IPO commitments and investor protection: When can companies alter their stated Objects of the Offer? – Part II

In continuation of the first part, this second part of the article examines the compliances and limitations associated with variations in the objects of the offer after the listing of the company. Post listing, the regulatory expectations become stricter in comparison, due to the fact that public funds have already been raised from investors

Regulatory framework governing post-offer variation of objects:

After the completion of the public offer and listing of the Issuer Company on the stock exchange(s), any variation in the objects of the offer moves into the realm of much tighter regulatory framework. At this stage, the disclosures made in the prospectus are no longer merely indicative in nature. They form the basis of investor decision-making, and hence acquire binding significance. The legal framework underlined primarily under Section 27 of the Act, read with Rule 7 of the Companies (Prospectus and Allotment of Securities) Rules, 2014 (the “Companies Rules”), and the SEBI ICDR, ensures that such variations are closely monitored, controlled, and are made subject to shareholders’ oversight.

In addition to Section 27 of the Act, Regulation 32 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, (“SEBI LODR”) imposes continuing disclosure obligations on listed companies in relation to IPO proceeds. Listed entities are required to periodically disclose deviations or variations in utilisation of funds, place such statements before the audit committee, and submit the same to the stock exchanges until the proceeds are fully utilised. Further, where a monitoring agency has been appointed under Regulation 41 of the SEBI ICDR for the public issue, the reports and observations of such agency on utilisation of proceeds must also be periodically reviewed by the audit committee and disclosed to the stock exchanges.

At the centre of this framework stands the requirement that the Issuer company cannot vary the objects of the offer or its terms of arrangement referred to in the objects section of the prospectus without shareholders’ approval by way of a special resolution. Notably, where the Issuer company has unutilised funds out of the IPO proceeds, Rule 7(1) of the Companies Rules further mandates that such approval must be obtained through a postal ballot, so that shareholders have a wider opportunity to participate in the decision.

The law prescribes a high standard of disclosure and transparency in this process. The notice seeking shareholder approval must contain granular details, which includes the following: the original objects of the offer; total funds raised; the extent of utilisation (for instance, whether 50 percent or 60 percent of the objects have been achieved); the unutilised amount of IPO proceeds; and the precise nature of the proposed variation. In addition, the company must set out the rationale for the proposed change, revised timelines for achieving the new objects, associated risk factors, if any and other relevant information necessary for shareholders to make an informed decision. This level of detail ensures the factuality that shareholders are not simply voting on a general proposal, rather, on how the proposed change may affect the deployment of IPO proceeds and the company’s stated plans.

Further, the process is accompanied by public dissemination-related requirements. The notice of the special resolution must be advertised in the prescribed form, i.e., Form PAS-1, and published in newspapers, one in English and one in the vernacular language of the city where the registered office is situated, and also hosted on the company’s website. These steps are intended to maintain transparency, including the assurance that both shareholders, and the market in general are informed of the proposed variation.

Exit rights and protection of dissenting shareholders:

A critical investor protection mechanism in this regime is the exit opportunity for dissenting shareholders. Under Section 27(2) of the Act, read with Regulation 59 and Schedule XX of the SEBI ICDR, promoters or controlling shareholders are required to provide an exit offer to shareholders who dissent and vote against the proposed variation. This reflects the basic expectation that investors who subscribed on the basis of specific disclosed objects should have the option to exit if those assumptions are altered.

However, the afore-mentioned obligation is subject to certain thresholds. The exit offer mechanism is triggered only when the following two conditions are met:

(a) at least 10 percent of the shareholders who are present and voting on the resolution dissent (i.e., vote against the proposed variation); and

(b) less than 75 percent of the funds raised have been utilised for the original objects.

For instance, if a company raises ₹1,000 crore for expansion of manufacturing capacity but has utilised only ₹600 crore, and proposes to divert the remaining ₹400 crore towards a new line of business, dissenting shareholders may be entitled to an exit opportunity, provided the prescribed thresholds are met. On the other hand, the requirement of providing exit option may not arise if a substantial portion of the funds (say, over 75 percent) has already been deployed as originally disclosed.

Under Schedule XX of the SEBI ICDR, the exit price payable to dissenting shareholders is determined as the highest of the following points: (a) the volume-weighted average price paid or payable for acquisitions by promoters during the fifty-two weeks immediately preceding the relevant date; (b) the highest price paid or payable for any acquisition during the twenty-six weeks immediately preceding the relevant date; and (c) the volume-weighted average market price for sixty trading days immediately preceding the relevant date on the exchange with maximum trading volume. The relevant date is the date of the board meeting approving the proposed variation.

From a procedural point of view, the regulations have laid down detailed steps. The framework broadly requires the company and promoters to disclose the exit offer upfront, determine the price through a registered merchant banker, secure the payment obligations through an escrow mechanism, and complete the tendering and settlement process through the stock exchange mechanism within prescribed timelines.

It is also pertinent to note that the obligation to provide an exit offer applies only where there exists identifiable promoters or controlling shareholders. In their absence, such a requirement is not triggered. Additionally, if the exit offer results in promoter shareholding exceeding permissible limits, the promoters are required to subsequently dilute their stake to comply with minimum public shareholding norms under the SEBI LODR.

Finally, Section 27(1) of the Act, also imposes a substantive restriction on the use of funds: a company shall not use any amount raised through a prospectus for buying, trading, or otherwise dealing in equity shares of any other listed company. This ensures that IPO proceeds are not diverted into activities unrelated to the disclosed objects of the offer that were not originally contemplated or disclosed to investors.

The underlying idea behind this framework is that the greater the deviation from originally disclosed objects, the higher the compliance burden and regulatory scrutiny. While issuers are permitted a degree of latitude to refine their plans during the pre-offer stage, subject to threshold-based triggers under Schedules XVI and XVI-A, this flexibility narrows materially once funds are raised from the public. At that point, the disclosed objects take on a much more binding character, and any deviation is subject to: special resolution approval (via postal ballot where funds remain unutilised); enhanced disclosures containing granular justification, timelines, and risk factors; public dissemination through newspaper advertisements and website hosting; and exit rights for dissenting investors where the prescribed thresholds are satisfied. The framework, in essence, recognises that once public money has been raised on the basis of specific disclosures, companies cannot materially depart from those stated objectives without shareholder oversight and adequate investor safeguards.

About the authors: Kshitij Asthana is a Managing Associate and Ashutosh Anand is an Associate at Luthra and Luthra Law Offices India.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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