The Hindu Business Line : Scores low on the market front

THE Concept Paper (CP) on codification of the Companies Act proclaims toserve as a pre-cursor to the re-codification of the company law. What follows are some of the important provisions of the CP that have a bearing on the capital market.

IPO allotment in demat form

The object of Section 68 B is to ensure that the securities which are sought to be listed are not issued in physical form, as SEBI has stipulated that deliveries in listed securities should be in demat form only. In case the shares are permitted to be allotted in physical form, investors will have to send the physical certificates for dematerialisation and wait for credit of securities until they can sell the same in the secondary market, that is, through the trading mechanism of the stock exchanges.

The era of compulsory dematerialisation has ensured proper title and liquidity to the investors and, obviously, the object of Section 68 (B) is that further paper in the form of share certificates is not introduced in the system.

Nomination facility: New Section 30: Sections 109(A) and (B) was inserted by the Companies Amendment Act, 1999 to provide for nomination facility. On death of the sole holder, who was holding securities, the legal heirs had to complete a lot of formalities for obtaining the succession certificate which was time consuming and expensive. To remove the hardships, nomination facility was introduced.

Pursuant to Sections 109A and B, many of the beneficial owners (BOs) have appointed nominees to their BO accounts. Deletion of such a provision in the Companies Act would be disastrous to the BOs as that would turn the clock back and put them to a lot of inconvenience.

Declaration of beneficial interest: Although the securities held by the depository as the registered owner on behalf of its beneficial owners are not held in the capacity of the trust, the declaration of beneficial interest is not required to be complied with as per the provisions of Section 153, 153 B and 153 C. It would be impossible for the depository to comply with the provisions of new Section 44(1) and, hence, a proviso be added suitably.

Free transferability: The Section 111A (2) provision that the shares and debentures and any interest therein shall be freely transferable has been deleted from the new Section 30. This feature of free transferability is the cornerstone of corporate investment and it needs to be retained, particularly in the context of the proposed sub-section 10 of Section 30.

Rectification of register of members: Section 111 (3) provides that the parties entitled to make an application for rectification of register of members to be depository, company, participant, investors or SEBI. However, in the new Section 30 (10), depository and the company have surprisingly been deleted.

Date stamping of transfer form: The requirements relating to date stamping and validity period and provisions were introduced so as to prevent blank transfers and benami holdings and also to curb the unlimited period of currency and circulation of blank transfer deeds. The restriction relating to dating and validity period of transfer forms have caused immense hardship to investors and it was time that the restrictive provisions were removed, in line with the practices in the liberalised markets of the West. The proposed amendment is undoubtedly a welcome feature.

Payment of dividend: New Section 48 (5) would lead to a situation where the company will have to make payment of dividend to the depository in respect of the shares held. The relevant provisions of Section 205 (5)(b) provide that any dividend payable in cash may be paid by cheques or warrants sent through post directed to the registered address of the shareholder entitled to payment of dividend. It is, therefore, suggested that mention about the registered holder and non obstante clause about the beneficial interest be deleted and the proposed section modified.Innovative features of the Companies Amendment Bill (CAB), 2003 have been left out.

Reconciliation of issued capital: Section 83 A of CAB 2003 provides that "every company shall reconcile the securities issued by it with the securities in physical form and held with a depository and the aggregate shall not exceed the securities issued by it."

This is an important measure which made it mandatory for a company to carry out reconciliation of the issued capital with the securities in physical form and the electronic form. This needs to be incorporated in the codified Bill to provide for the integrity of capital of every company.

Multiple applications: Section 68 A of the CAB 2003 sought to add one more category to punish persons who make multiple applications to a company in different names or in different combinations of names for acquiring or subscribing to any securities of such company. It is not clear as to why this provision was deleted from the CP.

Buyback of securities through Section 391: The proposed amendment to Section 391(7) of CAB 2003 provided that the compromise or arrangement shall not include buyback of securities other than Section 77 A. The year 2002-03 went down in the history of corporate practices when two listed companies, having a large investor base, composed altogether new tunes and articulated strikingly different themes. The modality for implementing buyback of shares involved the transfer of shares held in physical form without execution of the transfer forms and transfer of shares held in demat form without execution of the instruction slip by the beneficial owners; and this had the blessings of the High Court.

These were inconsistent with Section 108 of the Companies Act and regulation 42(2) of the SEBI (D&P) Regulations, 1996.

Thus the buyback of securities was resorted to via Section 391and implemented through the medium of negative consent and, thereby, circumventing Section 77 A in terms of the procedure and extent of securities which were bought back.

It was in fact an exercise of implementing a scheme of arrangement and compromise in an entirely different sense and context, as the buyback took back the basic rights of the investors.

The proposed amendment sought to curb such manipulative tendencies in the name of innovation and bring back the confidence of the investors and necessarily follow the royal route prescribed under Section 77 A.

It is not clear as to why this provision was overlooked while drafting the CP.

(The author is vice-president (legal) and company secretary, Central Depository Services (India) Ltd, Mumbai.)

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