CS Vinita Nair & CS Meenakshi Lakshmanan
Companies strive for surge in their bottom lines. They adopt different strategies to achieve their targets. One of those strategies is the inorganic growth where by a company targets to acquire another company / business unit or merge with the other to create a synergy effect and thereby expand its operations.
SEBI has been constantly revisiting the requirements for compliance and submission of documents to stock exchanges in accordance with the requirement under Listing Agreement/ Listing Regulations. Initially, issued circular in February, 2013, clarifications issued in May, 2013, thereafter, issued revised circular in November, 2015 in accordance with provisions of Listing Regulations. The current circular issued by SEBI on March 10, 2017  (present Circular) is in response to discussions made at SEBI Board meeting held on January 14, 2017 and the recent amendments made in various regulations w.e.f. 15th February, 2017.
This article analyses the key changes made and the likely impact in this write up.
SEBI in its Board meeting approved the proposals to revise and streamline the regulatory framework governing schemes of arrangement. The focus was on following:
a. In case of merger of an unlisted company with a listed company (if it is listed on stock exchange having nationwide trading terminals):
i. Unlisted company to comply with requirement of disclosure of material information as specified in the format for abridged prospectus;
ii. Have wider public shareholding and to prevent very large unlisted company to get listed by merging with a very small company.
b. Pricing formula as specified under ICDR Regulations shall apply to such cases;
c. Extending the requirement to obtain approval through e-voting of public shareholders in following cases:
i. The schemes involving merger of an unlisted company resulting in reduction in the voting share % of pre-scheme public shareholders by more than 5% of total capital of merged entity.
ii. Schemes involving transfer of whole or substantially the whole of the undertaking of a listed company and consideration for such transfer is not in the form of listed equity shares.
iii. Schemes involving merger of unlisted subsidiary with listed holding company where the shares of the unlisted subsidiary have been acquired by the holding company directly or indirectly from the promoters/promoter group.
d. Companies should be required to submit compliance report confirming compliance with the circular and Accounting Standards duly certified by Company Secretary, CFO and Managing Director.
e. Schemes which provide for merger of a Wholly owned Subsidiary (WoS) with the parent company shall not be required to be filed with SEBI. Such schemes shall be filed with stock exchanges for the limited purpose of disclosures only.
|Particulars||Position under March, 2017 circular||Position under November, 2015 circular||Remarks|
|Position||Supercedes November, 2015 circular||Superceded February & May, 2013 circular|
|Applicability||Applicable to schemes filed after 10th March, 2017||Was applicable to schemes filed after 30th November, 2015||Schemes filed on or before 10th March, 2017 shall comply with requirements under November, 2015 circular.|
|Circular not applicable to||Schemes which solely provides for merger of Holding and WOS.
However, such draft schemes shall be filed with SE for dissemination of information.
|Only valuation report was not required to be submitted.||In line with the amendment made in Regulation 37 vide SEBI (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2017, w.e.f. 15.02.2017|
|Merger of unlisted transferor entity with listed entity||Issuance of shares shall be as per pricing provisions of Chapter VII of ICDR where the shares are issued to a select group of shareholders. And5, the relevant date for the purpose of computing pricing shall be the date of Board meeting in which the scheme is approved.||No such provision||In line with the amendment made in Regulation 70 vide SEBI ((Issue of Capital and Disclosure Requirements) (Amendment) Regulations, 2017, w.e.f. 15.02.2017|
|Listing fee payable post sanction of proposed scheme||0.1% of the paid-up share capital of the listed / transferee / resulting company, whichever is higher, post sanction of the proposed scheme, subject to a cap of Rs.5,00,000.
|No such provision||In line with amendment made vide SEBI (Payment Of Fees And Mode Of Payment) (Amendment) Regulations, 2017 by inserting Schedule XI (Fee in respect of draft scheme of arrangement) in Listing Regulations|
|Submission of documents to SE||Similar list as per previous circular.
