Expert Advisory Committee

1.29 Query:

Disclosure of particulars of options

on unissued shares.

1. A Government company incorporated in 1965, is engaged in petroleum refining and manufacture of certain petrochemical products. The company was started as joint venture amongst the Government of India (GOI), A Ltd., incorporated in Iran and B Ltd., incorporated in U.S.A.

2. A formation agreement was made in November 1965 to “from a company in India which will own and operate the refinery”. The formation agreement provides that the participation in the initial equity capital of the refinery shall be as follows:

The Govt. of India and such other as

the Govt. of India may determine including

the State in which the company is incorporated. 74%

A Ltd. 13%

B Ltd. 13%

The participation of the Govt. of India and others as above mentioned in any increase in the equity capital shall be 74%. The participation of A Ltd., and B Ltd., in any such increase shall be in proportion to the shares then held by them or their affiliates.

3. Article 11(a) of the Articles of Association of the company dealing with further issue of capital provides that

“Where at any time it is proposed to increase the issued and subscribed capital of the company by allotment of further shares, then such further shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid up on those shares”.

4. The Govt. Auditors while auditing the accounts of the company under Section 619 (4) raised the following query:

“Under the formation agreement between A Ltd., and GOI an offer is to be made to A Ltd., in any issue of share capital in proportion to the shares held by them at the time of such issue to enable them to maintain their holding at the existing percentage. Thus, there exists an option to A Ltd., on the unissued share capital.”

As per Schedule VI to the Companies Act “particualars of any option on unissued share capital” is “to be specified”.

This has, however, not been done resulting in noncompliance with Schedule VI”

5. The company is of the view that the right available to A Ld., as per formation agreement on any future issue of share capital in proportion to the shares held by them at the time of issue is the one contemplated under Section 81(1) of the Companies Act to any existing shareholder of the company. As it is a general right available to any existing shareholder of the company, no separate disclosure has been made. The same view has been taken even in earlier years.

6. The querist has sought the opinion of the Expert Advisory Committee on the following issues:

(i) Whether the company is right in contending that this right is similar to the right available to any other shareholder under Section 81(1) of the Companies Act, 1956, and as such no separate disclosure is necessary; or

(ii) The company should make a separate disclosure as observed by the Government Auditors.

Opinion February 7, 1996

1. The Committee notes that Part I of Schedule VI to the Companies Act, 1956, inter alia, requires as below:

“Particulars of any option on unissued share capital to be specified”.

2. The Committee further notes para 8.11 of ‘Statement on Auditing Practices’, issued by the Institute of Chartered Accountants of India, which states as below:

“8.11 An option on shares arising when a person has acquired a right under an agreement with the company to subscribe for shares in the company if he so chooses. Such options generally arise under the following circumstances:

(i) under promoter’s agreements, subsequently ratified by the company, or

(ii) Collaboration agreements, or

(iii) loan agreements, debenture deeds, or

(iv) agreements to convert preference shares into equity shares, or

(v) other contracts, such as for the supply of capital goods and/or merchandise.

3. The Committee also notes Section 81(1) of the Companies Act, 1956, which states as below:

“81(1) Where at any time after the expiry of two years from the formation of a company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares, then, -

(a) Such (further) shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company in proportion, as nearly as circumstances admit to the capital paid up on those shares at that date.”

4. Based on the above, the Committee is of the view that if the right available to A Ltd., is to subscribe to specific percentage of any future issue of equity shares by the company as per the agreement with the company, which is different from that as it would have been under section 81(1) of the Companies Act, 1956, a disclosure shall be made. However, if it is as per the general right, in accordance with Section 81(1) of the Companies Act, 1956, available to any person who, at the date of the offer, is a holder of equity shares of the company in proportion as nearly as circumstances admit, to the capital paid up on those shares at that date, then no separate disclosure needs to be made.

5. Based on the above, the Committee is of the following opinion in respect of the issues raised in para 6 of the query:

(i) The company may not make a separate disclosure as per Schedule VI to the Companies Act, 1956, if the right available to A Ltd.’s shareholders is as per the general right available as per law.

(ii) A separate disclosure as observed by the Government Auditor would be necessary if as per the agreement entered into with the company the option that is available to A Ltd., is to subscribe to a specific percentage of any future issue of equity shares by the company, which is different from that as it would have been under section 81(1) of the Companies Act, 1956.

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