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JAN 06, 2018

Amendment to The SEBI Circular Relating to Scheme of Arrangement Involving Listed Companies

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SEBI on 03rd January 2018; has amended various clauses of its Circular dated 10th March 2017 pertaining to Schemes of Arrangement involving Listed Entities. The original circular dated 10th March 2017 is applicable to the Scheme of Arrangement, involving a listed company. Such Schemes require prior “No Objection/Observation” from recognized Stock Exchanges and SEBI. The latest circular makes certain changes and clarifies certain positions of the earlier Circular. Let’s have a quick a glance over amended provisions of the Circular.

  • The Exemption from obtaining NOC from Stock Exchanges and SEBI is extended to the cases of “division with Parent Company”.
  • Now independence of Valuer and the Merchant Banker would be necessary i.e. the Chartered Accountants giving the valuation report for merger/demerger and the Merchant Banker giving Fairness Opinion should be independent and there should be no conflict of interest between them.
  • The Minimum Public Holding of 25% will be checked in Post Scheme Shareholding on Fully Diluted Basis.
  • Requirement for submitting documents to Stock Exchange after sanction of Scheme from NCLT has been done away with.
  • Requirement for lock in has been applied to merger of listed Company as well as its one of more divisions with Unlisted Company along with certain conditions.
  • Time period for trading and listing of securities post merger/demerger has been extended by 15 days {i.e. earlier time period of 45 days (Trading in Securities) has been extended to 60 Days (which includes both listing & trading of Securities} from the date of NCLT order.

OBSERVATION ON AMENDED CIRCULAR ISSUED BY SEBI.

PARA NO. OLD PROVISION(Circular Dated 10th March, 2017) NEW PROVISION(Circular Dated 03rd January, 2018) OBSERVATION(s)
7 The provisions of this circular shall not apply to schemes which solely provides for merger of a wholly owned subsidiary with the parent company. However, such draft schemes shall be filed with the stock exchanges for the purpose of disclosures and the stock exchanges shall disseminate the scheme documents on their websites. The provisions of this circular shall not apply to schemes which solely provides for merger of a wholly owned subsidiary or its division with the parent company. However, such draft schemes shall be filed with the stock exchanges for the purpose of disclosures and the stock exchanges shall disseminate the scheme documents on their websites. This clause can be read as conditional clause, whereby Merger of a wholly owned Subsidiary or its division with the parent company” are exempted to seek NOC from Stock Exchanges/SEBI. Thus, the exemption is expanded to demerger of a division from Parent Company. , which is quite logical.
Insertion of Para (I)(A)(2A) N.A. The valuation report referred to in Para 2(b) above and the fairness opinion referred to in Para 2(d) above shall be provided by Independent Chartered Accountant and Independent SEBI Registered Merchant Banker respectively. The chartered accountant and the merchant banker referred herein shall not be treated as independent in case of existence of any material conflict of interest among themselves or with the company, including that of common directorships or partnerships. The insertion is more of clarification. Earlier too a Fairness Opinion on Valuation Report was required from independent Merchant Banker, but by virtue of this Circular it is made clear that an independence would be not only tested with respect to the Company but also between the Valuer and the Merchant Banker.
Para(I)(A)(3)(b) The percentage of shareholding of pre-scheme public shareholders of the listed entity and the Qualified Institutional Buyers (QIBs) of the unlisted entity, in the post scheme shareholding pattern of the “merged” company shall not be less than 25%. The percentage of shareholding of pre-scheme public shareholders of the listed entity and the Qualified Institutional Buyers (QIBs) of the unlisted entity, in the post scheme shareholding pattern of the “merged” company on a fully diluted basis shall not be less than 25%. As the Minimum Public Holding of 25% would be checked on fully Diluted basis, all instruments being issued in the scheme of arrangement which can be convertible into equity shares shall be considered as converted and checked if minimum public holding is achieved.
Thus, it will be difficult to merger of large size unlisted Company into a listed company as maintaining 25% public holding on fully diluted basis will be difficult in such cases. Companies used issue Convertible instruments as part of the consideration.
Para (II) of Annexure I Requirement after the Scheme is sanctioned by the Hon’ble National Company Law Tribunal. Para (II) of Annexure I to the circular shall stand repealed. The amended Circular has omitted this provision in order to remove unnecessary compliance/duplicity of filing the documents after approval of scheme by the Hon’ble NCLT.
Para (III)(A)(3) In case of Scheme involving hiving- off of a division from a listed entity the entire pre-scheme share capital of the unlisted issuer seeking listing shall be locked in as follows :
  1. Shares held by promoters up to the extent of twenty percent of the post-merger paid- up capital of the unlisted issuer, shall be locked-in for a period of three years from the date of listing of the shares of the unlisted issuer;
  2. The remaining shares shall be locked – in for a period of one year from the date of listing of shares of the unlisted issuer.
  3. No additional lock-in shall be applicable if the post scheme shareholding pattern of the unlisted entity is exactly similar to the shareholding pattern of the listed entity.
In case of a scheme involving merger of a listed company or its division into an unlisted entity, the entire pre-scheme share capital of the unlisted issuer seeking listing shall be locked in as follows:
  1. Shares held by promoters up to the extent of twenty percent of the post-merger paid- up capital of the unlisted issuer, shall be locked-in for a period of three years from the date of listing of the shares of the unlisted issuer;
  2. The remaining shares shall be locked – in for a period of one year from the date of listing of shares of the unlisted issuer.
  3. No additional lock-in shall be applicable if the post scheme shareholding pattern of the unlisted entity is exactly similar to the shareholding pattern of the listed entity

