Where a listed transferor company merges into an unlisted transferee company, the shareholders of the listed transferor lose the liquidity and the regulatory protections associated with a listed status. Section 232(3)(h) of the Companies Act, 2013 ("the Act") addresses this consequence by requiring the scheme to provide an exit opportunity to the dissenting shareholders of the listed transferor, at a price and in a manner prescribed by the Securities and Exchange Board of India ("SEBI").
The Trigger and the Beneficiaries
The exit obligation is triggered where the transferor company is listed and the transferee company is unlisted. It is owed to the dissenting shareholders—those who did not vote in favour of the scheme, or who voted against it. The obligation is imposed on the promoters or the controlling shareholders of the listed transferor, not on the transferee company, although the scheme may allocate the cost differently.
The rationale is that a shareholder who invested in a listed entity should not be forced to hold an unlisted security without a fair opportunity to exit. The exit opportunity is the price of the loss of listing.
The SEBI Framework: Regulation 157 of the ICDR Regulations
Regulation 157 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 governs the post-listing exit opportunity for dissenting shareholders. The regulation prescribes the manner of the exit offer, the pricing formula, and the timelines. The exit offer must be made at a price that is not less than the price determined in accordance with the applicable formula, and it must be open for acceptance for the prescribed period.
The SEBI framework is not a substitute for the scheme's exit clause. The scheme must contain the exit offer, and the offer must comply with Regulation 157. A scheme that provides an exit opportunity on terms that do not comply with the SEBI regulations is a scheme that is vulnerable to SEBI objection and to shareholder challenge.
The Interaction with the NCLT Process
The NCLT does not determine the fairness of the exit price; that is a SEBI function. The Tribunal's role is to ensure that the scheme provides the exit opportunity and that the dissenting shareholders have been informed of their rights. The observation letter from the stock exchanges, which is a condition precedent to the NCLT's consideration of a listed scheme, will address the exit opportunity.
The exit opportunity is not a remedy for oppression. It is a statutory consequence of the loss of listing. A shareholder who is aggrieved by the scheme's commercial terms must use the exit opportunity or challenge the scheme on other grounds; the exit opportunity does not validate an otherwise oppressive scheme.
Call to Action
Anuj Desai & Associates advises listed companies, promoters, and dissenting shareholders on the exit opportunity under Section 232(3)(h) and Regulation 157—from the structuring of the exit offer and the pricing formula to the SEBI observation process and the NCLT sanction. If your scheme involves a listed-to-unlisted merger, we can help you design a compliant exit mechanism.
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