Recently the MCA released the Draft Unlisted Companies (Preferential Allotment) Rules, 2011. The draft rules seeks to substitute the Unlisted Companies (Preferential Allotment) Rules, 2003. The Draft rules inter alia requires more disclosures and also mandates the securities to be kept in a demat form. Here is a comparative table of both the rules:
Point | Current 2003 Rules | Proposed 2011 Rules |
Applicability | Applies only to unlisted public companies in respect of preferential issue of equity shares, fully convertible debentures, partly convertible debentures or any other financial instrument which would be convertible into or exchanged with equity share at a later date. | Identical |
Special Resolution | The issue of shares can be only made, if (i) the AoA of the company authorizes to do so and (ii) a special resolution is passed at the general meeting authorizing the allotment. The special resolution has to acted upon within a period of 12 months. | Additional Requirements The company has to make disclosures in the offer document as prescribed. The offer document has to be approved by way of a special resolution. Both the copy of the special resolution and the offer document has to be filed with the RoC. |
Condition for the issue of Private Placement | Does not prescribe any such condition. | The following conditions are prescribed: Not more than 30 day gap between opening and closing of the issue. Minimum 60 days gap between two issues. Any financial instrument which is convertible into equity shares at a later date and resulting into a cumulative amount of Rs. 5 Crores or more will require the prior approval of the central government. After the issue, the company has to file a return of allotment with the RoC within 30 days. |
Dematerialization of Securities | No such requirement | All securities issued under preferential allotment or private placement has to be kept in a demat form. |
Compliance Certificate | A Similar audit certificate was only required to be placed before the shareholders. | The compliance certificate has to be filed with the RoC. |
Disclosures in the offer document | Not applicable. However disclosures are to be made in the explanatory statement to the notice for the general meeting. | The 2003 rules only prescribed that the object of the issue had to be disclosed. The 2011 rules requires disclosures with regard to the object of the issue, brief detail of the project and statutory clearances required and obtained for the project. Apart from this the two rules are more or less the same in this regard. |
It is quite clear that the new rules, if they become operational, would increase the compliance burden on the companies. It will also increase the paper work and possibly the transaction cost. Moreover, fund raising through the issue of convertible financial instruments would be hit severely as now all such transactions resulting into a cumulative amount of Rs. 5 Crores or more will require Central Government approval.
The rationale for these new rules is unclear. However, initial reports suggest that the rules are a fallout of the Sahara-Sebi Controversy.
Thanks for the comparison. Am cross-posting this comment I made on IndiaCorplaw :
ReplyDeleteA very basic understanding of Berle-Means model should have sufficed for the MCA to avoid drafting rules such as these. In unlisted companies, ownership tracks control more densely than w/ listed companies where either the management or the majority owner has control, rendering the latter subject to agency problems. Not so, with respect to unlisted companies where the parties may protect themselves through SHAs and the like. So, it seems that motives other than economic efficiency ie political economy are the driving force behind these rules. Perhaps another instance of empire building among Indian regulators.
Also, note that the substantive content of the rules too seems to be devoid of logic--- to quote just one example, Issue of convertibles over 5 crores is subject to permission while issue of vanilla equity is not. The red tape might deter the investees from issuing convertibles in favor of vanilla equity--- which financial economics tells us, is most likely to issue at a discount (information asymmetry owing to the investees' unlisted status, as also the pecking order theory of corporate finance. In fact, thats why most would prefer issuing convertibles under ordinary circumstances) leading in most cases to more dilution than promoters would be inclined to have.
In summary, regressive step reflective of political economy of corporate regulation.
this is really nice and helpful comparision.....but i have a small query here...
ReplyDeletelet us assume an unlisted public company is incorporated on 1st December 2011 with initial subsribed capital of Rs. 1 crore.
now the company wants to issue further shares to promoters on 1st March 2012...then instead of applying section 81 (1A), can we not apply section 81(1) wherein in the first paragraph there is enabling caluse for the companies to issue further shares (if we read the restrictive section as enabling otherwise) within a period of two years from the formation or one year from the date of first allotment...
your comments are sought on this point of view....