1. Introduction Buyback of Shares: Differential Voting Rights:... 5 Global Scenario:... 5 Indian Scenario:... 5 Issue of DVRs by Tata

Transcription

1 A Study 2014

2 1 1. Introduction Buyback of Shares: Differential Voting Rights:... 5 Global Scenario:... 5 Indian Scenario:... 5 Issue of DVRs by Tata Motors... 7 Changes made by SEBI... 7 Advantages of issue of DVRs:... 8 Disadvantages of issue of DVRs: Conclusion Reference... 9

3 2 1. Introduction Shareholding pattern has assumed great significance in the modern era with a number of instrumental changes happening in the way issuing of shares is being done. Company being a separate legal entity is characterized by separation of management from the ownership. 1 The line of strict distinction between ownership and control has blurred over the years and the shareholder has been gradually reduced from an owner in the company to someone who is merely entitled to profits, i.e., dividends and other consequential benefits. The right to vote is an inherent right of the shareholders which signifies their overall supervisory powers and ultimately, control over the actions of the company. It helps them steer the management to act in the interest of the company. In India, the Companies Act, 1956 classifies shares into two kinds: equity and preference shares. Every member of a company limited by shares and holding any equity share capital shall have a right to vote. 2 This is proportionate to the number of shares held. But the concept of One- share, one-vote slowly began to undergo dilution with the management wanting more control to ward off hostile takeovers, which were becoming recurrent. The era of globalisation and privatisation led us into an era of sweeping changes like never before. The urge to retain control demanded innovative ways of handling issue of shares. Keeping this objective in mind, an Expert study on establishment of New Stock Exchange was set up in 1991 under the chairmanship of Mr. M.J. Phewani. The Committee proposed that the dividend-paying companies having a track-record of dividend payments in the preceding two years and/or in four out of five years or five out of seven years can issue non- voting shares (hereinafter referred to as NVS) i.e., certain shares without the incidental right to vote. 3 The provision for NVS found its place in the Companies Bill 1993 and with the condition that such shares shall not exceed 25% of the issued share capital with voting rights. 5 This was also made subject to terms and conditions prescribed by the Central Government from time to time. But these bills could not see the light of the day. Unsuccessful attempts at enacting a new Companies Act forced the government to amend the existing Companies Act, 1956 to incorporate the concept of Differential Voting rights (hereinafter referred to as DVRs). S. 2(46) A provides that shares may be issued with DVRs in accordance with the provisions of s.86. The Companies Act Amendment of 2000 altered the s. 86 to now add a new class of equity shares which may be issued with differential rights as to dividend, voting or otherwise in accordance with such rules and subject to such conditions as may be prescribed. 1 Solomon v. Solomon & Co Ltd, [ ] All ER 33 (HL) 2 Section 87, Companies Act, Roy, Souvik & Kumar, Akarshan, Differential Voting Rights:A Necessity or A Burden, < 4 Mukherjee, Arindam, No act of Corporate Democracy, Outlook India Online, September 1, 1997, < (Last visited on September 14, 2009) 5 Shares minus voting, The Hindu Financial Daily, January 11, 2001, < (Last visited on 14 th September, 2009)

4 3 The inclusion of the aforementioned shares with DVRs meant that s. 88 which prohibited the issue of shares with disproportionate rights had to be repealed. 6 To give effect to the new provision of 86(a) (ii), the Department of Company Affairs came up with the Companies (Issue of Share Capital with DVRs) Rules, These rules govern the issue of shares with DVRs and Rule 3 lays down the pre-conditions as well as the duties of a company seeking to issue such shares. The rule lays down that the total number of shares with DVRS cannot be more than 25 percent of the issued share capital. 2. Buyback of Shares: The Securities and Exchange Board of India [SEBI] has issued SEBI (Buy back of Securities) Amendment Regulations, 2013 [hereinafter referred to as "New Regulations"] vide notification No. LAD-NRO/GN/ /16/6348 dated 8th August, 2013 amending the existing SEBI (Buy back of Securities) Regulations, 1998 [hereinafter referred to as "Regulations"/ "Old/Earlier Regulations"]. The changes have been discussed point wise as follows: 1. Ceiling prescribed for buy back from open market: The existing regulations do not prescribes any cap on the amount on buy back of securities. However, with the issue of new regulations, a provision has been added to Regulation 4 which provides that buy-back offer from the open market shall not be made for 15% or more of the paid up capital and free reserves of the company. In this regard, clause 68 of the Companies Bill, recently approved by Rajya Sabha provides that the buy-back of securities shall be limited to 25% of total paid-up capital and free reserves. Provided that in case of buy-back of equity shares it is 25% of total paid-up equity capital in a financial year. 2. Lock in period on further buy-back : The existing regulations do not provide for any lock in period between two buy back offers. However, the new regulations has issued a sub-regulation 4 after sub-regulation 3 of Regulation 4 which provides that no offer of buy-back shall be made by any company within a period of one year from the date of closure of the preceding offer of buy back. The Companies Bill in this regards also provides that no offer of buy-back shall be made within a period of one year from the date of closure of preceding offer of buy-back. 3. Minimum Buy Back limit: The newly introduced sub regulation 3 of Regulation 14 of the new regulations provides that at least 50% of the amount set aside for buy-back shall be utilized for buying back shares or other specified securities. There was no such limit prescribed in the existing regulations. Further, the Companies Bill is also silent with respect to such limit. 4. Public Announcement (PA): Regulation 15(d) of the said regulations provided that the PA shall be made at least 7 days prior to the commencement of buy back. 5. However, the new regulation has modified the said regulation and provides that the PA shall be made within 7 working days from the date of passing the resolution authorizing buy-back. It is to be noted that there is no such condition relating to the same has been provided in the Companies Bill. 6 Vide the Companies (Amendment ) Act, 2000 (53 of 2000) 7 Notification SO 167(E) dated

