Exit offer if 10% investors dissent

Promoters to return money if they differ with change in objectives in offer document: Proposal

Capital market regulator Securities and Exchange Board of India (Sebi) has proposed a framework for exit offers for dissenting shareholders. In a discussion paper, it has said promoters will have to return money to investors if at least 10 per cent of shareholders dissent to change in objectives stated in the offer document or prospectus filed during fund-raising.

The treatment of dissenting shareholders is part of the Companies Act, 2013, which states, “The dissenting shareholders being those shareholders who have not agreed to the proposal to vary the terms of contracts or objects referred to in the prospectus, shall be given an exit offer by promoters or controlling shareholders at such exit price, and in such manner and conditions as may be specified by Sebi by making regulations in this behalf.”

Even though the new Companies Act is in place for nearly two years, it is only now that Sebi has decided to come out with a framework on this.

“While there is a rising debate whether too much minority protection can suffocate the corporate democracy where a majority of shareholders decide. However, Sebi's move is reformist in nature and largely in line with the Companies Act,” said lawyer Vaneesa Agrawal.

Investment bankers said Sebi’s move would bring more seriousness to the capital-raising process.

“Since companies would now be aware of consequences, it will ensure that they raise funds with full clarity of purpose. It would not really hit companies’ fund-raising ability, but ensure that they do not just rush to the market without proper plan for its utilisation,” said Ajay Saraf, executive director, ICICI Securities.  

Not just those investing in the public offer, but even secondary-market investors, as of the cut-off date, will be entitled to the exit offer. Also, as the refund has to be made by promoters and not the company, Sebi has proposed an exemption for companies where there is no identifiable promoter or controlling stakeholder. The market regulator has also prescribed a formula for arriving at the exit price. The formula takes into consideration the average market price for up to a year before changing the objects of the issue. In the event a company uses a majority of the Initial Public Offering proceeds, it may not have to make an exit offer, Sebi has proposed. Sebi has also said promoters will be given an open-offer exemption if the exit offer results in increase in shareholding beyond 25 per cent — a trigger under the new takeover code. Similarly, if the promoter shareholding breaches the 75 per cent mark — the maximum a promoter entity can hold in a listed entity — they will have a year to bring it down to 75 per cent again.