Takeover norms for unlisted firms getting finalised, to be unveiled soon

Industry experts said that policy must ensure a functional market for corporate control and any state intervention in such market is justified only if it addresses a potential market failure
The Ministry of Corporate Affairs is giving final touches to the takeover code for unlisted companies and it is likely to be introduced soon, a senior government official told Business Standard.

The new rules, which are under consideration, will allow a person alone or together with other parties owning 75 per cent in an unlisted company to trigger a takeover of the entire shareholding by moving the National Company Law Tribunal (NCLT). 

Unlisted companies have no formal takeover code and shares are transferred on the basis of contracts and agreements.

“We want to bring a mechanism which is not very onerous and yet meets the test of law. We will lay down the process and criteria for such takeovers,” the senior government official said.

In 2014, the government had added a provision in the Companies Act under Section 230 (11) that said: “Any compromise or arrangement may include takeover offer made in such manner as may be prescribed: Provided that in case of listed companies, takeover offer shall be according to the regulations framed by the Securities and Exchange Board of India (Sebi).”

Section 230 (12) further added, “An aggrieved party may make an application to the tribunal in the event of any grievances with respect to the takeover offer of companies other than listed companies in such manner as may be prescribed and the tribunal may, on application, pass such order as it may deem fit.”

This amendment was not executed, as the finer details of the takeover code were still being worked out.

According to experts, once the takeover code is notified, an entity such as Tata Trusts, for instance, which holds 66 per cent in Tata Sons, might have an option to utilise the provision, along with other group companies, to meet the 75 per cent stake condition, and approach the NCLT to take over the shares held by a minority. This can be done as long as it remains a private company. However, the cost of such a takeover can be prohibitive. 

The National Company Law Appellate Tribunal estimates suggest the little over 18 per cent stake held by Shapoorji Pallonji — the minority shareholder in Tata Sons — is currently valued at around Rs 1 trillion. 

In fact, when the Supreme Court last Friday gave protection to the Cyrus Mistry family (Pallonji Group) from Article 75 contained in the Tatas' Articles of Association, which enables buyout through shareholders' resolution, senior lawyer Harish Salve said the Tatas were not looking at such a provision at present. 

Meanwhile, the Union law ministry is vetting the proposed takeover code. 

“Currently, takeover of listed companies is not subject to any regulatory approval. The government seems to provide for a mechanism for takeover, where minority shareholders can also tender shares along with majority shareholders pursuant to scheme subject to approval of the NCLT,” Ankit Singhi, partner, Corporate Professionals, said. 

Currently, the takeover code in India, notified by Sebi, applies to only public listed companies. One of the main objectives is to protect the interests of small shareholders.   

The new code
  • Section 230(11) of Companies Act provides for a takeover code in unlisted companies 
  • The sub-section introduced in 2014 is yet to be implemented 
  • Section 230 provisions for squeezing out of minority, if acquirer has 90% share in equity share capital 

  • Proposed code to require NCLT nod for takeover by a majority holding of 75% 
Industry experts said that policy must ensure a functional market for corporate control and any state intervention in such market is justified only if it addresses a potential market failure. 

“State supplied regulations to protect minority shareholders must ultimately help in enhancing the market for corporate control. We need to think of the need for takeover regulations from this perspective, especially when there are alternative legal mechanisms available for minority shareholder protection," said Pratik Dutta, senior research fellow, Shardul Amarchand Mangaldas.  

Section 237 of the Companies Act provides that if an acquirer comes to hold 90 per cent of the issued equity share capital through an amalgamation, share exchange, conversion of securities or for any 

other reason, they shall notify the company of their intention to buy the remaining equity shares. 

In such a takeover, the acquirer does not have to go to the tribunal. With 90 per cent share, the acquirer is within his rights to buy out others.  With the proposed code, the majority of 75 per cent can go to the tribunal to take over minority shareholding. 

“We want to protect all shareholders... The tribunal will have to take a view on whether the offer being made to the minority is sufficient,” the official quoted above said.

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