Drag Along (Bring Along) Right
Also written Drag along right · Bring along right
An exit right obliging other shareholders — typically the promoters — to sell their shares to the same buyer on the same terms when the AIF holding the right chooses to sell.
In plain language
A 15% stake in an unlisted company is hard to sell. Buyers want control, and a minority slice with no say over the business commands a discount. An AIF that needs to exit before its fund winds up can find itself with few takers at any sensible price.
A drag along right, also called bring along, solves this by letting the fund offer the buyer more than it owns. It "creates an obligation on the other shareholders of the company (subject to such right), to sell their shares to a potential purchaser if the shareholder with such right chooses to sell to that buyer".
In the workbook's example the AIF holds the right over the promoters: "if it wishes to exit, the promoters will be obliged to sell to the same buyer on the same terms".
How it works
When it is insisted upon. The workbook says a drag along is "usually insisted when the AIF is a minority investor in the investee company".
Why. The objective is to drag the promoters along so that the stake offered to the buyer is large enough to attract a control or strategic premium, optimising the exit. Without the right, the sale of a minority stake "could be difficult and sub-optimal due to minority or non-marketability discount".
Mechanics.
- The AIF finds a buyer for its stake.
- It exercises the drag along.
- The promoters (or other shareholders subject to the right) must sell to the same buyer on the same terms.
- The buyer acquires a combined, larger block — often control.
How it fits the exit menu. It is most relevant to trade sales and strategic sales, where a corporate buyer may pay a strategic premium for a controlling stake. The workbook ranks the strategic (M&A) sale as usually the second most preferred exit after an IPO.
Tag along versus drag along. A tag along lets the minority join the promoter's sale; a drag along lets the right-holder force others into its own sale.
A worked example
Illustrative figures. Periyar Private Equity Fund holds 18% of Munnar Spices Pvt Ltd (1 crore shares). Its fund life ends in 18 months, so it must exit. The promoter family owns 82%.
Offer A — minority stake alone. A financial buyer offers Rs 300 per share for the fund's 18 lakh shares, citing the lack of control.
18 lakh shares x Rs 300 = Rs 54 crore
Offer B — control. A listed FMCG company wants at least 51% and will pay Rs 420 per share for a controlling block.
The fund exercises its drag along. The promoter family must sell to the same buyer on the same terms. The block offered becomes the fund's 18% plus 33% dragged from the promoters — 51 lakh shares.
Fund's 18 lakh shares x Rs 420 = Rs 75.6 crore
Promoters' 33 lakh shares x Rs 420 = Rs 138.6 crore
The fund's proceeds rise from Rs 54 crore to Rs 75.6 crore — a gain of Rs 21.6 crore, which is the control premium the workbook describes. Without the drag along, the fund would have been left with Offer A and its minority discount.
Why NISM asks about it
Chapter 7 (Investment Process and Governance of Funds) explains drag along (bring along) rights at 7.4.6 under exit rights, immediately after tag along. Chapter 10 (Fund Monitoring, Reporting and Exit) supplies the exit menu in which it matters most — trade sales and strategic sales. Expect a definition question, a "when is it typically insisted upon" question (AIF as minority investor), and questions contrasting it with tag along.
Common exam traps
- Drag along compels others to sell; tag along lets the holder join a sale. Reversing them is the standard trap.
- It is typically insisted upon when the AIF is a minority investor — not when it already holds control.
- The purpose is a control or strategic premium, avoiding the minority or non-marketability discount.
- Same buyer, same terms. The dragged shareholders do not get worse terms than the right-holder.
- "Bring along" is the same right, not a different one.
- It sits in the Shareholders' Agreement as an arrangement between shareholders, with the articles amended for enforceability.
Where this is taught
Free preparation for NISM Series XIX-ARelated terms
- Shareholders' AgreementAn inter se agreement between an AIF and all existing shareholders of the investee company, binding them to the rights and obligations of the deal — made enforceable by amending the articles.
- Strategic SaleAn AIF's exit by selling its stake in a portfolio company to a corporate buyer in the same or an adjacent industry — usually the second most preferred exit after an IPO.
- Tag Along (Co-sale) RightAn exit right letting the AIF insist that anyone buying a promoter's shares also buys the same percentage of the AIF's shares, at the same price and on the same terms.
- Right of First OfferA shareholders' agreement right requiring a selling shareholder to obtain the holder's best offer first, and to sell to the holder at that price if the market cannot beat it.
- Right of First RefusalA shareholder right to match the best outside quote a selling shareholder has obtained — the holder sees the price first and may buy at it, or refuse and let the sale proceed.
- Secondary SaleAn AIF exit in which it sells its stake in a portfolio company to a third party — often another AIF, such as a later-stage PE fund taking over from a VC fund — rather than exiting through an IPO.
- BuyoutA private equity transaction in which investors acquire a controlling interest — typically 51% or more of the share capital or voting rights — in a target company; with significant leverage, it is an LBO.