Exit Option For Minority Investors
New Delhi: Minority shareholders who find themselves at their wit’s end when promoters alter their plans after raising funds through an IPO would soon receive succour from the government. They would get the option to exit the company in case of such breach of trust.
The ministry of corporate affairs is learnt to have included a provision of ‘exit options’ in the Companies Bill, slated to be tabled in Parliament in the ongoing session. A Parliamentary standing committee had earlier vetted the Bill. The move would help foreign institutional investors (FIIs), insurance companies, banks and retail investors holding minority stakes in various companies cover their risks.
Under current norms, a company can change its objectives from what is stated in the Red Herring Prospectus after a shareholder resolution, which is passed by majority shareholders. This however, does not provide for any safeguards for minority shareholders. But with the new proposal, promoters would have to go in for mandatory acquisition of the stake of its minority shareholders, in case of a post-IPO change in plans which the latter might find unacceptable.
According to officials, the ministry will also set conditions for such an ‘exit option.” This could include clearly defining a minority shareholder, setting a maximum time period within which the entire exercise has to be completed and possibly set an average share price for the buyback offer.
The move is significant because the Takeover Code, which has also sought to enhance safeguards for minority shareholders, is yet to be implemented. Sources said the move is part of the government’s overall efforts to fix financial obligations on companies which change objectives without consulting their minority shareholders.
Take for instance a company which raises money through an IPO for setting up a new power plant and after the entire process is completed, decides to diversify into chemicals. Under the current law, the company merely has to get a majority shareholders’ approval for such a policy shift, leaving minority shareholders with no option, even if they are not in agreement with the new plan.
Sources said this issue would be addressed in the Companies Bill by according minority shareholders an exit option in suchcircumstances. “This is one of the biggest changes that the new Companies Bill is going to include,” a source privy to the details told FE. In fact, the ministry has been working in conjunction with market regulator Sebi to strengthen the rights of minority shareholders. Senior officers of the corporate affairs ministry and Sebi are also part of a high-level committee to track the end use of IPO money. “The Companies Bill will have a provision for exit options for minority shareholders. But as we go forward, we are going to come out with specific parameters for the same,” the source explained. Managing director of the Delhi-based institute Corporate Professionals Pavan K Vijay said the move is significant; however, the provision would not be able to cover genuine cases. “Some companies might change the objectives for the benefit of shareholders. What happens then?,” he said. The sentiments were echoed elsewhere as well. Head (research) at SMC India Jagannadham Thunuguntla said the move is very important and an excellent one. “My only concern is that the provision should have a clause for genuine cases. If that is covered, it is an excellent step with long-term implications,” he said. He added that move is going to put a moral-cum-financial obligation on companies to comply with the stated objectives in the Red Herring Prospectus.