SEBI’s Stringent Roadmap for Merger/Demerger of Listed Company

SEBI has issued a Circular No. CIR/CFD/DIL/5/2013 dated 4th February, 2013, to revamp the whole process of approval of Scheme of Mergers/demergers involving listed Companies. At present all schemes of merger/demerger/reduction of capital involving listed companies require a No Objection of Stock Exchanges before the schemes/petitions are filed before the High Court having jurisdiction over the companies. Similarly, schemes which allow listing of unlisted companies require approval of the SEBI after the scheme is approved by the High Court. As per the circular SEBI has observed that, in the recent past, the applications received for seeking exemption, contained inadequate disclosures, convoluted schemes of arrangement, exaggerated valuations, etc and is of the view that granting listing permission or exemption based on such applications may not be in the interest of minority shareholders.

Vice President
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Keeping in views these observations, now SEBI has revised the rules relating to Scheme of arrangements under the Companies Act, 1956 for the Stock Exchanges and Listed Companies. The amended provisions now require Stock Exchanges to give their reasoned observations on the scheme and refer the same to SEBI. SEBI would also analyse the scheme, the valuation report etc. and give their observations on very Scheme of Merger/Demerger and Reduction of Capital. Besides this all relevant information and documents would be made public by the Company as well as Stock Exchanges and Comments/Objections received during 21 days would be addressed by the Company and considered by the Stock Exchanges/SEBI while granting No Objection. The other important change is mandatory Postal Ballot approval and eVoting on the scheme. SEBI also mandated approval of the scheme by at least 2/3rd of Minority shareholders. These changes would create much better transparency and protection of minority investors. The process has become very much similar to Takeover Offers/Rights Issues.
The Circular is applicable with immediate effect and would be applicable to:
  • Listed companies which are entering into the Scheme of Arrangements but have not submitted the Scheme with the Hon’ble High Court; and
  • The companies that have submitted the Draft Scheme with the stock exchanges under Clause 24(f) of Listing Agreement and such schemes have not yet been submitted with the Hon'ble High Court for approval.
  • All scheme which have already got their No Objection from Stock Exchanges but have not yet filed with High Court would require resubmission with the Stock Exchange

The salient features of the revised rules include the following:

1. OBLIGATIONS OF LISTED COMPANIES

      1.1Listed companies shall file the Draft Scheme of Arrangement, with the Stock Exchange in accordance with Clause 24 (f) of the Listing Agreement;
      1.2 Such companies shall also place before its Audit Committee the Valuation Report obtained from an Independent Chartered Accountant. The Audit Committee shall furnish a report recommending the Draft Scheme, taking into consideration, inter alia, the aforementioned valuation report;
      1.3 The Listed Co. shall choose one of the Stock Exchange as designated stock exchange for the purpose of coordinating with SEBI.
      1.4 Immediately upon filing of the Draft Scheme with the stock exchanges, the listed company shall disclose the Draft Scheme and all the documents on its website.
      1.5 Listed companies are also required to:-
        1.5.1 Include the observation letter of the Stock Exchange in the notice sent to the shareholders;
        1.5.2 Bring the same to the notice of the Hon’ble High Court at the time of seeking approval of the Scheme;
        1.5.3 Disclose the Observation Letter of the stock exchanges on its website within 24 hours of receiving the same.

      1.6 APPROVAL OF SHAREHOLDERS

        1.6.1 Listed companies shall ensure that the Scheme provides for obtaining shareholders’ approval through special resolution passed through postal ballot and e-voting.
        1.6.2 The Scheme shall also provide that the special resolution shall be acted upon only if the votes cast by public shareholders in favor of the proposal amount to at least two times the number of votes cast by public shareholders against it.

2. OBLIGATIONS OF THE STOCK EXCHANGES

      2.1 The designated stock exchange, shall forward the Draft Scheme to SEBI within 3 working days;
      2.2 The Stock Exchange, shall immediately on receipt, shall also disclose on their websites the Draft Scheme and documents.
      2.3 The Stock Exchanges shall forward their “Objection/No-Objection” letter to SEBI within 30 days from the date of application or within 7 days of date of receipt of satisfactory reply;
      2.4 The stock exchanges, upon receipt of comments from SEBI, shall issue Observation Letter to the listed company within 7 days from the receipt of the comments. The ‘Observation Letter’ issued by the stock exchanges shall be valid for six months from the date of issuance, within which the Scheme shall be submitted to the Hon’ble High Court;
      2.5 The Stock Exchange, shall also disclose the Observation Letter on its website immediately upon issuance.

3. PROCESSING OF THE DRAFT SCHEME BY SEBI

      3.1 Upon receipt of “Objection/No-Objection” letter, SEBI shall endeavour to provide its comments on the Draft Scheme to the stock exchanges within 30 days from the later of the following:
        3.1.1 Date of receipt of satisfactory reply on clarifications, if any sought from the company by SEBI; or
        3.1.2 Date of receipt of opinion from Independent Chartered Accountant, if sought by SEBI; or
        3.1.3 Date of receipt of “Objection/No-Objection” letter from the stock exchanges.

4. REDRESSAL OF COMPLAINTS

      4.1 All complaints/comments received by SEBI on the Draft Scheme shall be forwarded to the designated stock exchange, for necessary action and resolution; Listed company shall submit to stock exchanges a ‘Complaints Report’ which shall contain the details of complaints/comments received by it on the Draft Scheme from various sources prior to obtaining Observation Letter from stock exchanges
      4.2 ‘Complaints Report’ shall also be included in the notice sent to the shareholders while seeking approval of the Scheme.
      4.3 ‘Complaints Report’, shall be submitted to the stock exchanges within 7 days of expiry of 21 days from the date of filing of Draft Scheme with stock exchanges

5. REQUIREMENTS AFTER THE SCHEME IS SANCTIONED BY THE HON’BLE HIGH COURT

      5.1 Upon sanction of Scheme by the Hon’ble High Court, the listed company shall submit the documents, to the stock exchanges.
      5.2 The designated stock exchange shall forward its recommendations to SEBI
      5.3 SEBI shall endeavour to offer its comments/approval, to the designated stock exchange in 30 days.

To download the Circular, Click Here

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