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Buy ordinance lays down strict norms for companies

An ordinance amending the Companies Act allowing the companies to buy back upto 25 per cent shares was promulgated on Saturday night in order to revive the sagging capital market.

An official communique said the ordinance brought several important changes in the Act to provide the companies to buy back their own shares and make inter-corporate investments/loans without government approval. It has also the provision for nomination facility to the holders of shares/debentures/deposits and setting up of investor education and protection fund and to declare Infrastructure Development Finance Company Limited as a public financial institution.

An announcement to this effect was made by Prime Minister Atal Bihari Vajpayee at the annual general meeting of the Federation of Indian Chambers of Commerce and Industry recently to do away with government permission for inter-corporate investments.

There were also provisions to make mandatory compliance of accounting standards by the companies while preparing their annual accounts specified by the Institute of Chartered Accountants until the National Advisory Committee on Accounting Standards was set up and notified, the release said.

The release said that the government also decided that the Companies Bill 1997 pending before Parliament will be taken up for discussion. This comprehensive bill was to replace the Act.

There were a number of new features in the bill which would facilitate further growth of the corporate sector.

The features of the ordinance promulgated are: companies are allowed to buyback their own shares up to 25 per cent of the paid-up capital and free reserves; buyback of shares can be done out of company's free reserves, securities premium account or proceeds of any earlier issue specifically made for buy-back purposes.

Buyback is permitted only if the Articles of Association of the companies authorised the same and a special resolution is passed in a general meeting of the company. Buyback of shares will not be allowed if the companies have defaulted in repayment of deposits, redemption of debentures/preference shares and repayment to financial institutions.

The buyback process will have to be completed within 12 months from the date of passing the special resolution. The companies shall not make any further issue of securities within a period of 24 months from the date they completed the process of buyback of its securities, except by way of bonus issue, conversion of warrants, preference shares or debentures.

Shares bought back shall be extinguished and physically destroyed within seven days from the date of buyback.

The listing companies opting for buyback of shares will also have to comply with regulations and guidelines prescribed by the Securities Exchange Board of India for this purpose.

The companies will have to make full and complete disclosure of all material facts in the notice of the meeting at which special resolution for the purpose of buyback is proposed to be passed.

These disclosures will include the necessity for the buyback, class of securities intended to be purchased, amount to be invested for the buyback and the time limit for completion of the buyback.

The companies will henceforth have full freedom to make inter-corporate investments and loans to other corporate bodies. No prior approval of the Central government will be required for this purpose. They can make investments or give loans upto 60 per cent of their paid-up share capital and free reserves with the approval of board of directors. For investments and loans beyond this limit, the companies will have to pass a special resolution in the general meeting.

The special resolution mentioned above will have to clearly specify the limits, the particulars of the body corporate in which the investment is proposed to be made or loan to be given, the purpose of investment and sources of funding etc.

The companies will not be allowed to give loan to any body corporate at a rate of interest lower than the prevailing bank rate.

The companies will be allowed to issue sweat equity authorised by resolution passed by general meeting. The resolution should specify the number of shares, their value and class or classes of directors or employees to whom such equity is proposed to be issued.

The issue of sweat equity will be further subject to regulations made by the Securities Exchange Board of India.

All limitations, restrictions and provisions relating to equity shares shall be applicable to sweat equity shares as well.

The expression sweat equity would mean equity shares allotted either on discount or for consideration other than cash for providing know-how, making available rights in the intellectual rights or value addition etc.

Every holder of shares, debentures, fixed deposits will have freedom to nominate at any time a person to whom his shares/ debentures/deposits shall vest in the event of the death.

Where the shares / debentures / deposits are held by more than one person and jointly, the joint holders may together may make such nomination.

The government shall establish a fund to be called Investors' Education and Protection Fund to which amounts in the unpaid dividend and unclaimed application money, unclaimed matured deposits, unclaimed matured debentures and the interest accrued on these amounts shall be credited after a period of five years from the date these become due for payment.

The funds shall be utilised for protection of investors' awareness and the interests of the investors.

The Central government will appoint an authority or committee which will administer this fund.

The Central government will have powers to constitute, by notification in an official gazette, the National Advisory Committee on Accounting Standards.

This committee will advise the Central government on formulation and laying down of accounting policies and accounting standards for adoption by companies.

The committee will have members from the Institute of Chartered Accountants of India, Institute of Cost and Works Accountants of India, Institute of Company Secretaries of India, the Reserve Bank of India, the Comptroller and Auditor-General of India, the Central Board of Direct Taxes, the Securities Exchange Board of India and representatives from the Chambers of Commerce and Industry.

UNI

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