Finance Ministry Against Making Govt Nod For Buyback Must
The finance ministry has opposed a proposal that companies be required to seek government approval for buying back shares.
According to officials, it has also opposed the proposal to restrict issue of sweat equity to software companies on the ground that sector-specific concessions are not legally tenable. Sweat equity denotes capital issued for considerations other than cash.
Since the finance ministry was one of the prime-movers of the initial buyback proposal, its view may influence the eventual decision of the cabinet.
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In its comments on the cabinet note circulated by the Department of Company Affairs, the finance ministry observed that the clause making government approval mandatory for buyback would revive the inspector raj. It felt shareholder approval was a sufficient check on a company's buyback intentions.
"Making any government department responsible for clearance would be asking for trouble. In any case, it violates market principles," an official stated.
Several safeguards to prevent companies from misusing share buyback have been included in the cabinet note. These include disclosure of the class of shares to be purchased and fund requirements for such buybacks.
The cabinet note was circulated by the DCA in preparation for an ordinance to incorporate buyback and sweat equity for the information technology segment in the Companies Act, 1956.
The proposal for sweat equity seeks to introduce a new proviso to Clauses 73 and 74(7)(6) of the Companies Bill, 1997:
"Software companies in India or their subsidiaries abroad may also issue sweat equity to their promoter-directors or whole-time directors or employees for providing any knowhow, intellectual property or value addition to the company on an exclusive basis on such terms and conditions as may be prescribed by Sebi or the Centre as the case may be. A new definition No (66) will be added after definition No (65) in clause 2 as under as "(66) Sweat equity means equity allotted to promoter-directors, whole-time directors or employees for providing any knowhow, intellectual property or value addition to the company".
The finance ministry has observed that such sector-specific reservation is not legally tenable. Further, it maintains that since stock options are permitted, companies should be encouraged to use this route.
Officials explained that under sweat equity, pricing is not specified and an individual could be allotted shares for free. The ministry is not comfortable with this clause. Instead, it has suggested the more transparent stock-option route be employed.
The proposal suggests that a new section may be added to the Companies Act, wherein any software company, whether listed or unlisted, engaged in the development of software may allot equity provided that:
lIssue of such equity shall be limited to 33.33 per cent of the paid-up capital of the company;
lIssue of such equity shall be approved by the members of the company by a special resolution;
lProper disclosures have been made of allotment of such equity in the annual accounts in the year in which it is to be allotted.