5 4 6. Filing of copy of PA with SEBI: The regulations provided that copy of PA shall be filed with SEBI within 2 days of making such announcement. The same has now been modified and the companies shall now be required to ensure that copy of PA shall be filed with SEBI simultaneous with the issue of public announcement. 7. Submission of information pertaining to buy-back : Regulation 15(i) in the regulations provided that the company shall submit the information pertaining to buy-back on daily basis to Stock Exchange and publish the same in a national daily on a fortnightly basis. However, as per the amended regulation (i) of Regulation 15, the company shall be required to submit the information regarding the shares or securities bought back to stock exchange on daily basis in specified form and the stock exchange shall upload the same on its website. Further, newly inserted sub regulation (ia) of Regulation 15 provides that the company shall upload the information regarding the shares or other securities bought-back on its website on a daily basis. 8. Period of buy back offer: The newly inserted sub regulation (k) of Regulation 15 provides that the buy-back offer shall open not later than seven working days from the date of public announcement and shall close within six months. No such condition was prescribed under the existing regulations. However, the Companies Bill provides that the buy-back shall be required to be completed within a period of 1 year from the date of passing of resolution authorizing buyback. 9. Buying back physical shares/ specified securities: Regulation 15A has been inserted in the new regulation which deals with buy-back of physical shares or other specified securities. Following are some of the key points: i. a separate window shall be created by the stock exchange, which shall remain open during the buy-back period, for buyback of shares or other specified securities in physical form. ii. Before proceeding with buy-back, verification of the identity proof and address proof needs to undertaken by the broker. iii. the price at which the shares will be bought back shall be the volume weighted average price of the shares or other specified securities boughtback, other than in the physical form, during the calendar week in which such shares or other specified securities were received by the broker No such conditions were prescribed in the earlier regulations. Neither there is any provision relating to same in the Companies Bill. 10. Escrow Account: New Regulation 15B has been inserted which provides that before opening of the buy-back offer, the company shall create an escrow account towards security and shall deposit 25 % of the amount earmarked for the buy-back in such escrow account. No such condition was/is there either in the regulations or Companies Bill. 11. Extinguishment of Certificates: The newly inserted sub regulation 3 of Regulation 16 provides that the company shall be required to extinguish and physically destroy the security certificates so bought back during the month in the presence of a Merchant Banker and the Statutory Auditor, on or before 15th day of the succeeding month. Further, the company shall ensure that all the securities bought-back are extinguished within seven days of the last date of completion of buyback. Earlier

