The Securities and Exchange Board of India (SEBI) has issued a circular dated 10 March 2017 (Ref: CFD/DIL3/CIR/2017/21) (New Circular) which lays down detailed requirements that listed entities need to comply with while undertaking schemes of arrangements.
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) provides that a scheme of arrangement/ amalgamation/ merger/ reconstruction/ reduction of capital undertaken by a listed entity must be in compliance with the applicable securities laws. The Listing Regulations also provide, inter alia, that a listed entity must file a scheme of arrangement (Scheme) with a stock exchange to obtain an observation letter or a no objection letter, as the case may be, from the designated stock exchange before filing a Scheme with the relevant bench of National Company Law Tribunal (NCLT).
In order to further regulate the merger and amalgamation of listed entities, SEBI also issued a circular dated 30 November 2015 (Ref: CIR/CFD/CMD/16/2015) (2015 Circular). The 2015 Circular prescribed various requirements and procedures to be complied by listed entities with respect to undertaking Schemes under the Companies Act, 1956 and the Companies Act, 2013.
Thereafter, SEBI, in its board meeting held on 14 January 2017 (Board Meeting), passed certain proposals to revise and streamline the regulatory framework governing Schemes. Now, basis the proposals passed at the Board Meeting and after consulting stock exchanges and market participants, SEBI has decided to further revise the regulatory framework for Schemes being undertaken by listed entities. A brief highlight of some of the material changes to the regulatory framework under the 2015 Circular are detailed below.
Merger of a wholly owned subsidiary (WOS) with its parent
In the Board Meeting, SEBI considered the need to ease the procedure for Schemes involving the merger of a WOS with its parent company. To this effect, an amendment was made to the Listing Regulations on 15 February 2017 which stipulated that Schemes which provide for merger of a WOS with its parent will need to be filed directly with stock exchanges for the limited purpose of disclosures. Such Schemes will not require the prior approval of SEBI.
The New Circular has recognised this relaxation and has clarified that the requirements contained therein will not be applicable to a Scheme which solely provides for merger of a WOS with its parent.
Fees payable to SEBI
The New Circular states that, once the Scheme has been sanctioned, the listed entity will have to pay a fee to SEBI equal to 0.1% of the paid up share capital of the listed/ transferee/ resulting company, whichever is higher. This fee is subject to a cap of INR 500,000. An amendment to this effect in the Listing Regulations has been notified on 6 March 2017.
Issuance of shares to a larger audience
The New Circular states that if a Scheme provides for issuance of shares only to a select group of shareholders or to the shareholders of unlisted companies, then the listed entity must follow the pricing formula prescribed under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR). An amendment to this effect in the Listing Regulations has been notified on 6 March 2017.
Clarity on the format of the detailed compliance report (DCR)
The New Circular provides the format for a DCR which has to be duly certified by the Company Secretary, Chief Financial Officer, and the Managing Director certifying compliance of the various regulatory requirements. The key features of the DCR are as below:
- The DCR must confirm that the Scheme is compliant with securities laws; and
- The Chief Financial Officer must certify that the accounting treatment is in compliance with the accounting standards applicable to the listed entity.
While the format provided by BSE Limited under the 2015 Circular provided for certification by either the Managing Director or the Company Secretary, the new format under the New Circular requires: (a) the Managing Director and the Company Secretary to certify adherence to all the legal and compliance requirements and (b) the Managing Director and Chief Financial Officer to certify adherence to the accounting treatment.
Greater public shareholder participation and involvement
- The New Circular has provided clarity
on the following:
- The shareholding of the pre-scheme public shareholders of the listed company and that of qualified institutional buyers of the unlisted company must not fall below 25% in the merged company that is to be listed; and
- The unlisted company must disclose all material information in the form of an abridged prospectus as part of the explanatory statement or notice or proposal accompanying resolution sent to the shareholders for seeking their approval. Such disclosures shall have to be certified by a SEBI registered merchant banker after carrying out the necessary due diligence. Such disclosures will also have to be submitted to stock exchanges for uploading on their websites.
- In addition to the scenarios
specified under the 2015 Circular, the New Circular has introduced
the following two additional scenarios where a majority of the
public shareholders will need to provide their consent for the
Scheme to be effective:
- the merger of an unlisted company that would result in the voting share percentage of the pre-scheme public shareholders reducing by over 5% of the total capital of the merged company; and
- the transfer of whole or substantially the whole of the undertaking of a listed company for a consideration in a form other than listed equity shares.
Consent of SEBI for any amendment to a Scheme
The New Circular stipulates that any change to a Scheme after it has been filed with SEBI will require the prior approval of SEBI unless such change has been mandated by regulators/ authorities/ NCLT. While as a good practise, all subsequent changes were highlighted to SEBI, the New Circular has clarified the need to obtain SEBI's approval.
The New Circular provides that in case of a Scheme involving a hiving-off of a division of a listed entity into an unlisted entity and its subsequent listing, the entire pre-scheme share capital of the unlisted entity will be locked-in as follows:
- up to 20% of the shares held by the promoters of the post merger paid up share capital of the unlisted issuer will be locked-in for 3 years from the date of listing; and
- the remaining shares will be locked-in for a period of 1 year from the date of listing.
However, no additional lock-in will be required if the post scheme shareholding of the unlisted entity is the same as that of the listed entity.
The New Circular comes on the back of the Board Meeting where proposals to strengthen the regulatory framework for undertaking Schemes were discussed. Further, the New Circular also addresses the concerns that some High Courts have raised on SEBI's jurisdiction in raising objections to a Scheme.
In general, with the New Circular, SEBI has sought to establish a robust framework to regulate Schemes and prevent misuse of the exemption provided under Rule 19(7) of the Securities Contracts (Regulations) Rules, 1957. It is possible, however, that with the revised framework the timeline for passing a scheme of arrangement may be lengthened.
However, due credit must be given to SEBI as it has taken efforts to provide clarity on numerous aspects. For instance, by providing the format of the compliance report, SEBI has ensured that there is uniformity and transparency on the nature of confirmations sought at the time of approving a Scheme. Further, the New Circular has also reduced the compliance burden on the non-promoter shareholding of the unlisted issuer by reducing their lock-in period down to 1 year from the date of listing. However, unlike Regulation 37 of the ICDR, which provides for exemptions from the lock-in requirement for shares issued under employee stock options schemes and shares issued to registered venture capital and foreign venture capital investors; there is no such exemption for such shareholders under the New Circular. SEBI has also 'grandfathered' all Schemes filed in terms of the 2015 Circular, as they continue to be governed by the requirements of the 2015 Circular. Therefore, only Schemes filed after the date of the New Circular will be governed by its terms. Lastly, instead of piecemeal amendments to the 2015 Circular, SEBI has sought to revise the regulatory framework by overriding the 2015 Circular in its entirety and has issued a revised set of regulations. This helps in avoiding the need to refer to multiple circulars which could have led to ambiguous interpretations.
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