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Corporate Law Updates – Union Budget 2019-20

July 6, 2019 3732 Views
Pammy Jaiswal
Partner, Vinod Kothari and Company
Dibisha Mishra
Assistant Manager, Vinod Kothari & Co.

1. Capital Market Reforms

a. Bar on Minimum Public Shareholding (MPS) proposed to be raised from 25% to 35%

Introduction

The Finance Minister in her budget speech for the year 2019-20, has mentioned that she has already proposed SEBI to raise the current threshold of MPS in listed companies which is currently 25% to 35%. The said amendment when made effective can face huge reactions from such listed companies around the country. While the proposed changes are put up with an intent to strengthen corporate governance, it might act as a reason for some to exit the security market.

Considering the present scenario of listed companies, the said proposal may require hundreds of listed companies to undergo change in shareholding once the proposed changes are implemented.

Expected Impact of Change

Although this change is still being proposed, the implementation of the same may have the following impacts:

  I.  Better price discovery

When the shares come out of the hands of the promoter and fall in the hands of the public, there may be chances that the trading of the shares increase leading to better price discovery in the secondary market.

 II.  Increased Public Ownership

The public stake in the listed companies will shoot up to 35% leading to dilution in the promoter stake.

III. Enhanced Corporate Governance standards

The increased stake of the public in the listed companies may cause some serious problems to the promoters who have been sitting tight on their shares. Presently, getting a special resolution was comparatively easier where greater number of shares are held by promoters/ promoter group. In case of listed companies having promoter shareholding of upto 75%, special resolution could be easily be passed. However, now since the MPS is increased to 35%, this will further raise the hurdle for corporate actions favoring the internal management or promoters.

IV. Companies might consider delisting

Many companies listed in the secondary market, who want their shares to be held by their promoters to the maximum extent possible. This not only enables better control in the company especially for decisions requiring special majority but also reaps benefits ploughing back to them. With the changes coming into force, such companies may opt for delisting rather than lose control over the company due to increase in the public stake.

V. Implementing Issues

   •  Long-term Capital Gain Tax: Where promoter shareholding is diluted via market sale, it will result in long-term capital gain tax to be borne by the promoter selling its shares.

VI. Compliances under various Regulations

   •  Any change in shareholding of an existing shareholder holding 5% of shares in the company, due to this action, resulting in change of more than 2% of their shareholding, will trigger disclosure requirements under regulation 29 of the SEBI SAST Regulations.

   •  In case of disposal of shareholding of 5% or more in a listed entity by a listed shareholder which happens to be a promoter of the investee, the same has to be disclosed by the promoter entity as a material event in terms of SEBI LODR Regulations, 2015.

   •  Further, disclosures under regulation 7 of SEBI PIT Regulations will also get triggered in case the value of trading turnover exceeds Rs. 10 lakhs.

VII. Corporate Actions to be taken for increasing MPS

Unless specifically prescribed, applicable listed companies can opt any of the following methods to increase MPS:

   •  Further Public Issue

   •  Preferential issue of equity shares

   •  Market sale of shares by promoters to public, or

   •  Private placement of equity shares

b. Buyback tax extended to Listed Companies.

Section 115QA of the Income-Tax Act relates to tax on distributed income to shareholders. Sub-section (1) of the said section provides that a domestic company shall be liable to pay additional income-tax at the rate of twenty per cent. on the distributed income on buy-back of shares not being shares listed on a recognised stock exchange from a shareholder. It is proposed to amend the said sub-section so as to provide that the provisions contained therein shall also apply to the buyback of shares listed on a recognised stock exchange.

It is a practice in listed companies where they utilize their profits to buy back its shares instead of distributing the same to the shareholders. The reason being higher rate of tax for distributing dividend as compared to buyback of shares. To discourage this practice, it is proposed to extend the applicability of additional tax at 20% to listed companies as well.

2. SEBI (ILDS) Regulations and Companies Act, 2013

It has been seen that the budget has explicitly favored the NBFCs in all its might. Adding to one of these, is the doing away with the Debenture Redemption Reserve ('DRR") requirement in case of public issue by NBFCs.

The current scenario required that the adequacy of DRR will be 25% of the value of outstanding debentures in case of public issue while the requirement of DRR was exempted in case of private placement.

3. Securities Contracts (Regulation) Act, 1956

i. Under section 23A - Penalty for failure to furnish information, return, etc.

The penalty under this section can also be levied where the listed entity fails to furnish information, return, etc to the SEBI. Earlier the penalty was levied if the listed entity failed to report to the stock exchange only.

4. SEBI Act, 1992

  i. Under section 14 - Fund

  •  The General Fund constituted under the said section can be utilized for capital expenditure as per annual capital expenditure plan approved by the Board and the Central Government.

  •  New Insertion - Reserve Fund shall be constituted and 25% of the annual surplus shall be transferred to such Reserve Fund.

  •  After application towards expenses, the surplus of the General Fund to be transferred to Consolidated Fund of India.

 ii. Under section 15C - Penalty for failure to redress investors' grievances.

  •  Penalty shall be levied under the section if the listed entity fails to redress investors' grievances when called upon to do so either in writing or by means of electronic communication.

iii. Under Section 15F - Penalty for failure in case of stock brokers

  •  Penalty for non-compliance by stock brokers extended to one crore rupees.

iv. New Section 15HAA inserted

  •  Penalty for alteration, destruction, etc., of records and failure to protect the electronic database of Board inserted.

  •  Penalty shall not be less than one lakh rupees but which may extend to ten crore rupees or three times the amount of profits made out of such act, whichever is higher.

Conclusion

The Union Budget 2019-20 seems to have a mixture of proposed amendments for corporate law reforms in terms of significance. One of the crucial changes is that of increase in the MPS requirements. Owing to the cumbersome and substantial steps to be taken for compliance, a challenge awaits for the listed companies once the said amendment becomes a reality. Further, the time period allowed for complying with the changes is yet to be seen.

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