THE ECONOMIC TIMES
EDITORIAL
|
Time
to act |
A lot has been written about
the buyback of equity of nationalised banks. Little is
known, though, of what the government can actually do under existing
regulations and laws. What is surprising is that even the government seems to
be a little lost on the legal position of the matter.
Firstly, nationalised banks are not
companies. This becomes clear upon a reading of the Indian Companies Act which
defines ‘companies' in a limited manner and the banks which were formed by an
Act of parliament would clearly be outside the purview of the Act. This point
is reinforced if you see the Banking Companies (Acq
and Transfer of Undertakings) Act which deems nationalised
banks to be Indian companies for the purpose of income tax (and by reverse
logic in no other case). This position is in contract to an incorporated bank
which would be governed by the Banking Regulation Act and the Companies Act.
The definition of listed
public companies in S.2 (23A) is predicated on the entity being a company in
the first place. If a bank (because of nationalisation)
is not a company for the purpose of the Companies Act then it cannot be a 'listed
company' under S. 77A of the Companies Act (which provides for buybacks).
Therefore, it is clear that the nationalised banks
need not fulfil the mandatory requirements of Section
77A of the Companies Act. The buyback provisions fall under S. 77A of the
Companies Act and the rules are different depending on whether a company is
listed or not. Nationalised banks fall under the
peculiar category -- listed but not public/private company.
A nationalised
bank is governed by the Banking Companies (Acquisition and Transfer of
Undertakings) Act 1980 as amended. This Act allows issue of capital by the nationalised bank so long as 51 per cent of the equity is
held by the government. Another provision allows reduction of capital with RBI/govt approval before any public issue of capital. However,
if a public issue has already been made, the Act allows reduction of capital by
a special majority. On a strict construction, there is nothing in the provision
which restricts the government holding to go below 51 per cent in the event of
buyback.
In law what is not prohibited
is usually permitted. The Banking Companies (Amendment) Bill has been under
fire for several years now by the Opposition and by the bank staff and is
hanging, waiting for its day of judgement. The Bill which reduces the 51 per cent holding requirement of the
government to 33 per cent and brings the nationalised
banks within the purview of the Companies Act is not even necessary. The
government can sell and the bank can buyback equity at market related prices
without violating the mandate of the law. However, as my colleague Mr. TT Ram
Mohan has suggested in this newspaper recently, the buyback price should be
less than the market price because ultimately the bank would have to go to the
public to access the capital markets and when it does so, it would have to
issue shares below the market price.
The mandatory provisions
apply only to the issued capital from the banks’ perspective alone i.e. issue
and buyback of shares. What is interesting is that there is nothing in the Act
which restricts the government from selling its stake whether over or below 51
per cent. The Act does not restrict the government from selling its
shareholding. Thus outside the buyback route, it would be open in my opinion,
for the government to sell the shares either in the open market or by strategic
sale without violating any provision of the Banking Companies (Acquisition and
Transfer of Undertakings) Act 1980 Act. Let the Opposition fume for once at not
being able to stop the privatisation and
restructuring of public sector banks for want of legislative amendments.
Since the shares are listed,
a peculiar situation would arise. Though the shares are not governed by any of
the Sebi and Companies Act laws, the shares are, in
fact governed by the listing agreement that listed nationalised
banks have with the stock exchanges. Listing norms operate on two levels -- one
on the basis of contract and secondly on the basis of law. As law, the norms
may not bind the banks since they are not companies, but as a pure contractual
relationship, they would bind a nationalised bank.
Thus, the government wishing to divest shares
may be bound by listing norms of the stock exchanges as may be applicable.
(The author is an advocate with P.H. Parekh & Co. and visiting faculty, IIM-A)