Query regarding Schedule XX of SEBI ICDR Regulations

[Jai Gehani]

Dear All,

I want to obtain a clarification from you all regarding the "condition of exit offer" as provided in "Schedule XX" of SEBI ICDR Regulations.

What would be the correct interpretation of the below mentioned condition, the extract of the same is as follows:

" the amount to be utilized for the objects for which the offer document was issued is less than seventy five per cent. of the amount raised (including the amount earmarked for general corporate purposes as disclosed in the offer document). " 

I the Company has raised INR 100, and spent INR 95, then whether its is required for the Company to provide for Exit Opportunity.

Views are personal and Feedbacks are welcome.

Best Regards

ACS Jai Gehani

Company Secretary in Practice

[Ashutosh Shukla]

Hello Jai,

Let's first start with Regulations 59/157 of the ICDR, which provides that:

a) an exit offer must be provided by the promoters or shareholders in control 

b) to dissenting shareholders 

c) if there is a change in objects or variation in the terms of the contract related to objects referred to in the offer documents. 

On the other hand, Schedule XX of the ICDR 2018 says, in relation to the condition for the exit offer, that: 

a) the proposal for change in objects or variation in terms of a contract, referred to in the offer document is dissented by at least ten percent of the shareholders; and 

b) the amount to be utilized for the objects for which the offer document was issued is less than seventy-five percent of the amount raised (including the amount earmarked for general corporate purposes as disclosed in the offer document).

Let me explain the above using an example. There is a company called ABC Ltd engaged in the seafood business for quite some time. However, it does not have a cold storage, processing, and packing facility of its own. The company works out that its EBITA shall be much better if it owned these facilities. Since the company does not have sufficient funds in its hands, it approaches the intermediaries and enters into an agreement with them and finally it is decided that the company shall be raising 100 crores, which will be utilized to build a large cold-storage facility, an advanced food processing and packing facility. Regulatory formalities are completed and the company goes on to raise the funds. However, soon after raising the funds, a storm hits, and the boats that the company owned were wrecked. The priority, thus, shifts all of a sudden towards repairing and, if necessary, the acquisition of new boats. The company estimates that it would be incurring 26 crores out of the money it had raised for the purpose of cold storage, processing, and packing facility. 

Now, if and only if, at least 10% of its shareholders do not agree to such spending, the company shall have to give an exit offer to such dissenting shareholders. If there is no such dissent or less than 10% dissent, there is no issue whatsoever. What if the company incurs 24 crores for repairing the boats? Since 76% of the amount shall still be utilized for the original purpose, there shall be no exit offer even if 10% of shareholders of the company dissent to such change in the object. In your case, you have already spent Rs. 95. However, you have not disclosed whether you spent it on the object for which you had raised Rs. 100. If I assume that you have spent the amount in pursuance of the purpose for which you had raised it, you are not supposed to provide the facility of exit offer under the provisions of ICDR 2018. On the contrary, if you spent it on something else not covered by the offer document, you will be required to provide the offer document if 10% of your shareholders go against your decision and record their dissent formally by way of a resolution passed in a general meeting. 

Thanks and Regards,

CS Ashutosh Shukla

Disclaimer: For information purposes only. Not professional advice. 

[Jai Gehani]

Dear  Ashutosh ji,

Thank You, for helping me in having an understanding of the provision.

However, the doubt was due to the language of the clause, which provides that "amount to be utilized for the objects"

Although the intent of law is clear, that if 75% of the amount raised is utilised, it will not be the case of Exit Opportunity. The language does not result in such an interpretation.

Best

Jai

Contact: +91 70149 99180

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