SEBI Clarification - Observation on M&A Scheme

SEBI has issued a Circular No. CIR/CFD/DIL/8/2013 dated 21st May, 2013 to clarify and relax certain issues in reference to its Circular CIR/CFD/DIL/5/2013 dated February 4, 2013 dealing with its observation on M&A Scheme (in addition to the NOC from Stock Exchange).

The following issues have been addressed by SEBI through this Circular:

1. Applicability of SEBI Circular CIR/CFD/DIL/5/2013

Issue: Due to the language of opening para of SEBI Circular CIR/CFD/DIL/5/2013 dated February 4, 2013 there was confusion amongst the corporate that whether this circular is applicable only to the cases where exemption from Rule 19(2)(b) of Securities Contracts (Regulation) Rules, 1957 is sought from SEBI.


Clarification:
    1.1. SEBI Circular No. CIR/CFD/DIL/5/2013 dated February 4, 2013 is applicable to all listed companies undertaking a Scheme of Arrangement for Reduction of Share Capital / Amalgamation / Merger / Demerger / Reconstruction under Companies Act, 1956.
    1.2. Thus, it is hereby clarified that the Circular CIR/CFD/DIL/5/2013 and CIR/CFD/DIL/8/2013 are applicable even to cases where no exemption from Rule 19(2)(b) of Securities Contracts (Regulation) Rules, 1957 is sought from SEBI.

2. Requirement of submission of Valuation Report from Independent Chartered Accountant:

Issue: There was confusion regarding whether Valuation Report is required in all cases including cases of Reduction of share Capital, Merger of Wholly owned Subsidiary Company with Parent Company, cases of Nil consideration, Demerger etc. 

Clarification:
    2.1. It has been clarified that all listed companies undertaking a Scheme of Arrangement for Reduction of Share Capital / Amalgamation / Merger / Demerger / Reconstruction under Companies Act, 1956 are required to submit a valuation report other than those specifically exempted. 
    2.2. It is further clarified that ''Valuation Report from an Independent Chartered Accountant'' is not required in cases where there is no change in the shareholding pattern of the listed company / resultant company. 
    2.3. For the purpose of this Circular SEBI has also define “the Change in shareholding Pattern” shall mean; 
    • Change in the proportion of shareholding of any of the existing shareholders of the listed company in the resultant company; or 
    • New shareholder being allotted equity shares of the resultant company; or 
    • Existing shareholder exiting the company pursuant to the Scheme of Arrangement 
    2.4. In case a wholly-owned-subsidiary of a listed entity is merged with the parent listed company where the shareholders and the shareholding pattern of parent Listed Company remains the same, it will be treated as ''no change in shareholding pattern''.

3. Modification in SEBI Circular dated February 4, 2013 (Clarification on Designated Stock Exchange for the purpose of Communication with SEBI) 

Issue a : There was no clarity in earlier SEBI Circular dated February 4, 2013, that what will be the procedure if company involved in restructuring is listed only on regional stock exchange, how they Communicated with SEBI.

Clarification: 
    3.1. For companies listed solely on regional stock exchange, wherein exemption from Rule 19(2)(b) of Securities Contracts (Regulation) Rules, 1957 is sought, the company shall obtain in-principle approval for listing of equity shares on any stock exchange having nationwide trading terminals. 
    3.2. For companies listed solely on regional stock exchange, wherein exemption from Rule 19(2)(b) of Securities Contracts (Regulation) Rules, 1957 is not sought by the company, one of the stock exchanges having nationwide trading terminals shall provide a platform for dissemination of information of such Schemes and other documents required under the SEBI Circular dated February 4, 2013. For such purpose, stock exchanges having nationwide trading terminals may charge reasonable fees from such companies.
Issue b: There was no Clarity in earlier SEBI Circular, how SEBI will give its comments on the scheme of the companies which is only listed on regional stock exchange 
It is clarified that SEBI shall endeavor to provide its comments on the Draft Scheme to the stock exchanges within 30 days from Date of receipt of copy of in-principle approval for listing of equity shares of the company seeking exemption from Rule 19(2)(b) of Securities Contracts (Regulation) Rules, 1957 on designated stock exchange, in case the company is listed solely on regional stock exchange.

4. Approval of Shareholders to Scheme through Postal Ballot and e- Voting:

Issue a: Through its earlier circular, SEBI introduced a new concept of voting for Public shareholders through Postal ballot and e-voting which sought 2/3rd of the voting in favor. There were apprehensions on how the same would work and that it may cause practical difficulties

Clarification and Modification: 
    4.1. The following cases have been prescribed in which vote by public shareholders through Postal Ballot & e-voting is required after disclosure of all material facts in the explanatory statement sent to the shareholders in relation to such resolution - 
    • Where additional shares have been allotted to Promoter / Promoter Group, Related Parties of Promoter / Promoter Group, Associates of Promoter / Promoter Group, Subsidiary/(s) of Promoter / Promoter Group of the listed company, or
    • Where the Scheme of Arrangement involves the listed company and any other entity involving Promoter / Promoter Group, Related Parties of Promoter / Promoter Group, Associates of Promoter / Promoter Group, Subsidiary/(s) of Promoter / Promoter Group.
    • Where the parent listed company, has acquired the equity shares of the subsidiary, by paying consideration in cash or in kind in the past to any of the shareholders of the subsidiary who may be Promoter / Promoter Group, Related Parties of Promoter / Promoter Group, Associates of Promoter / Promoter Group, Subsidiary/(s) of Promoter / Promoter Group of the parent listed company, and if that subsidiary is being merged with the parent listed company under the Scheme. 
    4.2. For all other cases, the requirements under this clause shall not be applicable. In such cases, the listed entities shall furnish an undertaking certified by the auditor and duly approved by the Board of the company, clearly stating the reasons for its non-applicability.
    4.3. The undertaking as referred above shall be displayed on the websites of stock exchanges and the listed company along with other documents submitted, 
    4.4. Any mis-statement or furnishing of false information with regard to the said undertaking would be viewed seriously and liable for punitive action as per the provisions of applicable laws and regulations 
Issue b: Positive votes required in case of Public Shareholders
Relaxation has now been granted in the quantum of votes required for the schemes. The Scheme shall now be acted upon only if the votes cast by the public shareholders in favor of the proposal are more than the number of votes cast by the public shareholders against it.

Conclusion: 
Through this circular, SEBI has tried to remove the ambiguities and have also relaxed the % voting criterion in case of Public shareholders voting. The same would bring cheer to the M&A community. Probably one of the issue that needs to be seen is how the Courts interpret the new concept of Public voting through postal ballot (e-voting) as currently under the Companies Act, 1956 and rules framed for Mergers, the shareholders meetings take place under the supervision of Court appointed chairpersons which consider the cumulative votes of Promoters and Public.
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