CS Kiran Kumar Guptha B
The SEBI, vide Circular No. CIR/CFD/DIL/5/2013 dated February 4, 2013 by rescinding the Circular No. SEBI/CFD/SCRR/01/2009/03/09 dated September 03, 2009, has revised the requirements for the Stock Exchanges and Listed companies desirous of undertaking a Scheme of Arrangement (Amalgamation/ Merger/ Reconstruction/ Reduction Of Capital, etc.) Under sections 391, 394 and 101 of the Companies Act, 1956.
This Article attempts to throw some light on the procedural aspects in revised requirements and analysis of some critical aspects/ambiguities.
This Circular will be applicable to listed companies which, on the date of this Circular i.e. February 4 2013, have not submitted the Scheme with the Hon’ble High Court.
The following are the brief steps involved for Listed companies proposing a Scheme of Arrangement Under sections 391, 394 and 101 of the Companies Act, 1956.
Stage-1: Requirements – Pre Observation Letter of the stock exchanges
1. A Valuation Report has to be obtained from an Independent Chartered Accountant and which has to be placed before the Audit Committee of the company.
2. The Audit Committee shall furnish a report to the Board recommending the Draft Scheme, taking into consideration, inter alia, the valuation report.
3. Listed company shall choose one of the stock exchanges having nation-wide trading terminals as the designated stock exchange for the purpose of coordinating with SEBI.
4. Listed company has to submit the documents mentioned in Para 2 of Part A of Annexure I to the Circular and other documents in accordance with the Clause 24(f) of the Listing Agreement to the stock exchanges.
5. A listed issuer may submit the Draft Scheme under rule 19(7) of the Securities Contracts (Regulation) Rules, 1957 seeking relaxation from the strict enforcement of rule 19(2) (b) thereof, for listing of equity shares to be allotted by the unlisted issuer (transferee entity) on a recognized stock exchange without making an initial public offer, if it satisfies the conditions specified in Para 1 of Part A of Annexure I to the Circular.
6. The listed company shall disclose the Draft Scheme and all the documents submitted to Stock exchange on its website immediately upon filing of the Draft Scheme with the stock exchanges.
7. The stock exchanges where the specified securities are listed / proposed to be listed shall also disclose on their websites immediately on receipt.
8. The designated stock exchange, upon receipt of the Draft Scheme and the documents referred, shall forward the same to SEBI within 3 working days.
9. Listed company has to submit to stock exchanges, 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 documents on the websites of Stock exchanges and the company, a ‘Complaints Report’ (as per the format specified at Annexure II to the Circular ) containing the details of complaints/comments received by it on the Draft Scheme from various sources (complaints/comments written directly to the company or forwarded to it by the stock exchanges)
10. The stock exchanges shall forward their “Objection/No-Objection” letter on the Draft Scheme to SEBI within 30 days from the date of application or within 7 days of date of receipt of satisfactory reply on clarifications aforesaid, if any sought by stock exchanges.
11. The ‘Complaints Report’ shall be forwarded by the stock exchanges to SEBI before SEBI communicates its comments on the Draft Scheme to the stock exchanges.
12. SEBI shall provide its comments on the Draft Scheme to the stock exchanges within 30 days from the later of (a) satisfactory reply on clarifications, if any sought from the company or (b) Opinion from Independent Chartered Accountant by SEBI or (c)“Objection/No-Objection” letter from the stock exchanges.
13. The stock exchange, within 7 days of receipt of comments from SEBI on the Draft Scheme issues ‘Observation Letter’ to the listed company after suitably incorporating the comments received from SEBI.
14. Listed company has to disclose the Observation Letter of the stock exchanges on its website within 24 hours of receiving the same and the stock exchange also discloses the Observation Letter on its website immediately upon issuance.
Stage-2: Requirements – Post Observation Letter of the stock exchanges
1. The ‘Observation Letter’ of 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. Listed companies shall bring the Observation Letter to the notice of the Hon’ble High Court at the time of seeking approval of the Scheme.
