Rajendra Nalam
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 markets. For existing investors, it?s an added blessing because it opens up exit windows on international markets.
Another amendment permits a listed company to merge with an unlisted company and remain unlisted as long as a suitable exit is provided to investors. Further, if the minority shareholders are at 10% or lower, the majority is compulsorily required to offer an exit at fair value ? this is a welcome change as it provides a clear mechanism for buyouts of minority.
Notification to regulators: The Bill recognises India has a multiplicity of laws and that M&A transactions leave an imprint in several places. Thus, a scheme of arrangement is required to be notified to Sebi, RBI, Central government, CCI, tax authorities, etc. For discipline, the Bill demands a response in 30 days ? it remains to be seen whether our over-worked regulators can meet this timeline and, more importantly, if this facilitates or delays restructuring initiatives. However, more flexibility is offered in some cases by introduction of fast-track mergers among ?small? companies and among a company and its 100% subsidiary.
Legacy structures: The Bill brings in certain restrictions that could impact existing companies, such as legacy multi-layered investment structures and treasury stock. One needs to consider whether existing structures need to be unwound and the consequences of failure to do so.
Insolvency: A ?sick? company is now defined by inability to repay 50% of secured debt, and this has been extended to all companies. The authority to supervise this process vests with the NCLT and specific procedures/ timelines have been prescribed. However, the interests of unsecured creditors and other claimants are not equally protected, and this could be an area of concern.
In summary, the Bill gets our thumbs up and is hopefully seen as a genuine effort by the government to do its bit for market reforms. For this to be effective, accompanying changes in other laws and smooth transition from the existing Companies Act should be ensured.
(Rajendra Nalam is Partner, BMR Advisors. With inputs from Pallavi Mohindra. The views are personal.)
