Dissenting shareholders

A company raising money from the public tells investors what it will do with the money. That promise sits in the prospectus.

Suppose the company later changes its mind. It wants to spend the money on something else, or to vary the terms of a contract the prospectus described. It can put that to a shareholder vote and win it.

But the shareholders who voted against did not sign up for the new plan. They are the dissenting shareholders, and the rules do not leave them stuck. They must be offered a way out — an exit offer, at a price fixed under the regulations.

Who pays for that exit? Not the company. The promoters or shareholders in control do, because they are the ones changing the deal. And they must appoint a SEBI-registered merchant banker to run it.

The definition is narrow, and worth reading twice. A dissenting shareholder is not anybody who is unhappy. It is somebody who voted against that specific resolution.

The definition (Chapter 8, section 8.6). Dissenting shareholders means those shareholders who have voted against the resolution for a change in objects, or a variation in the terms of a contract, referred to in the prospectus of the issuer. Two triggers, one test: a recorded vote against.

The relevant date. The date of the board meeting in which the proposal for the change in objects or variation in terms of a contract referred to in the prospectus is approved, before seeking shareholders' approval. Note the order — the board approves first, and the relevant date is fixed then, not at the shareholder meeting.

Frequently traded shares. The term has the same meaning here as in the SAST Regulations, 2011: shares in which the traded turnover on any stock exchange during the twelve calendar months preceding the calendar month of the announcement is at least 10% of the total number of shares of that class. See frequently traded shares. The classification matters because it decides how the exit price is arrived at.

Who does what. The promoters or shareholders in control shall appoint a SEBI-registered merchant banker and finalise the exit offer price in accordance with the regulations. The obligation sits on them, not on the issuer.

The closing disclosure. Within two working days from the payment of consideration, the issuer shall furnish to the recognised stock exchange(s) disclosures giving:

• the aggregate number of shares tendered;
• the number accepted;
• details of the payment of consideration;
• the post-offer shareholding pattern of the issuer; and
• a report by the merchant banker that the payment has been duly made to all the dissenting shareholders whose shares were accepted in the exit offer.

What the workbook does not give. Section 8.6 gives no exit price formula, no minimum exit price and no minimum acceptance threshold. It names the inputs — the relevant date, the frequently-traded classification and the regulations — and stops. Do not supply a price rule from memory: the only figure this section carries is the two working days.

Illustrative figures. Bhima Foods Ltd raised Rs 600 crore in an IPO. The prospectus said Rs 420 crore would build a processing plant at Nashik.

Eighteen months later the board wants to buy an existing plant in Gujarat instead. That is a change in objects.

The vote splits like this:

Only the 55,00,000 shares voted against belong to dissenting shareholders. The 15,00,000 abstaining shares do not, however annoyed their owners may be.

The merchant banker finalises an exit offer price of Rs 118. Of the eligible shares, 50,00,000 are tendered and 48,00,000 are accepted, 2,00,000 being rejected on technical grounds:

Consideration = 48,00,000 × Rs 118 = Rs 56,64,00,000 = Rs 56.64 crore.

That Rs 56.64 crore is paid by the promoters or shareholders in control — not out of the Rs 600 crore the public subscribed, and not by Bhima Foods.

By 7 August, Bhima Foods files with the exchanges: 50,00,000 tendered, 48,00,000 accepted, Rs 56.64 crore paid, and its post-offer shareholding pattern. Alongside it goes the merchant banker's separate report that every one of those accepted shareholders was actually paid.

Chapter 8 (Other Merchant Banking Activities – Disinvestment, Buyback of Equity Shares) is 10% of the paper, and section 8.6 covers the merchant banker's role where an exit opportunity has to be given to dissenting shareholders.

It is a short section, so the questions are definitional and numerical. Expect: who is a dissenting shareholder — one who voted against the resolution for change in objects or variation in terms of a contract referred to in the prospectus; what is the relevant date — the date of the board meeting approving the proposal, before shareholders' approval is sought; who appoints the merchant banker and fixes the price — the promoters or shareholders in control; and within what period must the issuer disclose to the exchanges — two working days from the payment of consideration.

• Voting against is the test. Abstaining, not voting, or complaining afterwards does not make a shareholder a dissenting shareholder.
• The relevant date is the board meeting date, not the shareholder meeting date, and it is fixed before shareholders' approval is sought.
• The promoters or shareholders in control appoint the merchant banker and finalise the price. The issuer does not, and the money does not come out of the issue proceeds.
• Two working days, and the clock starts from payment of consideration — not from the closure of the exit offer.
• The merchant banker's report is part of the disclosure. The issuer files the numbers; the merchant banker separately certifies that every accepted shareholder was actually paid.
• Two triggers, not one: a change in objects, or a variation in the terms of a contract referred to in the prospectus.
• This is an exit on a change of objects, not an AIF dissent right. Do not import the dissent period rules for alternative investment funds — the one-month window, the two independent valuers and the three-month completion belong to a material change in an AIF's private placement memorandum, and are taught in a different paper.
• The workbook gives no exit price formula here. It points to the regulations and to the frequently-traded classification, and nothing more.