The Securities Appellate Tribunal has upheld SEBI's ruling in the Sahara Case. In line with SEBI's ruling, SAT has also found that optionally fully convertible debentures (OFCDs) issued by the two Sahara Group Companies ( SIRCL and SHICL) are securities and that the issue was a public issue requiring mandatory listing and that SEBI has the jurisdiction under the SEBI Act to deal with all kinds of companies, whether listed or not.
Showing posts with label Corporate Law. Show all posts
Showing posts with label Corporate Law. Show all posts
Tuesday, October 18, 2011
Saturday, June 4, 2011
Preferential Allotment/Private Placement, New Rules
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.
Saturday, May 8, 2010
RNRL v. RIL
The full text of the Supreme Court judgement in RNRL v. RIL is available here. I shall analyse some facets of the judgement in subsequent posts.
Sunday, May 2, 2010
Laws Relating to "Sweat Equity Shares" in India
Though it is premature to comment on the root cause of the Indian Premier League (IPL) fiasco, it would not be incorrect to assert that the term “sweat equity” has certainly been at the forefront of the initial mess. So what is “sweat equity” and what are the legal regulations surrounding it. This post attempts to answer some of these questions.
Generally at the time of incorporation, IPO or other similar instances the company issues equity shares for a certain price i.e. monetary consideration (this is subject to the company being limited by shares). The cash that is collected through such a mechanism forms the capital of the company. Contrastingly, sweat equity is issued by the company to its directors /employees at a discount or for consideration other than cash i.e. to say that the consideration is generally kind and not cash (S.79A, Explanation II). It requires no Einstein to figure out that the basic idea behind the issuance of sweat equity shares is to incentivise the employees by providing them with some direct stake in the company. Sweat equity shares are quite akin to Employee Stock Option Plans (ESOPs), but there are some differences between the two. For e.g. sweat equity shares is grant of shares at discount or without any monetary consideration whereas ESOPs are grant of an option to purchase shares at a predetermined price (Compare section 2(15A) and section 79A of the companies Act, 1956).
S. 79A of the companies act, 1956 is the primary legal provision governing the issuance of sweat equity shares. S. 79A(1) confers a right on the company to issue sweat equity shares if certain conditions as laid down in the same provision are fulfilled. The conditions are as follows:
1. Issuance of such shares is authorized by a special resolution by the company
2. The resolution specifies the number of shares, current market price, consideration (if any) and the class of employees to whom such shares are issued
3. One year has elapsed after the date of commencement of business.
4. For listed companies, other regulations of SEBI are complied with
5. For unlisted companies, the guidelines as may be prescribed by the Central Government( Generally would be the Ministry of Corporate affairs (MCA))
S. 79A seems to lay down broad guidelines for the issuance of sweat equity shares, but the provision by no means is exhaustive. I say this because clause (4) and clause (5) [please note that clause 5 is actually a proviso under s. 79A(1), but for convenience I have used it as a distinct clause since the meaning does not change at all] grants power to SEBI and MCA to issue any further regulations or guidelines.
It is in this regard the SEBI came out with a regulation in 2002 titled SEBI (Issue of Sweat Equity) Regulations, 2002. Needless to say the regulation only applies to listed companies. It would not be feasible to reconcile all the facets of the regulation here, apart from just briefly touching upon the clauses dealing with the aspect of pricing of shares and valuation of intellectual property. Clause 7 of the Regulation specifies that the minimum price of sweat equity share should be (a) the average of the weakly high and low of the related equity shares during the last six months preceding the “relevant date” or (b) the average of the weakly high and low of the related equity shares during the two weeks preceding the “relevant date”; whichever is higher. “Relevant date” is defined as the date which is thirty days prior to the date on which the general meeting is convened as per s. 79A(1) of the companies act, 1956. As for the valuation of intellectual property or know how, clause 8 of the Regulation specifies that a merchant banker shall make such valuations after consultation with industry specific experts (it is to be noted that valuations of intellectual property and know how are important as sometimes the employees are given sweat equity shares in return for any know how that the employee may provide to the company).
Similarly for unlisted companies in 2003 the MCA came out with rules titled Unlisted Companies (Issue of Sweat Equity) Rules, 2003. As per the Rules the minimum price of sweat equity shares and the valuation of intellectual property are to be determined by an independent valuer. The MCA rules also imposes a restriction on the company not to issue sweat equity shares for more than 15% of the total paid up share capital in a year or shares of the value of 5 crores; whichever is higher.
The law with regard to sweat equity shares revolves mostly around the conditions for issuance of such shares. However one may be curious to know what happens after the employee is allotted the sweat equity shares. In this regard the law only prescribes that the sweat equity shares shall be locked in for a period of three years after the date of allotment i.e. to say that the employee or the director cannot dispense of these shares within a period of three years (See clause 12 and clause 10 of the 2002 SEBI regulations and 2003 MCA Rules).
