Buyback, Non-Voting Shares Recommended

The working group set up to redraft the Companies Act, 1956, yesterday recommended that companies can buy back shares subject to certain conditions, and issue non-voting shares, hybrid hedging instruments like options and derivatives, and employees stock options.

The report of the eight-member expert committee was placed by the government in the Parliament library for public debate yesterday.

The group was set up last year by finance minister P Chidambaram under the chairmanship of K R Chandratre, the then chairman of the Institute of Company Secretaries of India, to present a report for public debate.

The group said companies must not be allowed to issue any new shares including rights shares but excluding bonus shares for one year after the buyback was completed.

 

In anticipation of full convertibility of the rupee, the committee has recommended the setting up Indian depository receipts (IDRs) similar to the American and global depository receipts (ADRs and GDRs) whereby foreign companies can issue IDRs where the underlying security is the equity or any other security of a foreign company. Amendments have also been suggested to the definition of the term prospectus, to facilitate book-building.

The group has also suggested filing of ADRs and GDRs by foreign companies with the Registrar of Companies. It has also suggested that the concept of shelf prospectus be incorporated in the new Act. Consolidation of group accounts has been made optional, and provisions for a chief financial officer (CFO) is being provided.

Since a buyback is for extinguishing share capital it should not lead to an increase in the debt-equity ratio in excess of 2:1, the report said. It said in the case of a buyback that would constitute a treasury operation, new shares should not be re-issued for a period of two years.

If a companys treasury department buys its own shares as an investment it would qualify as a treasury operation.

In the case of a full buy-out where a person or group acquires 95 percent of a publicly listed company either through a takeover or otherwise the report said shareholders should be allowed to sell their shares at a price based on guidelines set by the Securities and Exchange Board of India, the market regulator.

Managerial remunerations are being retained at the existing level, while an over all ceiling of 60 per cent is being set for inter-corporate investments. The concept of sole selling agents is being continued, and existing methodology for calculating depreciation in the Companies Act and the Income Tax Act has been retained.

The definition of officer in default is being widened to include merchant bankers, share transfer agents, registrars and bankers to an issue. Non-executive directors who are not signatory to any declaration being made by a company are, however, being excluded from this definition.

Postal ballot has been ruled out given the present state of the postal services, but the role of proxies is being strengthened by permitting two rights