The Firm

Show Timings:

Friday: 10.30 pm, Saturday: 11.30 am

Sunday: 9:30am & 11.00pm

CNBC TV18
Network18

Cos Act Ep#4: Shares, Debentures & Deposits

Published on Mon, May 12,2014 | 16:02, Updated at Tue, Jun 03 at 16:36Source : Moneycontrol.com |   Watch Video :

Last week on Companies, Act we discussed Chapter 3 - Prospectus & Allotment of Securities. This week we continue our discussion with Manan Lahoty of Luthra & Luthra, VS Parthasarathy of M&M and TV Raghunath of Kotak Investment Banking on corporate fundraising provisions in the Companies Act, 2013 - namely chapter 4: Share Capital & Debentures and chapter 5: Acceptance Of Deposits.

Now, if chapter 3 includes companies intending to list then chapter 4 expands its scope to private companies as well.

CHAPTER IV: SHARE CAPITAL & DEBENTURES
Rules
The provisions of these rules shall apply to
(a) all unlisted public companies;
(b) all private companies; and
(c) listed companies,
so far as they do not contradict or conflict with any other provision framed in this regard by the Securities and Exchange Board of India.

When granting voting rights, section 47 says preference shareholders can vote only on resolutions pertaining to their rights or winding up or reduction of share capital. But, preference shareholders shall have the right to vote on all resolutions if dividend has not been paid for a period of two years. The 1956 Act explained that dividend shall be deemed to be due whether declared by the company or not that explanation is missing in 2013 Act.

VOTING RIGHTS: PREFERENCE SHARES
2013 ACT: Section 47.
Preference shareholders have right to vote on all the resolutions placed before the company if ‘dividend not been paid for a period of 2 years or more’

1956 ACT: Section 87.(b)
Preference shareholders entitled to vote on every resolution if ‘the dividend due on such capital has remained unpaid’  

Explanation: Dividend shall be ‘deemed to be due…whether a dividend has been declared by the company on such shares for such period or not’

In the matter of differential rights shares, the 2013 Act imposes two new conditions that if variation in rights of one class of shareholders affects other class then 75 percent of that other class must approve such a variation. And that a company can issue differential rights shares only if it has not defaulted on any loan or statutory payment to employees.

VARIATION OF SHAREHOLDERS’ RIGHTS
Section 48.
Provided that if variation by one class of shareholders affects the rights of any other
class of shareholders, the consent of three-fourths of such other class of shareholders shall also be obtained…

Rules: Can issue equity shares with differential rights only if
(g) the company has not defaulted in payment of…repayment of any term loan from a public financial institution or State level financial institution or scheduled Bank that has become repayable or interest payable thereon or dues with respect to statutory payments relating to its employees to any authority…

The 2013 Act also imposes new restrictions on the use of the securities premium account and on sweat equity shares but it is in section 55 that the new law springs a surprise by allowing for the first time the issue of preference shares for a period exceeding 20 years.

PREFERENCE SHARES
Section 55.
Provided that a company may issue preference shares for a period exceeding twenty years for infrastructure projects, subject to the redemption of such percentage of shares as may be prescribed on an annual basis at the option of such preferential shareholders

Any company engaged in the setting up of infrastructure projects can issue preference shares for an up to 30 year tenure for a condition that 10 percent annual redemption will be done starting the 21st year.

PREFERENCE SHARES
Rules: Issue & redemption of preference shares by company in infrastructural projects
A company engaged in the setting up and dealing with of infrastructural projects may issue preference shares for a period exceeding twenty years but not exceeding thirty years, subject to the redemption of a minimum ten percent of such preference shares per year from the twenty first year onwards or earlier, on proportionate basis, at the option of the preference shareholders.


Doshi: So, this infrastructure preference shares is a good one?

Parthasarathy: Yes, it is to some extent. The way I say it is that you have introduced easy monthly installments (EMI) for infrastructure sector after 20 years you can pay in 10 installments the amount due. So, that’s how I look at it.

Lahoty: In fact if you see the language it is only more positive. It says companies engaged in setting up and dealing with infrastructure projects. So its not an infrastructure company, it’s probably some other companies maybe like an engineering, procurement and construction (EPC) company for example could argue that they should be covered here.

