By Mahafrin Sidhwa.Treasury stock has always been a concept of wonderment. It doesn’t find any roots within true letters of corporate law in India. Yet the concept has widely been used by companies and big business houses. So what is treasury stock? Treasury stock is stock that is created by mergers and amalgamations or a buy back. However the question of treasury stock created by a buy back is not relevant in the Indian context since as per the Securities and Exchange Board of India (Buy-Back of Securities) Regulation 1998 the shares so created have to be extinguished within seven days of such a buy back..In case of a merger and amalgamation it is created on account of the ‘cross holding’ between the acquiring company and the target. For example Company A and B are going to merge such that one company i.e. Company B would seize to exist and all the shareholders of B would be shareholders of Company A. Company A already has shares in the erstwhile Company B i.e. before the merger took place. While implementing the scheme of amalgamation if Company A decides to use a method of share swap by which Company A will be issuing its shares to buy the shares of Company B. What does Company A do about the shares it held in erstwhile Company B which is now Company A? Company A cannot hold shares in itself. There are two alternatives. Company A may cancel the shares that it holds in Company B which may not be the most pragmatic solution to the problem. In the alternate it may transfer the shares to a special purpose entity (SPE), usually a Trust. This would facilitate a company to hold its own shares..At present there is no specific provision governing treasury stock in India. Section 77 of the Companies Act, 1956 specifically restricts a company from issuing shares to itself or through its own holding company. However the proviso to the Section allows a company to purchase, or subscribe to fully paid shares in itself or its holding company where the subscription is by trustees or to be held by or for the benefit of employees of the company, including any director holding a salaries office or employment in the company. This is to say a company can hold its own shares through an external trustee or for the benefit of its employees, Directors holding salaried office or employment as the case maybe. This proviso has been used as a leeway for companies to acquire shares through a trust as a vehicle for the purpose facilitating their own ability to hold shares for themselves. However the section does not state that shares to be held in trust should be for the benefit of the company itself. Typically, treasury stock doesn’t possess any voting rights. No dividend can be distributed on such shares..Many companies like Reliance Industries Limited (“RIL”) have used treasury stock as a tool to hold shares for itself. RIL before its merger with Indian Petrochemicals Corporation Limited (“IPCL”) held a 46% stake through four of its fully-owned investment subsidiaries. When RIL merged with IPCL, through a stock swap deal, all IPCL shareholders got RIL shares since IPCL would be a part of RIL. Thus RIL’s four subsidiary companies got RIL shares. However, since a company cannot hold its own shares, a trust was created to hold these shares which were under the control of RIL. Such trusts were created by the other five companies also to deal with similar merger issues. Besides RIL many other companies have held their own shares in the form of treasury stock like JP Associates and its merger with Jaypee Hotels, Jaypee Cement, Jaiprakash Enterprises, Gujarat Anjan Cement, the transaction between Punjab Tractors and Mahindra Finance and BPCL which merged with Kochi Refineries..However, this treasury stock lacks legal sanctity and has been conveniently used by companies to issue shares to itself. Internationally, treasury stock has been created by the US, UK, China and many other countries. Majority of these countries have specific legislations governing treasury stock..Under the International Financial Reporting Standards (IFRS) system, which would be implemented by 2013, treasury share sales would not be counted as profit or loss instead they will be considered as further issue of capital and the proceeds of treasury stock-sales would go to the company reserves. Thus a company would not be able to treat such shares as profit and loss. Such transactions resulting in transfer of wealth from one set of owners to another, routed to come back to the first owner cannot be termed as profit and loss. The gain or loss from the sale of treasury stocks is adjusted in equity directly. It is not routed through profit and loss account, which is allegedly done by companies generating treasury stock at present..The Indian Companies Bill, 2012 has specifically abolished treasury stock created on account of mergers and amalgamations. Sub clause 10 of clause 233 of the Companies Bill, specifically states that a transferee company on merger or amalgamation, would not hold any shares in its own name or in the name of any trust either on its behalf or on behalf of any of its subsidiary or associate company and all such shares shall be cancelled or extinguished on the merger or amalgamation. This would entail that companies would have no additional route of raising money which has so far been used. Companies would now be