Business Restructuring Companies Act, 2013 & Competition Act

1. Business RestructuringCompanies Act, 2013 & Competition Act Ashish Ahuja Managing Partner Wadia Ghandy and Co. ashish.ahuja@wadiaghandy.com

2. Forms of Business Restructuring considered under this Presentation • Equity Restructuring – internal equity restructuring includes buy backs, splits, consolidation, etc; • Preference Share Restructuring; • Debt Restructuring – including Sick companies; • Group restructuring– including mergers, demergers and slump sales; • Certain General principles which may impact business structuring and restructuring as a whole.

3. Equity Restructuring Stock Splits and Consolidation • A number of companies, particularly listed companies quite often consider stock splits relating to their shares. Consolidation is often considered at times. • For consolidation a proviso has been added in section 61 – which reads as follows: • “Provided that no consolidation and division which results in changes in voting percentage of shareholders shall take effect unless it is approved by the Tribunal on an application made in the prescribed manner.” • The word “results in” is very broad. • Questions would arise on where there are shareholders who lose shares at the time of consolidation because of not having the requisite number of shares, into which the shares are being consolidated into, would require tribunal consent? • This happens very often where shareholders have odd lots. For instance where I have 13 shares and the consolidation is for every 2 shares, one consolidated share is issued • This should not affect stock splits though

4. Equity Restructuring (contd.) Differential Voting and dividend rights • Very often a tool for internal restructuring that is used is the route of issue of DVRs • Previously private companies were not governed by the rules relating to DVRs. Accordingly, irrespective of track record of dividend they were in a position to issue DVRs. • The 2013 Act makes no concession for a pure private company to issue various classes of shares having diverse rights attached to them. Section 43 of the New Act does not have an exception provision relating to private companies.

5. Equity Restructuring (contd.) Buy-back of shares • No offer for buy-back shall be made within a period of one year from the date of preceding buy-back. The 1 year has to be reckoned from the date of the preceding offer of buy-back. [Section 68] • Buy backs through schemes would not be permitted. Reduction of share capital • Reduction of share capital is now required to be approved by NCLT. Further, NCLT will now send the notice of application of capital reduction received from a company to the CG, ROC and SEBI (whenever applicable) and creditors of the company and consider their representation, if any.  [Section 66] .

6. Preference Share Restructuring • Inability to redeem preference shares (or payment of dividend on such shares):Companies which are not able to redeem any preference shares (in accordance with terms of issue) or pay dividend due on such shares may redeem the same with further issue of equivalent amount of preference shares (including the dividend due thereon) with the consent of (i) 3/4th in value of such preference shares (ii) Approval of NCLT. • Persons who do not consent to redemption as above need to be discharged.

7. Debt Restructuring • Apart from the CDR, the other popular methods of restructuring debt were through a scheme of arrangement through the court • The BIFR was available only to industrial enterprises and which were sick • New provisions have now been inserted in the Act in relation to sick companies. Sick Companies • A company may be declared sick if it fails to pay the amount of debt on demand by the secured creditors representing 50% or more of the outstanding debt. The 2013 Act omits the criteria of 50% or more erosion of net worth for determination of sickness of a company. • These provisions are no longer restricted to industrial undertakings and have now been made applicable to all companies. • The power of the Board of Industrial & FinancialReconstruction will now vest with NCLT.

8. Group Restructuring • Mergers and demergers are one method of group restructuring. These have been made more difficult now for the following reasons: • Registered valuer • Detailed Disclosures: Inter alia, thelatest financial position, details of pending litigation, reduction of share capital within the compromise and arrangement, any scheme of corporate debt restructuring consented to by not less than 75% of the secured creditors in value; the Rules in this regard also require disclosure regarding the relationship subsisting between the companies that are a part of the arrangement.[Section 230(10)] • Dispensation of creditor meeting requiring 90% consent • Postal Ballot Voting: Shareholders or creditors can now vote through postal ballot for approval of the scheme of arrangement. Draft rules in this regard have also been released. • Extinguishment of Treasury stocks

9. Group Restructuring (contd.) Sale of Businesses to subsidiaries and group companies, through Slump Sale or otherwise: • Section180, concerning business undertaking sales, now applies to all companies. There is no longer the exemption enjoyed by private companies under the 1956 Act. Further, the 2013 Act has clarified the following definitions, • “Undertaking” defined to mean such undertakingin which the company has investment exceeding 20% of its net worth as per audited balance sheet of the preceding financial year or an undertaking which generates 20% of the total income of the company during the previous financial year. • ‘Substantially the whole of the undertaking’ in any financial year means 20% or more of the value of the undertaking as per the audited balance sheet of the preceding financial year.

10. Certain General Principles Entrenchment of Articles • The 2013 Act allows for amendments to specified clauses of the articles to be made more difficult and restrictive. Statutory sanction has been given to shareholders to impose conditions/restrictions/procedures to be complied with, as may be more restrictive than those applicable in the case of a special resolution. [Section 5(3)] Recognition of restrictions on free transferability of shares • The principle that shareholders in a public company can contractually agree on restrictions on free transferability of shares is now statutorily recognised. It is recognised that the same would be enforceable as a contract. [Proviso Section 58(2)]

11. Certain General Principles (contd.) Voting on Related Party Transactions • A member of a company will not be permitted to vote on resolution if such a member is a related party with respect to a contract or arrangement put to vote. Therefore, where group companies enter into an inter-se transaction which qualifies as a related party transaction as listed under the 2013 Act, the particular group company will have to refrain from voting on that matter. [Proviso to Section 188] • The definition of ‘related party’ in relation to a company also includes shadow directors.

12. Certain General Principles (contd.) Investment only upto two levels • Investment through more than two layers of investment companies is no longer permitted. An exception has been made for: • acquiring any other company incorporated in a country outside India if such other company has investment subsidiaries beyond 2 layers as per the laws of such country; • a subsidiary company from having any investment subsidiary for meeting any requirements under any applicable law

13. Competition Act, 2002 • Clause (b) of Explanation to Section 5 defines group as, • “group” means two or more enterprises which, directly or indirectly, are in a position to – • exercise 26%, or more of the voting rights in the other enterprise, or • appoint more than 50% of the members of the board of directors in the other enterprise; or • control the management or affairs of the other enterprise.

14. Competition Act (contd.) • The CCI (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations, 2011 carve out an exception, inter alia, for the following from notifying CCI, “(8)An acquisition of shares or voting rights or assets, by one person or enterprise, of  another person or enterprise within the same group, except in cases where the acquired  enterprise is jointly controlled by enterprises that are not part of the same group. (9) A merger or amalgamation of two enterprises where one of the enterprises has more than fifty per cent (50%) shares or voting rights of the other enterprise, and/or merger or amalgamation of enterprises in which more than fifty per cent (50%) shares or voting rights in each of such enterprises are held by enterprise(s) within the same group: Provided that the transaction does not result in transfer from joint control to sole control” • Otherwise various thresholds on assets and turnover are notified and in existence.

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