Companies Bill: Ups and downs for private equity investors

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SummaryThe Bill restricts multiple subsidiaries and stops a company from giving its PE investors timely exit

The Companies Bill, 2013, recently got the approval of the Rajya Sabha, having already received the approval of the Lok Sabha late last year. It is now only a matter of time that the Bill will soon become an Act. This article attempts to highlight some of the key provisions under the Bill, which private equity investors should be aware of.

Buy-back: It is customary for investment agreements to contain exit-related provisions for private equity investors, notable amongst which is the obligation on part of the promoters and the target company to cause a buy-back of the investor’s shares on or before defined time lines. Under the Companies Act, 1956 (Act), while a cooling off period of one year had been prescribed between two successive buy-backs authorised by the board of directors, a dominant interpretation under the Act permitted a buy-back of up to 10% of the paid up equity capital and free reserves of the company by way of a board resolution, immediately followed by another buy-back of up to 25% of the total paid up equity capital and free reserves by way of shareholders’ resolution. However, under the Bill, no buy-back shall be allowed for a period one year from the date of a preceding buyback, irrespective of who authorised such buyback (i.e. board or shareholders, as the case may be). This could have an impact of reducing the ability of a target company to give a timely exit to private equity investors in a staged manner even in cases where the company may be sitting on surplus cash.

Restrictions on multi-layered structures: The Bill limits the ability of a company to make investments through not more than two layers of investment companies, unless otherwise prescribed and subject to two specific exceptions: (i) allowing Indian companies to acquire offshore companies, which, in turn, has subsidiaries beyond two levels; and (ii) in cases where a company needs to have more than two layers of investment companies in order to comply with law. Similarly, the Bill also preserves the right of the central government to limit the number of subsidiaries that certain classes of holding companies will be able to have.

The restriction on a company having multiple subsidiaries/investment companies (placed with a view to curb diversion of funds through a web of complex corporate structures) is set to hurt infrastructure companies the most as the commercial realities of this sector often require

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