The Securities and Exchange Board of India (‘SEBI’) vide its circular1 dated 10 March 2017 has provided for guidelines to be followed by listed entities desirous of undertaking a scheme of arrangement (‘Scheme’). The said circular broadly provides for submission of the draft Scheme and prescribed documents with the stock exchanges before filing the Scheme with the jurisdictional National Company Law Tribunal (‘NCLT’). The circular also requires the stock exchanges to forward the draft Scheme to SEBI prior to the issue of ‘Observation Letter’ / ‘No-Objection’ by the stock exchanges.
To further streamline processing of the draft Schemes filed with the stock exchanges, certain amendments2 vide circular dated 3 November 2020 (‘2020 Circular’), have been made by SEBI in this regard. Effective for Schemes filed after 17 November 2020, the key amendments are as summarised hereunder:
Stock Exchanges shall refer the draft Scheme to SEBI only after being convinced that the listed entity is in compliance with requisite SEBI norms
2. Submission of documents
- Report from the Audit Committee
The report from the Audit Committee taking into account aspects such as the valuation report proposed to be submitted with the stock exchanges, to additionally include comments on the need and rationale of the Scheme, synergies of business of the entities involved in the Scheme, impact of the Scheme on the shareholders and cost benefit analysis of the Scheme.
- Report from the Committee of Independent Directors
The 2020 Circular casts a responsibility on the Independent Directors to submit a Report recommending the draft Scheme, taking into consideration, inter-alia, that the Scheme is not detrimental to the shareholders of the listed entity.
3. Valuation report
All listed entities are now required to submit a valuation report from a Registered Valuer instead of an Independent Chartered Accountant.
4. Approval of shareholders to the Scheme through e-Voting:
In specified instances, a Scheme can be acted upon only if the votes cast by the public shareholders in favour of the proposal are more than the number of votes cast by the public shareholders against it, including, inter-alia, a scheme which 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.
The term “Substantially the whole of the undertaking” has now been defined to mean 20% 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)(ii) of the Companies Act, 2013.
Further, it has been clarified that for seeking approval of shareholders to the Scheme through e-Voting, the term ‘public’ shall have the same meaning as defined in Rule 2 of Securities Contracts (Regulation) Rules, 1957 (‘SCRR’).
5. 3Requirements to be fulfilled by listed entities for listing of equity shares
Steps for listing and trading in securities of such listed entities to be completed within 60 days (against earlier timeline of 45 days for trading as stated in the SEBI Circular dated 17 March 2017) of receipt of order from the NCLT. Before commencement of trading, the listed entity is to disclose information (in an information document) on the website of the stock exchanges as well as publish an advertisement in specified newspapers. Such an information document and advertisement are provide details as prescribed.
6. Application by a listed entity for listing of equity shares with differential rights as to dividend, voting or otherwise
Subject to prescribed conditions, a listed entity desirous of listing of its equity shares with differential rights as to dividend, voting or otherwise, without making an initial public offer of such equity shares, could make an application to SEBI seeking relaxation from strict enforcement of Rule 19(2)(b) of the SCRR. This application can no longer be made to SEBI.
With additional information to be provided in the report from the Audit Committee as well as the requirement of obtaining a report from the Independent Directors, the amendments exert more responsibilities on such experts. The valuation report, to be obtained, not from a Chartered Accountant but from a Registered Valuer, goes on to align the same with the requirement as prescribed under the Companies Act, 2013. Ambiguity around the term “Substantially the whole of the undertaking” has been removed by defining the parameters. Lastly, the extent of information now to be filed prior to listing has increased manifold (in lines with a company going for Initial Public Offering).
1Circular no. CFD/DIL3/CIR/2017/21 dated 10 March 2017
2Circular no. SEBI/HO/CFD/DIL1/CIR/P/2020/215 dated 3 November 2020
3Effective 3 November 2020