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Assured returns to foreign investors -- DoT pushing for further amendments to Cos Act

G. Rambabu

NEW DELHI, April 17

THE Department of Telecommunications (DoT) is pushing for amendments to the Companies Act, in a bid to ensure assured returns to foreign investors and make their investments in the telecom sector lucrative.

According to official sources, DoT has sought amendments to Section 78 and Section 208 of the Companies Act, over and above the amendments to Section 87 (relating to voting rights of preference shareholders), which it had been earlier pushing for.

They pointed out that amendment to Section 78 provides for payment of dividend to the preference shareholders from securities premium account, even though the company is not in a position to declare dividend.

The sources noted that this amendment was expected to act as an incentive to foreign investors as they were assured of return on their investment. Also, this will facilitate the Indian company to retain management control by making payment of dividend through security premium account. However, the security premium account would be available only with those companies that had already issued shares at a premium. This will not be so for a new company.

Amendment to Section 208 provides for payment of interest not exceeding 12 per cent to the preference share capital also as applicable to normal share capital, treating preference shares like quasi debt instruments, through a board resolution instead of special resolution and previous Government sanction.

As the foreign investors are likely to get certain return on their investment in the form of interest, this will act as an incentive to them. Also, as the dividend in the form of interest is likely to be paid to them, Indian companies can retain management control with them.

The sources noted that the negative aspects of this amendment was that payment under this section would be "interest", not "dividend"; hence the company might accept interest and still claim voting rights under Section 87. Therefore, the interest paid under section 208 may be treated as dividend for the purpose of Section 87. This provision will apply to all shareholders including preference shares, both Indian and foreign.

It may be recalled that DoT had earlier sought amendments to Section 87, which provides for limiting the voting rights of foreign investors to the FDI cap of 49 per cent even though dividend remained unpaid. This was sought to disallow foreign investors from gaining management control over telecom companies through the issuance of non-convertible preference shares.

As per the present guidelines of the Department of Economic Affairs (DEA), non-convertible preference shares do not attract a sectoral cap. Foreign investors in the telecom sector have preferred this route in the telecom sector, since such shareholders get voting rights under certain conditions.

This amendment will deprive foreign investors of their voting rights as well as dividend and might prove to be counter-productive. But DoT has been pushing for this because it wants to ensure management control with the Indian shareholders.

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