Companies Bill: Boon for India Inc, Bane for Investors

Eid couldn't have been sweeter for Cadbury. The newly approved Companies Bill , which will replace the Companies Act, 1956, lets it buy minority shareholders' shares and become a 100 per cent private company. Under the new law, minority shareholders will have no choice but to surrender their shares if the company wants to buy them out.

But the new law is a bitter pill for investors such as P.H. Ravikumar. The former CEO of the National Commodity & Derivatives Exchange Limited (NCDEX) has shares in chemicals company Schenectady Herdillia, and the old law let him enjoy tax-free dividends even after the company got itself delisted in from stock exchanges in 2009. But under the new law, if Schenectady Herdillia wanted to buy him out, he would have to sell. "The new bill is a bane for investors," he says. "Rather than protecting minority shareholders, it gives more power to corporates."

Companies don't take the decision to list on an exchange lightly. They have a responsibility towards minority shareholders. Many critics of the new law argue that it favours listed multinational companies, letting them delist easily and become 100 per cent private.

Generally, when minority shareholders have balked at buybacks, it has been over the price. Usually, the discounted cash flow method - in which all future cash flows are estimated at present value - is used to determine the price. It remains to be seen whether and how this may change under the new law, and whether it tips the scales in favour of minority shareholders. But one thing is clear: the new law helps companies buy out minority shareholders without risking years of legal battle.

Until now, the only way companies could become 100 per cent privately owned after delisting was by reducing their share capital. Basically, a company could squeeze out minority shareholders by opting for a capital reduction to buy out dissident shareholders and extinguish their shares. The new law makes the process a cakewalk by comparison.

There are plenty of cases in the courts, of companies fighting to buy out minority shareholders. Among them is Cadbury India Ltd, which delisted in 2003. The delisting price was Rs 500 per share. Over the years, Cadbury has raised its buy-back price to Rs 1,900. Court-appointed valuer Ernst & Young came up with a value of Rs 2,014 per share, which was rejected by shareholders who wanted Rs 2,500 then. Today, minority shareholders are asking for Rs 3,000 per share. The case for capital reduction has dragged on in the Mumbai High Court, as the company and minority shareholders have been unable to agree on the buy-back price.

Jay Parikh, Partner at Verus Advocates, a Mumbai-based law firm, says: "For corporate, the new Companies Bill is a boon. It makes a clear provision for companies that can buy out minority shareholders without any opposition from them." He adds: "This saves lot of time. Anyway, as per law, reduction of capital is a domestic affair to be decided by the majority. Even the Companies Act of 1956 leaves it to the company to decide for itself the extent and mode of reduction, but bearing in mind that it takes care of the interest of creditors and minority shareholders, so as to see that it is fair, just and equitable."

Just last week, on August 5, the Rajasthan High Court ruled in favour of RayBan Sun Optics India Ltd for capital reduction by cancelling minority shareholders' shares, which accounted for 6.68 per cent of the total equity share capital. Incidentally, the capital reduction price of Rs 137 per share is below the delisting price of Rs 140 announced in 2008.

The courts maintain that valuation is an art and not a science, and the mere fact that the price is not acceptable to objectors should make no difference, unless it is found that price paid to minority shareholders is unfair and inequitable. In the case of RayBan, the court saw nothing wrong in the valuation method that determined the price of Rs 137, as against some objectors' demand of Rs 293. "The new act will bring down these legal delays," says Parikh of Verus Advocates. "But it nowhere suggests that it is unfair to minority shareholders. With the courts being vigilant, shareholder interests will always be of the utmost importance, and it will not be easy for companies to get away with murder."

The new Companies Bill of 2012 is certainly a boon to corporate India, as many companies that delisted years ago and want to become 100 per cent privately owned will now be able to do so easily. For example, Bharti Telecom, which has a 43.5 per cent stake in Bharti Airtel, could be a beneficiary and buy back five per cent of its shares, which are held by minority shareholders, to become 100 per cent privately owned. It is over a decade since Bharti Telecom delisted from domestic bourses by offering shareholders Rs 96 per share.

Ravikumar says: "There must be stricter regulations, and companies should be penalised for delisting." He adds that after a company delists, if another group company seeks to be listed, the group should be required to explain clearly the reasons for both delisting and listing.

The Securities and Exchange Board of India has toughened buy-back and listing norms (the minimum non-promoter holding should be 25 per cent). But it should also bring down creeping acquisition levels for companies from five per cent a year down to one or two per cent, which may act as a deterrent if companies have plans to delist. It may be a while before the regulator comes out with stringent norms. But it is clear that the Companies Bill is a boon to corporate India. It will be interesting to see how companies such as Cadbury use the new law.