Regulatory Alert : Listing of shares issued pursuant to Scheme of Arrangement

The Securities Exchange Board of India (‘SEBI’) has, from time to time issued circulars governing the framework for Schemes of Arrangement by Listed Entities and relaxation from minimum public offer and allotment related requirements specified in Rule 19(2)(b) of the Securities Contracts (Regulation) Rules, 1957 (‘SCRR’) applicable to companies seeking listing of shares. The latest consolidated circular in this regard was issued on 10 March 2017 (‘March Circular’).

Background:

Clause III (A)(1)(b) of Annexure I of the March Circular deals with relaxation from minimum public offer and allotment related requirements under SCRR for listing of equity shares proposed to be issued by an unlisted issuer (‘Transferee entity’) to the holders of securities of a listed entity (‘Transferor entity’), pursuant to a Scheme of Arrangement under Section 230-232 of the Companies Act, 2013 e.g. merger.

One of the requirements for above relaxation is atleast 25% of the post-scheme paid-up share capital of the Transferee entity shall comprise of shares allotted to the public shareholders in the Transferor entity (‘Minimum 25% public holding’).

The Amendment:

Rule 19(2)(b) of SCRR specifies minimum public offer and allotment related requirements for companies seeking listing through public issue. In order to align the minimum public offer and allotment related requirements for companies seeking listing through public issue and companies getting listed pursuant to a Scheme of Arrangement, the SEBI has, vide circular no. CFD/DIL3/CIR/2017/105 dated 21 September 2017, amended Clause III (A)(1)(b) of March Circular.

In line with SCRR, the amended Clause provides that where an entity is not able to meet Minimum 25% requirement of public holding, it would still be eligible for listing of shares issued pursuant to a Scheme of Arrangement, where:

• The entity has a valuation in excess of Rs.16,000 million as per the valuation report;
• The value of post-scheme shareholding of public shareholders of the listed entity in the Transferee entity is not less than Rs. 4,000 million;
• At least 10% of the post-scheme paid up share capital of the Transferee entity comprises of shares allotted to the public shareholders of the Transferor entity; and
• The entity shall increase the public shareholding to at least 25% within a period of 1 year from the date of listing of its securities and an undertaking to this effect is incorporated in the Scheme.

BDO Comment:

Though the provision to maintain public shareholding of 25% of the post-scheme paid up share capital of the Transferee entity remains, the express relaxation given to above mentioned companies to comply with this requirement within a period of 1 year from the date of listing would facilitate M&A transaction between listed and unlisted entities. This is especially where value of unlisted entity is significantly more than the listed entity. Perhaps, it would have been helpful if timeline to comply this requirement could have been set as 3 years from listing in line with SCRR as against 1 year.