Sebi's Observations On Scheme Of Arrangements

PARADIGM SHIFT FROM SE TO SEBI

Prior to 4th February, 2013, the scheme of arrangements, involving listed companies, were regulated in accordance with clause 24 (f) of Listing Agreement i.e. with the Stock Exchange (SE). However, post 4th February, 2013, SEBI amended the requirements and introduced a circular, wherein it widened its scope for dealing with the Schemes and provided for additional disclosures/ procedural compliance’s by SE’s/ Listed Companies.


The Circular had been introduced, by SEBI, the capital market watchdog, as the scheme of arrangements, were having inadequate disclosures, exaggerated valuations, convoluted structures, etc. 

As indicated in the Circular, SEBI in its observation letters have categorically, pointed out following major concerns, and has ensured that none such scheme shall go through, that has been prepared, with the intent to provide harm to minority shareholders or has been adopted as a route for backdoor listing circumventing the SEBI Takeover Code/ ICDR.

SEBI's CONCERNS IN RESTRUCTURING SCHEME

SEBI has provided there negative comments on all such schemes, wherein, the Scheme of Arrangement has either of the following features:
  1. Dilution in public shareholding;
  2. Achieving listing status of unlisted company w.r.t. IPO;
  3. Swap ratio skewed in favor of unlisted company and resulting public shareholding of listed company get reduced;
  4. Valuation of Listed Company should not be less than prevailing market price;

SEBI REMARKS ON THOSE POINT IN RECENT TIME


1. DILUTION IN PUBLIC SHAREHOLDING

Recently, SEBI has objected the Schemes, on the ground that post restructuring the public shareholding in the listed company gets reduced to well below 25%. 

SEBI in several schemes, has noted that, the management of the Listed Company, structures the Scheme in such a manner, that the Public Shareholding, tends to reduce more than the minimum prescribed limit as prescribed under Clause 40 A of LA (i.e. 25%). SEBI, in its letter, further noted that, the management in the Scheme of Arrangement itself, categorizes the promoter shareholding in the public category, so as to fulfil the above said criterion and hence try to fool the regulatory authorities/ public shareholders.

In terms of Rule 19A of SCRR, as amended on June 4, 2010 every Listed Company (other than public sector Company) shall maintain public shareholding of at least 25%. The object of this minimum shareholding requirement is to ensure the availability of minimum portion / no. of shares (floating stock) of the listed company with the public. 

SEBI is of the view that since the object of the minimum public shareholding is not being fulfilled and the applicable laws are not being complied with, hence it has provided its negative comments to all such restructuring schemes.

2. ACHIVING LISTING STATUS OF UNLISTED COMPANY W.R.T. IPO

SEBI in the last 1 year has raised an objection to all such schemes, wherein, an attempt is made by the management, to list the business of an unlisted company through the process of backdoor listing.

SEBI, in view of above, has marked out following scheme of arrangement: 
- The Scheme, wherein name of Listed Transferee Company being swapped with the name of Unlisted Transferor Company;
- In term of Size / Turnover, unlisted Transferor Company is much bigger than Listed Transferee Company;
- Listed Transferee Company has allotted huge no. shares to the shareholder of Unlisted Transferor Company in lieu of transfer of assets and liabilities and actual public shareholder of Listed Company becomes minor;

SEBI, in respect of the aforesaid scheme is of view that, a company in order to get its share listed is required to go through the process of Initial Public Offer (IPO) in compliance with the provisions of Rule 19(2)(b) of SCRR and ICDR. The IPO process is detailed, as it requires due diligence processes, appointment of Merchant Bankers; DRHP, briefing out the complete information pertaining to Company, its Business and Promoters.

SEBI Further noted that, the process of backdoor listing does not provides such information/ documentations or even the exit opportunity is not being provided to public shareholders, hence, this route of listing could not be considered as legal.

Thus SEBI has provided its negative comments to all such scheme.

3. SWAP RATIO SKEWED IN FAVOR OF UNLISTED COMPANY THEREBY REDUCING PUBLIC SHAREHOLDING OF LISTED COMPANY

SEBI has also raised objections on all such schemes, where, it has observed that, shares of Listed Transferee Company are issued in manner that it skewed in favor of promoters of Unlisted Transferor Company.

SEBI in its letter has noted that, pre- scheme net worth of Unlisted Transferor Company is less than the Listed Transferee Company, however, shares of Listed Transferee Company are issued in higher ratio to the shareholder of Unlisted Transferor Company based on exaggerated valuation of Unlisted Company. Thus SEBI has observed that, valuation and corresponding swap ratio proposed in these scheme are not truly reflecting the size of the Transferor Unlisted Company thereby leading to unfair dilution of interest to public shareholder in favor of new promoter.

4. VALUATION OF LISTED COMPANY SHOULD NOT BE LESS THAN PREVAILING MARKET PRICE

SEBI has also objected the scheme on the ground that, valuation of listed company does not reflect the market price of the shares of Listed Transferee Company. The price of shares of the listed company during 52 weeks and 2 weeks was much higher than the valued price and due to this valuation, the shareholders of unlisted company get benefitted.
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