"Punters versus The Real Economy
SEBI has come out with a consultation paper on exit being provided to dissenting shareholders where public offer proceeds have not been applied towards the disclosed object.
To provide a brief context, sections 13 and 27 of the Companies Act, 2013 provide that where a company has raised money from the public, and wishes to use part of the funds towards an object not originally stated in the prospectus, then such change of object must be permitted by shareholders by way of a special resolution. In addition, dissenting shareholders are to be provided an exit by the promoters of the company in terms of regulations of SEBI.
The basic premise of the Companies Act in the two sections is that a change of objects for use of funds raised is by itself a dubious activity. It also seems to protect shareholders from such a change by guaranteeing them money back. On the face of it, this does not sound wrong at all. If a company has raised money for a purpose, it must use it for that purpose. But the reality is quite different from the optics.
The world of economics and the competitive landscape for almost every company is a slippery slope. Oil at $100 a barrel versus oil at $37 in a matter of just over a year can make entire industries highly uncompetitive, where they were previously profitable. And of course conversely, many companies would find the dip in oil prices a big bonanza, so that they would like to enter into a business which was previously unattractive. For a company, the price of oil is merely one of the hundreds of variables which make their business viable or unviable. The reality is that these variables, much as we like predictability, vary on a daily basis. Whether it is input costs, change of regulations, number of competitors or many other unforeseen factors.
Now imagine a company which had raised funds for a particular project, say deep sea oil discovery in 2013 or a beer factory in Kerala in 2014. Now imagine what such a company would be looking at in 2015. Funds were raised for a project which has now become unviable because of change in competitive features or regulatory changes. If the oil drilling is done the cost of extraction (say) would exceed the sale price by 30% and in the second case sale of beer locally would be banned and transport costs would ensure that sale outside the state would be unviable.
Now imagine what the promoters of the company would do with the funds raised, assuming that only a small part of the funds raised had actually been invested in the two projects. They can do one of the two things a) continue with the projects and watch the shareholder money go down a certain black hole, but with no liability on the promoters/managers. b) discontinue the project and attempt to invest in a viable sector, but seek shareholder approval and give them an exit option out of the personal funds of the promoters. Clearly, the incentive will be to take the first option given the new Companies Act. Equally clearly, this is a bad outcome for the company, the shareholders and for economy.
While the SEBI discussion paper seems to understand some of the issues, it only subtly talks about them and recommends statutory change. SEBI as a creation of the statute of course rightly does not challenge the statute itself. But, someone ought to- in the national interest. This law is unwholesome in its application and is wholly wealth destructive for genuine shareholders. Some punters may make some money in the short term in some cases, but broadly everyone loses. We really need a discussion paper on the existence of the statutory provisions more than a discussion paper on the logistics of the SEBI norms for providing the exit option to dissenting shareholders."
(Attached is SEBI’s Discussion Paper on “Exit Offer to Dissenting Shareholders)