The new Companies Bill gives dissenting minority shareholders an opportunity to exit a company if they are not comfortable with any alterations made to the draft red herring prospectus or the objects for which the prospectus was drafted. While experts feel this has the potential to give minority shareholders a stronger voice, a section of the market says it is too early to say that small shareholders would rush for the exit despite the facility under the new regulations.
Section 27(2) of the new Act states that dissenting shareholders who do not consent to any variation in the terms of a contract referred to in the prospectus or the objects for which the prospectus was issued are required to be provided an exit opportunity by the promoter/controlling shareholder. The new Bill replaces the 57-year old Companies Act, which had no such provision.
?In the last three years, there have been a couple of instances where companies made changes to their prospectus after public offers, but minority shareholders on both occasions showed support. While this Section does not empower minority shareholders to greatly influence company affairs, it would at least make sure that they are not treated unfairly. Management would now be more careful while drafting the prospectus,? said Amit Tandon, managing director, Institutional Investor Advisory Services.
Experts say while shareholder activism has not yet gained traction in India, the new laws could see minority shareholders making the most of Sections included specifically to empower them. ?Shareholder democracy has not yet picked up in India. But, the new Bill, with its various provisions, can enable shareholders to influence company affairs,? says JN Gupta, founder, Stakeholders Empowerment Services (SES).
Other Sections that have been put in the new Companies Bill to protect minority shareholders? interests include Section 245 (prescribed number of shareholders can bring a class action suit against the company), Section 188 (related party transactions which are not entered into on an arm?s length basis requires consent of the shareholders) and Section 236 (any person who becomes holder of 90% or more of the equity share capital is required to provide exit to the minority shareholders).
Consultancy firms feel that legal interpretation of Section 27(2) would be crucial to determine its effectiveness. ?A lot would depend upon how provisions of the Bill are enforced as promoters can refuse to give an exit saying that the business is going through a rough phase,? said Avinash Gupta, head, financial advisory, Deloitte.