compelled to extinguish those shares which were created on account of cross holdings after the scheme of amalgamation was implemented..Thus companies have to try and offload their treasured treasury stock by selling them in the open market to be in line with the Companies Bill and IFRS standards. However treasury stock could be fairly advantageous as it could positively increase share prices as the number of shares in the market reduce. Treasury stock could be used to provide incentives to employees in lieu of cash, to protect the company against hostile takeover attempts and to return capital to shareholders in a way that has a more positive tax result. Another advantages of creation of treasury stocks is that these shares would remain as a part of the company’s paid-up capital and when the company requires some funds, it can simply sell them in the open market or through a private deal to get money which is more cost effective than to raise money through other ways like rights issue, follow-on offering, private placement, institutional placement (QIB) or some other method, as these would be lengthy and time consuming..Treasury shares in the UK are governed by a new statutory instrument called the Companies (Acquisition of Own Shares) (Treasury Shares) Regulation 2003 which has amended the U.K. Companies Act, 1985 to allow companies to buy back shares and keep them in a Treasury Share account. In the US, under the laws of some states, including Delaware and New York, a company that repurchases its own shares has two main options either to hold them as treasury shares (i.e., shares that have been authorised and issued but generally are not considered outstanding), or by retiring the re-purchased shares. The concept of treasury shares does not exist in some states, such as California, the laws of which provide that repurchased shares automatically are restored to the status of ‘authorised but unissued shares’ (unless the company’s organisational documents prohibit their reissuance). The states in the US have there own set of norms and restrictions governing these shares..It would not make any sense to rule out treasury shares in totality. The Companies Bill ideally should have provided for such shares with certain strict terms and conditions. When most economies do have special norms for such shares, disallowing them in totality is baseless. There should have been certain sections governing the usage and manner of creation of treasury stock during a scheme of merger and amalgamation and not a strict prohibition of the same..(The author is an Associate with J. Sagar Associates and her views are personal. Email: mahafrin.sidhwa@jsalaw.com)
By Mahafrin Sidhwa.Treasury stock has always been a concept of wonderment. It doesn’t find any roots within true letters of corporate law in India. Yet the concept has widely been used by companies and big business houses. So what is treasury stock? Treasury stock is stock that is created by mergers and amalgamations or a buy back. However the question of treasury stock created by a buy back is not relevant in the Indian context since as per the Securities and Exchange Board of India (Buy-Back of Securities) Regulation 1998 the shares so created have to be extinguished within seven days of such a buy back..In case of a merger and amalgamation it is created on account of the ‘cross holding’ between the acquiring company and the target. For example Company A and B are going to merge such that one company i.e. Company B would seize to exist and all the shareholders of B would be shareholders of Company A. Company A already has shares in the erstwhile Company B i.e. before the merger took place. While implementing the scheme of amalgamation if Company A decides to use a method of share swap by which Company A will be issuing its shares to buy the shares of Company B. What does Company A do about the shares it held in erstwhile Company B which is now Company A? Company A cannot hold shares in itself. There are two alternatives. Company A may cancel the shares that it holds in Company B which may not be the most pragmatic solution to the problem. In the alternate it may transfer the shares to a special purpose entity (SPE), usually a Trust. This would facilitate a company to hold its own shares..At present there is no specific provision governing treasury stock in India. Section 77 of the Companies Act, 1956 specifically restricts a company from issuing shares to itself or through its own holding company. However the proviso to the Section allows a company to purchase, or subscribe to fully paid shares in itself or its holding company where the subscription is by trustees or to be held by or for the benefit of employees of the company, including any director holding a salaries office or employment in the company. This is to say a company can hold its own shares through an external trustee or for the benefit of its employees, Directors holding salaried office or employment as the case maybe. This proviso has been used as a leeway for companies to acquire shares through a trust as a vehicle for the purpose facilitating their own ability to hold shares for themselves. However the section does not state that shares to be held in trust should be for the benefit of the company itself. Typically, treasury stock doesn’t possess any voting rights. No