The Companies Bill, 2012 will change the way business is done in India, it will impact every segment, including corporates, investors, lenders, FDI, and even the regulators.
While the overall Bill is forward-looking and in tune with current market reality, if one was to focus only on the restructuring space, it throws up several interesting themes.
Investor protection: A capital-starved economy like India needs to protect its investors more than ever — this is addressed by legally acknowledging extraordinary shareholder rights (entrenchment provisions) as well as share transfer rights, apart from the introduction of a sharper dispute resolution framework (special courts, class action suits, NCLT, NCALT).
Distributions to shareholders: The Bill removes the need to set aside profits every time a company declares dividends, which enables one to distribute profits earned. However, restrictions on buybacks (only one per year) and increased timelines for capital reduction (new three-month notification requirement) are a disappointment. To keep attracting capital, India needs to distribute returns, failing which it will be seen as a defaulter; amid the cacophony of changes in tax laws, one needs clear and simple avenues to distribute cash quickly.
Transparency and fairness: A number of provisions require auditors’ certificate (for example, capital reduction) or a third-party fair valuation report (for example, preferential issue); further, several provisions that were earlier applicable only to public companies have now been extended to private companies (for example, loans and investments). All these steps augur well for M&A market as they provide the safeguard of an expert sign-off and reduce ambiguous accounting/ valuation manoeuvres.
Enhanced disclosures (for example, valuation report for a scheme) will enable informed decision making – while this could be counterproductive due to protracted litigation in some cases, a 10% shareholding threshold to raise objections on schemes ensures that frivolous claims are eliminated. Similarly, introduction of a single forum (NCLT) for restructuring efforts should speed up execution timelines.
Cross linkage: If a company defaults in one place, restrictions immediately kick in to prevent further wrong doing. For example, if a company has defaulted on repayment of public deposits, it is restricted from distributing dividends or undertaking buybacks, thereby ensuring that shareholders cannot extract cash while public investors suffer.
New arrangements: The Bill permits Indian companies to merge into foreign companies subject to conditions; this significant amendment paves the way for Indian companies to aggressively explore international partnerships, raise foreign capital and access new