RE: Legal Memorandum as to whether it is mandatory for Company 1 to be converted into a listed public limited company as prescribed by SEC.
From perusal of the provided documents it appears that, Company 1 (“COMPANY 1”) has received a letter dated July 01, 2007 (“the Letter”) from the Securities and Exchange Commission (“SEC”). In the Letter, SEC has asked COMPANY 1 to inform SEC of the steps COMPANY 1 has taken thus far to comply with SEC’s Notification No. …………….. dated February 08, 2006 (“the Notification”), since COMPANY 1’s paid-up capital at present is more than Tk. 40 crore (COMPANY 1’s paid-up capital at present is Tk. 410,64,93,600.00 (Taka four hundred ten crore sixty four lac ninety three thousand six hundred) only.
In these circumstances you require our legal opinion regarding the following:
1) Whether it is mandatory for COMPANY 1 to be converted into a listed public limited company as prescribed by SEC vide the Notification taking into consideration the fact that COMPANY 1 is a public limited company registered under the Companies Act 1913 during 1981,82, having paid-up capital at present of more than 460 crore and the share capital of which was from time to time increased within the authorised limit but no increase have been made after 1993?
Article 1 of the Notification applies to a private limited company. As COMPANY 1 is a public limited company, Article 1 does not apply to COMPANY 1.
Article 2 of the Notification states as follows:
“2. A public limited company, including the said converted public limited company, whose paid up capital exceeds taka fifty crore shall, adhering to due legal process, apply to the Commission for making an issue of capital through public offering to the extent of at least 30 percent of the amount it intends to raise as additional capital:
(a) Within one year from the date its paid up capital exceeds taka fifty crore, or from the date of publication of this notification in the official gazette, whichever comes later, if it has already been in commercial operation for three years or more, or
(b) Within three years of commencement of its commercial operation, if it has not yet commenced its commercial operation.
[Note: The date recorded with the taxation authority about commencement of commercial operation shall be considered the date for this purpose]”
According to the literal interpretation of Article 2 of the Notification, it appears that a public limited company whose the paid up capital exceeds Tk. 50.00 crore and has been in commercial operation for 3 years or more, intending to raise additional capital shall apply to SEC within one year for the date its paid up capital exceeds Tk. 50.00 crore or from the date of the Notification, whichever comes later, and in which case shall provide public offering to at least 30% of the amount it intends to raise as additional capital.
Therefore, the absence of clarification of SEC, as to the interpretation of the language of Article 2 of the Notification, although the paid up capital of COMPANY 1 exceeds Taka fifty crore, Article 2 appears only to apply to COMPANY 1 if and when COMPANY 1 intends to raise additional capital by issuing further shares and so long as COMPANY 1 does not intend to raise additional capital, Article 2 is not triggered.
2) If COMPANY 1 reduces its paid up capital below BDT 400,000,000 and increases capital through bonus shares, will it trigger a mandatory public offering as prescribed by the Notification?
Reduction of Share Capital: A company may reduce its share capital provided that it follows the procedure laid down in sections 59-70 of the Companies Act 1994. COMPANY 1 may reduce its paid-up share capital provided that such reduction is confirmed by the High Court Division of the Supreme Court of Bangladesh.
According to Section 59 of the Companies Act 1994, a company limited by shares and having a share capital may reduce its share capital in any way if:
i) there is authority in the Articles of Association for such reduction of share capital,
ii) a special resolution is passed reducing its share capital; and
iii) such reduction is confirmed by the High Court Division of the Supreme Court of Bangladesh.
Where a company has passed a resolution for reducing share capital, it shall, according to Section 60 of the Companies Act, have to apply by petition to the High Court Division of the Supreme Court of Bangladesh for an order confirming the reduction.
In considering the reduction of the share capital, the Court shall consider the interest of the creditors of the Company and also shall consider the reason for such reduction. The Court has the discretion to refuse to confirm the reduction if the reasons for such reduction is not fair and reasonable.
The special resolution reducing the share capital of a Company as confirmed by an order of the Honourable Court shall take effect after the Registrar of the Joint Stock Companies and Firm (“RJSC”) registers the following documents in accordance with Section 65 of the Companies Act:
(a) the certified copy of the order of the Court confirming the reduction of the share capital of a company.
(b) a copy of the minutes approved by the Court, showing the following :
(i) the amount of the reduced share capital;
(ii) the number of shares into which it is to be divided;
(iii) the nominal value of each such share;.
Bonus Shares: A bonus issue of shares occurs where a company capitalises profits or revenue reserves and applies the proceeds in paying up bonus shares which normally go to existing members in proportion to their entitlement to dividend. The process involves the use of funds mentioned above to provide the shareholders with additional fully paid shares in the company. Bonus shares are fully paid up shares and form part of the paid up capital of the company.
After reducing its paid-up share capital, COMPANY 1 may issue bonus shares of up to BDT 99,999,999.00 (i.e. less than 10 crore so that the total paid up capital does not go beyond 50 crore) and such issue of bonus shares shall not trigger a mandatory public offering as prescribed by the Notification. However, if COMPANY 1 issues bonus shares of BDT 10 crore or more than it shall trigger a mandatory public offering as prescribed by the Notification when COMPANY 1 intends to raise additional capital.
3) What procedure should COMPANY 1 follow in order to get an exemption to the Notification?
The Notification has been issued by SEC in exercise of the power conferred by Section 2CC of the Securities and Exchange Ordinance 1969 (“the Ordinance”), which provides as follows:
“2CC. Power to impose Conditions – Notwithstanding anything contained in the Companies Act, 1994 (Act XVIII of 1994) or any other law for the time being in force, or in any contract or any Memorandum or Articles of Association of any company, any consent or recognition accorded under section 2A, section 2B or section 2C,whether before or after the commencement of this section, shall be subject to such conditions, if any, as the Commission may, from time to time, think fit to impose.”
The Ordinance provides a provision for exemption and condonation of contravention of all or any of the provisions of section 2A, 2B, and 2C (provisions of law under the statute) without any reference to section 2CC.
However, Section 2CC of the Ordinance grants wide powers to SEC to issue directions from time to time, and the Notification in question is a piece of delegated legislation issued in pursuance of Section 2CC and is not a provision of a statute. In which case, SEC shall be entitled to grant exemptions or condonation under Section 2CC in relation to such delegated legislation.
Notwithstanding the above, the Notification affects not only COMPANY 1 but many other companies in Bangladesh and if such exemption is granted in favour of COMPANY 1, there will be a floodgate f other applications for similar exemption. In view of the foregoing it is highly unlikely for SEC to entertain any request for exemption.
If you have any further query, please do not hesitate to contact the undersigned.
For: “The Lawyers & Jurists”