Companies Act Section 27

Companies Act Section 27: Variation in Terms of Contract or Objects in Prospectus

Section 27 of the Companies Act governs the procedures and restrictions related to variations in the terms of contracts or the objects specified in a prospectus. 

This section is essential for maintaining transparency and ensuring that shareholders are adequately informed and protected when significant changes are proposed by a company. 

Below is a detailed overview of the provisions outlined in this section.

1. Restrictions on Variation

a. Approval Required

Necessity of Approval: 

A company is prohibited from altering the terms of any contract mentioned in the prospectus or the stated objects for which the prospectus was issued unless it secures the necessary approval. 

This safeguard is in place to protect the interests of shareholders and ensure that any significant changes are made with their consent.

Special Resolution Requirement: 

The required approval must be obtained through a special resolution that is passed in a general meeting of the company. 

A special resolution typically requires a higher threshold of approval, often necessitating at least a three-fourths majority of votes from those present and eligible to vote.

b. Publication Requirement

Notice of Special Resolution: 

The company must publish details of the notice concerning the special resolution, as prescribed by the relevant regulations. 

This publication serves to inform all stakeholders about the proposed changes and provides transparency in the decision-making process.

Newspaper Publication: 

The notice must be published in newspapers one in English and one in the vernacular language of the region where the company's registered office is located. 

This dual-language requirement ensures that the notice reaches a broader audience and is accessible to all shareholders, regardless of their language preference.

Justification for Variation: 

The publication must clearly indicate the justification for the proposed variation. 

This transparency allows shareholders to understand the reasons behind the changes and assess whether they support the company's direction.

c. Restrictions on Fund Use

Prohibition on Fund Misuse: 

The company is expressly prohibited from using any funds raised through the prospectus for purchasing, trading, or dealing in the equity shares of any other listed company. 

This restriction aims to prevent potential conflicts of interest and protect the integrity of the funds raised from investors. 

It ensures that the capital acquired through the prospectus is utilized solely for the purposes stated therein.

2. Exit Offer for Dissenting Shareholders

a. Provision for Exit

Exit Option for Dissenting Shareholders: 

Shareholders who disagree with the proposed variation in the terms of contracts or the objects specified in the prospectus referred to as dissenting shareholders must be offered an exit option. 

This provision is designed to protect the interests of those who do not agree with the changes and provide them an opportunity to exit their investment.

b. Terms of Exit Offer

Responsibility of Promoters or Controlling Shareholders: 

The exit offer must be made by the promoters or controlling shareholders of the company. 

This ensures that those in positions of authority and responsibility within the company are accountable for providing a fair exit option to dissenting shareholders.

Specified Exit Price: 

The exit offer must be made at a specified exit price, which should be determined fairly to reflect the value of the shares. 

The conditions under which the exit offer is made must be in accordance with the regulations set forth by the Securities and Exchange Board of India (SEBI). 

This regulatory oversight helps to ensure that the exit terms are fair and equitable for all shareholders involved.