The new Companies Bill offers a broader canvas for corporate restructuring, but its drafting needs to be reviewed to promote India Inc's interests.
The Companies Bill 2008 is contemporaneous in concept and substantial in content. The post-liberalisation (since 1991) and globalisation experience has been distilled into framing finely-honed provisions for corporate restructuring, mergers, and de-mergers. It now has a broader canvas covering capital reduction and restructuring schemes; reduction of dues and support from creditors with concomitant protection to them by the Tribunal; it covers companies which are under the RBI’s Corporate Debt Restructuring Scheme; or under liquidation process; or are before the BIFR. New provisions recognise mergers through takeover of shares but it mandatorily excludes buyback of shares which would have to comply with a specific process. The Bill retains its distinctive characteristic of upholding the primacy of public interest.
The Companies Bill (2008) (hereinafter referred to as Bill) recognises certain international best practices; it provides for merger with companies registered in foreign countries and vice-versa, provided such countries are on the notified list. Internationally, law on mergers includes corporate entity mergers; asset mergers; and takeover of companies by acquisition of shares for shares of target company with or without share issue. The Bill now facilitates the third type also. It, however, does not provide for migration of companies from a foreign country to India and vice-versa; this is an accepted international practice. The need for this will grow with many Indian companies becoming multinational through international acquisitions.
The Bill also discontinues the present provisions of merger of large partnership firms with companies as earlier corporate bodies were allowed to merge with companies. The status quo ante should be restored and expanded to cover Limited Liability Partnership (LLP) so as to facilitate the evolutionary growth of business. Reverse mergers into LLP and firms should also be permitted.
Controversial Areas: The proposed law makes clear provisions in areas where different High Courts have been giving contradictory judgements. A scheme of arrangement can now include provisions for capital restructuring and reduction without requiring a separate petition. It also provides for adjustment of fee paid on the authorised capital by the transferor company to be set off against the fee payable by the transferee company. If a scheme is approved by the creditors meeting, then the Tribunal’s order sanctioning the scheme will become binding on all the creditors including any corporate debt restructuring scheme; this will curb the tendency of the non-consenting creditors to delay debt restructuring.
Substantially more information is now prescribed in a Scheme of Arrangement which may now also be proposed by the official liquidator besides the members or creditors; and requires additional disclosures regarding any investigations or proceedings, any reduction of capital, any Corporate Debt Restructuring (CDR), creditors responsibility statement; and measures for protection of creditors; supported by he Auditors Report regarding compliance of the liquidity test; and a valuation report on shares as well as all types of assets; and the company has to state whether it is following the RBI guidelines on CDR. A new provision is that the valuer’s report also will have to be circulated to all creditors and shareholders together with the scheme and an explanatory note. This will open a Pandora’s Box for litigious small shareholders and creditors. The recipients have to indicate their consent within 30 days; objections can only be made by persons holding not less than 10 per cent of the capital or lenders of 5 per cent of the debt. However, in spite of similar present provisions with reference to shareholders, courts have currently been giving opportunity even to holders of 500 shares to make representations.
The Bill has widened the network of government authorities with whom such application must be filed i.e. with the Department of Company Affairs, stock exchanges, RBI, Sebi, Registrar of Companies, Competition Commission, if necessary, and other such authorities which are likely to be affected. If no representations or objections are received within 30 days, presumption shall be otherwise. Such a filing even before filing the application with the Tribunal will delay the process as it currently happens with the stock exchange where a three-month delay is common. Each of these institutions have their own internal guidelines currently and, in the case of listed companies, schemes frequently take more than 12 months to fructify.
These provisions with a wider scope will lead to a quicker turnaround of potentially viable companies. Upon a scheme being sanctioned, relevant cases before BIFR will abate; and the order will apply to official liquidator also. However, buyback of securities and variation of shareholders rights will have to comply with the specific provisions of the Bill. Takeover offers can be made through a scheme and have to comply with Sebi takeover guidelines in case of listed companies. In case of unlisted companies, an aggrieved party can approach the Tribunal.
The Bill gives broader powers to the Tribunal not only to issue clarifications and amendments to their orders on the Schemes of Arrangement but also to take a proactive role in supervising the implementation of the scheme. Time will show whether it becomes another regulator’s office or that of a facilitator.
Merger with Unlisted Company: Currently where transferor company is a listed company and the transferee company is unlisted, the stock exchange stalls such schemes by insisting that the transferee must undertake to list. As Bombay Stock Exchange and National Stock Exchange have a minimum Rs 20 crore net worth criteria, medium-size companies simply cannot de-merge non-core activities. The Tribunal is now authorised to provide for the transferee company to continue to be unlisted, to provide for shareholders to opt out of such a scheme; to receive payment based on valuation; and in case the residual transferor listed company becomes a comparatively small company, to provide for it to be unlisted and for its public shareholders to be paid off.
Merger by Suo Moto action: A welcome measure in the Bill is a simpler process of merging small companies and merging subsidiary companies with holding companies and other subsidiaries. The scheme is to be circulated to the creditors and shareholders; objections, if any, are to be filed within 30 days and to be thereafter placed at the meetings of shareholders and creditors; the approved scheme is to be filed with the Official Liquidator (OL) and Registrar of Companies. A safeguard is introduced at this stage. The liquidator can file his objections with the registrar. If the registrar, suo moto or otherwise or any other person considers that the scheme is not in public interest or that of creditors, he has to file the scheme and objections before the Tribunal; the latter may approve the scheme or order the company to follow the normal route for mergers. These provisions should also cover de-mergers and capital restructuring and not be confined to mergers only.
Minority Shares Acquisition: Many multinational companies and large public companies acquiring shares of their subsidiary from public have found their effort frustrated by minuscule groups of shareholders demanding abnormally high prices. In line with international best practice, the Bill provides that if any scheme or contract involves transfer of shares which has been approved by shareholders of more than 90 per cent of the capital, the acquiring company has the right to acquire shares from the dissenting shareholders by giving 60 days notice within 4 months. The shareholder has a right to file objections with the Tribunal which may make orders to the contrary. Otherwise, the transferee company shall then deposit the consideration with the transferor company. The old share scripts shall be deemed to be cancelled; and the transferor shall issue new scripts to the acquirer. The transferor company shall then pay out the respective shareholders. Similar provisions have been made where the acquirer and associates through merger or otherwise become registered shareholders of more than ninety percent shares of the target company. All such takeover offers will have to give prescribed information in the circular; disclose availability of cash sources; and be registered with the registrar. If not registered by the registrar, the appeal will lie to the Tribunal.
A significant provision is that liability in respect of past defaults will continue on the officers in default even after merger or acquisition. However the drafting of the Bill needs to be reviewed to gain clarity and to make certain vital amendments to promote SMEs’ growth and corporate sector’s globalisation.
The author is Managing Partner of S S Kothari Mehta & Co
