India Inc sees red on voting rights for preference shares
DEV CHATTERJEE
Mumbai, 7 November
Indian companies are slowly discovering the devil in the details of
the Companies Act, 2013. Companies that have issued preference shares
to a large number of investors, including private equity, are in for a
big surprise as the Act gives the same voting rights to preference
shareholders as to equity capital holders. This will impact voting
rights of all those companies whose preference share capital is larger
than their equity capital. While the Act is silent on whether this
will be with retrospective or prospective effect, corporate lawyers
say if implemented retrospectively, the clause may even lead to many
promoters losing control over their companies, as and when the rule is
notified.
Ketan Dalal, joint leader, tax & regulatory services,
PricewaterhouseCoopers, says, " There is no clarity yet on whether
this provision ( of giving voting rights) will apply to existing
preference shares or to preference shares now issued. It seems totally
inappropriate if applied with retrospective effect, since it would
lead to critical unforeseen implications and would change the basis of
the shareholdercompany relationship. We hope there will be clarity on
this issue soon." Many members of a committee set up by the ministry
of corporate affairs have dissented to the move as it will impact
voting rights of equity shareholders. Though Parliament has cleared
the Act, all the rules it entails have not been notified yet.
Corporate lawyers say under the Companies Act, 1956, preference
shareholders had a right to vote in two circumstances: one, where
their rights were directly affected and two, when the dividend on such
preference capital was due but remained unpaid for a specified period.
The 2013 Act does not contain the second condition. " In a way,
preference shareholders have a broader right to vote now on any matter
where their rights get directly affected. The investing community and
India Inc have a greater reason to be concerned in this regard," says
Aakash Choubey, partner, Khaitan & Co.
Many Indian companies such as infrastructure firm GMR, real estate
major DLF and pharmaceutical major Wockhardt have issued far higher
number of preference shares as compared to equity shares. Preference
shares are issued to raise funds from investors interested only in
fixed dividend income and, in some cases of foreign investors, to
avoid sector caps. Earlier, Section 87 of the Companies Act, 1956,
which gave the necessary voting rights to preference shareholders, did
not apply to private companies ( other than subsidiaries of public
companies). Interestingly, this section now applies to all companies.
" The import of this is very significant. There is considerable
ambiguity where the investors who invested in preference shares and
applied their rights on a ' fully converted basis' may no longer be
able to rely on this provision, as the proportion of voting rights of
equity and preference shareholders has to be the same as that of the
equity to preference share capital," Choubey adds.
With this change, lawyers say private equity and other investors must
be more cautious so that the rights they seek in management are duly
covered contractually. PREFERENCE OUTWEIGHS EQUITY
(FY12- 13 figures in ₹ crore)
Company Equity Preference PC as capital ( EC) capital ( PC) % of EC
GMR Infra. 389.24 1,971.10 506.40 DLF 339.74 1,799.20 529.58 KF
Airlines 808.72 553.10 68.39 Wockhardt 54.79 298.55 544.90 Gateway
Distr. 108.50 295.80 272.63 Aban Offshore 8.70 281.00 3,229.89
JSWSteel 284.15 279.03 98.20 Max India 53.10 125.00 235.40 JBF Inds.
72.63 110.35 151.93 Bhushan Steel 43.89 101.59 231.47
Filtered for BSE 500 companies ( excluding banking & financial
companies) Compiled by BS Research Bureau Source: Capitaline
Many members of ministry panel give dissent note on clause; no clarity
yet on whether it will apply to existing shares or new ones
Telecom M& A: New rules make circle mergers easier
However, with the riders on valuation of a firm with spectrum,
viability concerns remain
SURAJEET DAS GUPTA & SOUNAK MITRA New Delhi, 7 November
Wednesday's new merger and acqusition ( M& A) rules for the telecom
sector will allow the two top companies in terms of market share in 15
of the country's 22 circles to merge.
The Telecom Commission has permitted a combined entity to have amarket
share of up to 50 per cent in terms of subscribers. Earlier, a
combined entity could not have a share of more than 35 per cent,
almost ruling out any scope for a merger between the top two telcos in
any circle.
The circles in which such a merger would now be possible include
Andhra Pradesh, Delhi, Mumbai, Gujarat, Haryana, Kolkata, Maharashtra,
Punjab, Karnataka and Tamil Nadu. In four of the remaining seven
circles, the combined market share is marginally above 50 per cent.
