You may have encountered instances where a company which you invested in, during the exuberance of the primary market has utilised the money raised from you for a purpose other than that stated objects, but you did not have enough legal recourse to safeguard your interest.

But now you could be protected under the company law. The recently, introduced new Companies Bill 2011 passed in both houses of the Parliament (the Lok Sabha as well as the Rajya Sabha) specifically provides an opportunity to the shareholders to exit from a company in case of change in its objects or in its offer document. According to the said Bill, a company cannot vary the terms of a contract referred to in the prospectus or objects for which it was issued except by way of special resolution. Moreover it provides recourse to the dissenting shareholders by giving them an exit offer by the promoters or controlling shareholders.

Also if the company has raised the money from the public vide a prospectus, but kept the amount unutilised; it can’t change its objects for which it has raised the money, provided that a resolution thereto is passed for the same. The company will have to publish details of the resolution in a newspaper, indicating the justification for such change. Thus if some shareholders disagree with the company, they have to be provided with an exit opportunity by promoters and shareholders having control over the company.

It is noteworthy that, the Companies Act, 1956 does not expressly provide protection to dissenting shareholders, when they disagree with changes to the contract terms or objects referred to in the prospectus.

We are of the view that this is a welcoming move intended to protect of shareholders across categories. But this would provide greater recourse to large investors, such as High Networth Individuals (HNIs), Domestic Institutional Investors (DIIs) and Foreign Institutional Investors (FIIs), who invest in companies based onobjects and growth prospects. The stipulation is also expected to make companies more responsible and diligent while raising funds. This would also preclude diversion of funds to other businesses.

However what remains to be seen is how the valuations or price would be offered for the exit option in the aforesaid matter. It is expected that the capital market regulator, the Securities and Exchange Board of India (SEBI) specifies detailed regulation hereto.

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