Though the Companies Act, 2013 (“Act”) had provided for the treatment of dissenting shareholders and their exit in case of a company which, after raising funds from the public through a prospectus, has varied the terms of a contract referred to in the prospectus or the objects for which the prospectus was issued, it is only recently that the Securities and Exchange Board of India (“SEBI”) has actually come out with a discussion paper on implementing the same and laying down the framework (“Paper”). Subsequently, the SEBI took up the suggestions made in the Paper and approved amendments to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 at its board meeting held on January 11, 2016. This blog aims to discuss the suggestions made in the Paper and the decision of the SEBI at the recently concluded board meeting accepting the same. It has also been specifically mentioned that the provisions shall be applicable on a prospective basis, i.e., for public issues which opened after the commencement of the related provisions in the Act.

Under the Act, dissenting shareholders have been said to be those shareholders who have not agreed to the proposal to vary the terms of contracts or objects referred to in the prospectus, and such shareholders shall be given an exit offer by promoter(s)/ persons in control at such exit price, and in such manner and conditions as may be specified by the SEBI.

It had been proposed in the Paper and accepted by the SEBI that the promoter(s)/persons in control of a company shall provide an exit to investors through the purchase of their shares if at least 10% of the shareholders of the company dissent to any change in the objectives which were stated in the offer document or prospectus filed during fund-raising. The Paper also added that to prevent frivolous claims, it has also been stated that these provisions should be made applicable to variation of only such contracts which may substantially affect the main line of business or revenue generation of the company. This point has not been mentioned in the SEBI board meeting minutes, but in my view may be added to the final regulations and might have been left out for the sake of brevity.

Additionally, the Paper rightly states that it is presumed that investors in the secondary market take an informed decision of investing in the shares of the company and hence such investors as of a cut-off date (of course, in addition to those who have invested through the public offer) should also be given the opportunity to exit in case they do not agree to the change in the objects of the company. The SEBI board meeting minutes are silent on this point, however, it cannot be discounted that such a provision may find its way in the final regulations.

As regards the offer price for the exit offer, though the Paper made a remark that the exit price should be based on the existing market value of the stock and not on historical price, however the actual suggestion is to have the exit price be based on price determined in case of exit offers given to the existing shareholders under Regulation 8(2) of the SEBI (Substantial Acquisition of Shares and Takeovers), Regulations, 2011 (“Takeover Code”) and the relevant date for pricing shall be the date of the board meeting in which the proposal for change in objects was approved. This suggestion has also been accepted by the SEBI.

The Paper had also discussed a couple of exemptions to be provided to certain companies from the obligation to provide an exit to the dissenting shareholders. One of these is for companies where there are no identifiable promoter(s)/ persons in control, since the exit is to be provided by way of a purchase of the dissenting shareholders’ shares by the promoter(s)/ persons in control. This appears to be a fair position and has been accepted by the SEBI.

Another exemption proposed in the Paper, which does not find mention in the SEBI board meeting minutes, was for companies which had already used a majority of the Initial Public Offering proceeds and wished to change the objects by a small degree due to certain reasons. In such a case, the promoter(s)/ persons in control were required to give exit only if the amount utilized is less 75% of the total amount raised for the objects of the issue (including the amount earmarked for general corporate purposes as disclosed in the offer document).

While we are on the topic, we cannot ignore the implications of the Takeover Code. The Paper has suggested, and the SEBI had accepted it in its board meeting, that in case the shareholding of the promoter(s)/ persons in control crosses 25% due to the purchase of dissenting shareholders’ shares, such acquisition shall not trigger an open offer under the Takeover Code. Furthermore, in case the promoter(s)/ persons in control are already holding a 75% stake in the company, they cannot use the provisions of Regulation 3(2) of the Takeover Code to refuse honouring the dissenting shareholders’ exit rights and shall still be required to provide them an exit. However, in case the aggregate shareholding of the promoter(s)/ persons in control post the provision of exit to the dissenting shareholders results in their shareholding exceeding 75% in the company, they will have to comply with the provisions of the Securities Contracts (Regulation) Rules, 1957 and bring their shareholding back to 75% within a period of 1 year. This can cause unfair hardship and economic losses to the promoters/persons in control if the stock price goes down after the exit has been provided to the dissenting shareholders as they would then have to sell down shares forcibly in poor market conditions to comply with the 25% minimum public shareholding requirement.

The SEBI at its meeting has also specified that such investors who held shares as on the date of the board meeting in which the proposal to change the objects is approved and those who cast their vote against the resolution shall be eligible to avail of the exit opportunity under this provision and has also provided exemption for contra trade restrictions on promoters / controlling shareholders / dissenting shareholders, under the SEBI (Prohibition of Insider Trading) Regulations, 2015.

Additionally the Paper also lays down in detail the procedural aspects of the manner of providing exit opportunity to the dissenting shareholders and provided for suitable changes to be made to the Act as well to implement the suggestions, which has also been mentioned in the SEBI board meeting minutes, should find their way into the proposed regulation as well.

In my view, this is a positive reformist step taken by the SEBI to bring harmony with the Act and would ensure that companies do not blindly jump on the fund-raising bandwagon without any consequence. They will need to ensure that they raise funds with complete clarity of purpose and a proper utilisation plan. Though earlier, these proposals were at the discussion paper stage and hence not crystal clear, with the recently concluded board meeting, it is expected that the SEBI shall formally enact them with further clarity to ensure consistency with the Act on this issue.