New requirement: Detailed compliance report as per the format specified in Annexure IV confirming compliance with various regulatory requirements specified for schemes of arrangement and all accounting standards is required to be submitted duly certified by the CS, CFO and MD.
|Compliance with the requirements of Regulation 17 to 27 of Listing Regulations was required to be submitted.
|Specific format has been provided for submission of certificate. Content of the certificate is in similar lines with the requirements of previous circular.|
|Valuation Report||Valuation Report is not required in cases where there is no change in the shareholding pattern of the listed entity / resultant company.
|‘Valuation Report from an Independent Chartered Accountant‘ need not be required in cases where there is no change in the shareholding pattern of the listed entity / resultant company
|Earlier provision created confusion as to whether valuation report from other than independent CA was required to be provided. Current provision clarifies that there is no requirement to submit valuation report if there is no change in the shareholding pattern of the listed entity/ resultant company.|
|Conditions for schemes of arrangement involving unlisted entities.||Listed entity to include applicable information pertaining to unlisted entity/ies involved in the scheme in the format specified for abridged prospectus as provided in Part D of Schedule VIII of the ICDR Regulations, in the explanatory statement or notice or proposal accompanying resolution to be passed sent to the shareholders.
Accuracy and adequacy of such disclosure shall be certified by SEBI registered Merchant Banker after following due diligence process.
Atleast 25% of the post scheme shareholding pattern of the “merged company” shall comprise of pre-scheme public shareholders and QIBs of the unlisted entity.
Unlisted entities can be merged only if the listed entity is listed on a stock exchange having nationwide trading terminals.
|No such provision|
|Auditor’s certificate||Same requirement as previous circular.||Required to be submitted to the effect that accounting treatment contained in the scheme is as per the accounting standards specified by CG u/s 133 of Act, 2013 or requirements of the respective sectoral regulatory authorities.|
|Redressal of Complaints||Same requirement as previous circular.||Report on complaints to be submitted to the stock exchange within 7 days of expiry of 21 days from the date of filing of Draft Scheme with Stock Exchanges and hosting the Draft Scheme along with other documents on the website.|
|Disclosure on website||Same requirement as previous circular.||Immediately upon filing of the draft scheme.
Observation letter received from SE shall also be uploaded on the website within 24 hours of receiving the same.
|Explanatory statement or notice or proposal accompanying resolution sent||Same requirement as previous circular.||Observation letter to be included in the explanatory statement.
Explanatory statement shall disclose the pre and post arrangement or amalgamation, expected capital structure and shareholding pattern, and the fairness opinion.
Listed entity shall upload the report on complaints and compliance report on company’s website and website of SE.
|Approval of shareholders to scheme through e-voting||The present circular removes the requirement to obtain consent by postal ballot.
E-voting facility is to be mandatorily provided to the public shareholders.
Approval of public shareholders by ordinary resolution is required in cases provided in previous circular.
Two additional cases have been added to the list being:
a. the scheme involving merger of an unlisted entity that results in reduction in the voting share of pre-scheme public shareholders of listed entity in the transferee / resulting company by more than 5% of the total capital of the merged entity;
b. where the scheme involves 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
|Public shareholders were to be provided with the facility of voting through postal ballot and e-voting.
Approval of public shareholders by ordinary resolution is required in cases where additional shares are allotted to or
where the scheme of arrangement involves the listed entity 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 or
where the scheme involves merger of subsidiary with parent listed entity that acquired equity shares of such subsidiary, either directly or indirectly, from Promoter / Promoter Group, Related Parties of Promoter / Promoter Group, Associates of Promoter / Promoter Group, Subsidiary/(s) of Promoter / Promoter Group.
|This is a major relief as postal ballot need not be facilitated by the listed entity.|
|No change in the draft scheme||Subsequent filing the draft scheme with SEBI no changes to the draft scheme, except those mandated by the regulators / authorities / tribunal shall be made without specific written consent of SEBI||No such provision|
The matters stated in the table are the key pointers with respect to the latest notification dated 10th March, 2017. Apart from these the other regulations remain the same including the exemption from Regulation 19(2) of Securities Contracts (Regulation) Rules, 1957. With this circular, SEBI has thrown light on the questions with regard to merging with unlisted entities that was unanswered earlier. To conclude with, we can say that SEBI as a regulating authority is stringent and focuses on the public shareholders. At the same time SEBI also is inclined towards the companies and reduces their hardship by giving certain exemptions that can lessen the cumbersome procedures to be followed by the companies.
 the expression “substantially the whole of the undertaking” in any financial year shall mean twenty per cent or more of value of the company in terms of consolidated net worth or consolidated total income during previous financial year as specified in Section 180(1)(a)(i) of the Companies Act, 2013.
(Author CS Vinita Nair & CS Meenakshi Lakshmanan are associated with Vinod Kothari & Company)