The times through which are economy is passing is certainly not stressful and the same is seen in the state of banks where NPA’s have been rising sharply. At the same time one also sees the banks becoming aggressive against those companies where the promoters are seen as resourceful but are not honouring the commitment made by their companies.
The companies which are genuine and facing hardship are being supported by banks through a special cell set up by RBI called CDR. The cell admits companies which have undergone stress and restructures loans of such companies. A pre-requisite for admittance to this cell for a company is that the company should be viable and that the promoter or promoter group should be prepared to bring in capital to make the unit viable.
SEBI under its ICDR allows companies to raise capital through preferential offer to promoters and promoter group provided they have not sold any shares in the previous six months. There is a grey area as to whether sale of pledged shares by lenders is to be treated as sale of shares or not? The general understanding of the law as of today is that pledged shares sold on account of fall in market price triggering loss of mark to market value or non-repayment of loans taken amounts, to promoter sale of shares.
The ambiguity in law starts here. Stock Exchanges are SRO’s or self-regulatory bodies deriving powers from SEBI and also companies act. Issue of capital is a function of SEBI but CDR is a cell under RBI and Ministry of Corporate Affairs MCA. Companies may seek in principle clearance from the stock exchanges for the issue of preferential allotment to promoters and promoter groups but the exemption required from the ICDR regulation of no sale in six months cannot be given by stock exchanges or SEBI. This is only possible by getting the same from MCA as they would approve the allotment and not give exemption under the ICDR regulation.
These days companies in their zest to get the preferential allotment approved by their general bodies get complicated and all empowering resolutions voted upon without realising that there would be further complications as the resolutions approved are incorrect in the first place. ICDR stipulates that there should be no sale for 6 months prior, there should be a reference date and the allotment should be done within 15 days. In the case of CDR package the rule of six months is to be waived because the companies going for CDR which is approved would have allotment on a preferential basis as a precondition. Secondly in many cases companies restructuring also entails conversion of existing loans into equity for lenders.
A very important point in all this is the fate of the minority shareholder who simply does not understand the implications of a special resolution being voted upon. There are enough instances where a handful of motivated minority shareholders attend the EGM and ensure that the resolution is passed on receiving small favours. All such special resolutions must henceforth entail a minimum number of minority shareholders in terms of percentage of shares voting for the resolution to be approved.
One hopes that companies which are really interested in coming out of the stressed conditions and are serious about their CDR package do a little bit of housekeeping, understanding the law and then proceed. Delays in restructuring on account of procedural lapses or issues could damage the long term interest of companies, their promoters and certainly their shareholders.
