The ordinance amending the Companies Act, 1956, is riddled with all sorts of inconsistencies and anomalies. At bottom, the ordinance is Clause 69 of the Companies Bill, 1997, with minor modifications. As was required by Clause 69(5), a declaration of solvency in the prescribed form is required by any company proposing a buyback of shares. This has to be verified by an affidavit that, according to the board of directors, the company will be able to discharge its liabilities and will not be rendered insolvent within a period of one year of the date of declaration of the board. This is exceedingly strange. The accounts of an entity are prepared on going-concern basis. Two, what if the company goes bankrupt after one year and one day? Third, how on earth can one certify a future event?

Another requirement is that post buyback, no further issue of securities can be made within a period of 24 months except bonus issue and pending conversions. Why debentures (NCDs) or preferenceshares issued cannot be issued is a mystery. Another reason why this requirement is unnecessary is that the companies are not allowed to issue securities within 24 months after completion of buyback. The ordinance itself specifies that buyback should be completed within 12 months from the date of passing the special resolution. Companies will issue securities after the buy-back is announced but before it is completed and hence the requirement will serve no purpose. The term used should have been "equity shares" instead of "securities" if the intention is to prevent price rigging prior to an issue through buy-back. Further, instead of specifying the amount to be invested under buy back, the number of shares to be bought back needs to be specified.

The ordinance is silent on the time frame within which payment has to be made. This will probably be taken care of by Sebi. One good point which is at odds with the Companies Bill, 1997 is that issue of shares cannot be made specifically for buyback. Thiseliminates the possibility of funding buy-back (partly) through preference shares and concentration of voting rights.

A proposal is mooted to set up a National Advisory Committee on Accounting Standards to advise the central government on formation and laying down of Accounting Standards. The committee shall consist of the same members who frame the Accounting Standards issued by ICAI. It is well known that CBDT has not been able to frame more than two Accounting Standards. This attempt to reinvent the wheel is beyond understanding. According to the ordinance, until the National Advisory Committee is established, the standards of ICAI shall be deemed to be the Accounting Standards. This raises two questions. One, what will happen in the interim period--between the time the Committee is established and the time the Accounting Standards are framed? Two, why use ICAI standards as stop gap measures? Either they are good enough, in which case they should be mandatory and if, in the opinion of the government thestandards need improvement, why use them at all? Since the Advisory Committee will have the same members as the Accounting Standard Board (ASB), what value addition will be achieved is impossible to understand.

Sections 370 and 372 of the Companies Act have also been amended and prior approval of central government has been done away with. This will be a great relief to the corporates. The amended Sec 372 also provides that the lowest rate at which loans can be advanced to any body corporate is the bank rate. What about the interest free loans already given and why restrict it to body corporates and exclude entities like firms?

Bata India

Business restructuring and focus on mass marketing finally seems to have worked for Bata. This is mirrored in the company's successful turnaround, which till now seemed to be gathering steam. However, Bata's third-quarter results reveal some distress signals which need to be nipped in the bud by the management.

Compared on a quarter-to-quarter basis, saleshave fallen from Rs 220.20 crore to Rs 170.49 crore, and when one considers that the third quarter includes the festival season, the drop in sales is worrying. Another distressing sign for the company is the squeeze on operating margins in the third quarter. Margins have dropped from 5.30 per cent to 4.87 per cent. The poor quality of earnings in the third quarter can be judged by the fact that other income as a percentage of PBT stands at 23.56 per cent.

Compare this with buoyant margins in the first (6.93 per cent in Q1) and second quarters (11.87 per cent). However, prices of raw material like rubber and leather have seen an upward revision in recent times. Increased ad-spend and marketing expenditure have also played a role in eroding earnings. These have obviously offset the benefits of a leaner workforce, a legacy of the on-going VRS.

But these problems in the third quarter aside, Bata's performance for the nine months ended September 1998 is satisfactory. As is reflected in the 169.07 per cent jumpin the bottomline. The rights issue of late 1996 and the retirement of costly debt in 1997 have resulted in a drastic reduction in the debt: equity structure of the company from 1.89:1 in 1996 to 0.37:1 for the year ended December 1997. This has obviously helped reduce interest charges. The interest burden for the nine-month period has dipped 47.8 per cent to Rs 6.05 crore.

With the normal retirement of almost 500 employees every year for the next three years, Bata would be in a position to reduce its cost per employee, which is important considering that Bata has an employee cost to turnover ratio of around 20 per cent.

With contributions from Urmik Chhaya and Percy Dubash