PREFERENCE SHARES
Rules: Issue & redemption of preference shares by company in infrastructural projects
A company engaged in the setting up and dealing with of infrastructural projects may issue preference shares for a period exceeding twenty years but not exceeding thirty years, subject to the redemption of a minimum ten percent of such preference shares per year from the twenty first year onwards or earlier, on proportionate basis, at the option of the preference shareholders.

Raghunath: But the schedule is pretty long, longer then the income tax act.

Doshi: The next positive is the fact that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract, that’s good news for call, put and options. We now have the Companies Act, we have Securities and Exchange Board of India (SEBI), we have Reserve Bank of India (RBI) all three on board in differing ways but all three on board nonetheless, this can only be a positive.
 
CALL/PUT OPTIONS, ROFRs…
Section 58.(2)
…the securities or other interest of any member in a public company shall be freely transferable:
Provided that any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract.

Raghunath: All this has achieved. You don’t need to etch your rights in the articles. Under 56 Act it was enforceable to a company or the other shareholders only if it is an article. This is removed by putting it in the act. If he and I as shareholders have a contract that is valid and enforceable under company law. Still doesn’t take away the need to comply with SEBI’s view.

Doshi: All those have to do more with pricing.

Lahoty: Like you said the only problem probably apart from the fact that the Companies Act does speak about this being enforceable vis-à-vis the shareholders as opposed to making it very clear that the company will also be bound by such a contract. You will still want to have it in the article just to make sure.

Doshi: The Companies Act 2013 says that a company intending to do a preferential allotment of shares needs prior approval via a special resolution and the price of such shares must be determined by a registered valuer. Note two things here. That all preferential allotments have to comply with private placement provisions and all of this applies to the private companies as well. The rules go on to define preferential allotment, excuse listed companies from meeting a valuation report to determine pricing and direct them to follow SEBI guidelines.

PREFERENTIAL ALLOTTMENT

2013 Act: Section 62.(c)
Special Resolution needed
Price of shares to be determined by valuation report of a registered valuer

1956 Act: Section 81.(1A)
Special Resolution OR Ordinary Resolution + Govt permission
No requirement for registered valuer’s report


PREFERENTIAL ALLOTTMENT
Rules
‘Preferential Offer’ means an issue of shares or other securities, by a company to any select person or group of persons on a preferential basis and does not include shares or other securities offered through a public issue, rights issue, employee stock option scheme, employee stock purchase scheme or an issue of sweat equity shares or bonus shares or depository receipts issued in a country outside India or foreign securities;

Registered valuer’s report not required in case of listed companies  
Company with listed securities should do preferential offer in accordance with SEBI regulations

Lahoty: Couple of things, one is of course the valuation report. I am not sure what they really wanted to cover. In the sense what kind of transactions they wanted to cover. Today you can’t do an initial public offering (IPO) without having to comply with the valuer’s report because just the way the definition of preferential basis and preferential offer is within the rules it is fairly confusing. In short, any kind of public issues by an unlisted company which is essentially going to be an IPO you will have to comply with the valuer’s post valuation. The act actually almost says that the price should be determined by the valuer essentially but the rule say on the basis of -- which gives you more comfort. The other issue here is that you should complete allotment within 12 months. Previously the 1956 Act rule said you should have acted upon the resolution within 12 months. So, typically when we file a draft red herring prospectus (DRHP), it does take time for SEBI to clear. It takes, at times, time to even for the markets to be good enough to launch. Now, you will have to keep in mind that you will have to keep in mind that you have to complete the allotment within 12 months. It’s no longer a question whether you file a DRHP and that is sufficient for the purpose of 12 months compliance.

Doshi: Any comments on preferential allotments?

Parthasarathy: It’s a good step in the right direction and all these are anyway being done. It’s nothing new. When you do a preferential allotment, you need the view of the majority valuation.                      
 
Doshi: We will come to new conditions on the reduction of share capital but more importantly the changes that now seem to apply to buy-back?

