The Board of securities market regulator SEBI has said that the shareholding of pre-scheme (scheme of arrangement for merger) public shareholders of the listed entity and the Qualified Institutional Buyers (QIBs) of the unlisted company, in the post scheme shareholding pattern of the “merged” company shall not be less than 25 per cent.

Approving the proposals which seek to streamline the regulatory framework for schemes of arrangement meant to merge/demerge companies,SEBI said “The objective is to have wider public shareholding and to prevent very large unlisted company to get listed by merging with a very small company.”

Unlisted company can now be merged with a listed company if it is listed on a stock exchange having nationwide trading terminals.

Sumit Agrawal, Partner, Suvan Law Advisor & ex-SEBI official said “SEBI was concerned because there were instances where route of Scheme of Arrangements or Merger was being used to get an indirect listing for an unlisted company. There were another category of misuse where under an arrangement; securities were being issued to promoter related persons only. There was an issue on electronic voting requirement as well. This amendment would also take care of recent challenges in High Courts. At least two High Courts had frowned upon SEBI’s jurisdiction over scheme of arrangements in the recent past. Government recently brought into force section 230(5) of Companies Act, 2013 which would also lend support to SEBI’s efforts in regulating such convoluted schemes.”

Disclosure

To improve disclosure standards in case of merger of an unlisted company with a listed company, SEBI said that the unlisted company has to disclose material information as specified in the format for abridged prospectus.

However, 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, SEBI said.

To prevent issue of shares to select group of shareholders instead of all shareholders as a result of a scheme, SEBI clarified that the pricing formula specified under SEBI Regulations would apply.

Public shareholder approval

To ensure larger participation of public shareholders, SEBI said public shareholder approval through e-voting would be required if it resulted in reduction in the voting share percentage of pre-scheme public shareholders by more than 5 per cent of total capital of merged entity.

Sanjeev Krishan, Partner and Leader - Deals, PwC India said "The regulations attempt to ensure the rights of the public shareholders are protected and also get them greater look-in on mergers with unlisted subsidiaries."

This would also be applicable to 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.

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 are also required to receive public shareholder nod through e-voting.

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