The Securities and Exchange Board of India (SEBI) has, inter alia, in its meeting held on 14 January 2017, approved numerous proposals to revise and streamline the rules for mergers and amalgamations between listed and unlisted entities by means of a scheme of arrangement.
SEBI, in its role as a securities regulator and the protector of the public shareholder interests, has been mindful of corporate governance risks associated with certain schemes of arrangement. To curb overzealous promoters from crafting self-serving schemes of arrangement, SEBI had amended the listing agreements requiring stock exchanges to pre-approve all schemes of arrangement involving listed companies. Realising the systemic imperfections in implementing these provisions, SEBI then issued circulars dated 4 February 2013 and 21 May 2013 (Old SEBI Circulars), laying down stringent guidelines for listed companies considering any scheme of arrangement under the Companies Act, 1956 (1956 Act).
Pursuant to the notification of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, (LODR), as amended, SEBI, vide circular dated 30 November 2015 (SEBI Circular), prescribed a new set of guidelines for approval of schemes of arrangement of listed companies under the 1956 Act and the Companies Act, 2013 (2013 Act).
On a further review and analysis of recent trends and schemes of arrangement proposed by the listed companies, SEBI has now approved certain proposals concerning the merger and amalgamation of listed and unlisted entities by means of a scheme of arrangement. The salient features of these proposals are as follows:
Greater public shareholder participation and involvement
- 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.
- Approvals from the public shareholders will need to be procured through the e-voting mechanism in the following schemes:
- 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;
- 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; and
- the merger of unlisted subsidiaries with their listed holding companies, if the shares of the unlisted subsidiary are being acquired by the holding company from the promoter/ promoter group.
Stricter disclosure standards
The unlisted company must mandatorily disclose all material information in the form of an abridged prospectus prior to its merger with a listed company.
Issuance of shares to a larger audience
To ensure that all classes of shareholders get an equitable treatment in schemes of such nature, the listed company must mandatorily follow the pricing formula prescribed under the LODR.
Merger of a wholly owned subsidiary (WOS) with its parent
SEBI also considered the need for easing certain procedures for schemes of arrangement involving merger of a WOS with its parent company. Such schemes do not need to be filed with, or require the pre-approval of SEBI. Such schemes will need to be filed directly with the stock exchanges for the limited purpose of disclosures.
Other key proposals
- An unlisted company can be merged with a listed company only if it is listed on a stock exchange having nationwide trading terminals.
- Companies will need to submit a compliance report confirming compliance with the SEBI Circular, and the accounting standards will need to be duly certified by the company secretary, chief financial officer, and the managing director.
It was clear from recent reports in the news media that SEBI was alarmed by the number of instances where large unlisted companies were listing themselves on stock exchanges by merging with a small listed company, effectively sidestepping their listing obligations and disclosures. To allay concerns, the SEBI Board has passed these proposals to ensure greater public participation and scrutiny of such schemes, thereby protecting the interest of public shareholders.
In general, these proposals will increase the compliance burden associated with mergers of unlisted companies with listed companies. However, certain proposals such as the nature of material information that needs to be disclosed by an unlisted company in the abridged prospectus would require greater clarity from SEBI, as currently there is a requirement for the unlisted companies to furnish an information memorandum at the time of getting their shares listed.
SEBI has also been careful to not overregulate all types of mergers. Taking cognizance of the relaxation under Section 233 of the 2013 Act for a fast track merger of a WOS with its parent company, the SEBI board has agreed to modify the approval requirement to a mere disclosure norm. This dispensation would reduce any ambiguous interpretation of Sections 230 and 233 of the 2013 Act.
SEBI has also intended for these proposals to cement its jurisdiction in regulating schemes concerning listed entities (something that was questioned by the high courts). In a way, these proposals read with Section 230(5) of the 2013 Act and the SEBI Circular should lend support to SEBI’s efforts in regulating schemes.
While SEBI’s regulatory intent may be clear, absent any formal amendment to the relevant SEBI regulations, they will not have the force of law. The actual text of the amended regulations need to be further analysed to understand the extent to which SEBI’s intentions have been manifested.