A look at Companies Bill’s provisions that will affect private equity

It is a historic moment. Finally, the new company law has seen the light of the day although the new law is still not in force as it will require the President’s assent and then a notification from the Central Government bringing the provisions into force. However, passing of the Companies Bill by the Rajya Sabha is a step in the right direction. It shows India’s seriousness in passing and reforming corporate laws. The new company law is an extremely crucial piece of legislation designed to meet the needs of modern business and align the Indian corporate laws with global standards. One hopes that the passing of this Bill will be the harbinger of growth and will lead to enhanced corporate governance and disclosure standards, greater checks on financial reporting, enhanced shareholders’ democracy/activism, scrutiny on corporate frauds and overall alignment of Indian corporate laws to international standards.

Some of the provisions which in my view will affect private equity are:

(a)  The legal status of a private company which is a subsidiary of a public company will be absolutely clear now. PE investor must check the true status of an investee company.

(b) Shareholders in a public company will be able to contractually agree on restrictions on free transferability of shares and such restrictions will be binding on them. PE investors in a public company can enforce their share transfer restrictions, such as, right of first offer or refusal, tag along against the other contracting shareholders.

(c)  An interesting concept of entrenchment provision in the articles of association has been introduced. A minority PE investor can insist on specified articles which cannot be altered except with its approval. A statutory sanction to retrenchment provisions will strengthen the enforceability of those clauses.

(d)  Differential right shares are here to stay. Companies Bill, 2009, had proposed their deletion but this Bill retains them.

(e)  One of the popular exit modes for a PE investor is a right against the investee company to buy back the shares held by the investor. The Bill proposes a cooling off period of one year between two buy-backs.

(f)   The Bill provides for immunity to independent directors unless they are guilty for those acts of omission or commission which occur with their knowledge, consent or connivance or when they had not acted diligently. Nominee director appointed by a PE investor will not qualify as an independent director in terms of the definition of independent directors. Therefore, they cannot claim the same immunity as provided to independent directors. However, they can claim immunity by proving as non-executive director, since non-executive directors are treated on the same footing as independent directors on the provisions of immunity.

(g)  From the language used in the Bill, it appears that payment of insurance premium on D&O policy is permitted now. There was no clarity regarding this in the Companies Act, 1956, though D&O  policies are taken.

(h)  Companies Bill subjects private companies to a greater control and compliances; a PE investor in a private company will have to be aware of such compliances.

(i)   Interested member will not be permitted to vote on resolution if such member is a related party. Therefore, cases where PE investor and the investee company enter into a transaction which qualifies as a related party transaction as listed under the Bill, the PE investor will have to refrain from voting on that matter.

(Lalit Kumar is a partner with J. Sagar Associates. Views are personal.) 

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