For a corporate world without borders
The Hindu Business Line
Senior Tax Professional
Finally, on August 8, Minister for Corporate Affairs Sachin Pilot tabled the Companies Bill 2012 in the Rajya Sabha and it was cleared. Now, after the President’s approval, it can be enacted. The Lok Sabha passed the Bill in December last year. The Companies Bill will replace the current Companies Act, 1956. It has been almost nine years since the proposal was first mooted to overhaul the existing corporate law legislation, and the expert committee made its recommendations. In this context, let’s look at some relevant provisions on cross-border and domestic mergers.
A welcome change is the introduction of provisions enabling the merger of an Indian company and a foreign one; this will make overseas funds accessible. In the current economic and political scenario, Indian markets are not attracting substantial capital inflows. This is impacting business. Capital-intensive sectors such as infrastructure, power and real estate are feeling the need to access public funding to de-leverage and continue the existing business. Indian corporates are exploring ways and means to access overseas capital markets, be it Nasdaq in the US, SGX in Singapore, or AIM in the UK.
Since the entire business value of a company is generally housed in India, many corporates face a challenge setting up an overseas listing vehicle.
Enabling overseas mergers will allow for easier setting up of overseas listing vehicles and global re-organizations involving Indian companies.
Such mergers will trigger implications under multiple laws, especially exchange control and tax, for which consequential enabling amendments will be required. It will be interesting to see whether tax neutrality is extended to overseas mergers, or if certain taxes are imposed, given the shift in tax jurisdiction, going forward.
In the past, India Inc has implemented domestic restructuring for diverse objectives ranging from entity consolidation to cash repatriation. Existing provisions allow considerable flexibility for restructuring under a prescribed approval process with no substantial restrictions.
The Companies Bill looks to go a step further by including provisions to tighten the existing approval framework and give greater consideration to stakeholder interests.
Fast-track contractual mergers: A fast track concept of ‘contractual mergers’ has been introduced for simple mergers between the holding company and wholly-owned subsidiaries, or inter se ‘small companies’, where no prior regulatory approvals would be required since contractual mergers are generally not expected to have an adverse bearing on stakeholders.
This liberalization would ease the burden of the regulatory authorities and remove lengthy implementation timelines, especially in these times when a stronger focus on business is key.
Prohibition of treasury stock: Treasury stock, as a concept, has not found mention in Indian law. Given that there is no specific restriction on the creation of treasury stock pursuant to a restructuring, listed companies (including Reliance, Mahindra & Mahindra, Escorts) have, in the past, created and held treasury stock as part of intra-group mergers.
This enabled future fundraising for the company through the sale of treasury stock and retention of higher control in the promoter’s hands in some instances. Minority shareholders continued to raise concerns about related voting rights and shareholding dilution in such situations.
The Companies Bill has now prohibited the issuance of treasury stock pursuant to a scheme. Given the recent concerns on various restructuring schemes, the prohibition is being seen positively by minority shareholders.
Pre-notification to regulatory authorities: The Companies Bill has also introduced a pre-notification requirement, wherein prior notice of restructuring is to be issued to various regulatory authorities (including the Income tax and the RBI), for raising objections, if any. This would allow regulatory authorities to raise concerns and queries on the restructuring, prior to implementation.
Under the existing norms, there have been instances of regulators raising concerns after restructuring was approved; at this stage, only limited remedies were available. Of course, pre-notification will have its own challenges in terms of additional queries from regulators and potential delay in approvals.
The Companies Bill has now made it to the last leg of the approval process. There is still a fair bit of background work to be done in terms of drafting supporting rules, repealing allied laws, and agreeing on an effective date for enactment of the new legislation (whether at one time or in a phased manner).
While it has been a long wait, the Companies Bill is finally here and ushers in a new dimension to corporate restructuring, in terms of opportunities, additional compliances, and increased responsibilities for stakeholders and regulators.
Views expressed are personal.