The New Companies Bill - What's Wrong?

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Q: The new delisting rules - missed that as well?

Shroff: They not only missed that but I think they are quite retrograde. So there is a big disconnect over there and it is not going to tally with what's proposed as well. So that's the other point. And I think it is high time in this country that we have the ability for leveraged buyouts. Mr. Vasani made the point that it was suggested and turned down. But I think it's a huge lacuna. What's happening is for Indian M&A transactions, people are actually going to London to finance them. Why shouldn't we have it?

Q: Financing is the only key area that is stuck right, and the Companies Bill doesn't allow you to be able to finance the acquisitions?

Shroff: Any modern company law regime has the ability to be able to do a leveraged buyout provided certain safeguards are followed. And now that we have buyback of shares, it is conceptually very similar to having the ability to do a leveraged buyout. If you cross that mental threshold we should have been able to do this as well.

Vasani: One aspect of the Companies Bill where I am very happy about is M&A except for a few deficiencies.

Q: So that it missed LBO (Leveraged Buyouts)?

Vasani: There are two things they have done just to take revenge on the judgment of the Bombay High Court, which is specifically now provided that you cannot do buyback through the scheme of arrangement. That was to overcome the judgment of the Bombay High Court, the Sterlite case.

There are some bits of drafting deficiencies in this part which they need to rectify. Like, they said allotment of foreign direct investment (FDI). There is one section which says that the scheme may contemplate allotment of FDI but there is no allotment of FDI. So, there are many such typos that they need to clean up. This is one part where we can say that there is a reform of company law compared to what was there in the '56 Act.

Malegam: That permeates throughout the bill in that it needs a lot of tidying up. Not just editorial, but some obvious things. One thing that comes to my mind because I have to deal more with accounts, it says that an auditor shall report whether the accounts are in accordance with the auditing standards. What has financial information got to do with accounting standards? So that's the sort of things which need to be cleaned up.

Doshi: So drafting errors is the smallest of the problems though sometimes they can prove to be big stumbling blocks. I wonder whether LBOs also requires RBI's consent to some extent because I am not sure how would they look upon banks in India, financing leveraged buyouts but like you said, that's a missed opportunity, this Companies Bill does not, in any sense tackle that.

I think we are ending this first part of this two part series on a slightly mixed note. M&A may have sort of moved a step forwards but on many other issues we are still either in the same place that what we were with the existing Companies Act 1956 or maybe two steps behind. And it is also a Bill that is riddled with typos and errors and drafting issues.

We will come back and discuss the bigger issue and that is this Bill good enough? Conceptually, does it visualise a modern, contemporary framework for corporate India? Will it stand the test of time? That's on the second part of this series.