Section 236: Purchase of Minority Shareholding
Riteek Baheti
Associate Member, Institute of Company Secretaries of India (ICSI) LL.B.
Proprietor, Riteek Baheti & Associates
(Kolkata-based Practicing Firm)
Registered Valuer, Insolvency and Bankruptcy Board of India (IBBI)
(Security or Financial Assets Valuation Specialist)
A very happy CA Day to all!
BACKGROUND
Minority squeeze-out provisions have seen limited success in Indian company law. Parliament remains hesitant to mandate minority shareholders to sell their stakes, viewing it as “expropriation.” Despite the Dr. JJ Irani Committee’s recommendation, a conservative approach prevails, allowing majority owners only a limited “buyout” power. Legislators remain reluctant to grant majority shareholders full acquisition rights, even after the “right to property” was removed as a fundamental right.
In contrast, the majority shareholders have a clear entitlement to appropriate protections under the company rules of the majority of developed nations, such as Sections 979 and 983 of the English Companies Act, 2006. Although English company law serves as the foundation for much of Indian company law, we have deviated from it in one crucial area.
A limited mechanism for a minority squeeze-out was provided by Section 395 of the Companies Act, 1956 (“1956 Act”), which drew on the legislative goals. This mechanism applies when a scheme or contract involving the transfer of shares between two companies is approved by at least 90% of the shareholders whose shares are being purchased.
Section 235 of the Companies Act, 2013, provides for the compulsory purchase of shares held by dissenting shareholders. It is the statutory equivalent of Section 395 of the 1956 Act., which is equivalent to Section 395 of the 1956 Act. The transferee company may give notice to buy the remaining shares if a plan or agreement for the transfer of shares to another company is accepted by at least 90% of the shareholders within four months. Dissenting minority shareholders may, however, challenge the acquisition by contacting the NCLT by Sections 235(2) and 235(3).
Apart from the restricted process outlined in Section 235, businesses have implemented alternative strategies, such as selective capital reduction under Section 66 of the Act, to squeeze out minority shareholders.
According to the SEBI (Delisting of Equity Shares) Regulation, 2021 (“Delisting Regulations“), listed businesses also have the option to delist their equity shares.
The Act also incorporated Section 236—a new clause about the “purchase of minority shareholding“—in addition to Section 235.
As we delve into the nuances of Section 236 of the Companies Act, 2013, it is essential to recognize its significance in addressing a critical aspect of corporate governance: the purchase or squeeze-out of minority shareholders. This provision legalizes what has often been a contentious issue within the corporate world, allowing majority shareholders to acquire minority-controlled shares (those held by shareholders owning not more than 10%) at a price determined by a registered valuer.
Key Provisions of Section 236
1. Purchase of Minority Shares by Majority Holders
Under Section 236(1) of the Act, if an acquirer or a person working in concert acquires 90% or more of a company’s issued equity share capital, or if an individual or group gains 90% through amalgamation, share exchange, conversion of securities, or other means, they must notify the company of their intention to purchase the remaining equity shares.
Additionally, Section 236 allows majority shareholders—those holding 90% or more of a company’s equity—to purchase the remaining minority shares, with the price for this acquisition determined by a registered valuer certified by the Insolvency and Bankruptcy Board of India (IBBI), who has passed the prescribed valuation examination.
2. Minority Shareholders’ Right to Offer Their Stake
According to Section 236(3), the company’s minority shareholders may offer to sell their equity stake to the majority shareholders at a price determined by the guidelines specified under Section 236(2), without affecting the terms of Sections 236(1) and 236(2).
Dispute Resolution Mechanism
In instances where minority shareholders are dissatisfied with the takeover offer made by the acquiring shareholder, they have recourse to the National Company Law Tribunal (NCLT). They can file an application reporting their grievances against the takeover application, supported by relevant documentation. This mechanism provides a layer of protection for minority interests and ensures that their concerns are addressed legally.
