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Exit Offer to Dissenting Shareholders

Finsec Law Advisors

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SEBI released a consultation paper on “Exit to dissenting shareholders” on December 01, 2015. The paper is pursuant to the requirement under the Companies Act, 2013, for promoters or persons in control of a company to provide an exit offer to dissenting shareholders when the company intends to: (1) change the objects for which it raised money through a public issue; (2) change the terms of a contract referred to in its prospectus. The paper discusses the procedure for providing an exit offer, and proposes to utilise the pricing guidelines in the takeover regulations to determine the exit price and provide an exemption from making an open offer, if any, under the takeover regulations.

The basic premise behind providing an exit offer is that, a company must use the funds raised through a public issue for the stated objects; any modification thereof is seen as a dubious activity. It seems to protect shareholders by providing a money back guarantee. While this sounds harmless on the face of it, in reality there are certain issues. For instance, a company might have raised funds for a particular project, say deep sea oil discovery in 2013 or a beer factory in Kerala in 2014. These objects might become unviable if oil prices drop unforeseeably or sale of beer is banned in Kerala. Some promoters/controlling shareholders may prefer to continue with the original objects, to avoid the substantial economic cost of an exit offer, thereby sinking valuable capital raised from the public into an unviable project. Hence, the requirement is unwholesome in its application and wealth destructive for genuine shareholders.

Further, it is counterintuitive when promoters hold a minority stake in the company and exercise no control over the board of directors, and hence do not decide to alter the objects. In this light, a discussion paper on whether promoters/controlling shareholders should be obligated to provide an exit offer to dissenting shareholders would be preferred to the present consultation paper on the logistics of SEBI norms governing the exit offer.