SEBI Alert

Background

SEBI vide circular dated March 10, 2017 has notified an updated circular governing Scheme of Arrangement by listed entities. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’) prescribes obligations with respect to Scheme of Arrangement (‘Scheme’) on Listed Entities and Stock Exchange(s) in terms of Regulations 11, 37 and 94 of the Listing Regulations. Schemes filed after March 10, 2017 will be governed by the new circular.

Key Changes in the revised circular are as under:

Merger of WOS with its Holding Company: The Provisions of this circular would not be applicable in case the Scheme is with respect to merger of WOS with its holding company including obtaining observation letter from the stock exchange.

Compliance Report: Along with other specified documents, the listed entity shall now submit a duly certified Compliance Report in the prescribed format, confirming compliance with various regulatory requirements specified for schemes of arrangement and all accounting standards. The Compliance Report is also to be disclosed by the Company on its website, together with all other information filed with the Stock Exchange.

Valuation Report It is clarified that all listed entities should obtain and attach a valuation report from an Independent Chartered Accountant unless there is no change in shareholding of the listed entity.

Approval of shareholders through e-voting.

• The listed entities must ensure that they provide for voting by public shareholders through e-voting, for all Scheme of Arrangement.
• In certain specified cases, the Scheme is approved only if majority of public shareholders’ vote in favour of the Scheme. Some additional instances are as follows:
  • Where the Scheme involving merger of an unlisted entity results in reduction in the voting share of prescheme public shareholders of listed entity in the transferee / resulting company by more than 5% of the total capital of the merged entity,
  • Where the scheme 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

Conditions for Schemes of Arrangement involving unlisted entities.

• The Listed entity shall disclose details pertaining to unlisted entity, in the format prescribed for abridged prospectus (Part D of Schedule VIII of ICDR Regulations) in the explanatory statement attached to the notice containing resolution seeking approval of the Scheme. Such disclosure is to be certified by SEBI registered Merchant Banker after following the due diligence process. The listed entity shall also submit the same to Stock Exchange(s) for uploading on their website.  
• Unlisted entities can merge with listed entity only if the listed entity is listed on a Stock exchange having nationwide trading terminals.
• The percentage of shareholding of pre-scheme public shareholders of the listed entity and qualified institutional buyers of the unlisted entity, in the post scheme shareholding pattern of the merged company shall not be less than 25%.

Post approval of the Scheme involving unlisted companies, the shares held by promoters up to the extent of 20% shall remain locked-in for the period of 3 years however, however remaining shares shall be locked-in for the period of one year. However, no such additional lock-in would be applicable if the post scheme shareholding of the unlisted entity is exactly similar to the shareholding pattern of the listed entity.

Comment Letter by SEBI

• In case of companies listed on Regional Stock Exchanges, SEBI shall issue Comment Letter upon receipt of Observation Letter or No-Objection letter from the Designated Stock Exchange.
• In other cases, SEBI shall issue Comment Letter upon receipt of Observation Letter or No-Objection Letter from Stock Exchanges having nationwide trading terminals.