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Stressed companies may get to issue shares at a discount for funds
Money-losing companies may get the leeway to sell shares at a discount to raise much-needed capital to mitigate financial distress, according to a set of amendments to the Companies Act that the government is working on.
Money-losing companies may get the leeway to sell shares at a discount to raise much-needed capital to mitigate financial distress, according to a set of amendments to the Companies Act that the government is working on.
The proposals by the corporate affairs ministry, part of the draft bill to amend the existing law, aim to offer businesses operational flexibility, reduce red tape and make the framework of tribunals and the National Financial Reporting Authority (NFRA) stronger, a person aware of discussions within the government said, requesting anonymity.
One of the key proposals is to let businesses reporting losses for three years in a row sell shares at a discount, a flexibility currently available only for converting debt to equity as part of a rescue package sanctioned by a tribunal or the Reserve Bank of India.
Once implemented, it will allow distressed businesses to issue shares below their face value.
Other proposals to be included in the draft bill include eliminating the need to file affidavits under many provisions of the Companies Act and replacing them with self-declarations, making it easier to restore companies removed from records, introducing the producer limited liability partnerships (LLPs) concept for farm sector companies and broadening the regulatory ambit of NFRA.
An email sent to the spokesperson for the ministry early on Tuesday remained unanswered at the time of publishing
A cabinet note will soon be prepared to propose the amendments, the person said.
“The government must be an enabler so enterprises can focus on economic activities. The proposals will further enhance the ease of doing business,” the person said.
Allowing distressed businesses to sell shares at a discount is expected to help companies secure the funds required when other means of mobilizing funding become challenging.
This may allow the government to infuse capital into an enterprise for shares at a discounted price when such a move is in the public interest.
In the case of companies going through bankruptcy proceedings, the ability to raise interim finance could help them run their operations and avoid slipping into liquidation.
According to Yogendra Aldak, partner at Lakshmikumaran and Sridharan Attorneys, interim financing is crucial to a company undergoing corporate insolvency resolution as it helps meet routine expenses for sourcing goods and services crucial for running the business and maintaining the going-concern status.
Such interim financial support enables the debtor to stand on its legs during the bankruptcy resolution proceedings, he said.
The plan to allow such companies to issue shares at a discounted price will certainly help raise capital, Aldak added.
The ministry intends to replace affidavits with self-declarations except where an affidavit is needed before a judicial or quasi-judicial authority.
Also, NFRA is likely to get more powers to take action in cases where the nature of the breach does not come under the ’professional or other misconduct’ category.
One example is defaulting on filing annual returns by auditors.
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First Published:31 Aug 2022, 12:52 AM IST
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