Amendments to SEBI Circular on Schemes of Arrangements by Listed Entities

Stacy Rebello | January 2018

The Securities and Exchange Board of India (SEBI) in its circular dated 3rd January 2018 (Ref: CFD/DIL3/CIR/2018/2) (2018 Amendment Circular), amending certain provisions of the SEBI Circular dated 10 March 2017 (Ref: FD/DIL3/CIR/2017/21) which laid down detailed guidelines and procedures for listed entities undertaking schemes of arrangements (2017 Circular). The amendments were carried out considering various representations made, to expedite the processing of the draft Scheme of Arrangement (Scheme) and prevent misuse to bypass regulatory requirements.

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) provide that a scheme of arrangement/ amalgamation/ merger/ reconstruction/ reduction of capital undertaken by a listed entity must be in compliance with the applicable securities laws. The Listing Regulations further, inter alia, provide that a listed entity must file a Scheme to obtain an observation letter or a no objection letter, as the case may be, from the designated Stock exchange before filing the Scheme with the relevant bench of National Company Law Tribunal (NCLT). SEBI had received representations on its 2017 Circular. After considering the suggestions and in order to expedite the processing of draft schemes and to prevent misuse of Schemes to bypass regulatory requirements, SEBI has made certain amendments to the 2017 Circular. The major changes to the 2017 Circular are given below:

MERGER OF AWHOLLY OWNED SUBSIDIARY (WOS) WITH ITS PARENT

An amendment was made to the Listing Regulations on 15 February 2017 which relaxed the requirement of obtaining prior approval of Stock Exchanges for Schemes which solely provided for merger of a wholly owned subsidiary with its parent entity

Now SEBI has widened the scope of this relaxation to Schemes which provide for demerger/ hive-off of a division of a wholly owned subsidiary with its holding entity. Such Schemes are however, required to be filed with Stock Exchanges for the limited purpose of disclosures.In order to bring ease in internal restructuring by way of demerger from Wholly Owned Subsidiary (WOS) to its parent company, the exemption has been granted to such Schemes from compliance with the framework provided in existing circular. However, such Scheme is required to be filed with stock exchanges for disclosure purposes. Earlier, the exemption was available only in case of merger of WOS with the parent company, which is now extended even in case of demerger.

INDEPENDENT VALUER AND INDEPENDENT MERCHANT BANKER

The 2017 Circular provided for obtaining a fairness opinion from merchant banker and in certain cases, a valuation report from an independent chartered accountant. The 2018 Amendment Circular has mandated that fairness opinion shall be obtained from an ‘independent’ merchant banker and defined ‘Independent’ as having no material conflict of interest with the independent chartered accountant or with the company, including that of common directorships or partnerships.

Minimum Public Shareholding in Schemes Involving Unlisted Entities

The 2017 Circular provided that the public shareholding of the listed entity and the pre-Scheme shareholding of the Qualified Institutional Buyers (QIBs) in the unlisted company(ies) shall be regarded as ‘public’ shareholders of the merged entity for the purposes of computing minimum public shareholding of 25% of the merged entity.The 2018 Amendment Circular states that such computation of 25% shareholding, shall be done on a fully diluted basis.

No Requirement of Part II (commonly known as Part B) Approval

The 2017 Circular required the listed company to seek prior consent of SEBI through Stock Exchange(s) for any modification to the draft scheme as approved by the SEBI. The Part II of the 2017 Circular which, inter alia, provided the listed company to (i) disclose the changes made to the draft scheme between the date of SEBI approval and NCLT approval; and (ii) file certain documents along with Order of the jurisdictional NCLT, had become redundant because of the requirement of prior consent of SEBI to any change proposed to be made to the draft scheme.

The 2018 Amendment Circular deletes the provisions of Part II of the 2017 Circular, which will reduce the overall timelines for listing of specified securities pursuant to the Scheme by about one month.

Lock-in Requirements

The 2018 Amendment Circular provides that in case of a Scheme involving a hiving-off of a division of a listed entity share capital of the unlisted entity will be locked-in as follows:

Up to 20% of the shares held by the promoters of the post-merger paid up share capital of the unlisted issuer will be lockedin for 3 years from the date of listing; and
The remaining shares will be locked-in for a period of 1 year from the date of listing. However, no additional lock-in will be required if the post scheme shareholding of the unlisted entity is the same as that of the listed entity.
The 2017 Circular did not provide for any exemption for pledge or transferability of such lock-in securities as was available under the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2015 (SEBI ICDR Regulations).

The 2018 Amendment Circular provides that:

Locked-in shares can be pledged with any scheduled commercial bank or public financial institution as collateral security for loan granted by such bank or institution, provided that pledge of shares is one of the terms of sanction of the loan;
Locked-in shares may be transferred ‘inter-se’ among promoters in accordance with the conditions specified under Regulation 40 of SEBI ICDR Regulations i.e, lock-in on such specified securities shall continue for the remaining period with the transferee and such transferee shall not be eligible to transfer them till the lock-in period has expired; and
This clause is retrospectively applicable to any shares presently under lock-in as per the provisions of earlier circulars.

Amendment to Overall Timelines for Listing of Specified Securities Pursuant to the Scheme

With the omission of requirement to obtain approval of SEBI under Part II of the 2017 SEBI Circular, the 2018 Amendment Circular now stipulates an overall timeline of 60 days, from the receipt of the order of the Hon’ble High Court/ NCLT, for completion of listing and commencement of trading in securities by the issuing entity.Before commencement of trading the transferee entity shall give an advertisement in one English and one Hindi newspaper with national wide circulation at the place where the registered office of the transferee entity is situated.

Conclusion

The 2018 Amendment Circular is a welcome step. It has done away with certain duplicative procedures (Part II approval), it has also facilitated faster process (in case of demerger/ hive-off of a division of a wholly owned subsidiary), aligned lock-in provisions with SEBI ICDR Regulations, strengthened the procedures as in the case of Independent Merchant Banker. These amendments will lead to overall reduction in timelines for consummation of the Schemes.

About Author

Stacy Rebello

The author is currently a part of the Legal Team of Wockhardt Limited.