The legality of assisting in IPO subscription by issuer through negotiation of cheap loans

The disinvestment of PSUs has not been successful particularly in the retail and employee reservation category and this is a matter of concern for the government if one is to go by the number of articles in business papers on this issue. Hence is it not surprising that Coal India, the country’s largest coal miner, is negotiating with some of the state-owned banks such as SBI to seek cheap loans for its employees so as to enable them to subscribe to the shares reserved for the employees in its upcoming initial public offering. (See link). While these efforts on the part of Coal India carry good intentions since its employees will become equity holders, the method might require adherence to certain specific provisions of the Companies Act and, pursuant to which, specific disclosure in the prospectus will have to made.

As per section 76 of the Companies Act, a company may pay commission to any person in consideration of, inter alia, his procuring or agreeing to procure subscription for any shares in the company subject to fulfillment of certain conditions such as the payment of the commission must be authorized by the Articles, the commission paid should not exceed a certain specified amount, the amount of commission and the number of shares must be disclosed in the prospectus and a copy of the contract for the payment of the commission is delivered to the Registrar at the time of delivery of the prospectus. Underwriting agreements are a classic example whereby the company pays commission to the underwriter for it to agree to subscribe or procure subscription of shares being offered in the public offer. As a result section 76 is complied with and necessary disclosures are made in the prospectus.

In this backdrop, the efforts on the part of Coal India may trigger section 76 since if a big company like Coal India is negotiating access to cheap loans from big banks like SBI, it is unlikely that no monetary consideration would flow from Coal India to SBI in the shape of commissions. And for cheap loans to be made available, SBI would have to come up with a new loan product meant for prospective employee investors of Coal India and market it. This may amount to ‘procuring subscription’.

In the alternative, negotiating of cheap loans for IPO subscription by employees could also come within the ambit of section 77 of the Companies Act, which, inter alia, permits the provision by a company, in accordance with any scheme for the time being in force, of money for the subscription of shares in the company for the benefit of the employees of the company. This is one of the exceptions to the general rule which prohibits public companies to give any financial assistance in connection with subscription of shares in the company.

Thus the act of Coal India might fall under section 76 or 77 and this will depend on the modality that is adopted by Coal India such as the size of the loan, whether Coal India has a scheme in place or not etc. However if it falls under section 76, it will require additional compliances as indicated earlier.