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What are the rights of minority shareholders in companies facing bankruptcy?

What are the rights of minority shareholders in companies facing bankruptcy?

There are hundreds of listed companies under the Insolvency and Bankruptcy Code (IBC), where  the existing shareholders are expected to get a raw deal because of the new promoter or successful bidder bringing in fresh equity with a majority control.

There are hundreds of listed companies under the Insolvency and Bankruptcy Code (IBC), where  the existing shareholders are expected to get a raw deal because of the new promoter or successful bidder bringing in fresh equity with a majority control. The existing shareholders will get reduced to a minority in these companies. Take for instance, the new promoter Vedanta in the Electrosteel Steels, one of the 12 companies, referred to bankruptcy code, is bringing in Rs 1,800 crore as fresh equity, which will give Vedanta a 90 per cent stake. The existing shareholders with an existing paid up capital of Rs 2,400 will get crunched  within the 10 per cent equity. In many other cases, the new promoters will own anywhere between 50-90 per cent equity. So what are the rights of these minority shareholders?

1. First, there is a provision in the Companies Act for installing a small shareholder director, who can take care of the interest of minority shareholders. Recently, few minority shareholders of pharmaceutical company Alembic actually approached the company for a representation for small shareholder director, though it was rejected.

2. The minority shareholders have the rights to approach NCLT in case of oppression and mismanagement. This is largely in areas like misuse of funds or mismanagement of the company. The company is also required to make adequate disclosures to minority shareholders.

3. There is a strong possibility that the new promoter or successful bidder apply for a delisting of shares from the stock exchanges. The promoter first has to acquire 90 per cent shareholding through a buyback offer and then apply for delisting. The minority shareholders can raise the issue of 'pricing' if  it is not fair and correct.

4. There is also a big possibility of the merger with a group company or a strong company. The approval of High Court/NCLT is required in case of any merger and amalgamation. The minority shareholders can appear before the court to place their grievances, if any.

5. The Company Law also provides for an appointment of independent valuer by Audit Committee under the guidance of the board. The minority investors have the right to approach the court in case of any pricing issue.

6. If the new promoter sells the company to some other investor in future, minority shareholders can also approach Sebi for any grievances they have.