SECTION 81

FURTHER ISSUE OF CAPITAL

Whether the section covers cases of further allotment out of unsubscribed portion of capital and sale of forfeited shares.

Any allotment of unsubscribed portion of issued shares as and where applications are received will not amount to an increase in the subscribed capital of the company by issuing new shares and every allotment of shares within the issued capital is the first allotment so far as those shares are concerned. Section 81(1) is not, therefore, applicable to the remaining shares which were issued already. The said section is also not applicable to the sale of forfeited shares for which no allotment is necessary.

* LETTER NO. 2(27)/56-PR, DATED 4.10.1976

New guidelines for stipulation of convertibility clause and appointment of nominee directors - Effective from March 1984

In the Budget Speech, the Finance Minister had announced that changes were being made by the Government in the guidelines relating to conversion of loans granted by the financial institutions into equity and appointment and role of nominee directors of financial institutions on the board of assisted companies. In pursuance of this suitable guidelines have been issued to the financial institutions. Briefly, these are as under:

Conversion of loans into equity

I. WRITING OF THE CONVERTIBILITY CLAUSE IN THE LOAN AGREEMENTS/DEBENTURE ISSUES.

1. The insertion of the convertibility clause in all appropriate cases should be so made as to be in conformity with the provisions in section 81(3) read with the enabling provisions of the relevant statutes or charter under which the financial institutions have been set up or incorporated, as the case may be.

2. The convertibility clause need be stipulated only in respect of rupee loans sanctioned and/or rupee debentures subscribed and/or devolved as a result of underwriting facilities extended to a debenture issue.

3. Except as provided otherwise in these guidelines, stipulation of the convertibility clause in the agreement relating to financial assistance will be mandatory in all cases where the aggregate financial assistance (including outstandings) from the all-India financial institutions, exceeds Rs. 5 Crores.

4. The convertibility clause need not be stipulated where the combined equity holdings by all the all-India financial institutions (including the investment institutions) exceed 26 per cent in the case of non-MRTP companies and 40 per cent in the case of MRTP companies/large houses. However, in the event of default in repayment of institutional dues or mismanagement of the affairs of the company, the financial institutions will continue to keep the right to conversion in respect of projects financed by them and involving cumulative assistance of over Rs. 5 crores, irrespective of the extent of their equity holdings.

5. The institutions may continue to follow the existing policy of stipulating convertibility clause in respect of financial assistance to sick units irrespective of the amount of assistance and the level of shareholding, in the assisted company.

6. Convertibility clause need not be stipulated in respect of loans sanctioned for projects both of

MRTP and non MRTP companies being set up in Category A areas comprised of "No Industry District and Special Regions" as defined under the Ministry of Industry, Notification No.4/1/81 BAD (Vol.III), dated 22.5.1983.

7. Assistance under the Soft Loan Scheme and modernisation assistance or for acquiring additional balancing equipment within the existing capacity or for financing small overruns in respect of projects already financed by institutions, will not attract the convertibility clause.

8. Convertibility clause should not be written in loan agreements which relate either exclusively to sub-loans granted by Indian financial institutions to industrial concerns out of foreign currency lines of credit or to funds made available by foreign institutions directly to Indian financial institutions for sub-lending or to such portion of the rupee assistance from the Indian financial institutions to industrial concerns as would enable the concerns to purchase foreign exchange from the foreign lines of credit provided by the Government of India to the institutions out of foreign loans borrowed from abroad and operated by the Government.

If the institutions concurrently make available a rupee loan and in addition to the above-mentioned facility, the convertibility guidelines would apply to such additional rupee loans only.

If the institutions concurrently made available a rupee loan and in addition to the above-mentioned facility, the convertibility guidelines would apply to such additional rupee loans only.

