30 October 2008
What is treasury stock? It's a company owning it's own stock - either by way of a merger or a buyback. The company can reissue the stock on a future date. But in India as per company law, a company or its subsidiaries cannot hold it's own shares. So how come all these Indian companies have treasury stock?
Isha Dalal travels back in time to understand how India’s own homegrown version of treasury stock came to be.
Delhi High Court, 1996
Shardul Shroff, partner in India’s leading law firm Amarchand Mangaldas was on the verge of making corporate history.
Client, telecom solutions company Himachal Futuristic or HFCL had merged with Himachal Telematics through a court approved merger scheme
But what the court approved, the Department of Company Affairs did not!
Post merger, HFCL wound up in possession of a subsidiary that held HFCL shares. That was a violation of Section 42 of the Companies Act, and DCA was crying foul. But HFCL’s lawyers had a case to make.
Shardul Shroff, Partner, Amarchand Mangaldas
Suppose you have purchased shares in the market or purchased it in a bid, the cost of acquisition gets frozen in your schedule of investments. But the market cap or market value may be higher. If those shares were put to sale, the shareholders will benefit. And that is the logic that courts accept by asking a company to create an independent trust for the purposes of holding those shares temporarily and liquidating them over time so realization value is accruing to benefit of shareholders
And that's how the desi version of 'treasury stock' was born. In the last 10 years there have been 2 formats of holding this treasury stock that have been legitimised. Each with an accompany set of rules on how the stock is held, how it's classified, how it votes and when it's sold.
Type 1, is the HFCL type
Wherein HFCL's subsidiary Trade Invest ended up with 30 lakh shares of HFCL because of the merger. As per court directions Trade Invest then became trustee of those shares for the benefit of HFCL shareholders. The shares had to be held for 8 years , after which they could be sold and the proceeds shared by HFCL's shareholders. And while they shares were held in trust, they had no voting power.
Shardul Shroff, Partner, Amarchand Mangaldas
They suspend the right to vote because of the bar in law that you cannot use a subsidiary’s rights in a holding company and vote on them. Because you are in control of that subsidiary. So you are voting as a company on your own shares. And that is not permissible
Type 2 is the ICICI Bank case. In 2002 when ICICI merged with it's subsidiary ICICI Bank, the merged entity ended up with its own stock. Almost 16% of it. All held by a Trust, specially created for the purpose. Because of the ownership separation, these shares retained their full voting rights
However if assuming its a buy-back of securities is a company has to extinguish shares within 7 days of the last days of buy-back. if yes then how can treasury be created?
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