The companies act 2013 settles years of litigation regarding the distinction between reductions of capital and buy-back. Section 66 deals with the reduction of share capital and says nothing in that section applies to buy-backs. Section 66 also bars the company from reducing its share capital if deposit repayments or interest payments are in arrears. The creditors, the government, the registrar of companies and SEBI must be given notice of every reduction of capital scheme. They have three months to respond. As for buy-backs not much has changed in new law except the curtailing of frequency of such offers. The 2013 act says no buy-back offer can be made within a period of one year from the date of closure of the preceding offer. The 1956 act said 365 days from the date of the preceding offer.

REDUCTION OF SHARE CAPITAL
Section 66.(6)
Nothing in this section shall apply to buy-back of its own securities by a company under section 68


REDUCTION OF SHARE CAPITAL
Section 66.(1)
Provided that no such reduction shall be made if the company is in arrears in the repayment of any deposits accepted by it…or the interest payable thereon


REDUCTION OF SHARE CAPITAL
Section 66.(2)
The Tribunal shall give notice of every application made to it…to the Central Government, Registrar and to the Securities and Exchange Board, in the case of listed companies, and the creditors of the company and shall take into consideration the representations, if any, made to it by that Government, Registrar, the Securities and Exchange Board and the creditors within a period of three months from the date of receipt of the notice


BUY-BACK OFFER
2013 Act: Section 68.
Provided that no offer of buy-back under this sub-section shall be made within a period of one year reckoned from the date of the closure of the preceding offer of buy-back, if any.

1956 Act: Section 77A.
Provided further that no offer of buy-back shall be made within a period of three hundred and sixty-five days reckoned from the date of the preceding offer of buy-back, if any.


Raghunath: Two things common to both reduction and buy-backs is the non default vis-à-vis lenders and redemption of preference shares and deposits.
 
Doshi: You cannot do either without making sure you meet that?
 
Raghunath: Otherwise on reduction, I am not sure if there is any substantive change in terms of the process. In buy-backs, I guess it is something -- two important changes one visibly clear, the period of buy-back for this subsequent buy-back used to be earlier first 12 months from 365 days from the first offer and if a buy-back offer is valid for say six months so the six month of the first buy-back is included in that 12 months cooling. Now it says 12 months from the closure of the buy-back.

BUY-BACK OFFER
2013 Act: Section 68.
Provided that no offer of buy-back under this sub-section shall be made within a period of one year reckoned from the date of the closure of the preceding offer of buy-back, if any.

1956 Act: Section 77A.
Provided further that no offer of buy-back shall be made within a period of three hundred and sixty-five days reckoned from the date of the preceding offer of buy-back, if any.

 
Second probably is untended and maybe it is interpretationally vague is earlier there used to be an explicit provision in 77A of the 56 act on the percentage of equity you could buy-back. Those capped at 25 percent in addition to the amount deployable which is 25 percent of paid up capital and free reserves. Now the paid up capital and free reserves amount cap remains. The virtue of redrafting the proviso, I guess intentionally otherwise the percentage cap for equity seems to have been omitted. So can we end up doing more than 25 percent in a given buy-back is room for interpretation.
 
Doshi: For those who are watching you are referring in fact to the wording of 68.(2)(C). Manan are you reading with the same as TV Raghunath?                            

BUY-BACK OFFER
Section 68.(2)
No company shall purchase its own shares or other specified securities under
sub-section (1), unless
(c) the buy-back is twenty-five per cent. or less of the aggregate of paid-up
capital and free reserves of the company

Provided that in respect of the buy-back of equity shares in any financial year, the
reference to twenty-five per cent. in this clause shall be construed with respect to its total paid-up equity capital in that financial year

 
Lahoty: I think it is possible to read it differently. The language is not watertight and I think that is what TV Raghunath is saying. It doesn’t necessarily mean that is intention of…
 
Doshi: But who is going to sit and determine what the intention of the people want?
 
Lahoty: There could be enforcement action you need to be scared of that at least.
 
Doshi: Are you still reading it as a 25 percent cap?
 
Lahoty: I think there seems to be.
 
Doshi: That’s what you would advise clients as well TV Raghunath?
 
Raghunath: I would advise them to go to the lawyer first.
 