3. Listed companies shall include the Observation Letter and ‘Complaints Report’ in the notice sent to the shareholders seeking approval of the Scheme.
4. Shareholders’ approval to the Scheme has to be obtained through Special Resolution passed through ‘Postal Ballot and e-voting’ and 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.
Stage-3: Requirements after the Scheme is Sanctioned by the Hon’ble High Court
1. The listed company shall submit the documents mentioned in Part B of Annexure I to the Circular, to the stock exchanges upon sanction of the Scheme by the Hon’ble High Court,
2. Applications involving Schemes of Arrangement, Warrants along with NCDs, and Issuance of Equity shares with Differential Rights, the detailed requirements to be complied with are mentioned in Annexure I to the Circular.
3. Stock exchanges shall ensure that, an unlisted issuer may make an application to the Board under Rule 19(7) of the Securities Contracts (Regulation) Rules, 1957, pursuant to Part A of this Circular by satisfying the conditions laid down in Para 1 in Part B of Annexure I to the Circular.
4. The designated stock exchange forwards its recommendations to SEBI on the documents submitted by the listed company as referred above.
5. SEBI shall endeavor to offer its comments/approval, wherever applicable, to the designated stock exchange in 30 days.
Analysis of critical aspects/ambiguities
It appears from the earlier Clauses of the Circular that the Circular is applicable to the companies seeking exemption from the requirements of Rule 19(2)(b) of SCRR, 1957 in terms of Rule 19(7) of SCRR, 1957.
And Clause 5.1 envisages that ‘Listed companies desirous of undertaking a Scheme of Arrangement under Chapter V of the Companies Act, 1956, (Amalgamation/ Merger/ Reconstruction/ Reduction Of Capital, etc.) shall file the Draft Scheme with the stock exchanges in terms of Clause 24(f) of the Listing Agreement’, by which one can understand that, the revised requirements will not be applicable to the Scheme of Reduction of capital exclusively Under Sec. 101 as the same will not come under Chapter V of the Companies Act, 1956.
However, we can draw a conclusion that this Circular is applicable to all the listed companies proposing a Scheme of Arrangement Under sections 391, 394 and 101 of the Companies Act, 1956.
Designated stock exchange for the purpose of coordinating with SEBI:
The Circular states that Listed companies has to choose one of the stock exchanges having nation-wide trading terminals as the designated stock exchange for the purpose of coordinating with SEBI, here the question arises as to the entities listed only on regional Stock exchanges.
The listed entity may choose one of the regional stock exchanges as designated stock exchange. If the entity is listed only on regional Stock exchanges as there are no option left with.
Postal Ballot and e- Voting:
The Companies Act and Court Rules stipulates a physical meeting and approval by majority in number representing three-fourths in value, but the Circular stipulates Postal Ballot and e- Voting and a Special Resolution.
We can draw the following conclusions by harmonizing the provisions of the Companies Act and SEBI Circular:
a) The companies (passing of the resolution by Postal Ballot) Rules 2011 are yet to be amended to include the intention of the Circular.
b) Approval by majority in number representing three-fourths in value can also be achieved by taking into consideration the Number of Valid Postal Ballots received to recon the majority and Special Resolution here obviously represent the three-fourths in value.
c) As the Court appoints Chairman of the meeting, in case of listed companies in the present case such Chairman may act as a Scrutinizer for the Postal Ballot and e- Voting.
d) To protect the interest of small investors, public shareholders approval has been introduced.
SEBI shall endeavour to offer its comments/approval:
Though it appears improper SEBI offering its comments/approval after the Scheme is sanctioned by the Hon’ble High Court, in discharge of basic functions “to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto” SEBI is empowered to grant comments/approval for listing considering the changes carried out the Draft Scheme, Status of compliance with the Observation Letter/s of the stock exchanges and such other matters it may deem proper.
The Circular mentioned supra is available at https://taxguru.in/sebi/requirements-reconstruction-scheme-revised-listed-companies-stock-exchanges.html