SEBI revises regulatory framework around scheme of arrangements by listed entities

The Securities Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR) place obligations on listed entities and stock exchanges with respect to scheme of arrangements. On March 10, 2017, SEBI issued a circular revising the regulatory framework around scheme of arrangements and laid down requirements for listed entities seeing relaxations under rule 19(7) of the Securities Contracts (Regulation) Rules, 1957 (Rules) (2017 Circular).

Recently, on November 3, 2020, SEBI notified certain amendments to the 2017 Circular, thereby streamlining the processing of draft schemes filed with the stock exchanges by listed entities (Amendment). The Amendment will be applicable for all schemes of arrangements filed with the stock exchanges after November 17, 2020.

The changes brought about by the Amendment have been set out in brief, hereinbelow.

  • Audit Committee report: Prior to the Amendment, listed entities were required to submit a report from their audit committee recommending the draft scheme, taking into consideration the valuation report, which was also required to be placed before the audit committee. The Amendment imposes an additional obligation on the audit committee, requiring it to ensure that its report shall include comments on the following aspects of the 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.
    • Cost benefit analysis of the scheme.
  • Report by independent directors: Pursuant to a new insertion by the Amendment, independent directors of listed entities have been imposed with an obligation to ensure that the scheme is not detrimental to the shareholders of the listed entity and are required to issue a report, recommending the draft scheme, to this effect. Such report is required to be submitted by listed entities to the stock exchanges.
  • Valuation report: Under the 2017 Circular, all listed entities were required to submit a valuation report from an Independent Chartered Accountant. Pursuant to the Amendment, listed entities are now required to submit a valuation report from a Registered Valuer, who shall be a person registered as a valuer, having such qualifications and experience and being a member of an organization recognized, as specified in Section 247 of the Companies Act, 2013 read with the applicable rules issued thereunder.
  • Approval of shareholders to scheme through e-voting: Under the 2017 Circular, the scheme involved the transfer of whole or substantially the whole of the undertaking of the listed entity and the consideration for such transfer is not in the form of listed equity shares. To determine what constitutes 'substantially the whole of the undertaking', the 2017 Circular referred to the explanation provided under Section 180 (1)(a)(i) of the Companies Act, 2013. The Amendment now refers to section 180(1)(a)(ii) of the Companies Act, 2013 for the purpose of determining 'substantially the whole of the undertaking'.
  • Stock exchange(s) to issue no-objection letters only: Prior to the Amendment, stock exchanges having nationwide terminals or regional stock exchanges, as the case may be, had to provide either the 'observation letter' or 'no-objection Letter' to SEBI on the draft scheme submitted by listed entities, upon receipt of which SEBI issued a 'comment letter'. The Amendment now requires stock exchanges having nationwide terminals or regional stock exchanges, as the case may be, to issue only a 'no-objection letter' to SEBI, in co-ordination with each other, after which SEBI will issue its 'comment letter'. The Amendment removes the concept of 'observation letter' and accordingly stock exchanges re now required to issue 'noobjection certificates' only, in relation to the draft schemes.
  • Requirements to be fulfilled by listed entity for listing of equity shares: Listed entities seeking relaxation from the Rules were required to fulfil certain conditions prescribed in the 2017 Circular. One such condition was that trading of securities shall commence within 45 days from the order of NCLT/High Court and prior to commencement of trading, the transferee entity was required to publish an advertisement in in one English and one Hindi newspaper providing certain specific details.

    The Amendment has modified certain aspects of the aforesaid condition and now allows 60 days for the listed entity to commence trading simultaneously on all stock exchanges (where its equity shares is/was listed). The Amendment also prescribes the following additional details to be disclosed by the transferee entity, in the form of an information document, on the website of the stock exchange and in the advertisement to be published in one English and one Hindi newspaper:
    • Name and details of Board of Directors (experience including current / past position held in other firms)
    • Business model/business overview and strategy
    • Details in respect of 'restated' audited financials, as opposed to 'audited financials' as was prescribed in the 2017
    • Summary table of contingent liabilities as disclosed in the restated financial statements
    • Summary table of related party transactions in last 3 years as disclosed in the restated financial statements
    • Internal risk factors (minimum 5 and maximum 10)
    • Regulatory actions, if any, including disciplinary action taken by SEBI or stock exchanges against the promoters in last 5 financial years
    • Brief details of outstanding criminal proceedings against the promoters


The Amendment aims at empowering stock exchanges and ensuring that the recognized stock exchanges make an informed decision with respect to the draft schemes submitted by listed companies in a manner that they are fully compliant with the SEBI Act, rules, regulations and circulars framed thereunder and only then refer such draft schemes to SEBI. The Amendment ensures that, not only the audit committee, but also the independent directors of the listed entities recommend the draft scheme having regard to the interests of the stakeholders, from an unbiased perspective. The requirement for additional details to be disclosed on the website of the stock exchange and advertisements appear to have been introduced to enable the public and the stakeholders at large to gain a better perspective about the management, promoters, the business model and internal risks associated with listed entities. All in all, the Amendment protects the interests of investors and stakeholders and promotes the development of the securities market.

Introduction of 'Flexi-cap Fund' as a new equity MF category by SEBI


Securities and Exchange Board of India (SEBI), the capital markets regulator in India, has been directing the categorization and rationalization of mutual fund schemes since 2017. This is being done with a view to promote uniformity and transparency across the industry in order to enable investors to make better informed investment decisions.

Recently in September 2020, SEBI had directed that all 'Multi Cap Funds' would be required to invest a minimum of 25% of their corpus each in equity or equity-related instruments of large-cap, mid-cap and small-cap stocks (aggregating to 75% of their corpus), leaving the remaining 25% to be invested as per the discretion of the fund investment manager. With this, SEBI's intent was to ensure that the allocation within multi-cap funds is henceforth maintained true-to-label instead of being skewed in favor of one set of companies.

However, this led to unrest within fund houses and investor circles since a majority of multi-cap funds were already invested heavily into large-cap companies. These investments would need to be pruned and directed into mid-cap and small-cap instruments, which may have proved to be a challenging task. A note on the subject released by CRISIL stated that most multi-cap funds will have to sell off their large-cap investments to meet the new investment limits for mid and small-cap stocks, which could result in INR 41,000 crore of net outflows from large caps and net inflows of INR 13,000 crore and INR 28,000 crore in mid-cap and small-cap segments, respectively. Finding that order of investments in lower caps could be uphill task for fund managers, especially given the illiquidity in the segment and the downbeat economic forecasts amid the Covid-19 pandemic.

Introduction of the 'Flexi-cap Fund' category

Based on the market feedback and the recommendations made by its Mutual Fund Advisory Committee (MFAC), SEBI issued a circular on November 06, 2020 introducing flexi-cap fund (FCF Circular) as a new category under equity schemes. This category has been introduced with the intent of providing flexibility to fund managers in carrying out investment allocations of mutual fund portfolios - fund managers, who either had to reshuffle the multi-cap portfolio or merge with other schemes, can now just rebrand their scheme as a flexi-cap fund. Accordingly, all existing multi-cap funds seeking to maintain absolute independence over portfolio allocation can opt for reclassification as flexi-cap funds in order to not be bound by the earlier portfolio allocation rules made applicable in respect of multi-cap funds.

As per the FCF Circular, the flexi-cap fund will be available with the following scheme characteristics:

  • Category of Scheme: Flexi-cap fund
  • Scheme characteristics: Minimum investment in equity & equity related instruments - 65% of total assets
  • Type of scheme (uniform description of scheme): An open-ended dynamic equity scheme investing acros large-cap, mid-cap and small-cap stocks

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