered Valuer

Clause 247 of the Bill introduces a new concept of a Registered Valuer. Where a valuation is required to be made in respect of any property, stocks, shares, debentures, securities or goodwill or any other assets or net worth of a company or its liabilities under the provision of this Act, it must be valued by a Registered Valuer. The qualifications and experience for such a person would be prescribed. It may be recalled that a few years ago, the Shardul Shroff Committee had recommended that valuations should be carried out by independent registered valuers instead of the current practice. Would a CA automatically be registered as a registered valuer or would he have to acquire some additional qualification for the same? What happens in case of a partnership firm or LLP of professionals – would all partners need to obtain qualifications? One wonders whether a CA would be the right person to value property, plant and machinery whereas whether a chartered engineer would be able to value shares and goodwill? Does a one-size fits all approach work or is not the current dual system a better approach?

Some of the valuation areas under the Bill which would require a Registered Valuer include:

•    Further issue of shares
•    Assets involved in Arrangement of Non Cash transactions involving directors
•    Shares, Property and Assets of the company under a CDR
•    Scheme of Arrangement
•    Equity Shares held by Minority Shareholders
•    Assets for submission of report by Liquidator.

Reduction of Capital

Clause 66 of the Bill deals with Reduction of Share Capital of a Company:

(a)    A reduction of share capital cannot be made if the Company is in arrears in the repayment of any deposits accepted by it or interest payable thereon by it.

(b)    Further, an application for the reduction shall not be sanctioned by the Tribunal unless the accounting treatment, proposed by the company for such reduction is in conformity with the prescribed Accounting Standards. This would require framing of Standards on reduction. (c) The Order confirming the reduction shall be published by the company in such manner as the Tribunal may direct. Under the current provision, the Court has discretionary power to order publishing of reasons of reduction and such other information as it thinks fit.

(d)    The current discretionary power of the Court to order the addition of words “and reduced” to the names of the company reducing their capital has been withdrawn. Further, The current power of the Court to dispense with the requirement of the consent of the creditors in case of reduction of capital by way of either diminution in any liability in respect of the unpaid share capital or repayment to any shareholder of any unpaid share capital has been withdrawn.

Slump Sale

Currently, under the Act a public company is required to obtain its members’ consent to sell, lease, etc. of the whole or substantially the whole undertaking of the company. Thus, an ordinary resolution of the members is required u/s. 293(1) for a slump sale. In case of a listed company, this consent is to be obtained by a Postal Ballot.

Under Clause 180 of the Bill this provision of Postal Ballot will now be applicable even to a private limited company. Further, the approval of the members is to be obtained by way of a special resolution instead

of an ordinary resolution. Thus, the regulatory arbitrage available in a slump sale over a demerger is sought to be plugged. This would make it more challenging for listed companies to hive-off their undertakings by way of slump sales.

Specific definition of the terms ‘undertaking’ and ‘substantially the whole undertaking’ have been provided under the Bill as follows:

(i)    “Undertaking” shall mean an undertaking in which the investment of the company exceeds 20% of its net worth as per the audited balance sheet of the preceding financial year or an undertaking which generates 20% of the total income of the company during the previous financial year.

(ii)    “Substantially the whole of the undertaking” in any financial year shall mean 20% or more of the value of the undertaking as per the audited balance sheet of the preceding financial year.

It may be noted that this definition of undertaking is only relevant for the purposes of the Bill. What constitutes an undertaking for determining whether a transaction is a slump sale u/s. 2(42C) of the Income-tax Act, would yet be determined by Explanation-1 to Section 2(19AA) of that Act, which provides as follows:

“For the purposes of this Cl. , “undertaking” shall include any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.”

Thus, what may be an undertaking under the Bill may not satisfy the conditions laid down under the Income-tax Act. Distinctions between the two definitions are given in the Table:

Inter-Company Loans and Investments
Clause 186 of the Bill is at par with the current Section  372A of the Act. However, en masse changes have been carried out in this very important provision. Some of the key features of Clause 186 are as follows:

(a) A Company cannot make investment through more than 2 layers of investment companies. The restriction is on 2 layers of investment companies and not operating companies. An Investment Company means a company whose principal business is acquisition of shares, debentures or other securities. This is one of the most important restrictions under the Bill. This prohibition does not apply in two situations:

A company can acquire any foreign company if such foreign company has investment subsidiaries beyond two layers as per the foreign laws. However, the RBI is known to frown upon such multi-layer structures for outbound investment.

•  A subsidiary company can have any investment subsidiary for the purposes of meeting the requirements under any Law.

This prohibition is even applicable to NBFCs and Core Investment Companies (CICs) registered with the RBI and to private companies. One would have expected private companies and CICs to be exempted from this restriction.

