Public shareholders will now have a say in the sale or disposal of undertaking by a listed company through slump sales, thanks to market regulator SEBI now mandating the “majority of minority” rule for such transactions to sail through in the coming days.

To strengthen the extant framework of slump sale executed outside Scheme of Arrangement and safeguard the interest of minority shareholders, SEBI has stipulated that such transactions can go through only if majority of public shareholders vote in favour than those voting against it. 

This will have to be in addition to the requirement to pass a Special resolution, according to the latest changes made to SEBI’s Listing Obligations and Disclosure Requirements (LODR) Regulations and now notified by SEBI.

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SEBI has also now mandated disclosure of the objects and commercial rationale for such sale, disposal or lease, to the shareholders.

Exemption from the “majority of minority” rule has been provided for transfers to wholly-owned subsidiaries. However, the listed company has to comply with the latest shareholder approval provisions in the event the wholly owned subsidiary transfers the business or the listed company dilutes its shareholding in the subsidiary anytime.

The latest changes flow from a consultation paper issued by SEBI in February this year for strengthening corporate governance at listed entities by empowering shareholders.

Put simply, a slump sale involves selling off an undertaking or the whole business against a lumpsum amount.

Currently, companies can resort to sale, disposal or lease of their undertakings through two routes—(i) Scheme of Arrangement (prescribed under Companies Act and/or LODR Regulations); (ii) Business Transfer Agreement (outside the Scheme of Arrangement framework).

Sale of undertakings or their substantial part were being allowed to be executed outside the scheme of arrangement framework without being approved by the National Company Law Tribunal (NCLT). However prior to the latest SEBI LODR change, there was no explicit framework for protecting the interest of minority shareholders which in effect results in sale of the business undertaking without taking such shareholders into confidence.

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Experts’ take

Madhu Sudan Kankani, Partner, Deloitte India, said that the new SEBI stipulation of the approval process regarding sale, lease or disposal of businesses outside of the scheme of arrangement, aims to protect the interest of minority shareholders by requiring the approval “Majority of minority” shareholders.

Going forward, public shareholders will be able to drive the decision and approval process, he added.

Vaibhav Gupta, Partner, Dhruva Advisors, said this is likely to have a significant impact on any business transfers by listed companies. This is because the need to have ‘majority of minority’ public shareholders’ approval even for transfers to unrelated parties gives extra-ordinary powers to public shareholders and has the potential to delay such genuine third party transactions, he added.

Manendra Singh, Partner, Economic Laws Practice, said this now becomes another added instance where public shareholders’ vote will be critical for the transaction to go through under the “majority of minority” rule. 

SEBI is clearly moving towards recognising the voice that public shareholders need to have in a listed entity, he added.