6 5 there was no such provision under the regulations. The Companies Bill however, provides that the certificates shall be extinguished within 7 days of the last date of completion of buy-back. 12. Restriction on dealing in Shares or specified securities: Regulation 19(1)(e) has been modified so as to specifically mention the period during which the promoters or the person shall be restricted to deal in shares or specified securities. As per the said regulation, the promoter or the person shall not be allowed to deal in the shares or other specified securities of the company in the stock exchange during the period or off- market, including inter-se transfer of shares among the promoters during the period from the date of passing the resolution relating to buyback. As per the earlier regulations, such restriction was for during the period when buy back offer is open. No such condition as prescribed in the Companies Bill. 13. Raising of further capital: As per the newly inserted Regulation 19(1)(f ), the company shall not raise further capital for a period of 1 year from the closure of buyback offer, except in discharge of its subsisting obligations. However, as per the Companies Bill, a period of 6 months has be prescribed for the purpose of raising further capital except by way of bonus issue or in discharge of its subsisting obligation. 3. Differential Voting Rights: Shares with Differential Voting Rights (DVRs) means shares that give the holder differential rights as to voting (either more or less voting right) as against the Ordinary shareholders of the company. Shareholders being the owners of a company have a right to vote and thereby participate in the Management of a company. In India where most of the businesses are family owned, voting rights represent the only means by which an alignment of interest between the owners (promoters) and shareholders can be effected. The issue of DVRs can result in two types of shares: 1) Shares that have superior voting rights. 2) Shares that have inferior voting rights but offer higher dividends or are offered at a discount. Global Scenario: World over the concept of one share one vote is followed. However, DVRs also called Dual Class shares also started gaining popularity. Globally there are big names like Google, Ford etc. that issued DVRs. Many exchanges like the Singapore Stock Exchange don t allow the issue and listing of DVRs. Many Studies conducted in USA have shown that the Agency Cost tends to be higher in case of Dual Class of shares over the Ordinary shares. Indian Scenario: The use of shares with DVRS to exercise control has already begun in India. In Anand Pershad Jaiswal and Ors v. Jagatjit Industries Ltd. and Orsthe first case of its kind, before Company Law Board, the promoters were issued shares with 20 voting rights per share which enabled them to exercise complete control over the company.

7 6 The preferential allotment of new shares with superior voting rights had increased their voting rights to around 64% though the economic stake increased merely by a little more than 8 percent from 23.59% to around 32%. This was initially challenged before SEBI by the rival groups contending foul play in pricing of shares and the fact that approval for the same was not acquired from the stock exchanges. SEBI found itself incompetent to decide the matter citing the fact that Section 86 of the Companies Act does not come under Section 55A which enumerates the powers exercisable by SEBI on companies. The petitioners then moved the Company Law Board praying for declaration of the resolution approving such differential voting rights as bad in law and hence null and void. The contention was negated by the CLB. The issue of shares with DVRs was upheld as valid as being in accordance with the Articles of Association of the Company and provisions of the Companies Act. The Company was directed to buyback the entire shareholding of the two petitioner groups for a total consideration of Rs. 36, 50, 00,000/- to be paid to each Group. The said shares were ordered to be converted into physical form and tendered to the Company for buy back as a consequence thereof the share capital of the company stood reduced and the Company was exempted from compliance under Section 100 of the Companies Act, The CLB also observed that since the shares were being bought back by the Company from the existing promoters as part of a settlement between them, in the circumstances, the parties were exempted from complying with the provisions of Section 77A, the provisions of SEBI (Buyback of Securities) Regulations, 1988, SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1997 and any other applicable Regulations and provisions of the Companies Act. These conditions are: Every company limited by shares may issue shares with differential rights as to dividend, voting or otherwise, if- 1. The company has distributable profits in terms of Section 205 of the Companies Act, 1956 for three financial years preceding the year in which it was decided to issue such shares. 2. The company has not defaulted in filing annual accounts and annual returns for three financial years immediately preceding the financial year in which it was decided to issue such share. 3. The company has not failed to repay its deposits or interest thereon on due date or redeem its debentures on due date or pay dividend. 4. The Articles of Association of the company authorizes the issue of shares with differential voting rights. 5. The company has not been convicted of any offence arising under, Securities Exchange Board of India Act, 1992, Securities Contracts (Regulation) Act, 1956, Foreign Exchange Management Act, The company has not defaulted in meeting investors grievances.

