The move essentially frees up cash reserves and allows companies to reward shareholders.
New Delhi:
Metals and oil conglomerate Vedanta Ltd’s proposal to reorganise capital and transfer Rs 12,587 crore from general reserves to retained earnings has won the backing of US-based proxy advisory firm Glass Lewis.
Vedanta has convened a meeting of shareholders of the company on October 11 for approval of a scheme of arrangement.
In a notice to shareholders, Vedanta reasoned that the firm had over the years “built up significant reserves through transfer of profits”.
“The company is of the view that the funds represented by the general reserves are in excess of the company’s anticipated operational and business needs in the foreseeable future, thus, these excess funds can be utilised to create further shareholders’ value,” it said.
The transfer, it said, was in “the interest of all stakeholders of the company”.
The move essentially frees up cash reserves and allows companies to reward shareholders.
In its recommendation on the issue, Glass Lewis said, it believes that management of the business and the decisions associated with operations are best left to management and the board, but for any egregious or illegal conduct that might threaten shareholder value.
“We believe that board members can be held accountable on these issues when they face re-election,” it said.
It went on to state that the proposal will not have any economic effect on the company’s shareholders. “Therefore, we believe that shareholders should support the proposed transaction.” This is not the first time that such a transfer is taking place. HUL had in 2018 done the same when it transferred the entire balance lying in its general reserves as on April 1, 2015 (about Rs 2,187 crore) to its profit and loss (P&L) account.
The transfer of balance from general reserves to the P&L account was made possible by changes introduced by the Companies Act, 2013. Earlier, the companies had to transfer a certain percentage of profits to their general reserves before the declaration of dividends.
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