New Companies Act, 2013 - Insight Series - Vol 2

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Volume – II deals with the provisions in the Companies Bill relating to Reduction of Capital, Buy-back of shares and Buying out of minority shareholders as compared to similar provisions under the Companies Act, 1956.

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New Companies Act, 2013 - Insight Series - Vol 2

  1. 1. © 2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG FLASH NEWS KPMG IN INDIA New Companies Act, 2013 - Insight Series – Vol II 30 August 2013 Vol-II: Reduction of Capital, Buy-back of shares and Buying out of minority shareholding (collectively referred to as ‘Capital structuring’) Executive Summary Reduction of Capital  Notice to creditors made mandatory even in case not involving any repayment of capital.  Not allowed in case of companies not remedying default in repayment of deposits. Buy-back  Multiple Buy-back in the same year not possible.  Provisions relating to Buy-back limit in case of equity shares is not clear.  Company defaulting on repayment of deposits, etc. can not undertake Buy-back for 3 years post remedying the default. Buy out of minority shareholding  Shareholders holding >90 percent equity capital of the company can buy out remaining minority shareholding.  Once offer is made by the majority shareholder, purchase of shares is automatic.
  2. 2. © 2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Background In this bulletin, we have dealt with the new concepts introduced and the changes made to existing provisions relating to Reduction of Capital, Buy-back of shares and Buy out of minority shareholding (collectively referred to as ‘Capital structuring’). We have also discussed certain other provisions included in the New Act, but only to the extent that they impact the Capital structuring. Overview We have dealt with certain general issues in detail in Volume-I which may also impact the discussion under this Bulletin, therefore, the issues and impacts thereof are listed below for ready reference (For details please refer to Volume – I) :  The discussion in this Bulletin is subject to the Rules to be issued by the Ministry of Corporate Affairs (MCA).  In absence of Transitional provisions and in view of Repeal and Savings provisions not providing sufficient clarity, there is uncertainty about the applicable provisions and mechanism to deal with non-conformity arising from application of old provisions as compared with the new provisions.  The Companies Act, 2013 (New Act) provides that all Restructuring in progress, at the time when the National Company Law Tribunal (NCLT) becomes operational, shall be transferred from the High Court to NCLT, however, the New Act has not specified that NCLT will complete the process under the provisions of the New Act. Therefore, two issues raised in 2 above will apply even in relation of transfer of cases to NCLT. This issue is relevant in relation to Reduction of Capital discussed in this Bulletin.  According to the New Act the term ‘free reserves’ should not include any change in carrying amount of an asset or of a liability recognised in equity. Therefore, it may not include the reserve arising on recording of assets and liabilities, pursuant to amalgamation, under purchase method of accounting. Consequently, such reserve may not be available for buyback of shares, for computing limit of investment, etc. Subject to the above, we have dealt with specific issues relating to provisions dealing with Capital structuring at relevant places. Reduction of Capital Reduction of capital continues to be defined inclusively under the New Act as it was under the provisions of the Companies Act, 1956 (the existing Act). Therefore, the Reduction of capital need not be confined to the three modes specifically enumerated in the section but cover other modes also. The following are the key changes in the provisions:  The New Act prohibits a company from undertaking Reduction of capital if the company is in arrears in the repayment of any deposits accepted by it or the interest payable thereon. (new)  NCLT to give notice of application for Reduction of capital received to the Central Government (CG)(new), Registrar (new), Securities and Exchange Board of India (SEBI) (in case of listed companies) (new) and to the creditors of the company.  CG and others may make representations within three months from the date of receipt of the notice and If no representation has been received within the said period, it will be presumed that they have no objection to the Reduction of Capital. (new)  Under the existing Act, notice to creditors was required only in case involving reduction in liability in respect of unpaid share or reduction involving payment to shareholders. In other cases the High Court had the discretion to direct issue of such notice. Under the New Act, Notice to the creditors is made mandatory in all cases.  The company needs to file a certificate from its auditor to the effect that the accounting treatment for such reduction is in conformity with the prescribed accounting standards. (new)  The provisions relating to Reduction of capital should not be applicable to Scheme of Compromise / Arrangement involving reduction of capital and to Buy-back of shares. (new)  Under the existing Act minutes confirming Reduction of capital were deemed to be amendment to Memorandum of Association (MOA). No such provision in the New Act and therefore separate process of amending MOA may be required to be followed. Power of company to purchase its own securities (Buy-back) The restriction on companies, limited by shares or guarantee and having share capital, either to purchase its own shares or to provide financial assistance for that purpose continues to be the same under the New Act, except that in relation to financial assistance to purchase shares for the benefit of employees is allowed only if the Scheme relating to that is approved by the company through a special resolution.
