Appendix 54
TEXT OF POLICY GUIDELINES OF THE GOVERNMENT RELATING TO STIPULATION OF CONVERTIBILITY CLAUSE AND APPOINTMENT OF NOMINEE DIRECTORS
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 :
1. Writing in
of the convertibility clause in the loan agreements/debenture issues
(i) 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) of the Companies Act, 1956, 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.
(h) 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.
(iii) 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.
(iv) The convertibility clause need not be
stipulated where the combined equity holdings by the all‑India financial
institutions (including the investment institutions) exceed 26% in the case of
non‑MRTP companies and 40% 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.
(v) 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.
(vi) 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
Districts and Special Regions' as defined under Ministry of Industry,
Notification No. 4/1/81 ‑BAD (Vol. III), dated 2nd May, 1983.
(vii)
Assistance
under the Soft Loan Scheme & Modernisation assistance or for aequiring
additional balancing equipment within the existing capacity or for financing
small over runs in respect of projects already financed by institutions will
not attract the convertibility clause.
(viii) 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 in addition to the above mentioned facility, the convertibility guidelines would apply to such additional rupee loans only.
II. Mechanics
of conversion
(ix) Since the actual terms and conditions of conversion of loans/debentures issued into equity will be within the scope of section 81(3) of the Companies Act, 1956, the financial institution 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 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 gearing, 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 :
(x) 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%
and in the case of MRTP companies/Large Houses where such institutional
holdings exceed 40%. However, in cases of default in repayment of institutional
dues, mismanagement of the affairs of the company, etc., these prescribed
percentages may be exceeded.
(xi) 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% in non‑MRTP companies and 40%
in the NIRTP companies/Large Houses.
(xii) 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% in case a request for such conversion were to come from the
promoters themselves.
(xiii)
Conversion option may be exercised, if
necessary on more than one occasion, within a period of 3 years from
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. WBI, WC1, ICIC1 and IRCI should create a separate Department/Cell with official at the level of
GM and Dy. GM, 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 official from one
department to another. Outsiders should be appointed as nominee directors only
as additional directors on Boards where the institution wishes to have more
than one nominee director.
Nominee directors should be appointed on the Boards of all NIRTP
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%; and
(c) Where the institutional stake
by way of loans/investment exceeds Rs. 5 crores.
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.
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.
[Issued by the Ministry of
Finance, Department of Economic Affairs (Banking Division), dated March 2,
1984. Refer (1984) 55 Com Cases (St) 158.1