Companies Act Section 236

Companies Act, Section 236: Purchase of Minority Shareholding

Section 236 of the Companies Act, 2013 lays down a comprehensive legal framework for the compulsory acquisition of minority shareholding when a company reaches a 90% threshold of majority ownership. This provision enables majority shareholders or acquirers to consolidate their holding by offering to purchase the remaining equity shares held by minority shareholders, thereby streamlining ownership and decision-making.

At the same time, the section provides reciprocal rights for minority shareholders to demand an exit from the company under similar conditions. It sets out safeguards, procedures, valuation requirements, disbursement obligations, and contingencies in case of non-physical delivery or deceased shareholders.

1. Triggering Event and Intention to Acquire Minority Shares

When an acquirer or any person acting in concert with the acquirer, becomes the registered holder of 90% or more of the issued equity share capital of a company, they are required to take further action. This situation can arise not only through direct acquisition but also through corporate actions such as:

Amalgamation,
Share exchange,
Conversion of securities, or
Any other form of corporate restructuring.
Once this 90% threshold is reached, the acquirer or group of persons must notify the company in writing of their intention to purchase the remaining (minority) equity shares of the company.

2. Obligation to Make an Offer to Minority Shareholders

Following the notification, the acquirer or majority shareholders are required to make a formal offer to purchase the equity shares held by the minority shareholders. The purchase price must be determined based on a valuation conducted by a registered valuer in accordance with the rules prescribed under the Companies Act. This ensures that the offer price is fair, objective, and in line with market principles.

3. Reverse Right of Minority Shareholders

In addition to the acquirer’s obligation to offer an exit, minority shareholders themselves may initiate the process. That is, minority shareholders have the right to offer their shares for sale to the majority shareholders, who are then required to purchase the offered shares at the price determined as per Subsection (2).

This reverse right promotes fairness by allowing minority shareholders to exit voluntarily when they no longer wish to stay in a company dominated by a 90% majority.

4. Deposit of Purchase Consideration and Payment Timeline

To ensure transparency and protection of the rights of minority shareholders, the majority shareholders must:

Deposit the total value of the shares they intend to acquire into a separate bank account, to be operated by the company whose shares are being transferred.
This amount must be kept in the account for at least one year.
The amount shall be disbursed to the minority shareholders within 60 days of deposit. However, if any shareholders fail to receive the payment within this period (for any reason), the company must continue making such disbursements for a total period of one year from the date of deposit.

5. Role of the Company as Transfer Agent

In all cases of purchase under this section, the company whose shares are being transferred must act as a transfer agent. The company is responsible for:

Receiving and disbursing the purchase price to the minority shareholders, and
Taking delivery of the shares from the minority shareholders and transferring them to the majority shareholders.
This provision centralizes the transaction process, ensuring that both the buyer and seller have a reliable intermediary.

6. Non-Delivery of Physical Share Certificates

If the minority shareholders fail to deliver physical share certificates within the time prescribed by the company:

Such share certificates shall be deemed to be cancelled.
The company will be authorized to issue new shares in place of those cancelled.
The company will complete the transfer of shares in accordance with applicable law.
Payment will be dispatched from the advance deposit made under Subsection (4) to the concerned minority shareholders.
This ensures that the acquisition process is not halted due to administrative or logistical issues relating to physical share transfers.

7. Transfer of Shares of Deceased or Non-Existent Shareholders

If the majority shareholder(s) have deposited the purchase amount for shareholders who:

Have died,
No longer exist, or
Whose legal successors, heirs, administrators, or assignees have not yet been brought on record by way of legal transmission,
Then such minority shareholders or their successors retain their right to make an offer for sale of shares. This right will remain valid for three years from the date the majority shareholding was acquired.

This provision safeguards the interests of legal heirs and representatives of minority shareholders who may otherwise be left out of the transaction.

8. Duty to Share Additional Compensation

If, after acquiring the shares of minority shareholders, the majority shareholders (holding at least 75% of the former minority equity) negotiate or agree on a higher price for their shares (e.g., by entering into a private sale), and fail to disclose this likelihood or event at the time of acquiring shares from the minority, they are obligated to:

Share the additional compensation received as a result of the higher negotiated price,
On a pro rata basis with the minority shareholders whose shares were acquired earlier at the lower price.
This provision prevents unjust enrichment by majority shareholders and ensures equitable treatment for the minority.

9. Application to Residual Minority Shareholders

If the majority shareholder(s) fail to acquire 100% of the shares, and some residual minority shareholders remain, then this section will continue to apply to them, even if:

(a) The shares held by the residual minority shareholders have been delisted, and
(b) The one-year period or any period specified by SEBI regulations has elapsed.

This ensures that minority shareholder protections do not lapse merely due to administrative delays or regulatory transitions.