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According to experts, the operational aspects of such exits and implications such as the impact on promoter shareholding and whether this will trigger an open offer are yet to be addressed.
Section 27 of the Companies Act says a firm cannot change the objects of its issue except with the express permission granted by shareholders in a general meeting. “A company shall not, at any time, vary the terms of a contract referred to in the prospectus or objects for which the prospectus was issued, except subject to the approval of, or except subject to an authority given by the company in a general meeting by way of a special resolution,” the Act notes.
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Shareholders who disagree with the change should be offered an exit. “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 the Securities and Exchange Board by making regulations in this behalf,” says the Act.
According to Yogesh Chande, consultant at Economic Laws Practice, the provision for exit requires additional clarity from Sebi, including on aspects such as the impact this will have on the takeover code, which requires entities purchasing more than a certain number of shares to come out with an open offer to other public shareholders as well.
In the absence of a regulatory clarification on the same, opinion is divided on whether such an exit will even necessitate an open offer. “Sebi has not yet come out with operational guidelines on the exit route. It will also probably have to grant an exemption from the takeover code if it is to be done through the promoter purchase route,” said Sandeep Parekh, founder, Finsec Law Advisors.
According to Shriram Subramanian, managing director of InGovern Research Services, the exit involves buying back securities from the public. “So, a further open offer may not be triggered.”
While there were no consolidated figures on how many companies had changed the objects of their issue, Sebi had passed orders against seven companies on irregularities regarding use of capital raised through initial public offers in 2011.
In a bid to improve disclosures with regard to changes in the objects of public issues, Sebi had recently come out with a discussion paper on the mandatory appointment of a monitoring agency for all issues. Final norms on this are expected to be out soon.
It is also suggested the new exit provisions in the Companies Act have to be financed with additional capital.
“They will have to take a loan or the promoter may have to bring in fresh equity,” said Subramanian.
According to Parekh, granting an exit may not be in the best interests of the company. “This move is counterproductive. The company should have the flexibility to change the objects of the issue if the business climate changes. If promoters are faced with the prospect of bringing in additional capital to buy out dissenting shareholders, they may well decide to go ahead with the existing plan even if it is not in the interest of the company and its shareholders. Such decisions should be left to the company; however, now, the company law has made that a foregone conclusion.”
