1. Overview
Section 236 of the Companies Act, 2013 — part of Chapter XV on Compromises, Arrangements and Amalgamations (Sections 230 to 240), read with the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 — provides a statutory mechanism for the purchase of minority shareholding once an acquirer, or persons acting in concert, comes to hold ninety per cent or more of a company's issued equity share capital. The provision, which came into force on 15 December 2016, allows majority shareholders to consolidate ownership by buying out the remaining minority shareholders, while simultaneously giving minority shareholders the right to require the majority to purchase their shares on the same terms.
At the heart of the process lies a single, often contested question: what is a fair price for the shares being transferred? That question is answered through valuation by a registered valuer, and it is this valuation exercise that most frequently determines whether a Section 236 transaction proceeds smoothly or attracts challenge.
2. Statutory Trigger and Scope
2.1 The Ninety Per Cent Threshold
Sub-section (1) of Section 236 applies when an acquirer, or a person acting in concert with the acquirer, becomes the registered holder of ninety per cent or more of a company's issued equity share capital, whether this position arises through amalgamation, share exchange, conversion of securities, or any other reason. On crossing this threshold, the acquirer or group is required to notify the company of its intention to buy the remaining equity shares held by minority shareholders.
2.2 The Offer to Minority Shareholders
Sub-section (2) obliges the acquirer to offer to purchase the shares of minority shareholders at a price determined on the basis of valuation by a registered valuer, carried out in accordance with the rules prescribed under the Act. This is a compulsory offer mechanism rather than a negotiated buyout — the price is set not by agreement between the parties but by an independent professional valuation exercise conducted within a defined regulatory framework.
3. Determination of the Offer Price
3.1 Role of the Registered Valuer
Rule 27 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 governs how the offer price is determined. The registered valuer is required to arrive at the price and to provide a valuation report, addressed to the company's board of directors, setting out the justification for the valuation adopted.
3.2 Valuation Parameters
For unlisted companies, the rules direct the valuer to have regard to parameters customary for valuing shares of similar companies, including return on net worth, book value of shares, earnings per share, and the price-earning multiple relative to the industry average, among other relevant factors. For listed companies, the offer price is determined in the manner specified by the Securities and Exchange Board of India under the applicable regulations. The distinction matters: an unlisted-company squeeze-out and a listed-company squeeze-out draw on different valuation frameworks and disclosure expectations, even though both fall under the same statutory section.
3.3 Why the Valuation Step Is Central
Because the price is not negotiated, its defensibility rests on the quality, independence and documentation of the valuation. A thinly reasoned or inadequately substantiated valuation report is the most common source of dispute in a Section 236 transaction, whether the challenge comes from minority shareholders who consider the offer inadequate or from a company seeking to demonstrate that the process was conducted fairly.
4. Reciprocal Right of Minority Shareholders
The section is not one-directional. Minority shareholders of a company that has crossed the ninety per cent threshold may themselves offer to sell their shares to the majority shareholders, at a price determined in the same manner under Rule 27. This gives minority shareholders — who may otherwise hold an illiquid stake with limited influence over the company's affairs — a defined route to exit on fair terms rather than remaining locked in indefinitely.
5. Payment and Disbursement Mechanics
Once the offer price is determined, majority shareholders are required to deposit an amount equal to the value of the shares being acquired in a separate bank account, operated by the company whose shares are being transferred, for a minimum period of one year. Disbursement to entitled minority shareholders is required within sixty days, and the obligation to disburse continues, for the balance of that one-year period, in respect of shareholders who could not be paid within sixty days or who have not claimed payment. Where shareholders have died or ceased to exist and their heirs or successors have not been brought on record, the right to offer such shares for sale continues to be available for a period of three years from the date the majority shareholding was acquired.
6. Role of the Company
The company whose shares are being transferred is required to act as a transfer agent for the transaction — receiving and disbursing consideration to minority shareholders and effecting transfer of shares to the majority shareholder or group. This places a procedural and record-keeping responsibility on the company itself, distinct from the substantive obligations of the acquiring shareholders.
7. Related Consolidation and Exit Routes
Section 236 sits alongside other mechanisms available for shareholding consolidation and minority exit under Indian company law. Section 235 provides for the acquisition of shares of dissenting shareholders where a scheme or contract for the transfer of shares has been approved by holders of not less than nine-tenths in value of the shares affected. For listed companies, promoters seeking to take a company private may instead proceed under the delisting framework prescribed by the Securities and Exchange Board of India. Each route carries its own thresholds, procedure and valuation approach, and the appropriate mechanism depends on how the ninety per cent position was reached and the company's listing status.
8. Why the Provision Matters
A large body of minority shareholders holding a small residual stake can complicate a company's governance, add to compliance and communication overheads, and limit the operational flexibility available to the controlling shareholder. Section 236 permits genuine consolidation once control is functionally complete, while the valuation requirement and disbursement safeguards are intended to ensure minority shareholders are not disadvantaged by the process. For minority shareholders, the reciprocal exit right offers a way to realise value from a holding that may otherwise carry little practical benefit.
9. When the Service May Be Required
Section 236 typically becomes relevant on completion of an open offer or share acquisition that takes an acquirer past the ninety per cent mark, in post-merger or post-amalgamation shareholding structures where the transferee company crosses the threshold, and where promoters or a controlling group wish to consolidate ownership following a series of market or off-market purchases. Minority shareholders may also seek advice on their exit rights once they identify that the threshold has been crossed in a company in which they hold shares.
10. Key Considerations
Parties to a Section 236 transaction should be attentive to the independence and qualifications of the registered valuer, the adequacy of disclosures in the valuation report, the timelines for notification, offer and disbursement prescribed under the rules, and the distinction between the valuation approach applicable to listed and unlisted companies. Since the offer price is not negotiated, the credibility of the underlying valuation exercise is often the factor that determines whether the process withstands later scrutiny.
11. Our Professional Approach
An engagement of this nature generally begins with a review of the company's shareholding pattern to confirm that the statutory threshold has been reached, followed by an assessment of the valuation methodology proposed or applied — including its consistency with Rule 27 and, where relevant, applicable pricing norms prescribed by the Securities and Exchange Board of India — and advice on the procedural steps required under the section and the accompanying rules. This can extend to coordinating with a registered valuer engaged for the assignment, reviewing the resulting valuation report on behalf of a company, majority shareholder or minority shareholder, and advising on whether the report addresses the parameters and disclosures the rules require.
12. Who May Benefit
This service is relevant to majority shareholders and acquirers seeking to consolidate ownership, minority shareholders considering their exit options, companies required to act as transfer agent under the process, and boards of directors responsible for receiving and evaluating the valuation report submitted in connection with the transaction.
13. Conclusion
Section 236 provides a structured, valuation-driven mechanism for resolving residual minority shareholding once a company's ownership has effectively consolidated. Because the process turns on an independently determined price rather than negotiation, the rigour of the valuation exercise carries disproportionate weight in determining whether the transaction is fair, defensible and free of later dispute. Vallore Advisory LLP advises companies, majority shareholders and minority shareholders on the valuation and procedural aspects of this process.