dividend can be distributed on such shares..Many companies like Reliance Industries Limited (“RIL”) have used treasury stock as a tool to hold shares for itself. RIL before its merger with Indian Petrochemicals Corporation Limited (“IPCL”) held a 46% stake through four of its fully-owned investment subsidiaries. When RIL merged with IPCL, through a stock swap deal, all IPCL shareholders got RIL shares since IPCL would be a part of RIL. Thus RIL’s four subsidiary companies got RIL shares. However, since a company cannot hold its own shares, a trust was created to hold these shares which were under the control of RIL. Such trusts were created by the other five companies also to deal with similar merger issues. Besides RIL many other companies have held their own shares in the form of treasury stock like JP Associates and its merger with Jaypee Hotels, Jaypee Cement, Jaiprakash Enterprises, Gujarat Anjan Cement, the transaction between Punjab Tractors and Mahindra Finance and BPCL which merged with Kochi Refineries..However, this treasury stock lacks legal sanctity and has been conveniently used by companies to issue shares to itself. Internationally, treasury stock has been created by the US, UK, China and many other countries. Majority of these countries have specific legislations governing treasury stock..Under the International Financial Reporting Standards (IFRS) system, which would be implemented by 2013, treasury share sales would not be counted as profit or loss instead they will be considered as further issue of capital and the proceeds of treasury stock-sales would go to the company reserves. Thus a company would not be able to treat such shares as profit and loss. Such transactions resulting in transfer of wealth from one set of owners to another, routed to come back to the first owner cannot be termed as profit and loss. The gain or loss from the sale of treasury stocks is adjusted in equity directly. It is not routed through profit and loss account, which is allegedly done by companies generating treasury stock at present..The Indian Companies Bill, 2012 has specifically abolished treasury stock created on account of mergers and amalgamations. Sub clause 10 of clause 233 of the Companies Bill, specifically states that a transferee company on merger or amalgamation, would not hold any shares in its own name or in the name of any trust either on its behalf or on behalf of any of its subsidiary or associate company and all such shares shall be cancelled or extinguished on the merger or amalgamation. This would entail that companies would have no additional route of raising money which has so far been used. Companies would now be compelled to extinguish those shares which were created on account of cross holdings after the scheme of amalgamation was implemented..Thus companies have to try and offload their treasured treasury stock by selling them in the open market to be in line with the Companies Bill and IFRS standards. However treasury stock could be fairly advantageous as it could positively increase share prices as the number of shares in the market reduce. Treasury stock could be used to provide incentives to employees in lieu of cash, to protect the company against hostile takeover attempts and to return capital to shareholders in a way that has a more positive tax result. Another advantages of creation of treasury stocks is that these shares would remain as a part of the company’s paid-up capital and when the company requires some funds, it can simply sell them in the open market or through a private deal to get money which is more cost effective than to raise money through other ways like rights issue, follow-on offering, private placement, institutional placement (QIB) or some other method, as these would be lengthy and time consuming..Treasury shares in the UK are governed by a new statutory instrument called the Companies (Acquisition of Own Shares) (Treasury Shares) Regulation 2003 which has amended the U.K. Companies Act, 1985 to allow companies to buy back shares and keep them in a Treasury Share account. In the US, under the laws of some states, including Delaware and New York, a company that repurchases its own shares has two main options either to hold them as treasury shares (i.e., shares that have been authorised and issued but generally are not considered outstanding), or by retiring the re-purchased shares. The concept of treasury shares does not exist in some states, such as California, the laws of which provide that repurchased shares automatically are restored to the status of ‘authorised but unissued shares’ (unless the company’s organisational documents prohibit their reissuance). The states in the US have there own set of norms and restrictions governing these shares..It would not make any sense to rule out treasury shares in totality. The Companies Bill ideally should have provided for such shares with certain strict terms and conditions. When most economies do have special norms for such shares, disallowing them in totality is baseless. There should have been certain sections governing the usage and manner of creation of treasury stock during a scheme of merger and amalgamation and not a strict prohibition of the same..(The author is an Associate with J. Sagar Associates and her views are personal. Email: mahafrin.sidhwa@jsalaw.com)