The Importance of the Valuation Report
The valuation report prepared by the registered valuer is pivotal in this process. The valuer appointed shall:-
- Make an impartial, true, and fair valuation of any assets which may be required to be valued;
- Exercise due diligence while performing the functions as valuer;
- Make the valuation by such rules as may be prescribed; and
- Not undertake valuation of any assets in which he has a direct or indirect interest or becomes so interested at any time during three years before his appointment as valuer or three years after the valuation of assets was conducted by him.
Highest Price Paid: The report should disclose the highest price paid by any person or group for acquiring shares during the preceding 12 months, which may include prices paid by other shareholders.
Fair Price Determination: The fair price of shares must be calculated using various valuation parameters, including:
- Return on Net Worth (RONW)
- Book value of shares
- Earnings per share (EPS)
- Price-earning multiple (P/E RATIO) compared to industry averages
- Other customary parameters relevant to share valuation
While there is no specific method mandated under the rules for determining share value, courts have generally upheld the expertise of registered valuers unless there is clear evidence that their report is unjust or biased against any party involved.
Legal Framework and Interpretation
The language used in Section 236 creates an interesting dynamic between majority and minority shareholders. While majority shareholders are obligated to extend an offer to purchase minority shares, minority shareholders are not compelled to accept this offer. This distinction allows minority shareholders to retain some control over their investments, providing them with a form of protection against forced buyouts.
Moreover, Section 236(9) reinforces that if majority shareholders fail to acquire all minority shares, the provisions of Section 236 continue to apply to those residual minority equity shareholders. This ongoing applicability ensures that minority interests remain protected even if initial attempts at acquisition are unsuccessful.
Does section 235 overlap section 236 of the act?
Sr. no. | Basis | Section 235 of the act | Section 236 of the act | Remarks |
1. | Applicability | Applicable in case of acquisition of shares in a company by another company | Applicable when a majority shareholder, either alone or acting in concert with others, acquires shares from minority equity holders. | While section 236 allows acquisitions by any individual or group, including corporate shareholders of the company, section 235 deals with transfers between corporations. |
2. | Involvement of Schemes | Schemes or contracts are involved | Schemes or contracts not involved | Section 235 involves a lengthy process for buying the shares of the minority whereas section 236 is comparatively faster |
3. | Competent Authority | Hon’ble National Company Law Tribunal is the competent authority | No competent Authority is explicitly involved | Explicitly section 236 does not provide for an application to be made to the Hon’ble Tribunal unlike section 235, however in case the minority shareholders comply with the prerequisite of filing, they may do so |
4. | Period for which money is to be kept in the bank account | No explicit time has been mentioned to keep the consideration payable to the minority shareholders | Is explicitly provided under Section 236. | The maximum period for which the consideration shall be kept for in the separate bank account, however, considering the provision of the Limitation Act, such amount should be kept for a maximum time of 3 years. |
5. | Role of the company | The company has a fiduciary role to play in keeping the funds in the separate bank account open for the set purpose | transferor company only has a role to play that of a transfer agent and for taking delivery of the shares and delivering such shares to the majority | Company has a greater role to play under the provisions of the first mentioned section than under section 236 of the act |
Concluding Thoughts
As Section 236 does not make it mandatory for minority shareholders to sell their shares at fair value, Section 236 provides only a partial remedy for effecting a minority buyout. The language of Section 236 could have specifically stated that, upon satisfaction of the requirements outlined in Section 236, minority shareholders have a corresponding obligation to sell their shares to the majority at fair value, according to the recommendations made in the Irani Committee Report.
Majority shareholders are obliged to use alternative strategies, like selective capital reduction because the Act still does not provide a viable remedy for buying out the minority. According to the Delisting Regulations, listed firms can also choose to delist their equity shares. However, the “reverse book-building process” presents numerous practical obstacles to a successful delisting. Additionally, many minor shareholders who did not engage in the delisting process still own a negligible amount of shares once it is over, which places an unnecessary regulatory burden on these businesses.
In the upcoming round of revisions to the 2013 Act, our legislators must establish a clear legislative framework for minority squeeze-outs in India, complete with sufficient protections for the minority.
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