Parthasarathy: Yes but what about this particular one which says gaps are plucked but it says capital reduction is governed by national company law tribunal and what about that once that comes then you conclude that you got a rounded thing till that comes you are still in gray, so are seeing this way or differently?
 
Lahoty: Is this question on buy-back versus reduction?
 
Parthasarathy: Yes I was just talking about reduction.
 
Lahoty: One good thing is that there was little bit of confusion on whether a buy-back needs to follow the process of reduction of share capital in the section 102-104 which has been clarified now. So that gives fair amount of clarity because high court was taking different views on this. But that’s been taking care of I don’t think you will need to go NCLT for that.

REDUCTION OF SHARE CAPITAL
Section 66.(6)
Nothing in this section shall apply to buy-back of its own securities by a company under section 68
 
Raghunath: It explicitly says buy-backs will not be detained

Parthasarathy: I am talking more about capital reduction.
 
Lahoty: That’s the entire idea really one is of course without going to the tribunal second is by going to the tribunal, hence you have two different sections, two different provisions.

Doshi: Now we come to Debentures. Unlike the previous law the 2013 act requires the issue of optionally convertible debentures to be approved by a special resolution.

DEBENTURES
2013 Act: Section 71.(1)
Provided that the issue of debentures with an option to convert such debentures into shares, wholly or partly, shall be approved by a special resolution passed at a general meeting.

1956 Act
No such requirement
Secured debentures must be redeemed within 10 years, but here too there is an infrastructure exception. A company engaged in setting up infrastructure projects may issue secured debentures for a period of up to 30 years.

DEBENTURES
Rules
18.(1)(a) An issue of secured debentures may be made, provided the date of its redemption shall not exceed ten years from the date of issue.
Provided that a company engaged in the setting up of infrastructure projects may issue secured debentures for a period exceeding ten years but not exceeding thirty years;

But the tough news is that every debenture must carry a charge on specific assets.

DEBENTURES
Rules
18.(1)(d) the security for the debentures by way of a charge or mortgage shall be created in favour of the debenture trustee on-

(i) any specific movable property of the company (not being in the nature of pledge); or
(ii) any specific immovable property wherever situate, or any interest therein.

Besides, Section 71 also requires the need to setup a debenture redemption reserve and a liquidity fund of sorts.

DEBENTURES

Debenture Redemption Reserve: 50% of amount raised
Liquidity Fund: 15% of debentures maturing in the next fiscal

Doshi: How do you see the developments on the debenture front?

Parathasarathy: I think some bit of good news I heard as I was coming here was that Non Banking Financial Company (NBFC) position may have been looked at very positively by Ministry Of Corporate Affairs (MCA), so there might be some changes. For a moment let’s park that and say that we will come back when the final word on that comes.

NBFC industry opposed to some aspects of Debenture Redemption Reserve (50% of amount raised) & Liquidity Fund (15% of redemptions due next year)
On the debenture this is something that I feel quite agitated about.
The good things about debentures are that you don't need trustees unless there are above 500 trustees.

Company to appoint one or more debenture trustees if offer made to more than 500 people

Shelf prospectus is another good thing and therefore you can refresh it rather than trying to go through the entire ecosystem. Even though the class suit action is there it brings better activism, so I don't see that as a negative but more as a positive.

The key issue is this as an organization or more as a company we are trying to get better and world class standards. Why restrict tenures? Why restrict the class of time taken? The last time over six months back we issued a 50 year non convertible bullet repayment after 50 years. So this is defining new wheeled curves in the market.

DEBENTURES
Rules
18.(1)(a) An issue of secured debentures may be made, provided the date of its redemption shall not exceed ten years from the date of issue.
Provided that a company engaged in the setting up of infrastructure projects may issue secured debentures for a period exceeding ten years but not exceeding thirty years;

Now to say that you can't issue more than 10 years, it restricts the development of the market and our competitiveness will not be defined by restrictiveness. So to that extend I see it as a retrogative step and not a positive from a debenture point of view.

Doshi: 10 is what applies to all companies, only infrastructure companies can do 10-30?

Lahoty: We are talking about secured NCDs right? I think the limit of 10 years is only for secured.    

Doshi: It is only for secured.