    1st proviso, that shares locked-in under this clause may be pledged with any scheduled commercial bank or Public Financial Institution as collateral security for loan granted by such bank or institution if pledge of shares is one of the terms of sanction of the loan;

    2nd Proviso further that the shares locked-in under this clause may be transferred ‘inter-se’ among promoters in accordance with the conditions specified under Regulation 40 of ICDR Regulations.

    3rd Proviso further that shares presently under lock-in as per the provisions of earlier circulars shall also be governed by the provisions of this clause.

This amendment has removed the anomaly and now lock-in provision would also apply to merger of listed company into unlisted company, where the scheme provide for listing of such unlisted company through the scheme.

Further insertion of provisos to the Clause is welcome move as pledge of lock-in securities and transfer of lock-in shares between promoters groups has been permitted subject to condition specified under ICDR Regulations. Additionally, these provisions have been implemented retrospectively to facilitate these pledge/transfer of lock-in shares of already approved schemes.
Para (III)(A)(4) of Annexure I The listed entity under and/or transferee entity (unlisted entity), as applicable, shall ensure that it has completed steps for listing of its specified securities within thirty days of the receipt of the order of the Hon’ble High Court/NCLT sanctioning the Scheme, simultaneously on all the Stock Exchanges where the entity shares of the listed entity (or transferor entity) are/were listed. Para (II) of Annexure I to the circular shall stand repealed. Provision has been merged with Para (III) (A) (5).
Para(III)(A)(5) It shall be ensured that trading in securities commences within forty five days of the order of the Hon’ble High Court/NCLT. Before commencement of trading, the transferee entity shall give an advertisement in one English and one Hindi newspaper with national wide circulation and one regional newspaper with wide circulation at the place where the registered office of the Transferee entity (is situated) giving following details: It shall be ensured that step for listing of Specified Securities commences within sixty days of the order of the Hon’ble High Court/NCLT. Before commencement of trading, the transferee entity shall give an advertisement in one English and one Hindi newspaper with national wide circulation and one regional newspaper with wide circulation at the place where the registered office of the Transferee entity (is situated) giving following details: This clause has been merged with Para (III) (A) (5) of Annexure I of Circular dated 10th March; 2017. However time period for listing and trading of securities has been extended by 15 days of NCLT order i.e. now time period for listing and trading specified securities will be 60 days.