Business Restructuring
Companies Act, 2013 & Competition Act
Ashish Ahuja
Managing Partner
Wadia Ghandy and Co.
ashish.ahuja@wadiaghandy.com
Forms of Business Restructuring
considered under this Presentation
• Equity Restructuring – internal equity
restructuring includes buy backs, splits,
consolidation, etc;
• Preference Share Restructuring;
• Debt Restructuring – including Sick companies;
• Group restructuring–
including
mergers,
demergers and slump sales;
• Certain General principles which may impact
business structuring and restructuring as a whole.
Equity Restructuring
Stock Splits and Consolidation
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A number of companies, particularly listed companies quite often consider stock
splits relating to their shares. Consolidation is often considered at times.
For consolidation a proviso has been added in section 61 – which reads as follows:
– “Provided that no consolidation and division which results in changes in voting
percentage of shareholders shall take effect unless it is approved by the
Tribunal on an application made in the prescribed manner.”
The word “results in” is very broad.
Questions would arise on where there are shareholders who lose shares at the
time of consolidation because of not having the requisite number of shares, into
which the shares are being consolidated into, would require tribunal consent?
This happens very often where shareholders have odd lots. For instance where I
have 13 shares and the consolidation is for every 2 shares, one consolidated share
is issued
This should not affect stock splits though
Equity Restructuring (contd.)
Differential Voting and dividend rights
• Very often a tool for internal restructuring that is used
is the route of issue of DVRs
• Previously private companies were not governed by
the rules relating to DVRs. Accordingly, irrespective of
track record of dividend they were in a position to
issue DVRs.
• The 2013 Act makes no concession for a pure private
company to issue various classes of shares having
diverse rights attached to them. Section 43 of the New
Act does not have an exception provision relating to
private companies.
Equity Restructuring (contd.)
Buy-back of shares
• No offer for buy-back shall be made within a period of one year
from the date of preceding buy-back. The 1 year has to be reckoned
from the date of the preceding offer of buy-back. [Section 68]
• Buy backs through schemes would not be permitted.
Reduction of share capital
• Reduction of share capital is now required to be approved by NCLT.
Further, NCLT will now send the notice of application of capital
reduction received from a company to the CG, ROC and SEBI
(whenever applicable) and creditors of the company and consider
their representation, if any. [Section 66]
.
Preference Share Restructuring
• Inability to redeem preference shares (or payment of
dividend on such shares): Companies which are not
able to redeem any preference shares (in accordance
with terms of issue) or pay dividend due on such shares
may redeem the same with further issue of equivalent
amount of preference shares (including the dividend
due thereon) with the consent of (i) 3/4th in value of
such preference shares (ii) Approval of NCLT.
• Persons who do not consent to redemption as above
need to be discharged.
Debt Restructuring
• Apart from the CDR, the other popular methods of restructuring debt
were through a scheme of arrangement through the court
• The BIFR was available only to industrial enterprises and which were sick
• New provisions have now been inserted in the Act in relation to sick
companies.
Sick Companies
• A company may be declared sick if it fails to pay the amount of debt on
demand by the secured creditors representing 50% or more of the
outstanding debt. The 2013 Act omits the criteria of 50% or more erosion
of net worth for determination of sickness of a company.
• These provisions are no longer restricted to industrial undertakings and
have now been made applicable to all companies.
• The power of the Board of Industrial & Financial Reconstruction will now
vest with NCLT.
Group Restructuring
• Mergers and demergers are one method of group restructuring. These
have been made more difficult now for the following reasons:
– Registered valuer
– Detailed Disclosures: Inter alia, the latest financial position, details of
pending litigation, reduction of share capital within the compromise
and arrangement, any scheme of corporate debt restructuring
consented to by not less than 75% of the secured creditors in value;
the Rules in this regard also require disclosure regarding the
relationship subsisting between the companies that are a part of the
arrangement.[Section 230(10)]
– Dispensation of creditor meeting requiring 90% consent
– Postal Ballot Voting: Shareholders or creditors can now vote through
postal ballot for approval of the scheme of arrangement. Draft rules in
this regard have also been released.
– Extinguishment of Treasury stocks
Group Restructuring (contd.)
Sale of Businesses to subsidiaries and group companies, through
Slump Sale or otherwise:
• Section 180, concerning business undertaking sales, now applies to
all companies. There is no longer the exemption enjoyed by private
companies under the 1956 Act. Further, the 2013 Act has clarified
the following definitions,
– “Undertaking” defined to mean such undertaking in which the
company has investment exceeding 20% of its net worth as per
audited balance sheet of the preceding financial year or an
undertaking which generates 20% of the total income of the company
during the previous financial year.
– ‘Substantially the whole of the undertaking’ in any financial year
means 20% or more of the value of the undertaking as per the audited
balance sheet of the preceding financial year.
Certain General Principles
Entrenchment of Articles
• The 2013 Act allows for amendments to specified clauses of the
articles to be made more difficult and restrictive. Statutory sanction
has been given to shareholders to impose
conditions/restrictions/procedures to be complied with, as may be
more restrictive than those applicable in the case of a special
resolution. [Section 5(3)]
Recognition of restrictions on free transferability of shares
• The principle that shareholders in a public company can
contractually agree on restrictions on free transferability of shares
is now statutorily recognised. It is recognised that the same would
be enforceable as a contract. [Proviso Section 58(2)]
Certain General Principles (contd.)
Voting on Related Party Transactions
• A member of a company will not be permitted to vote
on resolution if such a member is a related party with
respect to a contract or arrangement put to vote.
Therefore, where group companies enter into an interse transaction which qualifies as a related party
transaction as listed under the 2013 Act, the particular
group company will have to refrain from voting on that
matter. [Proviso to Section 188]
• The definition of ‘related party’ in relation to a
company also includes shadow directors.
Certain General Principles (contd.)
Investment only upto two levels
• Investment through more than two layers of
investment companies is no longer permitted. An
exception has been made for:
–
acquiring any other company incorporated in a
country outside India if such other company has
investment subsidiaries beyond 2 layers as per the
laws of such country;
–
a subsidiary company from having any
investment subsidiary for meeting any requirements
under any applicable law
Competition Act, 2002
• Clause (b) of Explanation to Section 5 defines group
as,
“group” means two or more enterprises which, directly
or indirectly, are in a position to –
(i) exercise 26%, or more of the voting rights in the
other enterprise, or
(ii) appoint more than 50% of the members of the
board of directors in the other enterprise; or
(iii) control the management or affairs of the other
enterprise.
Competition Act (contd.)
•
The CCI (Procedure in Regard to the Transaction of Business Relating to
Combinations) Regulations, 2011 carve out an exception, inter alia, for the
following from notifying CCI,
“(8)An acquisition of shares or voting rights or assets, by one person or enterprise,
of another person or enterprise within the same group, except in cases where the
acquired enterprise is jointly controlled by enterprises that are not part of the same
group.
(9) A merger or amalgamation of two enterprises where one of the enterprises has
more than fifty per cent (50%) shares or voting rights of the other enterprise, and/or
merger or amalgamation of enterprises in which more than fifty per cent (50%)
shares or voting rights in each of such enterprises are held by enterprise(s) within
the same group:
Provided that the transaction does not result in transfer from joint control to sole
control”
•
Otherwise various thresholds on assets and turnover are notified and in existence.
Thank you