In India, a listed company desirous of undertaking any restructuring involving merger/demerger/reconstruction/capital reduction is required to comply with the regulations, circulars and directions as issued by the Securities and Exchange Board of India (SEBI) from time to time. In terms of Regulation 37 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations), a listed company is required to file the draft scheme of arrangement (involving merger/amalgamation/reconstruction) or capital reduction (Scheme) with the stock exchange(s) seeking their observation letter or no-objection letter before such Scheme is filed with the courts/tribunals.
This requirement of obtaining prior no-observation or no-objection letter from the stock exchange does not, however, apply in case of a merger of a wholly owned subsidiary or its division with the parent company. In such cases, the listed companies are required to file the draft schemes with the stock exchanges for disclosure purposes only.
Further, a public company desirous of getting its shares listed on a stock exchange has to fulfil, inter alia, the requirements set forth under the Securities Contracts (Regulation) Rules, 1957 (SCR Rules). However, SEBI has the power to, either on its own discretion or on the recommendation of a recognised stock exchange, waive or relax the strict enforcement of any or all of the requirements with respect to listing prescribed by the SCR Rules.
SEBI Circular No. CFD/DIL3/CIR/2017/21 dated 10 March 2017 (as amended from time to time) has laid down the guidelines (Guidelines) to be followed by Indian listed companies proposing to undertake any restructuring exercise such as merger, demerger, reconstruction, capital reduction etc.. The Guidelines also specify the obligations of the stock exchange(s) in connection with the Schemes submitted by a listed company. In addition, the Guidelines have also set out the conditions/requirements for the entities seeking relaxations from the strict conditions of the SCR Rules for listing of their securities on the stock exchange(s) pursuant to the Schemes.
Amendments in the Guidelines
With a view to further streamline the processing of draft schemes filed with the stock exchanges, SEBI has recently made certain amendments in the Guidelines by way of a circular dated 3 November 20201. Set out below are some key amendments (Amendments) as introduced by SEBI.
Audit committee report
The Guidelines provide that while submitting the Scheme to the stock exchanges for obtaining their observation letter or no-objection letter in terms of the Listing Regulations, a listed company is required to submit certain documents including a report from their audit committee recommending the draft Scheme. The audit committee is then required to consider, inter-alia, the valuation report while giving their recommendations on the draft Scheme. However, the Amendments provide that henceforth the audit committee shall also be required to comment on the following aspects in their report on the draft Scheme:
- Need for the merger/demerger/amalgamation/arrangement;
- Rationale of the Scheme;
- Synergies of business of the entities involved in the Scheme;
- Impact of the Scheme on the shareholders; and
- Cost-benefit analysis of the Scheme.
Report from the committee of independent directors
As per the Amendments, a listed company will now be required to submit a report from the committee of independent directors recommending the draft scheme, taking into consideration, inter alia, that the Scheme is not detrimental to the shareholders of the listed company.
Prior to the amendments, a listed company was required to submit a valuation report prepared by an independent chartered accountant. However, the Amendments provide that a listed company will now be required to obtain a valuation report from a registered valuer. This amendment aligns the provisions of the Guidelines with the provisions of the Companies Act, 2013.
Non-objection from the stock exchanges
As per the extant provisions of the Guidelines, the stock exchanges, upon receipt of the draft Scheme and other documents, are required to forward the Scheme to SEBI along with their observation letter or no-objection letter. Upon receipt of observation letter or no-objection letter from the stock exchanges, SEBI provides its comments on the draft Scheme to the stock exchanges. The Amendments have now removed the option of an observation letter and made it mandatory for the stock exchanges to submit their no-objection letter to SEBI while forwarding the Scheme(s) to SEBI. SEBI will give its comments upon receipt of the no-objection letter from the stock exchanges having nationwide trading terminals, or from the designated stock exchange, as applicable. Unless the stock exchange(s) have given their no-objection letter in respect of the Scheme, SEBI will not provide its comments thereon.
Additional disclosures to be made at the time of listing of equity shares
A company seeking listing of its securities on the stock exchange(s) pursuant to the Scheme is required to give newspaper advertisements disclosing information on certain aspects such as capital structure, business objects, financials, details of the group companies etc. The Amendments provide that the issuer company shall, henceforth, also disclose the necessary information in the form of an information document on the website of the stock exchange(s).
Further, the Amendments now require the issuer entity to make certain additional disclosures such as the disclosures related to outstanding criminal proceedings against the promoters, a minimum of five (5) and a maximum of ten (10) internal risk factors and details of any disciplinary action taken by SEBI or stock exchanges against the promoters in the last five (5) financial years.
Listing of equity shares with differential rights
The extant Guidelines permit the listing of equity shares with differential rights as to dividend, voting or otherwise (SR Shares), without making an initial public offer but subject to certain conditions. However, the Amendments have now repealed this provision in view of the recent amendments in the Listing Regulations as well as the SCR Rules, in respect of the issuance of the SR Shares.
The aforementioned amendments would be applicable for all the Schemes to be filed with the stock exchanges after 17 November 2020, barring the amendment in relation to the additional disclosures (to be made at the time of listing of equity shares) which would be applicable for all listed entities seeking listing and/or trading approval from the stock exchanges after 3 November 2020.
The Amendments aim at enhancing the obligations as well as accountability of the stock exchange(s) by providing that the stock exchange(s) can now refer draft Scheme(s) to SEBI for its comments only upon being fully convinced that the draft Scheme is in compliance with the SEBI Act, rules, regulations and circulars issued thereunder.
Further, the scope of the audit committee vis-à-vis the Scheme(s) has also been enhanced since the audit committee report would be required to provide comments on several other aspects of the Scheme including the impact of the Scheme on the shareholders.
While additional disclosures to be made by an issuer company seeking listing of its shares pursuant to the Scheme would strengthen the corporate governance framework, the most significant amendment is the requirement of the report from the committee of independent directors who would now give their recommendations on the Scheme after taking into consideration the impact of the Scheme on the public shareholders. This would be more significant in cases where the Scheme involves promoters/promoter group entities. In such cases, the independent directors would carefully assess the Scheme and ensure that the Scheme is not detrimental to the minority shareholders before giving their recommendations on the Scheme. The report of independent directors would aid the minority shareholders to understand how a particular Scheme(s) could affect their interests before they decide to vote on the Scheme(s). This amendment, therefore, aims at protecting the interests of the minority shareholders.
1. The text of the relevant circular can
be accessed at the following link:
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