IPO fund diversion: Dissenting investors to get exit offer

Proposed move would also help companies being more serious in stating their objectives at time of IPO

Companies may soon have to make mandatory exit offer to dissenting shareholders if they decide to use the funds raised through IPO for purposes other than the original stated objectives.

Capital markets regulator Sebi is considering changes in regulations to safeguard the interest of minority shareholders who might have invested in an IPO based on the stated objectives and do not consider a proposed change in the fund deployment scheme as advantageous to them.

There have been many instances of the companies changing their deployment strategy for funds raised through an IPO (Initial Public Offer) after securing shareholders' approval with majority of votes, despite some minority shareholders being opposed to such moves.

Therefore, it was felt that the dissenting shareholders should also be given an exit opportunity, if they are not happy with such developments at the company whose shares they own, a senior official said.

The proposed move would also help companies being more serious in stating their objectives at the time of IPO, as many entities tend to make generic statements in their public offer documents and tend to divert the funds at a later stage.

Many companies are already being investigated by Sebi for diversion of funds for purposes other than those stated in their IPO documents without necessary approval and for the personal benefits of their promoters.

The Companies Act, 2013, also provides for the dissenting shareholders -- those who have not agreed to the proposal to vary the terms of contracts or objects referred to in the prospectus -- being given an exit offer by promoters or controlling shareholders.

Taking forward the provisions made in the Companies Act, Sebi has begun a process to frame the rules for determining such an exit price, the official said.

The Corporate Affairs Ministry has also proposed a provision for giving an exit offer to dissenting shareholders in cases like takeover of an unlisted company.

In such cases, the dissenting shareholders would need to be given an exit price that is higher of the ones determined by an independent valuer and the best at which an acquirer has purchased the shares.

In case of takeover of a listed company, the Sebi norms already provide for the minority shareholders of the target company being made an open offer for purchase of their shares.