At a board meeting of the Securities and Exchange Board of India (“SEBI”) held on 19 November 2014, SEBI has approved several changes to Indian securities laws. While some of these changes are related to administrative and routine items such as settlement of proceedings, registration for depository participants, etc.; some of the changes may affect M&A transactions. This article briefly highlights the changes proposed and the potential ramifications thereof on M&A transactions.
Insider trading regulations
The existing insider trading regulations were notified in 1992. Given the time that has elapsed since the original regulations, SEBI had constituted a committee to review the regulations. The report of the committee was then released for public comments, and based on the report and the public comments, SEBI has approved new regulations to replace the existing 1992 regulations. Interestingly, now the new Companies Act, 2013 (the Act) also includes certain provisions regarding insider trading and derivative trading. It will be interesting to see how the new regulations refer to the provisions under the Act. Some of the key changes that will affect transactions are as follows:
- The definitions of “Insider”, “Connected Persons”, etc., have all been widened. These will now include, inter alia, persons being in any contractual, fiduciary or employment relationship allowing such person access to unpublished price sensitive information (“UPSI”), and immediate relatives, respectively. In the case of connected persons, they would have to establish that they were not in possession of UPSI.
- Any communication of UPSI has been categorically prohibited except for legitimate purposes, performance of duties or discharge of legal obligations.
- One would have to review the language of the regulations to see whether this would affect the ability of a counterparty to conduct due diligence on a listed company, not only in a stock purchase scenario, but also in an asset transfer transaction. The press release also stated that carve-outs have been created for communication of UPSI for a “legitimate business transaction”. It will be interesting to assess the requirements for a potential commercial arrangement to qualify as a “legitimate business transaction”. Additionally, the press release suggests that certain safeguard would have to be observed and implemented along with the disclosure.
- The definition of UPSI will relate to information related to the company and its securities which is not “generally available” and which may impact price. The term “generally available” will be assessed in the context of a non-discriminatory disclosure platform “which would ordinarily be [sic] stock exchange platform”.
Conversion of listing agreements into regulations
Until now, listed entities complied with the listing agreements and these agreements dictated the disclosures, etc., to be made by listed companies in relation to several events. SEBI now proposes to replace these agreements with regulations that SEBI will issue. These regulations would provide the overarching principles for making disclosures, mandatory filings through electronic platforms, introduction of a new annual information memorandum, etc. The new regulations would apparently also remove any redundancies that were present in the listing agreements. Companies would still be required to execute a short form listing agreement with the stock exchanges. For transactions going forward, it would be important to assess the compliance requirements specified under these new regulations. It is also relevant to note that the current listing agreements are consensual in nature and even though the violation of these agreements is punishable under law, they do not have the force of law as regulations would. Now, they will be replaced by Regulations which will clearly have a force of law.
Certain changes to the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 (“Delisting Regulations”) have been approved. Some of the key items in this are:
- For a successful delisting, the total shareholding of the acquirer after the completion of the offer should reach 90%, and atleast 25% of the number of public shareholders holding shares in dematerialised mode should tender their shares in the delisting process. This obligation to achieve 25% in number of the public shareholders may be very difficult to meet. Public shareholders with small holdings seldom tender their shares in any such process. This is likely to make the delisting process less attractive.
- The promoter/ promoter group should not have sold shares of the company during a period of six months prior to the date of the board approval of the delisting proposal.
- The board of directors of the company shall approve the proposal for delisting only after satisfying itself that delisting is in the interest of shareholders and that the company is in compliance with applicable securities laws. The board shall appoint a merchant banker on behalf of the company and the promoter for the said purpose and for compliance with the Delisting Regulations. This requirement was probably implicit in the directors’ fiduciary responsibility, and in the independent directors’ mandate to act independent of the promoters and / or the majority shareholders. However, one wonders whether this may create an added layer of cautionary enquiries from the directors.
- Small companies (companies whose paid up capital does not exceed Rs.10 crores and net worth does not exceed Rs.25 crores in the previous financial year) that have not faced any trading of their shares during the last 1 (one) year are exempt from the reverse book building process. This will be a welcome step for small companies that are not traded which wish to delist themselves.
- Timelines for completing the delisting process are to be reduced from approximately 117 working days to 76 working days. One would have to see the language of the Delisting Regulations to assess this in detail. However, on the whole, unless some of the substantive issues with delisting are resolved, reducing the timelines may not be very helpful.
- An acquirer seeking to acquire the company and triggering the takeover regulations will have the option to delist the shares of the company directly. However, if the delisting attempt fails, the acquirer would be required to complete the mandatory open offer under the takeover regulations and pay interest @ 10% per annum for the delayed open offer. This is again another welcome change for acquirers; but the larger questions on making a delisting successful still remain.
- SEBI may now provide exemptions in line with the provisions existing in the SEBI (Issue of Capital and Disclosure Requirements) Regulations and the takeover regulations. This will allow acquirers to plead their case before SEBI, and will allow SEBI to administer the regulations in a manner which allows for contingencies or special circumstances.