SEBI, MCA officials crucial meeting soon to discuss share buyback, fractional shares and SPAC regulations

Ministry of Corporate Affairs and Securities Exchange Board of India are meeting soon to discuss the recent company law committee report. MCA may discuss several recommendations in this meeting including fractional shares policy, buyback provision, and Special purpose acquisition companies (SPACs).

Ministry of Corporate Affairs released a new company law committee report on April 13th which was chaired by Ministry of Corporate Affairs secretary Rajesh Verma. In this report, several recommendations are given by committee members which can be implemented with the consultation of SEBI.

Committee recommended fractional of shares for benefitting retail investors. Committee feels in recent times more than 1.5 crores of new investors entered in the market and they are not able to buy entire share due to less purchasing power. So, fractional shares could be a good option for retail investors for entering into the market.

The report says “While retail investors may want to invest in certain companies, they may not have the purchasing power to buy a whole share due to the high price of a single unit. Allowing holding and trading fractional shares would enable them to invest precise and predetermined budgeted amounts in companies whose shares are otherwise inaccessible due to high prices”.

The report further added “The Committee was apprised of the domestic and international practices concerning fractional shares. The International Financial Services Centres Authority (“IFSCA”) has recently permitted the trading of fractional shares under its regulatory sandbox regime in India. Similar global practices that allow holding and trading fractional shares may be observed in Canada, Japan, and the United States (“USA”). In Canada, Section 49(17) of the Canada Business Corporation Act, 1985, provides for the rights of fractional shareholders. In Japan, Article 234 of the Companies Act, 2005 lays down how fractional shares are treated under Japanese law. Similarly, the US Security and Exchange Commission has released a Bulletin in 2020 that expressly aims to inform investors of the availability, benefits, and other rights and obligations associated with fractional share investing and trading”.

Report says “Fractional shares should only be issued in dematerialised form. For listed companies, such prescriptions may be made in consultation with SEBI. It is also clarified that this recommendation only pertains to cases that would involve a fresh issue of fractional shares by the company and not to those cases where fractional shares get created for the time being on account of any corporate action”.

Anand Lakra, Partner, JSA told Zee Business “Presently, fractional shares are not permitted to be issued or traded. Given the recent increase in retail shareholder participation in the public markets, this is an excellent recommendation as it would enable retail shareholders to trade in shares that hitherto were inaccessible*

Ministry of Corporate Affairs appointed committee apprised the demand of corporate houses for SPACs.

A Special Purpose Acquisition Companies (“SPAC”) is a type of company that does not have an operating business and has been formed with the specific objective of acquiring a target company.

This concept allows a shell company to issue an Initial Public Offering (“IPO”) without any commercial activity. After listing, the SPAC merges with or acquires a company, i.e., the target, thereby allowing the target company to benefit from such listing without going through the formalities and rigours of an IPO.

As a general practice, the SPAC begins searching for a target company after being listed. The business combination is required to be completed within a stipulated time frame, failing which the SPAC has to be liquidated. Despite this, the concept of SPAC has gained considerable global traction as seasoned investors and management professionals are turning to SPACs to mitigate the risks associated with an IPO.

Indirect listing of the target company through a SPAC offers many benefits. It allows a target company to get listed without undertaking the expensive and time-consuming process of an IPO.

As per the report “Committee was apprised of the modalities adopted by M/s Renew Power Private Limited, an Indian renewable energy company, on NASDAQ through an internationally incorporated SPAC in August 2021. The Committee felt that this is a clear indicator of the desirability of Indian companies to list on overseas exchanges through the SPAC route. Such a route may be particularly profitable for Indian companies in cases where overseas investors possess a keener awareness of the company’s potential than their domestic counterpart. The Committee also noted that IFSCA has already provided regulatory clarity on listing SPACs in International Financial Services Centres (“IFSCs”)”.

The report further added that “The Committee remained aware that a provision relating to the domestic listing of SPACs will require consultation with the SEBI. However, it was also noted that the Primary Market Advisory Committee of the SEBI has already been vested with the task as SEBI is actively examining the possibility of introducing a framework for regulating SPACs in India, particularly in laying down detailed listing regulations for such companies”.

Siddharth Hariani, Partner, Phoenix Legal applauds the recommendations of SPAC “Recommending recognition of Special Purpose Acquisition Vehicle reflects the importance of adopting and regulating new structures which support growth and business”

Further, it was brought to the Committee’s attention that SPACs are currently regulated and recognised across multiple jurisdictions such as the UK, USA, Canada, Singapore and Malaysia. Therefore, the Committee felt that enabling the listing of India incorporated SPACs on global exchanges would open up avenues for Indian companies to operate and carry out business in such jurisdictions.

Along with this committee recommended more powers for National Financial Reporting Authority (NFRA). Committee apprised independence of NFRA for that setup NFRA fund and more power to take action against individuals and firm.

Committee mentioned in their report about issues of shares on discount prices for distressed companies.

Sonam Chandwani, Manager Partner, K S legal and Associates told Zee Business “Issue of Shares at Discount is certainly now practiced in India. However, the provisions to allow discounted shares can be beneficial for distressed companies when the debt is converted into shares as a restructuring plan. It can also safeguard the creditors in some way. however, we can keep a check on such distressed companies by checking in the cash losses for the past 3 years or any such requirements by the central govt. Since discounting of shares will make it difficult for fresh issue of shares, at the brighter side issuing discounted shares will increase the government investment in such distressed companies in public interest. Thus, issuing of shares at discount in public interest should be widely considered by the company law committee”.

Buyback provision also can be discussed in the meeting of  As such, the Committee was of the opinion that ‘free reserves’ are to be included in the calculation of buy-back of equity shares, even if the term has not been specifically included in the proviso. For clarity, the Committee sought to include the reference to ‘free reserves’ in the proviso to Sec 68(2)(c). It is a long pending demand of information technology firms which they want to do frequently in place of giving higher dividends.

Information Technology association NASSCOM recommended “As per SEBI buyback regulations, buyback from the open market should be less than 15% of paid-up capital and free reserves of the company. Open market buyback is a preferred route globally for returning cash to investors since it allows for higher accretion of Earnings Per Share (EPS) and it is cost-effective for the company. Hence, we have requested SEBI to equate the limit of buyback from open market with that of tender offer (i.e., 25% of paid up capital and free reserves of the company). In this context, we highlighted that no separate limit has been prescribed for buyback from open market through stock exchanges in the United States”.

Rajesh Verma-led committee recommended several measures for strengthening the regime of auditors resignations, tenure of independent directors, and resignations Sops of Key management personnel.