Section 236 of Companies Act 2013: Purchase of Minority Shareholding
Section 236 of the Companies Act, 2013 provides a statutory mechanism for purchase of the remaining minority equity shareholding when an acquirer, a person acting in concert, or another person or group reaches the prescribed 90 percent level of issued equity share capital. The section also protects minority shareholders through valuation, payment and residual-right provisions.
- The statutory threshold is 90 percent or more of the issued equity share capital.
- The majority side must notify the company of its intention to buy the remaining equity shares.
- The offer price is determined through a registered valuer in accordance with the prescribed rules.
- Minority shareholders also have a statutory right to offer their shares to the majority at the prescribed price.
- The acquisition amount must be deposited in a separate bank account and payment is ordinarily to be disbursed within 60 days.
- Rule 26A contains a specific procedure for minority shares held in dematerialised form.
Meaning and scope of Section 236
Section 236 is titled Purchase of minority shareholding. Broadly, it applies when the shareholding described in sub-section (1) reaches 90 percent or more of the issued equity share capital. The provision addresses both the majority shareholder's purchase of the balance equity shares and the minority shareholder's ability to offer the minority holding for purchase.
The expression registered valuer should be read with Section 247 of the Companies Act, 2013 and the applicable valuation rules. The valuation requirement is important because Section 236 does not permit the majority to fix an arbitrary purchase price.
How purchase of minority shareholding works
1. Reaching the 90 percent threshold
Where the conditions in Section 236(1) are met, the acquirer, person or group of persons must notify the company of the intention to buy the remaining equity shares.
2. Offer to minority shareholders
Under Section 236(2), the majority side must offer to buy the minority equity shares at a price determined on the basis of valuation by a registered valuer in accordance with the prescribed rules.
3. Minority shareholder's corresponding right
Section 236(3) separately permits minority shareholders to offer their minority equity shareholding to the majority shareholders at the price determined under the prescribed valuation mechanism.
4. Deposit and payment
Section 236(4) requires the majority shareholders to deposit an amount equal to the value of the shares to be acquired in a separate bank account operated by the company whose shares are being transferred. The amount is maintained for at least one year for payment to minority shareholders. The section requires disbursement to entitled shareholders within 60 days, while continuing the payment mechanism for the specified one-year period for shareholders who could not receive or claim the payment earlier.
5. Company's role in transfer
The company whose shares are being transferred acts as the transfer agent for receipt and payment of the price and for taking delivery of shares and delivering them to the majority. Section 236 also provides a mechanism where physical share certificates are not delivered within the time specified by the company.
6. Protection of residual minority rights
The section preserves specified rights where shareholders have died, ceased to exist, or transmission has not been recorded, and it continues to apply to residual minority equity shareholders in the circumstances stated in Section 236(9).
Offer price under Rule 27
Rule 27 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 prescribes how the registered valuer determines the offer price for Section 236(2).
Listed company: the offer price is determined in the manner specified by SEBI under the applicable regulations, and the registered valuer is also required to provide a valuation report addressed to the board of directors giving justification for the valuation.
Unlisted company and private company: the valuation takes into account, among other things, the highest price paid by the acquirer, person or group during the preceding 12 months and the fair price determined by the registered valuer using customary valuation parameters such as return on net worth, book value, earnings per share and price-earnings multiples relative to industry averages. A reasoned valuation report is also provided to the board.
Purchase of minority shareholding held in demat form: Rule 26A
Rule 26A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 lays down a specific process for shares held in dematerialised form. It was inserted through the Companies (Compromises, Arrangements and Amalgamations) Second Amendment Rules, 2020.
The process includes verification by the company of the relevant minority shareholders, notice of a cut-off date, publication of the notice, communication with the depository, transfer through the company's designated DEMAT account, payment to the minority shareholders and onward transfer to the acquirer's DEMAT account. The rule also deals with cases in which a court, tribunal or statutory authority restrains transfer, or the shares are pledged or hypothecated.
Section 236: statutory provisions and practical effect
Section 236(1): When an acquirer or person acting in concert becomes the registered holder of 90 percent or more of the issued equity share capital, or a person or group becomes a 90 percent majority or holds 90 percent of the issued equity share capital by amalgamation, share exchange, conversion of securities or another qualifying reason, the company is to be notified of the intention to buy the remaining equity shares.
Section 236(2): The remaining minority equity shares are to be offered for purchase at a price based on valuation by a registered valuer in accordance with the prescribed rules.
Section 236(3): Minority shareholders may offer their minority equity shareholding to the majority shareholders at the price determined under the prescribed valuation mechanism.
Section 236(4): The majority shareholders must deposit the value of the shares to be acquired in a separate bank account operated by the company whose shares are being transferred for at least one year. Payment to entitled shareholders is to be disbursed within 60 days, subject to the continuing payment mechanism stated in the proviso.
Section 236(5): The company whose shares are being transferred acts as transfer agent for receiving and paying the price and for taking delivery of shares and delivering them to the majority.
Section 236(6): If physical shares are not delivered within the time specified by the company, the section permits cancellation of the relevant share certificates, issue of shares in lieu of the cancelled certificates, completion of transfer according to law and payment from the amount deposited by the majority.
Section 236(7): Where payment has been deposited for shareholders who have died or ceased to exist, or whose heirs, successors, administrators or assignees have not been brought on record by transmission, the right to offer the minority equity shareholding continues for three years from the date of majority acquisition or majority shareholding.
Section 236(8): In the circumstances specified in the subsection, additional compensation arising from a higher negotiated transfer price is to be shared with the minority shareholders on a pro rata basis.
Section 236(9): The section continues to apply to residual minority equity shareholders where the full purchase is not completed, including the situations specified in clauses (a) and (b) concerning delisting and expiry of the stated period.
Amendment note: The Companies (Amendment) Act, 2017 substituted the expression referring to the "company whose shares are being transferred" for "transferor company" in the relevant parts of Section 236, with effect from 9 February 2018.