The Hindu Business Line : NIF suggests measures to protect minority shareholders in M&As

NATIONAL Investors Foundation (NIF) has, in a presentation before the Dr J.J. Irani Committee, recommended that a price discovery mechanism coupled with an exit option be provided to dissenting minority shareholders in case of merger of two companies.

For unlisted companies, relevant provisions of the RBI Act should come handy, as they provide for an RBI-appointed valuer for determining the fair value of shares of dissenting shareholders with the same settled in cash by the transferee company.

In case of listed companies, NIF has suggested that the value of shares of the transferor company be determined through reverse book building, keeping in view the SEBI-approved delisting guidelines.

This would ensure that unscrupulous transferor companies are unable to avoid or circumvent the delisting process of the transferor company in the garb of a court-approved merger scheme (to the detriment of the minority shareholders).

It may be mentioned that the expert committee headed by Dr Irani is finalising a draft companies legislation. Its recommendations are expected to be placed shortly. NIF was represented by Mr C.V. Desai and Mr Sudip Bandyopadhyay, Managing Trustee and Trustee respectively.

"Option should be available to the shareholders of the transferor company to either accept cash equivalent of the price determined through reverse book building or accept shares of the transferor company in terms of the approved ratio," NIF has stated, adding that appropriate provisions in the amended Companies Act would usher in a giant step in the direction of facilitating smooth M&As.

NIF, which has tried to identify problems arising in M&As, has proposed certain amendments to the Act for safeguarding minority interests.

Serving as the background are, inter alia, disputes that often arise (in case of mergers of listed companies) due to inappropriate valuation processes adopted and the consequent unfair exchange ratio.

Examples such as ICICI-ICICI Bank, Glaxo-Burroughs and BPCL-Kochi Refineries have been cited in this regard.

During a merger, while the company merging is effectively being delisted, the share exchange ratio is very often perceived to be unfair to minority shareholders.

Invariably, most mergers result in a group of dissatisfied shareholders agitating against a merger, NIF said, adding that a combination of several valuation methodology adopted by a valuer cannot always arrive at a correct valuation; in any case, such valuations would differ depending on the valuer.

"Even though such valuation methodology takes into consideration the prevailing market prices of the shares of the two companies, the real issue is not appropriately captured," it said.

"The price discovery mechanism in the stock market is based on the normal supply and demand of volumes, but not of substantial blocks."

NIF also said that valuation of substantial shares can be arrived at by the reverse book-building process.

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NIF suggests measures to protect minority shareholders in M&As