Though the Companies (Amendment) Bill, 1998, has incorporated some of the suggestions made with reference to the ordinance on buy back and is a vast improvement over the Companies (Amendment) Ordinance, 1998, it still has some grey areas. First, let us consider the positive aspects. Under Sec 372 of the Companies Act, subscription to rights issue was exempt from the ceiling prescribed under that section. Neither a special resolution nor the prior approval of the central government was required for exceeding the ceiling prescribed. As per the Ordinance even the subscription to rights issue was included for calculating the ceiling on inter-corporate investments. The earlier position has mercifully been restored in the Bill. The issue of sweat equity shares will require a special resolution instead of ordinary resolution as was required by the Ordinance. A major deviation from the requirements of Sec 372 of the Companies Act is that for exceeding the ceiling prescribed, prior approval of the central government(which may take a period of a year or more even for minor sums) is no longer required. The other side of the coin is that instead of a subsidiary company as was the case earlier, the special resolution will be required for investments exceeding the ceiling prescribed in any company other than wholly-owned subsidiary(ies). Instead of no further issue of securities as was required under the ordinance, the Bill provides that post buy-back, issue of the same class of shares or securities won't be allowed for a period of twenty-four months except for bonus issue and pending conversions.However, the discovery of sense on few issues is not the reason to rejoice. The role of National Advisory Committee on accounting standards has not been altered. It will give recommendations to the government on matters of accounting policies and standards and auditing as may be referred to it. The committee will have the power to recommend on even the auditing and accounting practices. It can pick and choose the SAPs issued byICAI. The government has learnt no lessons from the failure of CBDT to frame more than two accounting standards and has given the advisory role on formulation and laying down of accounting policies and standards for adoption by corporate India. Even the accounting policies of the companies are not exempted from needless interference.
A grey area is the term "loan" for Sec 372. As per the bill, "loan" includes debentures or any deposit of money made by one company with another company, not being a banking company. Except for the inclusion of debentures the definition of Sec 370 of Companies Act has been retained. But the question is does "deposit of money made by one company with another company " include earnest money deposit?
A drafting error which has continued in the Bill is that buyback is to be "out of" free reserves/securities premium account. What needs to be considered is: in that event how will the capital be adjusted? Another classic example of drafting error is Sec 77(B) which provides that nocompany shall purchase its own shares or securities through any subsidiary company (Sec 42 of the Companies Act does not allow it in any case) and through any investment company or group of investment companies. How can a company buy its own shares through an investment company or group of investment companies is beyond comprehension.
One more issue to be considered is that though buyback through negotiated deal is not allowed (Regulation 4(2) of Sebi (Buy Back of Securities) Regulations, 1998), regulation 9 (4) has a loophole. The regulation provides that in case the number of shares offered is more than the total number of shares to be bought back by the company, the acceptances per shareholder shall be equal to the acceptances tendered by the shareholders divdided by the total accepatnces received and multiplied by the total number of shares to be bought back. Plain reading reveals that if the company wants to buy-out an institutional holder, all that needs to be done is to structure the deal in suchmanner that if X per cent is to be bought back, buyback for X+2 should be announced and the institution offers the entire stake held by it. Through this route, the entire stake could not be bought but a very substantial portion could be. Unfortunately, the first entity to take advantage of the loophole is GoI through the buyback of shares by IOC, BPCL, Gail, Nalco and ONGC.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
Printer-friendly page