(b) The main provision of Clause 186 is the same as Section 372A, i.e., a company cannot make a loan/investment/guarantee exceeding 60% of its paid-up capital + free reserves + securities premium or 100% of its free reserves + securities premium, without the prior approval by way of a special resolution. However, the current embargo on a loan/guarantee to any body corporate has been modified to a loan to any person. Thus, loans to individuals/HUF/firm/AOP/Trust, etc., would also be covered.

An NBFC whose principal business is acquisition of shares and securities, shall be exempt from the provision of this clause in respect of subscription and acquisition of securities.

(d) The loan must be given at a minimum rate of interest equal to the prevailing yield of 1/3/5/ 10 years’ Government Security closest to the tenor of the loan. Presently, the minimum rate is the Bank Rate of the RBI, which currently is 8.50%. The 2011 draft of the Companies Bill also pegged the minimum rate at the Bank Rate but the 2012 version has changed it to its current form.

(c) The current exemptions given u/s. 372A of the Act have been done away with. Consequentially:

•    Private limited companies will have to comply with this section.

•    Loans by a holding company to its 100% subsidiary would have to comply with this section. Thus, interest free loans to a 100% subsidiary will not be possible even for a private company.

•    Acquisition by a holding company by way of subscription, purchase or otherwise the securities of its wholly owned subsidiary would have to comply with this section.

•    Any guarantee given or security provided by a holding company in respect of any loan made to its WOS would have to comply with this section.

(d) A company shall disclose to the members in the financial statement the full particulars of the loans given, investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security is proposed to be utilised by the recipient of the loan or guarantee or security.

(e)    A company which is in default in the repayment of any deposits/interest thereon, shall not give any loan or give any guarantee or provide any security or make an acquisition till such default continues.

(f)    Restrictions have been put on SEBI intermediaries, such as, brokers, merchant bankers, underwriters, etc., from accepting inter-corporate deposits exceeding prescribed limits. One fails to see the logic for this provision when the SEBI Regulations do no prescribe any limits.

Shareholders’ Covenants

Currently, Restrictive Covenants forming part of Shareholders’ Agreement, such as, Tag Along, Drag Along, First Refusal, Russian Roulette, Texas Shoot-out, Dutch auction rights, etc., are the subject-matter of great dispute in the case of public companies.

The Supreme Court has held that they are valid against a company only if they are a part of the Articles of Association or else they remain a private contract between shareholders – V.B. Rangarajan vs. V. Gopalkrishnan, 73 Comp. Cases 201 (SC). A Single Judge of the Bombay High Court in the case of Western Maharashtra Development Corporation vs. Bajaj Auto Ltd., (2010) 154 Comp Cases 593 (Bom), had ruled that a Shareholders’ Agreement containing restrictive Clauses was invalid, since the Articles of a public company could not contain Clauses restricting the transfer of shares and it was contrary to Section 108 of the Act. Subsequently, a two-member Bench of the Bombay High Court, in the case of Messer Holdings Ltd vs. Shyam Ruia and Others (2010) 159 Comp Cases 29 (Bom) has overruled this decision of the Single Judge of the Bombay High Court.

The Bill provides that securities in a public company are freely trans-ferrable but a contract in respect of transfer of securities in a public company shall be enforceable. It is

submitted that this express provision sets at rest once and for all whether public companies can contain pre-emptive rights. This would be a big boost for Private Equity/FDI/Private Investment in Public Equity (PIPE) transactions since they usually come with pre-emptive rights.

Other Important Changes

Some other important changes in the sphere of restructuring include the following:

(a)    Infrastructure companies can issue redeemable preference shares having a tenure of more than 20 years provided they give the holders an option to ask for a redemption of a specified percentage every year. Real estate development has been defined as an infrastructure sector along with, air/road/water/rail transport, power generation, telecom, etc.

(b)    Prescribed class of companies which comply with accounting standards cannot utilise their securities premium account for paying premium on redemption of preference shares. They must use their profits alone. This is a very important restriction and it would be interesting to see the class which is prescribed. One fails to understand the logic behind this embargo.

(c)    Companies which are unable to redeem preference shares can, with the Tribunal’s approval, issue fresh preference shares in lieu of the same and that would constitute a deemed redemption of preference shares.

(d)    Prescribed class of companies which comply with accounting standards cannot utilise their securities premium account for buying back shares or for writing-off preliminary expenditure of the company. They must use their profits alone. Again, it would be interesting to see the class which is prescribed.

(e)    The time limit between two or more buy-back of securities, whether board approved or shareholder approved, has been made one year. The odd-lot buy-back provision has been dropped as a method of buy-back.

Conclusion

It would be interesting to see what the Rules provide since a bulk of the provisions would be prescribed in the Rules. Hence, the “Devil would lie in the Details (Rules)”. To sum up, there are some laudable amendments, some not so good and some quite serious ones. The Bill is a cocktail of surprises and shocks and corporate India would have to accept both. As Arnold Bennett, the English Author, once said:

“Any Change, even a Change for the Better, is always accompanied by Drawbacks and Discomforts”.