The Securities and Exchange Board of India (SEBI) has issued a circular on 4 February 2013 (Circular) which revises the existing requirements for stock exchanges and listed companies in respect of schemes of arrangement under the Companies Act 1956. The revised requirements are also made be applicable to listed companies who have not submitted the scheme of arrangement with the High Court concerned on the date of the Circular.

Following is the new process of approval of draft schemes of arrangement proposed by listed companies and analyses of the implications of the Circular in corporate restructuring.

BACKGROUND

Rule 19(2)(b) of the Securities Contracts Regulation Rules 1957 (SCRR) requires that every company desirous of making a public offer of securities shall offer at least 25 per cent of each class or kind of securities to the public for subscription unless it has fulfilled certain conditions as specified in which case it would only require to offer 10 per cent of each class or kind of securities to the public for subscription. Under Rule 19(7) of the SCRR, the SEBI may waive or relax the strict enforcement of any or all of the requirements with respect to listing prescribed by SCRR.

Vide a circular dated 3 September 2009, SEBI laid down certain requirements for considering applications seeking relaxation from strict enforcement of Rule 19(2)(b) of SCRR under Rule 19(7) of SCRR.

While it repeals the September 2009 circular, the Circular is said to have been issued in order to address the concerns faced by SEBI in considering applications for exemption from Rule 19(2)(b) received from entities containing, inter alia, inadequate disclosures, convoluted schemes of arrangement and exaggerated valuations.

PROCESS AND TIMELINES FOR APPROVAL OF THE DRAFT SCHEME

Listed companies are now required to place the valuation report obtained from an independent chartered accountant before its audit committee and the audit committee is further tasked with furnishing a report recommending the draft scheme taking into consideration, inter alia, the valuation report placed before it.

In terms of paragraph 5.1 of the Circular, any listed company desirous of undertaking a scheme of arrangement under Chapter V of the Companies Act 1956 (amalgamation/ merger/ reconstruction/ reduction of capital) shall file the draft scheme with the stock exchanges in terms of Clause 24(f) of the Listing Agreement, along with the necessary documents as specified in the Circular. Immediately upon filing, both the listed company and the stock exchange must display the draft scheme along with the documents furnished on their respective websites.

The designated stock exchange(s) would forward the draft scheme along with the necessary documents received from the listed company to SEBI within 3 working days. Further, the stock exchange(s) would process the draft scheme, which process would include seeking clarifications from the company and/or opinion from an independent chartered accountant, and forward their ‘objection/no-objection’ letter on the draft scheme to SEBI, within 30 days from the filing of the draft scheme by the listed company or within 7 days from the date of receipt of satisfactory reply on the clarifications from the listed company and/or opinion from independent chartered accountant, if any, as sought by the stock exchange(s), as applicable.

Upon receipt of ‘objection/no-objection’ letter from the stock exchange(s), SEBI would process the draft scheme and provide its comments on it. In this course, SEBI may seek clarifications from any person relevant in this regard including the listed company or the stock exchange and may also seek an opinion from an independent chartered accountant.

SEBI would endeavour to provide its comments on the draft scheme to the stock exchange(s) within 30 days from the later of (i) date of receipt of satisfactory reply on clarifications sought by SEBI from the listed company, or (ii) date of receipt of opinion of independent chartered accountant, if any, sought by SEBI, or (iii) date of receipt of “objection/no-objection” letter from stock exchange(s).

Subsequent to receipt of comments from SEBI, the stock exchange(s) would issue an ‘observation letter’ to the listed company after suitably incorporating comments received from SEBI, within 7 days of receipt of comments from SEBI. Both the listed company and the stock exchange must display the ‘observation letter’ on their respective websites.

Listed companies are also required to include the ‘observation letter’ in the notice sent to the shareholders for the general meeting convened for approval of the scheme, as well as to bring the ‘observation letter’ to the notice of the High Court concerned at the time of seeking approval of the scheme.

The validity of the ‘observation letter’ of stock exchanges would be 6 months from the date of issuance, within which the scheme must be submitted by the High Court concerned.

