In its circular dated 10 March 2017 (Principal Circular), SEBI vide has laid down the framework for schemes of arrangement by listed entities. The said framework obliges the listed entity to obtain a 'non-objection' or 'observation letter' from stock exchanges followed by a comment letter from SEBI on a draft scheme of arrangement proposed by such a listed entity. The said framework mainly emanates from empowerment granted to SEBI, inter alia, in terms of regulation 11 read with 37 of SEBI (Listing Obligations and Disclosure Requirements) 2015, and rule 19(7) of Securities Contracts (Regulation) Rules, 1957.

On 3 November 2020, SEBI issued a circular (Amendment Circular) to streamline the processing of draft schemes by stock exchanges and make certain amendments to Principal Circular concerning proposed schemes of arrangement by the listed entity.

The amendments prescribed in the Amendment Circular aim to ensure that the recognized stock exchanges refer the draft schemes to SEBI only upon being fully convinced that the listed entity complies with SEBI Act, Rules, Regulations, and circulars issued thereunder.

In the below table, we summarize the key provisions introduced in Amendment Circular:

Particulars Comments
Applicability The Amendment Circular shall be applicable for all schemes filed with the stock exchanges after 17 November 2020. However, provisions relating to seeking listing/trading approval from stock exchanges post-approval of the scheme by High Court/NCLT shall be applicable after 3 November 2020.
Recommendation of the scheme by an audit committee In addition to the requirement of recommending scheme after taking into account valuation report, now the audit committee report shall also require to comment on the following:
  • Need for the merger/demerger/amalgamation/arrangement
  • Rationale of the scheme;
  • Synergies of business of the entities involved;
  • Impact on the shareholders; and
  • Cost benefit analysis.
Recommendation by the committee of independent directors The Amendment Circular introduces a new requirement of a report from the committee of independent directors recommending the draft scheme, considering, inter alia, that the scheme is not detrimental to the shareholders of the listed entity.
Valuation report from a registered valuer All listed entities are required to submit a valuation report in respect of a proposed scheme from a registered valuer as defined under section 247 of the Companies Act, 2013. Under the Principal Circular, valuation from any independent chartered accountant was permitted.
No-objection letter from stock exchanges

The Amendment Circular now prescribes that the stock exchanges shall provide only 'no-objection' letter to SEBI on the draft scheme in coordination with each other.

The Principal Circular did not envisage coordination between stock exchanges while issuing 'no-objection.' Further, stock exchanges need to give their 'no-objection' to the draft scheme. The Principal Circular also allowed stock exchanges to provide an 'observation letter.' This is now withdrawn and the stock exchanges will have to provide their 'no-objection' to the draft scheme compulsorily.

Revises additional conditions for seeking relaxation in the conditions for listing

Amendment Circular replaces para III (A)(5) relating to additional conditions for seeking relaxation in terms of rule 19(7) of the Securities Contracts (Regulation) Rules, 1957. The Amendment Circular inter alia prescribes that:
Steps for the listing of specified securities are completed, and trading in securities commences within 60 days of receipt of the order of the Hon'ble High Court/NCLT as compared to forty-five(45) days in Principal Circular.

Requires a transferee entity to disclose the specified information in the form of an information document on the stock exchange/s, apart from advertising the same in newspapers.

Further expands the nature of specified information to be given in an information memorandum and newspapers which inter alia includes:

  • Restated Audited Financials for the previous three financial years prior to the date of listing;
  • Latest restated audited financials along with notes to accounts and any audit qualifications. (Financial statements should not be later than six months prior to the date of listing);
  • Change in accounting policies in the last three years and their effect on profits and reserves;
  • Summary table of contingent liabilities as disclosed in the restated financial statements;
  • Summary table of related party transactions in last three years as disclosed in the restated financial statements;
  • Details of its other group companies, including their capital structure and financial statements;
  • Internal Risk Factors (Minimum 5 and Maximum 10);
  • Outstanding litigations and defaults of the transferee entity, promoters, directors, or any of the group companies;
  • Regulatory Action, if any - disciplinary action taken by SEBI or Stock Exchanges against the Promoters in last five financial years; and
  • Brief details of outstanding criminal proceedings against the promoters.
Repeals para III B of Annexure I of Principal Circular The Amendment Circular seeks to repeal Para III B of Annexure I of Principal Circular relating to application by a listed entity to list equity shares with differential rights as to dividend, voting, or otherwise.

Our Comments

The amendments seek to instill more transparency regarding the proposed scheme by way of additional checks and disclosures. It also casts an onerous obligation on the committee of auditors and independent directors to give their recommendation after considering the scheme in light of the indicated parameters and ensuring it is not detrimental to the listed entity's shareholders. The stock exchanges can no longer issue just an 'observation letter' and have to provide a 'no-objection' to the draft scheme. This is likely to make the process more robust and reduce the comments from SEBI, given that draft schemes would be subject to close scrutiny and ensure that the draft schemes comply with SEBI Act, Rules, Regulations and Circulars at the level of stock exchanges. The remaining amendments are technical and clarificatory and seek to align with other statutory provisions.

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