Advantage infrastructure

A wide range of projects and facilities are granted the status of infrastructure projects under the new Companies Act, 2013. Prachi Manekar elaborates on the benefits from the new Act for the infrastructure projects.

The Companies Act, 2013 (new Act) is a milestone in the second generation reforms that is set to change the face of the Indian corporate world. It has brought forth a new regime of investor protection and set new standards of corporate governance. The new act recognises infrastructure projects as a separate class for grant of certain benefits.

Benefits to projects and companies

A wide range of projects and facilities are granted the status of infrastructure projects under the new Act. The list of such projects and facilities is given in Schedule VI of the new Act. It is much wider than the conventional list provided by RBI and others.

The benefits are extended to all infrastructure projects and not just infrastructure companies. Thus, even if the said projects are carried out by non-infrastructure companies, the benefits will be available. For instance, if a pharmaceutical company is constructing a Special Economic Zone then it can also avail the exemptions under the new Act for that project.

Benefits available

The following benefits are extended to infrastructure projects and facilities:

Preference shares of longer tenure: To enable infrastructure companies to raise capital of a quasi-equity and permanent nature, they are permitted to issue preference shares of tenure longer than 20 years. Thus, companies can issue preference shares of any tenure not exceeding 30 years for an infrastructure project.

Secured debentures: Under the draft rules proposed to be prescribed under the new Act, secured debentures cannot be issued for a period exceeding 10 years. However, companies that are engaged in setting up infrastructure projects may issue secured debentures for any period not exceeding 30 years.

Loans/guarantee/securities: The old and the new Acts govern the grant/provision/making of loans/guarantee/investment/security. Both the new and the old Acts, provide a threshold limit [The threshold limit for grant of loan and guarantees, provision of securities and making of investment to any person is 60 per cent of paid up capital and free reserves or 100 per cent of free reserves, whichever is higher.] for the said activities. If loans etc, collectively cross the threshold limit, many conditions including shareholders’ approval have to be complied with.

Under the new Act, the norms have become more stringent. The exemptions which were available under the old Act to private companies have been withdrawn. Further, the exemptions on grant/provision/making of/an loans/guarantees/securities/investment by a holding company to/in a wholly owned subsidiary company is withdrawn. Further, loans/guarantees/securities/investments granted/made/provided to any person (not just to body corporate under the old Act) are included for calculating the threshold limit. However, companies engaged in the business of providing infrastructure facilities are exempt from the norms while granting/providing loans/guarantees/securities.

Thus, even if the loans/guarantees/securities cross the threshold limit, the company will not have to approach the shareholders. The loans/guarantees/securities can be granted/provided without any prior approval of public financial institution (unless there is a specific contractual term). The said loans/guarantees/securities can be made at any rate of interest. Further, it can be made even though there is a default in repayment of deposits. The disclosures about the nature of the said loans/guarantees/securities and their utilisation need not be made in the financial statements.

The benefits that are set out above are given considering the special needs of the infrastructure sector. The Parliament has empowered government to grant further exemptions. Securities Exchange Board of India (SEBI) is permitted to notify sectors that can raise funds through shelf prospectus from the capital market. For the grant of further exemptions, the infrastructure associations will have to play a more active role in putting forth their representations to the government and to SEBI.

The author is a corporate lawyer advising infrastructure companies.