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Raghuvir Srinivasan

The use of Section 100 to buy out minority shareholders, legal as it is, raises some questions of propriety and procedure.

CALL IT the 100 for 100 route. Promoters of companies that have delisted their stocks after the mandatory open offers are gradually beginning to use Section 100 of the Companies Act that permits capital reduction, to acquire 100 per cent ownership.

Last week, Madura Coats Ltd. held an extraordinary general meeting to pass a resolution for reduction of capital. The proposal was to reduce share capital by paying off the minority public shareholders who still held on to the stock that was delisted recently after two open offers from the foreign promoters. Public shareholders, holding 6.48 per cent of the Rs 58.85-crore equity, were to be paid Rs 40 per share of Rs 10 and shown the door. And though technically the shareholders did have a say in deciding on the resolution, for all practical purposes it was not a choice. Against the 75 per cent support required for the resolution to be passed, the promoters alone held 93.52 per cent reducing the minority shareholders to a voiceless group.

Madura Coats was using Section 100 which permits a company to extinguish equity capital "in excess of its wants". It is curious indeed that what is in excess of the company's wants is equal to the public holding in the equity capital.

Actually, Madura Coats is not the first to adopt this route to snuff out public minority shareholders from a delisted company. John Fowler (India) did this recently and Sandvik Asia is reported to be going through a similar process. John Fowler went in for a capital reduction programme in June last that saw it extinguishing the 7.73 per cent stake of public minority shareholders in the company by repaying their holdings at Rs 62.50 per share.

To be sure, these companies will not be the last to adopt this ingenious route to cut stubborn public shareholders to size.

There are several more multinationals out there such as Philips India, Wartsila NSD, Carrier Aircon and Reckitt Benckiser, to name just a few, where the foreign parent holds more than 90 per cent of the equity and the stocks are close to being delisted. The Section 100 route is open to these companies too.

The use of Section 100 to buy out minority shareholders, legal as it is, raises some questions of propriety and procedure. Is it right to compulsorily buy out a shareholder who is not willing to sell his share? This is exactly what the Section 100 route does as it presents minority shareholders with a fait accompli. It should be remembered that these are shareholders who opted, for whatever reason, not to tender their holdings to the open offers from their company's foreign promoters. The spirit of Section 100 is to enable companies to restructure their capital when necessary, and the Section was framed at a time when stock-splits and buybacks, which also enable capital restructuring, were unheard of. Therefore, it is only those companies that genuinely wanted to cut down their capital or reduce the par value of their shares which took the route. Adequate safeguards were also built in to prevent misuse of this Section — consent of more than 75 per cent of shareholders was necessary as also permission from creditors and the Court.

Now, are these promoters who are using the Section to take their companies 100 per cent private respecting the spirit behind it as much as they are the letter? This is a question for the Court to consider especially because the other safeguard of a special resolution has turned meaningless in this case.

A logical question that arises is: Why are the foreign parents of these companies so particular that there are absolutely no public shareholders? Reduction in expenses is not a convincing excuse because it may cost no more than a few thousand rupees to service these shareholders once or twice a year. So what can the reason be? Is it that these companies want no prying shareholder eyes on their businesses and balance-sheets? It is, of course, far easier for multinational companies to handle issues such as royalty and transfer pricing when there are no public shareholders to reckon with.

Whatever the reason, if public shareholders indeed have to be paid off then it should be done on fair terms. Both John Fowler and Madura Coats have taken their open offer prices as the benchmark to pay off the remaining shareholders. But considering that these shareholders are being compulsorily bought out, a better benchmark may be the book-value of the stock, which really represents their share of the company's wealth.

The Department of Company Affairs should take note of this (mis)use of Section 100 and do one of two things: Plug the loophole and prevent others from taking this route or if it feels that companies should indeed have this option, then frame regulations that would enable fair pricing for the minority shareholders.

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