Wednesday, March 12, 2008

Company(s) name change (first tech, then infrastructure!)

Change of name (subject to availability of that name) of a Company requires a board motion to be approved by shareholders by special resolution (more than 74% in value of those members present and voting at the meeting should approve it, since this involves amendment to the name clause of the memorandum of association of the Company).

In case of listed companies this rule is no different except that the stock exchanges will need to be kept posted on the resolution and accordingly be informed to make the changes to the name of the Company and its ticker symbol as and when it is effected.

Listed Companies in India on an average have around 45-50% as promoter holding, with around 20% being held by FII’s and close to 5-10% by domestic institutions. Add to this the holding of HNI’s and you will realize that nothing can prevent a small group (in number) of shareholders to pass a special resolution should the promoters decide to go ahead with it.

By necessary implication the name of a Company should ideally be reflective / or is perceived to be reflective of the principal activity in which the Company is engaged in.

During the tech boom of 2000. Many Companies had their names changed prior to accessing the public markets (launching an IPO), this was done essentially to
Command higher valuations, Tech companies in those days used to trade at as high as 3 digit multiples
Create a buzz around the issue and thereby ensure subscription.

The Indian regulator after the party was over and damage done, introduced the following provisions in the DIP guidelines by circular no 11 dated 14-08-2003 (regulations for unlisted companies accessing public markets)
“In case the company has changed its name within the last one year, at least 50% of the revenue for the preceding 1 full year is earned by the Company from the activity suggested by the new name”
Since, the above rule applies to unlisted companies going for IPO’s. What about companies listed going for IPO’s or even other wise not accessing the public markets but going for a change of name to change the perception of the market participants about its business (meaning improve valuation multiples)? The answer - there are no rules in place to check them. Recently, to name a few well known companies have changed their names e.g.
Diamond Cables (is now renamed as) = Diamond Power Infrastructure
Reliance Energy (is now renamed as) = Reliance Infrastructure

Though with shareholder approval it is the right of every company to have its name changed in order to be reflective of the nature of activity it is getting itself into. My simple submission is that since I believe that reputation cannot be built on future projections, why is it that till such time the activity as reflective by changed name does not constitute a dominant activity it (Company) is not required to make adequate disclosures in respect thereof. In my view, the disclosure may be simple that the changed name should be affixed to the existing name and no changes to the website address or email addresses be allowed in the interim. Any other manner in which this can be achieved is also acceptable.

My question - Are the regulators waiting for the damage to happen and then create a regulation around it with the bad memories as a base?

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