Companies Bill: Role of economy in global arena will increase
Transaction Tax Partner, EY
Senior Tax Professional, EY
Four years back the Companies Bill was first launched for discussions and deliberations and, finally, after several rounds of debates, at least for now it appears that the new law seems to be finding its way through.
Amongst several other proposals for amendments in current legislations/introduction of new ones (such as GAAR provisions, the direct tax code), the recent Companies Bill, 2012, is slated to introduce inter alia several amendments in the M&A provisions in India.
Cheers all the way!
To prevent frivolous stakeholders from raising objections to a scheme of compromise, arrangement and amalgamation (scheme) and holding back the process for their own personal interests, the Bill provides that any objections to the scheme can only be made by members holding 10% of the shareholding or creditors entitled to 5% of the total outstanding debt.
Also, the Bill provides for corporate restructuring proposals to be approved by National Company Law Tribunal (NCLT) rather than multiple High Courts, thereby, speeding up the process and avoiding the hassle of going to multiple jurisdictional authorities for their approvals. Fast track mergers between two small companies and between the holding and subsidiary company may be carried out by obtaining approval from Official Liquidator and ROC without approaching the NCLT. Voting on the scheme has been allowed to be done through postal ballot to further speed up the process.
In a move to promote globalisation, the Bill permits both inbound and outbound merger. It would now be permissible for Indian companies to amalgamate into foreign companies (belonging to such jurisdictions as notified by Central government) and vice-versa, with a prior approval from RBI. The RBI shall have a critical role in drafting the rules for cross-border mergers jointly with Central government.
The Bill enlists detailed provisions for the purchase of shares from minority shareholders by the shareholders holding more than 90% of the shareholding of a company (by virtue of amalgamation, share exchange, conversion of securities etc), commonly referred to as squeeze out, giving a fair chance to the minority shareholders to exit the delisted companies mandatorily at a price determined by a registered valuer in accordance with prescribed rules.
And now the dampeners!
It requires mandatory filing of an auditor’s certificate for the accounting treatment provided for in a scheme, both for listed as well as unlisted companies.
With the Bill prohibiting any transferee company to hold any shares in its own name or in the name of any trust pursuant to any compromise or arrangement, it is sought to plug some innovative restructuring techniques typically resorted to by Indian companies for consolidating promoter stakes through corporate restructurings.
Further, it is provided that where the transferor company is a listed company while the transferee company is an unlisted company, the transferee company shall continue to be an unlisted company till the time it is listed and an exit option shall be provided to the shareholders of the transferor company at the pre-determined price.
A mandatory requirement to send a valuation report along with notice to the shareholders and creditors has been introduced. The scheme of arrangement or amalgamation has to be mandatorily also sent to RBI, Sebi, CCI and income tax authorities. With such provisions, the possibility of potential litigations and delays in completion are expected to increase.
The Bill provides that in case any valuation is required to be made of any property, stock, share, debenture, securities or goodwill or any other asset or net worth of a company or its liability, it shall be valued by a ‘registered valuer’. Additionally, companies would be prohibited from making investments through more than two layers of investment companies.
A restriction has been laid on more than one buy-back in one fiscal, whether approved by board of directors or shareholders. Such a restriction may not be very forthcoming, specially in cases where companies have surplus cash balances in a year that can be used in paying back the shareholders. Unlike the previous versions of the Bill, which specifically excluded buy-back from the purview of scheme, the present one proposes to include the same provided such buy-back is in accordance with provisions prescribed under the Bill.
With the Bill allowing cross-border mergers, the role of Indian economy in the global arena shall increase. It shall also provide the necessary means to the Indian business houses to further their plans of global expansion and allow foreign businesses to grow their footprint in India through inorganic means.
The Bill has tried to make the process of arrangements and amalgamations more transparent from the stakeholders perspective and also quicker. By imposing restrictions on who can object to the schemes, it provides for a safeguard to companies against dissenting shareholders who for their own self interest try and restrain the companies’ restructuring plans to be executed smoothly. At the same time, it has to an extent restrained companies that used ‘scheme’ as an important tool for undertaking inimitable restructurings to meet their objectives.