Section 235 vs Section 236: Minority Squeeze-Out

Section 235 vs section 236 is a distinction that decides who can be bought out of a company against their will, and on what trigger. Both sit in Chapter XV of the Companies Act, 2013 and both end with a minority shareholder losing shares in exchange for money. They start from opposite places: section 235 starts from a scheme that most shareholders accepted, section 236 starts from a shareholding percentage that somebody reached.

Section 235 vs section 236: the core differences

How section 235 works

Section 235(1) sets the arithmetic. Where a scheme or contract involving the transfer of shares, or any class of shares, in a transferor company to a transferee company has, within four months after the transferee company makes an offer, been approved by holders of not less than nine-tenths in value of the shares whose transfer is involved, the transferee company may give notice to any dissenting shareholder that it desires to acquire the shares.

Shares already held at the date of the offer by the transferee company or its nominee or its subsidiaries are excluded from that nine-tenths calculation. The notice must be given within two months after the expiry of the four months.

Section 235(2) then flips the burden onto the dissenting shareholder. Once notice is given, the transferee company is entitled and bound to acquire those shares on the same terms as the approving shareholders, unless the dissenting shareholder applies to the Tribunal within one month of the notice and the Tribunal thinks fit to order otherwise.

Section 235(3) sets out the mechanics that follow: on expiry of one month from the notice, or after any pending Tribunal application is disposed of, the transferee company sends a copy of the notice to the transferor company with an executed instrument of transfer and pays the consideration. The transferor company registers the transferee as holder and, within one month of registration, informs the dissenting shareholders of the registration and of the receipt of the price.

Section 235(4) requires the transferor company to pay any sum received into a separate bank account, hold it in trust for the persons entitled, and disburse it within sixty days.

The Explanation defines a dissenting shareholder as including a shareholder who has not assented to the scheme or contract, and any shareholder who has failed or refused to transfer shares in accordance with it.

How section 236 works

Section 236(1) covers two ways of getting there: an acquirer or person acting in concert becoming the registered holder of ninety per cent or more of the issued equity share capital, or any person or group of persons reaching ninety per cent by virtue of an amalgamation, share exchange, conversion of securities or any other reason. Either way, they must notify the company of their intention to buy the remaining equity shares.

Section 236(2) requires the offer to be at a price determined on the basis of valuation by a registered valuer, in accordance with prescribed rules. Section 236(3) opens the reverse door: the minority may offer to the majority to purchase the minority equity shareholding at that same determined price.

Section 236(4) requires the majority to deposit an amount equal to the value of the shares in a separate bank account operated by the company whose shares are being transferred, for at least one year, disbursed to the entitled shareholders within sixty days. The proviso continues disbursement for a further year for those who were not paid within the sixty days, or who failed to receive or claim payment from a disbursement that was made. The phrase "company whose shares are being transferred" was substituted for "transferor company" in sub-sections (4), (5) and (6) by Act 1 of 2018, section 73, with effect from 9 February 2018.

Section 236(5) makes the company act as transfer agent for receiving and paying the price and for taking and delivering the shares. Section 236(6) handles non-delivery: absent physical delivery within the time specified, the share certificates are deemed cancelled, and the company is authorised to issue shares in lieu and complete the transfer, paying the price out of the section 236(4) deposit.

Section 236(7) preserves the right to make an offer for sale for three years from the date of majority acquisition, where the majority deposited price for shareholders who have died or ceased to exist and whose heirs, successors, administrators or assignees have not been brought on record by transmission.

The two protections in section 236 worth knowing

A share of any higher price. Section 236(8) provides that where minority shares have been acquired under the section and, on or before the transfer date, shareholders holding seventy-five per cent or more of the minority equity shareholding negotiate or reach an understanding on a higher price for a proposed or agreed transfer of their shares without disclosing that fact or likelihood, the majority shareholders must share the additional compensation so received with those minority shareholders on a pro rata basis.

No expiry by delisting or elapsed time. Section 236(9) provides that where a majority shareholder fails to acquire full purchase of the minority shares, the section continues to apply to the residual minority shareholders even though the shares have been delisted and even though the one-year period, or the period specified in SEBI regulations, has elapsed.

The Explanation to section 236 imports the meanings of "acquirer" and "person acting in concert" from clauses (b) and (e) of sub-regulation (1) of regulation 2 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. That is the Act's own text rather than a slip for 2011, but the 1997 regulations were replaced by the SAST Regulations, 2011, so the cross-reference points at a rulebook that is no longer live.

Where this sits in the disclosure picture

Both sections operate alongside SEBI's takeover code rather than instead of it, which is why section 236 borrows the takeover regulations' definitions. What reaches the market as a filing is the underlying acquisition and the scheme, not the squeeze-out mechanics.

• What is a SAST open offer is the SEBI-side obligation an acquirer crossing thresholds triggers.
• What is a scheme of arrangement is the instrument section 235 hangs off.
• SEBI delisting and reverse book building is the separate route by which a company at high promoter holding leaves the exchange.
• The shareholding pattern is where a ninety per cent holding becomes visible quarter by quarter.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.