REDRESSAL OF COMPLAINTS

All complaints/comments received by SEBI on the draft scheme would be forwarded to the designated stock exchange(s) for necessary action and resolution by the listed company. The listed company would submit a ‘complaints report’ to the stock exchange(s) in the form and within the time period as specified in the Circular and which would contain details of complaints/comments received by it directly or forwarded by stock exchange(s), prior to obtaining the ‘observation letter’ from stock exchange(s) on the draft scheme. The stock exchange(s) would forward the ‘complaints report’ to SEBI before SEBI communicates its comments on the draft scheme to the stock exchange(s).

The listed companies would also include the ‘complaints report’ in the notice for general meeting sent to shareholders while seeking approval of the scheme.

APPROVAL OF SHAREHOLDERS THROUGH POSTAL BALLOT AND E-VOTING

Listed companies are now required to ensure that the draft scheme submitted to the High Court concerned for sanction, provides for obtaining shareholders’ approval through special resolution passed through postal ballot and e-voting, after disclosure of all material facts in the explanatory statement sent to the shareholders in relation to such resolution. The scheme would also provide that the special resolution shall be acted upon only if the votes cast by public shareholders in favour of the proposal amount to at least two times the number of votes cast by public shareholders against it.

Hence, in view of the above, in addition to the resolution being approved by 3/4ths of the shareholders, at least 2/3rd of the public shareholders are required to vote in favour of the scheme.

This requirement goes over and above the requirement provided under the Companies Act 1956 wherein it is specified that only 3/4th of the shareholders would have to vote in favour of the said scheme. It is an added requirement to those under the Companies Act 1956 for approval of a scheme of arrangement by the general body of shareholders of a listed company.

REQUIREMENTS POST SANCTION OF SCHEME BY HIGH COURT

Upon sanction of the scheme by the High Court concerned, the listed company would submit the documents as specified under this Circular, to the stock exchange(s). Thereafter, the designated stock exchange(s) would forward its recommendations to SEBI and SEBI would endeavour to offer its comments/approval within 30 days to the designated stock exchange(s).

It is not clear from the Circular that subsequent to approval of scheme by the relevant High Court, what would be the relevance of comments received from stock exchanges and subsequent comments/approval from SEBI.

CONCLUSION

The many requirements of the Circular may make the process of corporate restructuring more cumbersome and time consuming. That apart, the following are some of the criticisms of the Circular:

  • The Circular envisages filing of a draft scheme in case of reduction of capital under Chapter V of the Companies Act 1956. However, it does not discuss situations where a company would seek to reduce its capital under Sections 100-105 of the Companies Act 1956. Hence, it appears that a company may reduce its capital under Sections 100-105 of the Companies Act 1956 without necessarily meeting the requirements under this Circular.
  • SEBI’s review of each and every draft scheme of arrangement of a listed company appears to be a very heavy task. Perhaps, SEBI’s review should have been limited to processing and offering comments on only those schemes which would be referred to it by the concerned stock exchange(s).
  • There is no outer timeline prescribed for SEBI within which it must mandatorily provide its comments on the draft scheme; the Circular only specifies a period of 30 days from an event within which SEBI would endeavour to do the same. Going forward, this uncertainty may prove to be one of the factors for delay in processing of the draft scheme by SEBI, thus delaying the entire process of restructuring of the listed company.
  • The entire process of preparing a ‘complaints report’ appears to be too cumbersome and onerous on the listed companies. Large listed companies could be over-burdened with tracking and maintaining records of complaints / comments received from all and sundry.
  • It is settled position that a scheme of arrangement, once approved by the High Court concerned, can be implemented by the listed company without any limitation. However, the Circular fails to bring out the relevance of comments received from stock exchanges and subsequent comments/approval from SEBI. This provision will likely create confusion and uncertainty in the minds of the corporates seeking undergoing restructuring under Part V of the Companies Act, 1956.

Schemes of arrangement under the Companies Act, 1956 are not just important tools for corporate restructuring; they are also catalysts in creation of shareholder value. Keeping that in mind, SEBI may consider amending, modifying or clarifying some concerns lest the Circular is seen as a hindrance or impediment in the process of corporate restructuring.