  3. 3. © 2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The following are key changes in the provisions dealing with Buy-back:  Buy-back continues to be of two types :  Buy-back upto 10 percent of the total paid-up capital + free reserves approved by board of directors (Board approved Buy-back). or  Buy-back approved by shareholders in general meeting (General body approved Buy-back).  General body approved Buy-back allowed upto 25 percent of total paid-up capital + free reserves. However, in case of Buy-back of equity shares, the limit is replaced by 25 percent of total paid-up equity capital.  Under the existing Act, Buy-back of equity shares was allowed upto 25 percent of total paid-up capital + free reserves subject to a second limit that Buy-back of equity shares in a financial year shall not exceed 25 percent of total paid-up equity capital in that financial year.  Thus, plain reading of the provisions under the New Act, suggests that in case of Buy-back of equity shares, entire formula, i.e. 25 percent of total paid-up capital + reserves is to be replaced by 25 percent of paid-up equity capital. The exclusion of free reserves would reduce the quantum of consideration substantially and make Buy-back of equity shares almost impractical in most cases.  However, a harmonious reading with provisions for Board approved Buy-back suggest that the only total paid-up capital is required to be substituted by paid- up equity capital. That means in case of Buy-back of equity shares the applicable limit should be 25 percent of paid-up equity capital + free reserves. This seems to be a better view.  The New Act prescribes minimum gap of one year between two Buy-backs.  Under the existing Act, this provision was applicable only in relation to Board approved Buy- back.  Under the New Act it is applicable even to General body approved Buy-back. Therefore, multiple Buy- back in a year should not be possible under the New Act.  The existing Act provided for transfer to the extent of nominal value shares to the Capital Redemption Reserve (CRR) referred to in realation to redemption of preference share. Both the Acts provide that provision relating to reduction of capital apply to such CRR. However, the New Act provides for creation of CRR without reference to CRR in relation to redemption of preference shares and therefore prima facie it seems, though may be unintended, the provisions relating to reduction of capital may not be applicable to CRR in relation to Buy-back. The New Act specifies utilisation of capital redemption reserve created in relation to Buy-back for issuing bonus shares. (new)  The existing Act provided Buy-back of odd lots, as one of the mode of Buy-back, which is dropped under the New Act.  The existing Act did not allow a company to Buy- back, if the company had defaulted in repayment of deposits, redemption of debentures etc. till the time default persisted. Under the New Act a company which has defaulted as above is not allowed to Buy-back for a further period of 3 years after the default is remedied.  The New Act has added compliance with provisions relating to declaration of dividend as an eligibility condition for Buy-back. (new)  Buy-back of shares as a part of a Scheme of Arrangement also needs to be in accordance with the Buy-back provisions.(new) Buyout of minority shareholding The New Act has introduced new provisions relating to Buy-back out of minority shareholding under certain circumstances. This will provide greater flexibility to the promoters/ acquirer in realigning the control and management of company as unnecessary interference from minority shareholders is removed. The key provisions are:  Any person or group of persons holding 90 percent or more of the issued equity capital of a company by virtue of an amalgamation, share exchange, conversion of securities or for any other reason, can purchase the remaining equity shares of the company from minority shareholders at a price determined by a registered valuer in accordance with prescribed rules.