II. MECHANICS OF CONVERSION

9. Since the actual terms and conditions of conversion of loans/debentures issues into equity will be within the scope of section 81(3), the financial institutions concerned, while negotiating the terms for such conversions, should, in consultation with the Industrial Development Bank of India, give to the assisted industrial concern a clear indication of the terms and conditions they have in view in regard to convertibility of loans into equity. In giving this indication, the financial institutions shall exercise their discretion and best judgment, keeping in view all relevant factors, e.g. the nature of industry, the likely gestation period of the project, the debt-equity ratio, the projected profit potential, the prospects of expansion and so on. The concerned financial institutions should also, in consultation with the Industrial Development Bank of India, determine the maximum amount of loan which can be converted into equity capital in a specified case, the issue price of the share, the stage or stages at which the option can be exercised, the period during which the option shall remain open and the period of notice, if any, to be given for the exercise of option, and any other relevant matters.

III. ACTUAL EXERCISE OF OPTION TO CONVERT LOANS INTO EQUITY

10. The actual exercise of conversion option need not normally be done in respect of non MRTP companies where the combined holdings of the institutions exceed 26 per cent and in the case of MRTP companies/large houses where such institutional holdings exceed 40 per cent. However, in cases of default in repayment of institutional dues, mismanagement of the affairs of the company, etc., these prescribed percentages may be exceeded.

There would be no bar on investment institutions buying shares in the market as part of their normal investment operation even if by so doing the holdings of public financial institutions were to exceed 26 per cent in non-MRTP companies and 40 per cent in the MRTP companies/large houses.

There should be no bar on the public financial institutions converting a portion of their loans into equity even if the institutional holdings are already at a level of 26 per cent in case a request for such conversion were to come from the promoters themselves.

Conversion option may be exercised, if necessary, on more than one occasion, within a period of 3 years from the commencement of commercial production except in weak/rehabilitation cases where the institutions may continue to retain the option during the entire currency of the loan.

Appointment and role of nominee directors

1. The IDBI, IFCI, ICICI and IRCI should create a separate department / cell with officials at the level of G.M. and Dy. G.M., whose exclusive and whole-time function will be to represent the institutions on the boards of companies. In this way, the work of nominee directors will become an integral part of the operations of the institutions. The proposed department / cell should function like any other department of the institution with normal rotation of officials from one department to another. Outsiders should be appointed as nominee directors only as additional directors on the boards where the institution has more than one nominee director.

2. Nominee directors should be appointed on the boards of all MRTP companies assisted by the institutions. As regards non MRTP companies, nominee directors should be appointed on a selective basis especially in cases where one or more of the following conditions obtain: (a) the unit is running into problems and is likely to become sick; (b) institutional holding is more than 26 per cent; and (c) where the institutional stake by way of loans / investment exceeds Rs.5 crores.

3. Nominee directors should be given clearly identified responsibilities in a few areas which are important for public policy. The illustrative list of these are: (a) financial performance of the company; (b) payment of dues to the institutions; (c) payment of Government dues, including excise and customs duty, and statutory dues. Where the company feels that a particular tax demand is unjustified, nominee directors should satisfy themselves about the prima facie reasonableness of the company's case; (d) inter-corporate investment in and loans to or from associated concerns in which the promoter group has significant interest; (e) all transactions in shares; (f) expenditure being incurred by the company on management group; and (g) policies relating to the award of contracts and purchase and sale of raw materials, finished goods, machinery, etc.

4. The nominee directors should ensure that the tendencies of the companies towards extravagance, lavish expenditure and diversion of funds are curbed. With a view to achieve this object, the institutions should seek constitution of a small audit sub-committee of the board of directors for the purpose of periodic assessment of expenditure incurred by the assisted company, in all cases where the paid-up capital of the company is Rs.5 crores or more. The institutional nominee director will invariably be a member of these audit sub-committees. The above guidelines relating to the convertibility clause and nominee directors will come into effect from March 1, 1984.

* PRESS RELEASE ISSUED BY MINISTRY OF FINANCE ( DEPARTMENT OF ECONOMIC AFFAIRS), DATED 2.3.1984.