The government says it will now permit mergers even if the market
share is higher, if the combined entity reduces this in a year to
comply
with the rules ( see chart).
The top two telcos in the other 15 circles have a market share from a
low of around 40 per cent in Kolkata to touching 50 per cent in
Rajasthan and Tamil Nadu. In Mumbai, the top two have 43 per cent; in
Delhi, 45 per cent.
In striking contrast, the lowest two telcos in terms of market share
range from one per cent in Uttar Pradesh ( West) to a high of around
20 per cent in Assam. In Delhi, the smallest two have far less than 10
per cent; in Mumbai, 15 per cent. Currently, the number of companies
in each circle is around six to eight, offering scope for
consolidation.
Airtel, for instance, could hypothetically merge with Vodafone in all
circles, with the notable exception of West Bengal, and follow the
market share limit. Airtel could also merge with Idea Cellular in all
the 22. It could merge with Aircel in all save three — Assam,
northeast and Jammu & Kashmir. It could scrape through a merger of
Tamil Nadu, where Aircel is very strong.
Similarly, Vodafone and Idea could merge in all circles and just
scrape through in Gujarat, where both are big. Even Vodafone and
Aircel could merge in all circles. Idea and Aircel could in all, too,
and as a combined entity take on Airtel for the number one position,
each with a22 per cent pan- India market share Of course, M& A's would
also depend on many other factors. The government's decision that an
acquirer has to pay the market price for buying into an incumbent
compnay which has got spectrum bundled with the licence at an
adminstered price is a clear dampener.
Telcos say two other factors will keep away consolidation. By
acquiring acompnay which has spectrum bundled with it, the acquirer
now has to pay spectrum usage charge (SUC), which will go up from
three per cent to eight per cent. " That will be a killer which no one
would want. Until SUC is reduced to a uniform level, consodlidation
looks unlikely," said an official.
No 1 operator No 2 operator Combined Combined marketshare of share of
bottom Circle No 1 & No 2 two players
Andhra Pradesh Airtel 28.74 Idea 18.1 46.84 9.19 Assam Airtel 28.19
Aircel 24.31 52.5 20.2 Bihar Airtel 34.37 Reliance 17.05 51.42 13.01
Delhi Airtel 23.53 Vodafone 21.45 44.98 9.25 Gujarat Vodafone 31.42
Idea 16.5 47.92 1.8 Himachal Pradesh Airtel 28.83 Reliance 23.02 51.85
5.1 Haryana Vodafone 23.34 Idea 19.19 42.53 9.21 J& K Airtel 34.24
Aircel 27.13 61.43 12.79 Karnataka Airtel 30.6 Vodafone 12.9 43.5 7.49
Kerala Idea 26.6 Vodafone 20.49 47.09 1.41 Kolkata Vodafone 19.92
Reliance 19.7 39.62 9.53 Madhya Pradesh Idea 30.16 Reliance 24.43
54.59 1.91 Maharashtra Idea 24.98 Vodafone 20.28 45.26 10.3 Mumbai
Vodafone 22.88 Reliance 20.58 43.46 15.58 North east Airtel 30.39
Aircel 25.03 55.42 14.25 Orissa Airtel 28.7 Reliance 17.1 45.8 12.21
Punjab Airtel 23.4 Idea 19.34 42.74 8.59 Rajasthan Airtel 29.74
Vodafone 18.41 48.15 11.6 Tamil Nadu+ Chennai Aircel 29.72 Airtel 18.8
48.52 4.83 UP ( East) Airtel 20.68 Vodafone 19.39 40.07 11.78 UP (
West) Idea 23.01 Vodafone 19.33 42.34 0.92 West Bengal Vodafone 28.55
Airtel 23.09 51.64 8.22 All figures in percent Figures as of August
31, 2013 Source_ TRAI data
THE NETWORK THEY COMMAND
subscriber market share ( Only private players)
Rohan Murty's Infy appointment doesn't need ministry's nod
BIBHU RANJAN MISHRA
Bangalore, 7 November
The Union ministry of corporate affairs ( MCA) has informed Infosys
that the appointment of Rohan Murty, son of co- founder and executive
chairman NR Narayana Murthy, does not require its approval.
