COMPARATIVE STUDY OF PURCHASE OF MINORITY SHAREHOLDERS AND THEIR RIGHT AND REMEDIES IN PUBLIC vs PRIVATE INDIAN COMPANIES

Ahaanpreet Singh*

INTRODUCTION

This research paper seeks to explore the legal avenues for the purchase of minority shareholders’ shares and subsequent rights and remedies available to them, drawing a clear comparison between public and private companies in India.

Despite having a limited and handful stake in a company, they play a crucial role in efficient governance of company’s objectives. They ensure smooth corporate governance so that the decision-making power doesn’t fall in the hands of few. Consideration of all class of shareholders in the matters that affect company’s operations and financial health is important.

Minority Shareholders are individuals or groups who own a company’s shares but do not have the majority voting power. Typically, they own less than 50% of company’s outstanding shares and their voting rights are insufficient to influence company’s major decisions.

For the purchase of minority shares, Separate procedures are followed in compliance to the various provisions and regulations.

The Companies Act, 2013 along with regulations issued by Securities and Exchange Board of India (SEBI) provides a legal framework for the protection rights of minority shareholders to ensure that they aren’t unfairly disadvantaged by majority shareholders or company’s management.

PUBLIC vs PRIVATE COMPANY

Before starting with the detailed comparative analysis let’s discuss what is private and a public company.

A private company is an organisation whose shares (ownership) are owned by small group of individuals, private investors, management etc.

Shares of these companies are not traded or listed on stock exchange like NSE and BSE

A public company is an organisation whose shares are owned by various members including general public. This is because the ownership of a public company is listed and traded on regular basis in the stock exchange.

A public company is regulated with number of provisions as set by SEBI, RBI etc unlike private company where regulations are low as compared to a public company.

PURCHASE OF MINORITY SHARES IN PUBLIC AND PRIVATE COMPANY

IN A PUBLIC COMPANY

The purchase of minority shares in a public company in India is primarily governed by the companies Act, 2013 and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

According to SEBI, every public company must ensure that at least 25% of its total issued and paid-up equity share capital is held by public shareholders.

Section-236 of companies act talks about Purchase of minority shareholding which deals with the “Squeeze Out” of minority shareholders by an acquirer who holds ninety percent or more of the issued equity share capital of the company.

If an acquirer reaches the 90% threshold , they can express their interest to the company to buy the remaining minority shares.

The offer price for these shares must be determined by a registered valuer in accordance with prescribed rules (Rule 27 of the Companies (Compromises, Arrangements and Amalgamations) Rules,2016). The offer price cannot be less than what SEBI specifies under its regulations.

In case of Listed Indian company, the procedure is provided under the regulations of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2021 (Specifically Regulation 4,5,6,7 and 8).

IN A PRIVATE COMPANY

the offer price shall be determined after taking into account the following factors:-

(a) the highest price paid by the acquirer, person or group of persons for acquisition during last twelve months;

(b) the fair price of shares of the company to be determined by the registered valuer after taking into account valuation parameters including return on net worth, book value of shares, earning per share, price earning multiple vis-à-vis the industry average, and such other parameters as are customary for valuation of shares of such companies; and

(ii) the registered valuer shall also provide a valuation report on the basis of valuation addressed to the board of directors of the company giving justification for such valuation.

RIGHTS OF MINORITY SHAREHOLDERS

As the minority shareholders does not have any direct control over the company’s decisions, the vulnerability arises due to imbalance in the powers with the majority shareholders like promoters, which is the reason why minority rights are important-

Right to information and Inspection

Minority shareholders have the right to access relevant and timely information about company’s financial performance, other records etc

Section 94 of Companies Act, 2013 talks about Inspection of registers etc furtherly emphasizes allowing shareholders to inspect certain company records like Annual Returns.

Section 136 mentions right of member to copies of audited financial statement which members shall receive copies of audited financial statements, auditor’s report etc

Right to Vote

As shareholders are owners of the company, Adequate transparency is only evident if they are provided with Voting Rights

Section 108 talks about Voting through Electronic Means.

Right to appoint a Small Shareholder Director (Section 151)

A public company has number of equity shareholders that hold small volume of shares and others that own big lots too.

A director elected by small shareholders (Holding shares of nominal value up to ₹20,000) act as a representative for the minorities in a company.

Right to Dividends

Minority shareholders have the right to receive dividends declared by the company, subjected to the shares held by them.

Fair Treatment in Mergers and Acquisitions

As discussed, earlier SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 ensure that when a person or party wants to acquire a target company, He must make an open offer to remaining shareholders including minorities at a fair price.

REMEDIES AVAILIABLE TO MINORITY SHAREHOLDERS

When minority shareholders believe that their rights have been violated or any unjust treatment took place in the company against them, in such cases they can seek various remedies through the National Company Law Tribunal (NCLT) or other legal avenues.