  4. 4. © 2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.  The Majority shareholders to notify the company and make an offer to the minority shareholders.  In relation to shares under transmission, offer should be valid for a period of three years.  Provisions are applicable to acquirer and persons acting in concert as defined under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.  Thus, this provision seems to act as an alternative to delisting guideline. Being a statutory provision it may override the delisting guideline. However, whether it is intended to be an alternative or not is a moot point to be considered.  The minority shareholders of the company may also offer to the majority shareholders to purchase the minority equity shareholding of the company at a price determined by a registered valuer in accordance with prescribed rules.  The transferor company to act as a transfer agent for receiving / paying the price and to take / give delivery of shares.  The majority shareholders need to deposit the value of shares to be acquired by them in a separate bank account.  Disbursement to minority shareholders within sixty days.  The account need to continue at least for one year in case certain disbursement to the minority shareholders were not encashed or for such other reasons.  It is provided that in case physical delivery of shares is not received, the shares should be deemed cancelled and new shares to be issued and transfer should be completed in favour of majority shareholders and payment should be made to minority shareholders.  Above provisions suggests that once the offer is made by the majority shareholders, purchase of shares thereafter is automatic and no acceptance of offer by the minority shareholders is necessary.  There is no clarity as to whether and/or how the provisions will operate in case of shares in dematerialised form.  It is provided that in case the majority shareholders acquiring > 75 percent of the minority shareholding had agreed to sell their shareholding at a price higher than the price offered to the minority shareholders then such majority shareholders need to share the additional compensation received by them with such minority shareholders on a pro rata basis. In view of the peculiar drafting, the real impact of the provision is unclear.  It is provided that the above provisions would continue to apply to the residual minority equity shareholders, even though the shares of the company had been delisted and period of one year or the period specified by SEBI, had elapsed.  This provision seems to be enabling provision to cover cases of listed company following delisting guideline and not succeeding to acquire entire minority shareholding.  This provision does not seem to be impacting automatic purchase discussed above.
  5. 5. © 2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. www.kpmg.com/in Ahmedabad Safal Profitaire B4 3rd Floor, Corporate Road, Opp. Auda Garden, Prahlad Nagar Ahmedabad – 380 015 Tel: +91 79 4040 2200 Fax: +91 79 4040 2244 Bangalore Maruthi Info-Tech Centre 11-12/1, Inner Ring Road Koramangala, Bangalore 560 071 Tel: +91 80 3980 6000 Fax: +91 80 3980 6999 Chandigarh SCO 22-23 (Ist Floor) Sector 8C, Madhya Marg Chandigarh 160 009 Tel: +91 172 393 5777/781 Fax: +91 172 393 5780 Chennai No.10, Mahatma Gandhi Road Nungambakkam Chennai 600 034 Tel: +91 44 3914 5000 Fax: +91 44 3914 5999 Delhi Building No.10, 8th Floor DLF Cyber City, Phase II Gurgaon, Haryana 122 002 Tel: +91 124 307 4000 Fax: +91 124 254 9101 Hyderabad 8-2-618/2 Reliance Humsafar, 4th Floor Road No.11, Banjara Hills Hyderabad 500 034 Tel: +91 40 3046 5000 Fax: +91 40 3046 5299 Kochi 4/F, Palal Towers M. G. Road, Ravipuram, Kochi 682 016 Tel: +91 484 302 7000 Fax: +91 484 302 7001 Kolkata Infinity Benchmark, Plot No. G-1 10th Floor, Block – EP & GP, Sector V Salt Lake City, Kolkata 700 091 Tel: +91 33 44034000 Fax: +91 33 44034199 Mumbai Lodha Excelus, Apollo Mills N. M. Joshi Marg Mahalaxmi, Mumbai 400 011 Tel: +91 22 3989 6000 Fax: +91 22 3983 6000 Pune 703, Godrej Castlemaine Bund Garden Pune 411 001 Tel: +91 20 3050 4000 Fax: +91 20 3050 4010 The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2013 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity“ are registered trademarks of KPMG International Cooperative (“KPMG International”), a Swiss entity.

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