The latest Company Law Committee (CLC) Report is undoubtedly welcomed by India Inc. as it has eased several compliance checks and grids. These include overhauling the existing framework in respect of fractional shares, restricted stock units, and stock appreciation rights amongst other reforms. In so doing, the Report clarifies several ambiguities. Here’s a deep dive into the various relaxations.
Recognizing Fractional Shares
Currently, Section 4 of the Companies Act lays down provisions for an individual to hold a minimum of 1 share. In addition, schedule I – Table F also restricts a company from identifying fractional shares. However, the CLC Report recommends amending the current provision to allow issue, holding, and even transfer of fractional shares. First, of course, this is being recommended in dematerialized form only. Secondly, this recommendation is in case of fresh issuance of shares and not per se in M&A situations.
Taking a cue from jurisdictions like the USA where investors can hold fractional shares, and the International Financial Services Centre Authority which allows trading in fractional shares, the recommendation is at par with the global regulatory regime.
This change would reduce the need and complications arising from corporate actions such as split/bonus issues that companies take solely to reduce share price, leading to encouragement in retail participation. However, clarity is awaited on whether this change will include the issuance of Employee Stock Ownership Plans (ESOPs) and how the issuance of fractional shares would be implemented therein.
Restricted Stock Units (RSUs) and Stock Appreciation Rights (SARs)
RSUs and SARs are economic benefits of shares that employees get from the company. RSUs are like ESOPs in that compensation provides the employees the right over the shares of the competition during the vesting period. But, of course, these come with specific performance riders and duration of employment, which differentiate their benefits from those of ESOPs.
SARs, on the other hand, are compensations linked to the company’s stock price at a pre-determined period and in that respect they are similar to ESOPs. However, in the case of SARs, the employee does not have ownership of the shares, eliminating the requirement for issuance of shares and on-boarding on the cap table. Therefore, employees can reap the economic benefit of SARs without purchasing them.
The noteworthy point is that RSUs are not recognized under Indian law, whereas SARs come under the ambit of SEBI (Share Based Employee Benefits and Sweat Equity) Regulations, 2021. The CLC 2022 recommendations, therefore, include a critical aspect in addressing this difference. They mention that the issue of additional securities by the company can be a condition to shareholders’ approval in the form of a special resolution, provided as an annual omnibus approval, and thereby removing another significant compliance burden.
This relief is also a double-edged sword as, currently, companies would be drawn towards schemes that are not bound by any specific complex regulation.
Recognition of Special Purpose Acquisition Companies (SPAC)
The CLC Report is a proactive step toward the global surge in SPAC transactions. Any successful Indian company listed on NASDAQ via a SPAC transaction grabs attention. However, though recognizing SPAC transactions within the Companies Act is a booster, it would also come with SEBI’s close scrutiny of adherence to every regulation, especially in domestic listings.
India’s Blank Cheque Companies & SEBI’s Readiness
SEBI has recently conveyed to the Parliamentary Standing Committee on Finance that it has been deliberating over building a dedicated framework of SPACs in Indian capital markets. This means that India will soon have its own version of a blank cheque company. SEBI is likely to follow the US mechanisms of allowing the listing of SPAC companies.
The concept of SPACs encourages the cash-n-carry concept of acquiring a business. While a SPAC transaction is formed in adherence to raising capital through IPOs, it need not have any commercial operations. In other words, it bypasses the entire process-driven efforts of raising money through IPOs. It becomes magical for the company to get listed in exchanges within days if it merges with, or is acquired by, a SPAC. However, the SEBI Rules will rigidly govern this financial engineering behind SPAC and the transactions therein.
Not A Very Scenic View – SPACs
The recent global market crashes have in no way facilitated smooth sailing for the SPACs transactions. With the seemingly risky assets of blank-cheque companies, investors have been backing out of SPAC deals, and business has been fraught with difficulties.
Way Forward – CLC Report
Apart from the reforms listed above, other recommendations include re-aligning the financial year, fixing the tenure of independent directors, and prohibiting conversion of a cooperative society into a company. While, in totality, the Report sounds to be a cushion for the compliance galore that India Inc. has always been envisioning, it remains to be seen how various committees and authorities devise and implement the framework to translate words into action. Until then, the clear intent spells cheer for the future.
The author is a Partner, J Sagar & Associates. The views expressed are personal and not of the firm.
