India: Exit Opportunity - Shareholders Shield Under The New Companies Bill

Last Updated: 7 November 2012
Article by Shipra Paul

The proposed amendments under the Companies Bill 2011 have been approved by the Union Cabinet on 04th October 2011. With the proposed reformatory and contemporary provisions in the Companies Bill, 2011 the companies in the country would be able to comply with the requirements of the proposed Companies Act in a better and more effective manner. Exit opportunity is one of the contemporary provisions to protect the untainted Investor. The Companies Bill 2011 in its ladder of investor protection has introduced the step for exit opportunity. An opportunity provided to the stakeholders to exit from the Company at the instance of Change in the objects of the Company or change in the prospectus of the Company.

The prospectus issued by a company is a very important document. Besides informing the public about the newly formed company, it also entails consequences of creating belief and confidence in the minds of prospective investors by inducing them to invest in the company. Similarly seeking the industrial growth, objects of the Company are the base on the credence of which the stakeholder invests in a Company. The prospectus and the objects revealed in the prospectus advertise the advantages that one can gain by becoming a share holder and hence with the increasing number of frauds and scams by companies in the modern day, it has become increasingly important to protect the interests of the investor with right to any significant change in the prospectus.

Salient Features of the New Law in the Bill

In the more investor-friendly Companies Bill of 2011, the extant provisions of the Companies Act 1956 which seek to provide that a company shall not vary terms of a contract referred to in the prospectus or objects for which the prospectus was issued except by way of special resolution prolongs, however the new imbibe is dissenting shareholders shall be given an exit offer by promoters or controlling shareholders subject to such manner and conditions as may be specified by Securities and Exchange Board of India.

Following are some of the important provisions of the Companies Bill, 2011:

  • Now a Company, which has raised money from public through prospectus and still has any unutilized amount out of the money so raised, shall not change its objects for which it raised the money through prospectus unless a special resolution is passed by the company and
    • The details, yet to be prescribed, for such resolution shall also be published in the newspapers in circulation at the place where the registered office of the company is situated and shall also be placed on the website of the company, if any, indicating there in the justification for such change
    • The dissenting shareholders shall be given an opportunity to exit by the promoters and shareholders having control in accordance with regulations to be specified by the Securities and Exchange Board of India
  • Such Company which has varied the terms of contract referred to in prospectus or objects shall not use any amount raised by it through prospectus for buying, trading or otherwise dealing in equity shares of any other listed company.
  • The dissenting shareholders 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 the Securities and Exchange Board by making regulation in this behalf.

Variation in terms of contract or objects in Prospectus

The Companies Bill, 2011

The Companies Act, 1956

  1. Only with the approval of, or an authority given by the company in general meeting by way of Special Resolution.
  1. Only with the approval of, or an authority given by the company in General Meeting.
  1. The dissenting shareholders shall be given an exit offer by promoters or controlling shareholders in the prescribed manner.
  1. No exit offer for dissenting shareholders.
  1. Such company shall not use the amount raised through prospectus for buying, trading or otherwise dealing in equity shares of any other listed company.
  1. No restriction for buying, trading or otherwise dealing in equity shares of any other listed company.
  1. Notice of such proposed variation shall also be published in the newspapers.
  1. Publication in the newspaper is not required.

Legal Provisions under the Companies Act, 1956

The Companies Act, 1956 does not expressly provide for the protection of the interests of dissenting shareholders who have not agreed to a proposal to vary the terms of contracts or objects referred in the prospectus nor where a change is made in the objects clause contained in a company's memorandum of association.

The only provision relating to the above is:

Section 61: A company shall not, at any time, vary the terms of a contract referred to in the prospectus or statement in lieu of prospectus, except subject to the approval of, or except on authority given by, the company in general meeting.

Expected Impact and Response of the Industry

  • The provision of an exit opportunity for dissenting shareholders on variation in terms of contract or objects in a prospectus is another step designed for investor protection under the new law. It is a very welcome measure as notably, not only does it give more power to share and increase the rights of shareholders, but it also tends to enhance the sense of responsibility and diligence of companies.
  • Such provision will protect the Interest of all shareholders or Investors particularly Foreign Institutional Investors, High Net worth Investors, Public Financial institutions who have invested in particular company after seeking its objects in terms of Industrial growth analysis. Such Investors are being put in nuisance when abruptly the objects of the Company have been changed. Such Investors shall have the right to exist from the Company.

Impact of change in the law on Corporates

  • Any alteration in the object clause will be intricate process and costly affair for the Companies who have raised money through prospectus and looking forward for a healthier prospect in a different Industry.
  • Promoters and Shareholders having control shall have essential funds to purchase the Shares of dissenting shareholders.
  • Rules yet to be Specified by SEBI for any such conversion shall depict the clear picture
  • Intricate in case if the company opts for change but does not have the necessary funds.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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