8 7 7. The company has obtained the approval of share holders in General Meeting by passing resolution as required under the provision of sub-clause (a) of sub-section (1) of section 94 read with sub-section (2) of the said section. 8. The listed public company obtained approval of share holders through Postal Ballot. 9. The notice of the meeting at which resolution is proposed to be passed is accompanied by an explanatory statement stating a. The rate of voting rights which the equity share capital with differential voting right shall carry; b. The scale or in proportion to which the voting rights of such class or type of shares will vary; c. The company shall not convert its equity capital with voting rights into equity share capital with differential voting rights and the shares with differential voting rights into equity share capital with voting rights; d. The shares with differential voting rights shall not exceed 25% of the total share capital issued; e. That a member of the company holding any equity share with differential voting rights shall be entitled to bonus shares, right shares of the same class; f. The holders of the equity shares with differential voting rights shall enjoy all others rights to which the holder is entitled to excepting right to vote as indicated in (a) above. Issue of DVRs by Tata Motors With DVRs issue allowed in India since 2000, it was almost 8 years after it that Tata Motors became the first company to issue DVRs in India. To fund the Jaguar - Land Rover acquisition, in November 2008, Tata Motors issued 6.4 crores DVRs ( A Ordinary Shares) priced at Rs. 305 per share as against Rs. 340 for an ordinary share and offered higher dividend on these shares. These shares has 1/10th voting rights. Due to lack of awareness amongst the investors about such shares, these DVRs reported very low trading volumes. Issue of DVRs by Pantaloons Following Tata Motors issue, in February 2009, Pantaloons issued bonus shares which were DVRs. These class B shares also had 1/10th voting rights to the existing ordinary shares. These shares offered 5% additional dividend. The trading volume in these shares was significant due to the reason that they were offered as bonus shares and not fresh issues. Changes made by SEBI In 2009, Anand Pershad Jaiswal and Ors v. Jagatjit Industries Ltd. and Ors resulted in a significant debate over DVRs. In this case, the promoters of Jagatjit Industries Ltd. had issued with 20 voting rights per share. This resulted in an increase of voting rights to 62% for the promoters who held only 32% of economic stake in the company. The minority shareholders Anand Jaiswal and Jagatjit Jaiswal, who together owned 12% filled a petition with CLB. The CLB upheld the issue of DVRs as it had met all the regulatory requirements.

9 8 Following this judgment there were a lot of voices raised on the misuse of DVRs with superior voting rights by the management to get full control on the company to the deterrent of the minority stakeholders. Following this, SEBI came up with letter dated July 21, 2009 addressed to all stock exchanges which prohibited issue of DVRs with superior rights as to dividend or voting. So now an issue of the likes of Tata Motors or Pantaloons with higher dividends with lower voting rights is not possible. However, as these issues by Tata Motors were made before the amendments, SEBI has allowed issue of DVRs as bonus shares or rights issue to existing DVR holders of Tata Motors. The above informal guidance to Tata Motors (issued in April 2010) also allowed it to issue fresh DVRs with same terms by FPO issue, preferential allotment and QIPs and issue of ESOPs convertible into DVRs. Advantages of issue of DVRs: To Company: To Investors: 1) A company historically would want to issue DVRs to raise more capital without diluting its ownership structure. 2) Also, DVRs have been used as a tool to avoid a hostile takeover. 3) Sometimes shares with DVRs may be issued as a means of price discovery. 1) Investors benefit from a DVR issue as they are offered at a price discount. 2) Investors stand to benefit when the price differential between the Ordinary share and DVRs reduces. 3) Also, DVRs come with higher dividend as compared to ordinary shares. 4) It is beneficial for the passive investors who are not interested in company management and look for higher dividends and discounts. Disadvantages of issue of DVRs: To Company: To Investors: 1) Issue of can sometimes result in a tarnished image of the company. 2) It can ward off institutional investors as they have restrictive clauses in there by laws which prohibit investment in such instruments. 3) With lack of investor awareness about such issues, they tend to be illiquid. 1) Not beneficial for Institutional Investors as they are more interested in long term capital gains. 2) Lack of transparency as to the pricing of such instruments. 3) Lack of liquidity may hamper returns.

10 9 4) Results in avoidance of takeovers that might have been in the interest of the shareholders. 5) Makes management excessively powerful and insulate managers from accountability, since DVRs reduces shareholders right of challenging the management. 4. Conclusion The Securities and Exchange Board of India (SEBI) has simplified rules for foreign investors and tightened the norms for buyback of shares by the companies. While tightening the norms for companies to buy back shares, the SEBI has said that 50 per cent of the earmarked funds for a buyback have to be utilised by the corporates as against the existing stipulation of 25 per cent. The issue of shares with differential voting rights has not been used a great deal by the Indian companies. Moreover, it has not attracted the investors so much, one of the prime reasons being lack of awareness about these instruments. Though these shares are a great means to raise capital without much dilution of control, more often than not, these instruments are used by the promoters of the company to have an absolute control over the management of the company by issuing these shares. They tend to misuse their position, thus resulting in loss to ordinary shareholders. 5. Reference boardmeetings swdr.pdf 4. datafolder ews Chapter V.pdf 5. Ministry pdf CARules Chapter.pdf DF Terms of DVR.pdf 8. portals 6.pdf 9. Differential-voting-rights-shares.html