DEBENTURES
Rules
18.(1)(a) An issue of secured debentures may be made, provided the date of its redemption shall not exceed ten years from the date of issue.
Provided that a company engaged in the setting up of infrastructure projects may issue secured debentures for a period exceeding ten years but not exceeding thirty years;

Lahoty: Even the previous act spoke about Perpetual Debentures, even backend many years ago they thought perpetual bonds should be allowed.

Parathasarathy: Almost all things works on some bit of security, it is pure unsecure over 10 years or something is unlikely to happen.

Raghunath: The steps are progressive especially when it comes to protecting the interest of debenture holders by way of reserving for the next 12 months period, because anything all in due within the next financial year you have to provide for at least 50 percent of the amount in the redemption reserves as well as place it on a liquid bank deposit, there is a safeguard.  

DEBENTURES

Debenture Redemption Reserve: 50% of amount raised
Liquidity Fund: 15% of debentures maturing in the next fiscal

Lahoty: There is probably another issue that NBFCs are facing that is about security. What now the law says that you need to be specific about the movable property on which you will create security.

Now they typically used to have a floating charge on the residue bills, now it is fixed. Same thing in relation to immovable property there is a little bit of confusion whether the property should be yours or it could be somebody else for example promoter's property can be charged or could have been charged. But it doesn't seem very clear whether you could do that again or not.

DEBENTURES
Rules
18.(1)(d) the security for the debentures by way of a charge or mortgage shall be created in favour of the debenture trustee on-

(i) any specific movable property of the company (not being in the nature of pledge); or
(ii) any specific immovable property wherever situate, or any interest therein.

Doshi: There are new restrictions now on deposits as well. The 1956 act permitted all public companies to accept public deposits.

The 2013 act says only a public company with a net worth of not less than Rs 100 crores or a turnover of not less than Rs 500 crores can accept public deposits.
A company not meeting those thresholds can accept deposits only from its members or share holders.

ACCEPTANCE OF DEPOSITS
1956 Act: All public companies can accept public deposits
2013 Act:  Public companies that can accept public deposits

                     Networth >= Rs 100 cr                                                                              
                                            OR
                     Turnover >= Rs 500 cr

               Others can accept deposits from members only
*Does not apply to Banks, NBFCs, HFCs


The term ‘deposit’ has also been defined in the rules but it is simply too long to detail here.

ACCEPTANCE OF DEPOSITS
Rules
“deposit” includes any receipt of money by way of deposit or loan or in any other form, by a company, but does not include

Money received from Govt
Money received from Foreign Govt, Foreign Entity
Loan from Bank, Public Financial Institution
Amount received on issue of Commercial Paper
Amount received from any Other Company
Amount received from Director
Amount raised by issue of Bonds/Debentures (first charge)
Amount received in course of business of the company

All deposits have to be of a minimum six months and maximum 36 months tenure. Three months deposits are permitted but conditions apply.
A company accepting deposits has to deposit 15 percent of the deposits maturing over the next two fiscal years in a deposit repayment reserve account. It has also to provide deposit insurance.

ACCEPTANCE OF DEPOSITS
Tenure: Minimum 6 months, Maximum 36 months
                3month deposits permitted with restrictions
Atleast 15% of deposits maturing in 2 fiscal years to be kept aside in Deposit Repayment Reserve Account

Provide Deposit Insurance


Parathasarathy: For the smaller companies this does provide certain bit of limitation and generally there are two other things that come in now one is credit rating and second is credit insurance and deposit insurance both of which will pose some bit of different kind of concerns.

If you look at it overall they are now saying that from six months to 3 years, which is pretty much what it was earlier, is available for all companies which have a turnover of 500 plus. If we place the haves and have not’s, the haves have what they had earlier plus a little bit more in terms of three months and more.

The 500 and below there is a category which needs to, but here if you look at it little bit more clinically which are the ones which are defaulting  most on deposits? Therefore is there something which they looked at in the past and based on that they made the call between small and big companies I don't know.

