New Delhi, December 21, 2017

The Companies Amendment Bill passed by Parliament has brought relief for creditors involved in insolvency proceedings allowing them to acquire shares of insolvent company at a discounted price.

The Section 53 of the amended Companies Bill states, "a company may issue shares at a discount to its creditors when its debt is converted into shares in pursuance of any statutory resolution plan or debt restructuring scheme." Earlier provision under Section 53 of Companies Act 2013 said, "Any share issued by a company at a discounted price shall be void."

The amendments to Section 53 are expected to bring down the turnaround time for the entire restructuring process. "The amendment would provide a flexibility to creditors to convert their debt into shares issued at a discount which was earlier prohibited. This amendment would address the concern that when a company goes into insolvency its equity value is eroded and it is not a viable proposition to convert loan into shares at face value," said Anshul Jain, partner, Luthra & Luthra Law Offices.

Once the company issues the shares at a discount, the creditors would become the owners and take control of its affairs. "While this is a fairly significant change, we will have to see its acceptance and implementation by the stakeholders, and most importantly, assess whether it will give adequate returns to the creditors in the long run," said Mukul Shrivastava, partner, EY India. The Companies Amendment Bill 2017 was passed by Parliament on Tuesday bringing about stronger corporate governance standards with simpler provisions and stringent penalties for non-filing annual returns. The Bill was passed in the Lok Sabha during the monsoon session in July 2017.

"The new provision will help the creditors who were not inclined to buy at a higher price... It could not be done legally earlier," Ankit Singhi, partner, Corporate Professionals said. Major changes in the bill also include simplification of the private placement process and rationalisation of provisions related to loans to directors. The bill has replaced the requirement of government approval for managerial remuneration above prescribed limits by approval through special resolution of shareholders.

[The Economic Times]