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Sweat equity norms may get stiffer

A note cleared by the cabinet recently says 75 per cent of the shareholders present at an annual general meeting of a company would have to support the issue of sweat equity instead of 50 per cent provided in the ordinance.

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The cabinet has made it mandatory for companies to seek a special resolution for the issue of sweat equity instead of an ordinary resolution provided in the ordinance.

For buyback of shares, the Cabinet has retained the clause that it should not exceed 25 per cent of the paid-up equity and free reserves of the company.

In addition, share premium of which dividends are paid has been excluded from the definition of free reserves.

This is a new safeguard that was not included in the ordinance. The cooling off period of two years has now been limited to the issue of only "the same securities'' and not all types of securities such as debt, debentures and preference shares.

The check of two years on the issuance of fresh shares after a buyback is being retained to ensure that buyback does not take on the shape of a treasury operation.

Under treasury operations, companies can buy and sell the shares of their company without any checks.

The debt to equity ratio following a buyback is being retained at 2:1 but an enabling clause is to be provided in the bill that will empower the government to relax these norms if it so desires.

Since the finance and law ministry are opposed to the dilution of this requirement, unlike the Securities and Exchange Board of India, which had recommended the change, it is not likely that the relaxation will be extended easily, officials claim.

While stringent norms have been laid down under sweat equity issuance, the cabinet has granted some breathing space to corporations under the provisions of inter-corporate investments.

The cabinet has slightly relaxed the norms by providing that approval by the financial institutions would not be necessary for loans, investment, guarantees that are stood by a company to another up to 60 per cent of the free reserves and equity of the company. This is if the company has not defaulted on outstanding loans.

Foreign institution approvals would, however, be necessary for all loans, investments and guarantees exceeding this limit, irrespective of the company's track record in meeting its obligations, provided the company has outstanding loans from the institutions.

Private companies are, however, excluded from the provisions of the new inter-corporate investment norms.

In case of lending rate at which inter-corporate loans are to be made, relaxation has been provided by linking the interest rate to the Reserve Bank of India lending rate instead of the prime lending rate.

The cabinet has, however, rejected other demands from industry including the dilution of the penalties for violations and the exclusion of personal guarantees by the directors of the company and corporate guarantees stood by the company from the new provisions of inter-corporate investments.

- Compiled from the Indian media

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