Tag Along (Co-sale) Right
Also written Tag along right · Co-sale right
An 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.
In plain language
An AIF usually backs a company because of the people running it. If the founder quietly sells his stake to an outsider and walks away, the fund is left holding a minority in a business whose reason for investing has just left the building.
A tag along, also called co-sale, right protects against that. If a shareholder subject to the right wishes to dispose of shares, the shareholders who benefit from it "can insist that the potential purchaser agrees to purchase an equivalent percentage of their shares, at the same price and under the same terms and conditions".
The workbook's rationale is candid: the right has "the effect of making the shares more difficult to sell". AIF investors often bank on the technical and management experience of founders and management, and do not want those individuals reducing their stakes or exiting while the fund remains invested.
How it works
Mechanics.
- A promoter (or key manager) whose shares are subject to the right finds a buyer.
- The AIF may require the buyer to purchase the same percentage of the AIF's holding.
- The AIF's shares go at the same price and on the same terms and conditions as the promoter's.
- If the buyer will not take the AIF's shares too, the promoter's sale cannot proceed on those terms.
How it is usually packaged. The workbook notes that the right of first refusal and the tag along right are usually provided for simultaneously on the shares held by promoters and key managers. Investors may additionally require a lock-in on such shares for a specified period.
Where it lives. Like ROFR and ROFO, tag along is an exit right between shareholders and belongs in the Shareholders' Agreement, with the articles amended to make it enforceable.
Its opposite number. A drag along runs the other way: it obliges the other shareholders to sell alongside the right-holder. Tag along protects the minority from being left behind; drag along lets the right-holder bring others with it.
A worked example
Illustrative figures. Chambal Growth Fund owns 24% of Sariska Logistics Pvt Ltd. The founder, Mr Rathore, owns 56%. The SHA gives the fund a ROFR and a tag along on the founder's shares.
A strategic buyer offers Mr Rathore Rs 500 per share for half his holding — 28% of the company.
Step 1 — ROFR. Mr Rathore must first offer those shares to the fund. The fund declines to buy.
Step 2 — tag along. The fund invokes its co-sale right. Mr Rathore is selling half his holding, so the buyer must also purchase half the fund's holding — 12% of the company — at the same Rs 500 per share and on identical terms.
Suppose Sariska has 1 crore shares in issue:
Founder sells : 28 lakh shares x Rs 500 = Rs 140 crore
Fund tags along: 12 lakh shares x Rs 500 = Rs 60 crore
Buyer's total : 40 lakh shares = Rs 200 crore
The buyer planned to spend Rs 140 crore and now faces Rs 200 crore. It may accept, renegotiate the whole deal or walk away — and this friction is precisely the "more difficult to sell" effect the workbook describes.
Why NISM asks about it
Chapter 7 (Investment Process and Governance of Funds) sets out tag along (co-sale) rights at 7.4.6 under exit rights, between ROFR/ROFO and drag along, and lists "exit rights" among the chapter's learning objectives. Expect a definition question (same percentage, same price, same terms), a rationale question (keeping founders invested, making shares harder to sell), and a comparison with drag along.
Common exam traps
- Tag along gives the minority the right to join a sale; drag along gives the right-holder the power to force others to join. This pair is the commonest confusion on exit rights.
- Same price and same terms. A tag along at a discount to the promoter's price is not a tag along.
- "Equivalent percentage" is a percentage of the AIF's own holding, read in the usual way as the same proportion the seller is selling of his — not the same number of shares.
- The rationale is to keep founders and management in, by making their shares harder to sell.
- It is usually paired with ROFR on promoter and key-manager shares, sometimes with a lock-in as well.
- It is an arrangement inter se between shareholders, recorded in the SHA — not a right against the company.
Where this is taught
Free preparation for NISM Series XIX-ARelated terms
- Drag Along (Bring Along) RightAn 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.
- 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.
- 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.