Major highlights relating to Schemes of arrangements
With the introduction of circulars dated February 04, 2013 and May 21, 2013 SEBI started to monitor and take a serious grip on the mergers and other schemes of arrangements involving Listed Companies. Obtaining ‘No Objection’ from SEBI became a stipulation for the companies seeking to file scheme of arrangement with the High Courts. The provision continued with the introduction of SEBI (LODR) Regulations and circular dated November 30, 2015. The provisions, however strict it looked, proved inadequate in many cases where companies with ulterior motives manipulated the laws to their advantage. Since the introduction of said circulars in 2013, more than 500 schemes of arrangement have been filed with SEBI for its review and observation. In general, SEBI raised objections relating to issues such as Dilution in Public Shareholding, Valuing unlisted companies at substantially higher prices, increasing promoter shareholding through share swap bypassing preferential allotment norms, substantial acquisition of voting rights etc. On the various observations given by SEBI, different High Courts have given verdicts which are duly noted by SEBI and in line with them, SEBI had amended its various legislations. Also, as the legal framework changes with the changing market needs (such as the introduction of Companies Act, 2013) and Insolvency laws and introduction of new concepts such as Fast Track merger, SEBI has not at least as yet come out with circular either bring out clarification or updating its existing legislations.
In this view, the following decisions relating to schemes of arrangement are taken:
- Requirement of filing of schemes with SEBI in case of merger of Wholly-owned subsidiary with Parent Company (Fast Track Merger) has been done away with; filing with stock exchanges required for disclosure purpose only – This is a welcome move as SEBI has brought changes in line with the changes brought by Companies Act, 2013 relating to Fast Track Merger. Without this progress, concept of Fast Track Merger would not have materialized in spirit as an ample time is taken by SEBI in scrutinizing schemes as simple as merger of wholly owned subsidiary (WOS) companies its with Holding Company. It is worth noting that in such schemes, the shareholders of the Holding company are already the beneficial owner of its WOS Companies.
- Pricing as per SEBI (ICDR) Regulations, where shares are proposed to be issued to a selected group of persons pursuant to a scheme of arrangement – A sincere assurance to the Public Shareholders that the select few (often promoters or connected with them) are not given any undue benefits.
- Where Unlisted Company is being merged with Listed Company
- Disclosure of material Information by the unlisted company as per the format of abridged format required – Though details are awaited from SEBI, It will bring more transparency to the shareholders and investors at large especially where the control is being changed pursuant to the scheme of arrangement ;-
- Collective shareholding of minimum 25% in Post Merger entity to be held by Pre-scheme Public shareholders of listed company and QIB’s of unlisted company – Significant decision as QIB’s will now by default be considered to be under Public category. General Public Shareholders’ interest is balanced and protected, However, clarification is needed on whether all the shareholders other than QIB’s in the unlisted company will be considered to be Promoters of the listed company post-merger?
- Merger allowed only if listed company is listed on Stock Exchange having nationwide trading terminal – Important to note that except for Calcutta Stock Exchange and Ahmadabad Stock Exchange, all other regional stock exchanges have been derecognized by SEBI. This new decision will eliminate the scope of manipulation by the companies listed on any of the two regional stock exchanges especially in the context of direct listing as allowed by SEBI.
- Public Shareholding is reduced by more than 5% in Post-merged listed company in case of merger of Unlisted company;
- In case of demerger/ transfer of an undertaking or substantially the whole of undertaking, no consideration is paid in the form of listed equity shares;
- In case of merger of unlisted subsidiary with listed holding company, shares of unlisted subsidiary company have been acquired by the listed holding company through promoters/promoter group.
- Reduction of Fee Payable and Calibration of other Fee
- Fee to be paid by brokers is slashed from Rs. 20 per crore of turnover to Rs. 15 per crore of turnover (i.e reduced by 25%).
- Aligning the fee to be paid under SEBI (Buy-Back of securities) Regulations, 1998 with fee payable under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
- Filing fee to be introduced for filling the draft scheme with Stock Exchange and for seeking exemption from SEBI under Regulation 113 of SEBI (Issue of Capital and Disclosure Requirements) Regulations,2009 .
- Applicants seeking exemption from SEBI under Regulation 11 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 have pay Rs. 3 Lakhs instead of 5 Lakhs.
- Investment in Hybrid Instruments
- Mutual fund not to deploy more than 5% of its Net Asset Value in a single issuer of Real Estate Investment Trust and Investment Trusts (to be referred as “Entities”), however the Mutual Fund cannot deploy more than 10% of Net Assets Value in all such entities.
- The above said upper cap is not applicable to the investment by Mutual Funds in the schemes operated by the Entities which are industry specific or related to the index fund.
- Not more than 10% of units of one such Entitiy should be owned by Mutual Fund under its all schemes.
- Changes in SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014
- It is decided that the interest shall be charged in case of the excessive delay of filling of the settlement application or payment of the settlement amount and under the various situations.
- It is also decided that the amendments to include various incentive in order to encourage the defaulters to come voluntarily.
- Empowering Stock Exchange under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009
- It has been decided to empower the Stock exchanges to impose penalty/ suspend the trading etc for contraventions of SEBI (Issue of Capital and disclosure Requirements) Regulations, 2009 in case of public/ rights/ preferential/ bonus allotments.