Regulatory leash on mergers and acquisitions

The Securities and Exchange Board of India has been monitoring the Schemes of Arrangement undertaken by listed companies under the Companies Act, by issuing norms and requiring compliance with the listing agreement. Consequently, SEBI issued a circular on February 4, 2013, which along with a clarificatory circular issued on May 21, 2013, repeals an erstwhile circular issued by the regulator in September 2009 and requires listed companies undertaking Schemes of Arrangement to fulfil certain stringent requirements.

Why the need for the latest circulars?

The 2009 circular prescribed conditions for unlisted companies wishing to list their shares pursuant to a High Court-approved Scheme of Arrangement and seeking exemption from the requirement for maintaining a minimum public shareholding of 25 per cent.

The circular, however, failed to address certain issues, including inadequate disclosures, convoluted Schemes of Arrangement, exaggerated valuations, and so on. Moreover, according to SEBI, granting of listing permission or exemption from the requirement of maintaining a minimum public shareholding may not have been in the interest of shareholders.

Also, a delay or denial in granting the listing permission or such an exemption would add to uncertainty and deprive shareholders of an exit opportunity.

What do the latest circulars entail?

To address the anomalies, SEBI has issued the new circulars, providing for the following requirements:

All listed companies entering into a Scheme of Amalgamation/ Merger/ Reconstruction/ Reduction of Capital, and so on should comply with requirements under the circulars even if no relaxation is sought from the criteria of maintaining a minimum public shareholding of 25 per cent;

lays down the procedure for seeking SEBI’s permission, without having to comply with the requirement of maintaining a minimum public shareholding in case of listing (i) equity shares of an unlisted company pursuant to a Scheme, (ii) equity shares with differential dividend or voting rights, and (iii) warrants offered with non-convertible debentures;

only schemes that involve alteration (an indicative increase, according to the circulars) in promoter shareholding (promoters or promoter group companies) would require passing of public shareholder resolution with a simple majority through postal ballot and e-voting;

in all other cases, an undertaking of the reasons for non-applicability of voting requirement, certified by an auditor and approved by the company board, is sufficient compliance;

listed companies should obtain a valuation report from an independent chartered accountant. A valuation report is not required when there is no change in the shareholding pattern of the listed company/ resulting company. For instance, no valuation report is needed if a wholly-owned subsidiary merges with the parent listed company, or in the case of a demerger where the shareholding pattern of the demerged and resulting company remains identical and no shares are issued to shareholders in the resultant company.

Amongst other requirements — companies to obtain audit committee recommendation; submission of valuation report, audit committee report along with other documents and the draft scheme to a designated stock exchange; stock exchange to issue an ‘Objection/ No objection letter’ to SEBI; the regulator to issue an ‘Observation letter’ to the listed companies, and so on.

The recent circulars are aimed at bringing more transparency to a scheme undertaken by listed companies and safeguarding the interests of minority shareholders.

However, compliance could be time-consuming and affect the mergers and acquisitions and restructuring exercises that listed companies would want to undertake through court-approved schemes.

Hiten Kotak is Co-Head Tax, and Jinesh Shah is Partner M&A Tax, KPMG in India

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