Dca Lists Strict Buyback Norms

The Department of Company Affairs (DCA) has proposed that companies be mandatorily required to seek the government's approval for buying back their shares. The proposal is a part of the DCA's cabinet note on the proposed amendments in the Companies Act, 1956. It also suggests that companies be required to provide details about the source of funds and the modus operandi for their proposed buybacks.

The cabinet is expected to discuss the note this week. Once it clears the note, the amendments are expected to be introduced through a Presidential ordinance. The note also proposes several safeguards to prevent companies from misusing the share buyback provision. These include full disclosure of all material facts on the proposed buybacks, the class of shares proposed to be purchased under the scheme, the total fund requirements for such buybacks and the time limit for completion of the buyback process.

 

Companies which decide to go in for buyback will be required to explain their reasons to their shareholders. Details of the reasons, fund requirements and the class of shares to be bought back will have to be provided in an explanatory statement, along with a notice for a shareholders' meeting to seek their permission for the proposed buyback. Besides the share buyback provision, the proposed amendments in the DCA note include allowing software companies to issue `sweat equity" to their promoters, directors and employees and introducing the nomination facility to shareholders and debenture holders. The DCA's proposal to allow issue of sweat equity to even directors of software companies is significant, since the department has so far been talking of allowing it only for software employees who have made substantial intellectual contributions to their companies.

The proposed amendments in the Companies Act also include empowering the Central government to set up an Investor Education and Protection Fund. This is an old demand of the investing public, especially the investors' associations, for dealing with the investors grievances and bringing in more discipline in the capital market. Under the proposed share buy back provision, according to the DCA note, companies are also required to file declarations of solvency with both the Registrar of Companies and the Securities and Exchanges Board of India (Sebi) before going in for the share buybacks.