Section 241 of companies act, 2013 states application to tribunal for relief in cases of oppression, Mismanagement etc. which further explains that any member of a company who complains that affairs of the company have been or are being conducted in a manner prejudicial to the public interest or any member or the company related to any material change or any other alteration has the right to apply under Section 244.

Section 242 talks about Powers of Tribunal where if the NCLT finds oppression and mismanagement against any minority shareholder, it can grant wide ranging powers to pass orders as it deems to be fit including-

Regulation of Company’s affairs
Purchase of shares of minorities at a fair value
Setting Aside Resolutions
Removal of directors acting against the interest of minorities
Alteration of MOA/AOA

A Derivative Action is solution in this context where a lawsuit can be brought by a shareholder on the behalf of the company to remedy a wrong done in company itself. This acts very imperative for minority shareholders in addressing the power imbalance, Ensuring Accountability.

Section 245 which talks about Class Action Suit facilitates a form of collective derivative action.

Class Action suit allows a specified number of members or depositors to file a suit before the tribunal against the company, its directors, auditors or consultants.

Section 245 requires minimum number of shareholders to come together (100 members or 1/10th of total member whichever is less).

Minority Shareholders can bring suits in cases where Frauds is committed on the minorities and wrongdoers are in control, Any Ultra Vires Act (Any Act which is beyond the legal authority of the organisation) committed or any act passed by simple majority that requires a special resolution.

DISTINCTIVE ASPECTS OF PROTECTION

IN PUBLIC COMPANY

Public listed companies are subjected to extensive regulations by SEBI, particularly the LODR Regulations and the provisions in companies act, 2013.

These regulations impose enhanced disclosure requirements which states that public companies must regularly disclose financial information, annual reports and other relevant information necessary to be in the public eye.

These regulations also impose effective corporate governance norms which ensures fair play and protect minority interests.

IN PRIVATE COMPANY

As the regulations are less stringent in private company, minority shareholders heavily rely on privately negotiated shareholder agreement (SHAs) and Article of Association (AOA) for protection.

RELEVANT CASE LAWS

FOSS vs HARBOTTLE (1843)

This case established the principle that company being a separate legal entity is the proper claimant for wrongs done to it. It also brought up that minority shareholders could bring a claim in cases of fraud or where the majority is attempting to oppress to defraud the minority,

INCABLE NET (ANDRA) LIMITED AND OTHERS vs AP AKSH BROADBAND LIMITED AND OTHERS

A landmark Indian Supreme Court case from 2010 dealing with allegations of shareholder oppression and mismanagement within a corporate structure.

Here the petitioners, including Incable Net, alleged that a majority shareholders of AP Aksh Broadband engaged in conduct that was oppressive and detrimental to the minority shareholders.

ESCIENTIA LIFE SCIENCES vs ESCIENTIA ADVANCED SCIENCES (P) LTD. (NCLT Hyderabad, March 2025)

This is a significant recent case that demonstrates the NCLT’S intervention to resolve a shareholder deadlock, leading to structured buy-out.

This case involved a long-standing dispute between the original promoters (minority shareholders) of the Escientia Group and the majority shareholders (Deccan Fine Chemicals).

The minority shareholders alleged oppression and mismanagement, including unilateral removal of special affirmative voting rights of minority shareholders, which were established in AOA itself.

The Hyderabad NCLT, after extensive hearings, sided with minority shareholders. Crucially, the tribunal directed a buy-out to resolve the deadlock and prevent profitable venture from going out of existence.

CONCLUSION

The protection of minority shareholders in India stands as a critical determent of smooth corporate governance and helps in attaining investor confidence. A company is which minority shareholders have separate legal rights and their representation is heard in company’s matter are most like to have effective decision making which leads to better outcomes. As mentioned before, various provisions in companies act, 2013 and other regulations provides protection to minorities and provides framework for the purchase of minority shareholders in a manner that they are treated with fair exit value. Companies Act,13 applies both to public and private company. SEBI provides for public companies and the private companies are generally obligated by private agreements.

Nevertheless, NCLT by upholding principles of fairness ensures that minority shareholders are being heard in a company. As the business in India are growing at an exponential rate and possess a lot of potential, fostering an environment where every shareholder, regardless of their stake, feels protected and valued will be beneficial for long term financial health of the company.

BIBLIOGRAPHY

https://ca2013.com/236-purchase-of-minority-shareholding/

https://www.amsshardul.com/insight/mca-prescribes-rules-for-purchase-of-minority-shareholding-held-in-demat-form/

https://repository.nls.ac.in/cgi/viewcontent.cgi?article=1108&context=nlsir

*Student of 7th Semester , BBA LL.B.(Hons) School of Law , UPES Dehradun