Interestingly in India which is based on a “promoter controlled model” i.e. most of the shares of a given company are owned by a family group, the issuance of sweat equity shares could be fraught with difficulties. An illustration would drive home the point. Consider a Pvt. Ltd. company X having a shareholding pattern of 80:20 held by family Y and another company Z respectively. Now, if Y inducts a family member as an employee then it can easily offer sweat equity shares to the employee at a discount or any other consideration except cash and further increase the shareholding of the family Y without actually paying the actual price of the shares. The reason why family Y can easily do that is because in case of a special resolution family Y can easily have its way considering its 80% shareholding. The law relating to issuance of sweat equity shares should be based on the basis of the corporate structure prevalent in India and not merely a legal transplant i.e. borrowed from some other countries like the UK or the US where the corporate structure is quite different(shareholding is much more dispersed in companies).
In subsequent posts I shall discuss the taxability of sweat equity shares.
Generally at the time of incorporation, IPO or other similar instances the company issues equity shares for a certain price i.e. monetary consideration (this is subject to the company being limited by shares). The cash that is collected through such a mechanism forms the capital of the company. Contrastingly, sweat equity is issued by the company to its directors /employees at a discount or for consideration other than cash i.e. to say that the consideration is generally kind and not cash (S.79A, Explanation II). It requires no Einstein to figure out that the basic idea behind the issuance of sweat equity shares is to incentivise the employees by providing them with some direct stake in the company. Sweat equity shares are quite akin to Employee Stock Option Plans (ESOPs), but there are some differences between the two. For e.g. sweat equity shares is grant of shares at discount or without any monetary consideration whereas ESOPs are grant of an option to purchase shares at a predetermined price (Compare section 2(15A) and section 79A of the companies Act, 1956).
S. 79A of the companies act, 1956 is the primary legal provision governing the issuance of sweat equity shares. S. 79A(1) confers a right on the company to issue sweat equity shares if certain conditions as laid down in the same provision are fulfilled. The conditions are as follows:
1. Issuance of such shares is authorized by a special resolution by the company
2. The resolution specifies the number of shares, current market price, consideration (if any) and the class of employees to whom such shares are issued
3. One year has elapsed after the date of commencement of business.
4. For listed companies, other regulations of SEBI are complied with
5. For unlisted companies, the guidelines as may be prescribed by the Central Government( Generally would be the Ministry of Corporate affairs (MCA))
S. 79A seems to lay down broad guidelines for the issuance of sweat equity shares, but the provision by no means is exhaustive. I say this because clause (4) and clause (5) [please note that clause 5 is actually a proviso under s. 79A(1), but for convenience I have used it as a distinct clause since the meaning does not change at all] grants power to SEBI and MCA to issue any further regulations or guidelines.
It is in this regard the SEBI came out with a regulation in 2002 titled SEBI (Issue of Sweat Equity) Regulations, 2002. Needless to say the regulation only applies to listed companies. It would not be feasible to reconcile all the facets of the regulation here, apart from just briefly touching upon the clauses dealing with the aspect of pricing of shares and valuation of intellectual property. Clause 7 of the Regulation specifies that the minimum price of sweat equity share should be (a) the average of the weakly high and low of the related equity shares during the last six months preceding the “relevant date” or (b) the average of the weakly high and low of the related equity shares during the two weeks preceding the “relevant date”; whichever is higher. “Relevant date” is defined as the date which is thirty days prior to the date on which the general meeting is convened as per s. 79A(1) of the companies act, 1956. As for the valuation of intellectual property or know how, clause 8 of the Regulation specifies that a merchant banker shall make such valuations after consultation with industry specific experts (it is to be noted that valuations of intellectual property and know how are important as sometimes the employees are given sweat equity shares in return for any know how that the employee may provide to the company).
Similarly for unlisted companies in 2003 the MCA came out with rules titled Unlisted Companies (Issue of Sweat Equity) Rules, 2003. As per the Rules the minimum price of sweat equity shares and the valuation of intellectual property are to be determined by an independent valuer. The MCA rules also imposes a restriction on the company not to issue sweat equity shares for more than 15% of the total paid up share capital in a year or shares of the value of 5 crores; whichever is higher.
The law with regard to sweat equity shares revolves mostly around the conditions for issuance of such shares. However one may be curious to know what happens after the employee is allotted the sweat equity shares. In this regard the law only prescribes that the sweat equity shares shall be locked in for a period of three years after the date of allotment i.e. to say that the employee or the director cannot dispense of these shares within a period of three years (See clause 12 and clause 10 of the 2002 SEBI regulations and 2003 MCA Rules).
Interestingly in India which is based on a “promoter controlled model” i.e. most of the shares of a given company are owned by a family group, the issuance of sweat equity shares could be fraught with difficulties. An illustration would drive home the point. Consider a Pvt. Ltd. company X having a shareholding pattern of 80:20 held by family Y and another company Z respectively. Now, if Y inducts a family member as an employee then it can easily offer sweat equity shares to the employee at a discount or any other consideration except cash and further increase the shareholding of the family Y without actually paying the actual price of the shares. The reason why family Y can easily do that is because in case of a special resolution family Y can easily have its way considering its 80% shareholding. The law relating to issuance of sweat equity shares should be based on the basis of the corporate structure prevalent in India and not merely a legal transplant i.e. borrowed from some other countries like the UK or the US where the corporate structure is quite different(shareholding is much more dispersed in companies).
In subsequent posts I shall discuss the taxability of sweat equity shares.
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