The Bangalore- based company, also India's second largest information
technology ( IT) services firm, had filed an application with the
government under section 297 of the Companies Act, 1956, seeking
approval for Rohan's appointment.
"The application was filed as a matter of abundant caution and the MCA
has informed us that its approval is not required," the company said
in reply to a query by Business Standard.
Section 297 precludes directors from entering into any business
dealing or arrangements on behalf of the company in which they have a
personal interest or conflict of interest.
Infosys also clarified that Rohan had been designated executive
assistant to Narayana Murthy and not as vice- president.
In August, when speculation was rife that Rohan may have been given
the designation of V- P, the firm had issued astatement saying his
designation would be confirmed after his appointment was approved by
the MCA.
Rohan's appointment as his executive assistant was a precondition
Narayana Murthy set while accepting the board's proposal to rejoin the
company in June. The move raised eyebrows because it was a deviation
from the policy the cofounders had long followed, that of not bringing
members of their family into the company.
The company also reiterated that Rohan's term as the executive
assistant to the chairman will be co- terminus with that of incumbent
N R Narayana Murthy, and he is being paid a token compensation of ₹ 1
a year based on his request.
According to company sources, Rohan is now leading a 'productivity
improvement' drive at Infosys, one of the three major initiatives
undertaken by Murthy after he returned to the company. The other
initiatives are improving sales effectiveness and ensuring cost
rationalisation.
Infosys said Rohan had been designated executive assistant to Narayana Murthy
Sebi plans to get more muscle to rein in erring firms
SAMIE MODAK
Mumbai, 7 November
The Securities and Exchange Board of India (Sebi) is planning to come
out with a set of rules shortly to replace the stock exchange listing
agreement, a rule book followed by listed companies. The proposed
norms will arm the capital markets regulator to enforce the listing
agreement better and expand its scope following the recent changes to
the Companies Act.
Currently, a listing agreement is a contract between a stock exchange
and a listed company. It comprises a little more than 50 clauses —
dealing with corporate governance and information- based disclosures
such as filing of results, shareholding data, etc — which listed
companies have to follow.
Although the listing agreement framework is prescribed by the market
regulator itself, it is often perceived to be a private contract
between a stock exchange and a listed company.
Sebi is working on this new regulation which may be called the Sebi
Listing Regulation, said two people with knowledge of the development.
A former top Sebi official said replacing the listing agreement with a
new regulation would improve compliance and also iron out a lot of
operational issues. " At present, it is like the Sebi prescribing
rules but looking only from a distance. If it comes out with a
regulation, the Sebi can directly take action against violators than
have to wait for an exchange to act first," says M S Sahoo, secretary
at ICSI and a former whole- time Sebi member.
Shriram Subramanian, founder & Managing Director D, InGovern Research
Services, says the move could improve information- based surveillance.
"There are several instances where even notices for shareholder
meetings arent disclosed in time and nothing much is done about such
noncompliance.
A system to ensure that disclosures are timely and information
distribution is symmetric to all investors is still lacking in India.
Information- based surveillance can be greatly enhanced," he says.
Non- compliance with the listing agreement leads to disciplinary
action against a company, including suspension of trading or
delisting. In most cases, such action is first taken by a stock
exchange, where the company is listed. The regulator normally steps in
later, often only in serious cases. As the listing agreement is viewed
just as a contract, the level of enforcement is not the same as it
should be when it comes to following a regulation. Making frequent
changes to the listing agreement is a lot more challenging.
"Instead of frequently makingchanges to the listing agreement and
getting it signed by every listed company, it would be easier to make
amendments to the regulation," says Sahoo.
At times, Sebi's jurisdiction for making changes to the listing
agreement without a company's consent is also challenged. For
instance, in a recent case before the Bombay High Court between a
listed company and Sebi, it was even argued whether Sebi, being a
third party, could make changes to the listing agreement, a contract
between two entities.
GETTING A BETTER GRIP
|Sebi planning a regulation that will replace listing agreement |Move
aimed at enhancing compliance ®ulatory enforceability |Information-
based disclosure standards will get a boost |Sebi can take direct
action against violators |Incremental changes to the regulation will
be a lot easier
New rules set to replace listing agreement between companies, exchanges
--
CS A Rengarajan
9381011200
CS Benevolent Fund is a collective effort towards extending the much
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