ACCEPTANCE OF DEPOSITS
1956 Act: All public companies can accept public deposits
2013 Act:  Public companies that can accept public deposits

                     Networth >= Rs 100 cr                                                                              
                                            OR
                     Turnover >= Rs 500 cr

               Others can accept deposits from members only
*Does not apply to Banks, NBFCs, HFCs


Raghunath: From a country point of view if it is resulting in small companies not accessing public deposits I think it is good. Importantly it also puts a cap on the insurance; it's a Rs 20000 cap like in US banking system or even in India.

Lahoty: They have asked everyone who has already come out with the scheme in past to wrap it up within a year’s time that could be tough for some people, we didn't really expect this to come up right.

Parathasarathy: I thought it not that way, I read it as companies with existing deposits need not repay within one year if such deposits are honored as per original terms and conditions.

Lahoty: If you see Section 74 (1) (b) it says repay within one year from commencement or from the date on which such payments are due, whichever is earlier.

REPAYMENT OF DEPOSITS
Deposits accepted and unpaid before 2013 Act commencement
Section 74.(1)(b)
repay within one year from such commencement or from the date on which such payments are due, whichever is earlier.


Parathasarathy: We need to a look at that.

Doshi: So its one year.

Parathasarathy: I mean the lawyer is always right.

Doshi: These three chapters are the fund raising aspect of this Companies Act and I would like your last thoughts on where we have reached? This was the law that was supposed to deliver to us a more modern architecture. Has it made some aspects of the law so onerous that it is almost impossible to meet with it?

Parthasarathy: I had two comments when I presented to the senior management. One comment was it is an angel or Frankenstein and the other comment was is it a bird, is it a plane or is it superman?

Doshi: Is it an angel or Frankenstein?

Parthasarathy: Somewhere in between. It’s trying to be a little bit of the superman, we are doing the modern architecture, they have done all the right things in terms of steps and they have considered. The implementation in the administrative one’s which is still to be crossed which TV brought in the earlier part of our conversations will be very important and how SEBI and other agencies kind of come along with it and as we test the first few cases. We are comfortable with the 1956 act because we know what we can expect.

Doshi: There is so much precedent in it already right?  

Parthasarathy: This is going to be tested.

Doshi: That said do you think we have moved to step forward?

Lahoty: Yes. The act per se was far better than the previous one. The problems were also coming form the draft rules, lots of them have been sorted. The way I still see is the listed companies probably will find it easier to deal with it as opposed to the unlisted companies because it does mean to bring in the SEBI regulations for the unlisted companies for example buy-back and many other regulations where you would expect the unlisted companies not to be expecting to be complying with them. But, they now have to. You would almost think the SEBI to have written this act.

Doshi: In fact that’s a comment that comes up recurringly every time we discuss this act is the inclusion of public companies unlisted as well as private companies in several aspects of this act where they were not included in the previous act. That aside – how would you access these three chapters

Raghunath: I tend to take a radical view on the appropriateness of dragging in private companies also into this. What has this act achieved? It has achieved a certain norm for governance, a certain norm for disclosures and a certain penalty for non compliance that’s the broad objective here.

If you look at the country’s evolution and issues that we have seen around corporate India and abuse of law, etc. perhaps the time had come to bring in to the fold of well regulated fold even private limited companies.

What is the cost of the compliance? Not every company does buy backs every day in and day out, not every company ends up raising money by preferential issues. So, some of these are more one off matters but to bring them in the ambit of a forward looking act, it has made some of the issues we have faced around broader corporate India on abuse of government structure, its good for the country.

Doshi: What this means for fund raising for India INC?

Raghunath: As Partha said and I always have believed that in a developing, evolving country like ours all said and done, our well regulated stock market is all of 20 years old in this country. So, each time the regulator tries to play catch-up, there will be a certain set of developments on behavior which maybe ahead or behind the curve. So, you will face an evolving regulation. It is for intermediaries and corporates to acknowledge. We will have an evolving regulation; there will be slips and falls & ambiguities. So long as the intentions are understood and regulator is sort of co-operative and progressive in resolving ambiguities, this is a very good development.

 
Twitter


 
Copyright © e-Eighteen.com Ltd. All rights reserved. Reproduction of news articles, photos, videos or any other content in whole or in part in any form or medium without express written permission of moneycontrol.com is prohibited.