SEBI, in order to streamline the restructuring of listed companies, introduced two circulars dated February 04, 2013 and May 21, 2013, respectively whereby, it became a pre-condition for the listed companies proposing a scheme of arrangement or petition involving Capital Reduction to file such draft scheme/petition with the SEBI for its Observation letters/No-objection letter before filing it with High Court(s)/ NCLT. With these circulars, SEBI for the first time started to review, comment or raise objection to the schemes of arrangement or petition involving Capital Reduction by the listed entities.  The circulars provided for the complete process to be followed along with the documents to be submitted to obtain such Observation Letter/ No-Objection Letter. Subsequently, SEBI came out with SEBI (LODR) Regulations, 2015 (‘’Listing Regulations’’) wherein Regulation 37 provided the same pre-condition of obtaining Observation Letter/ No-Objection Letter from SEBI by Listed entities before filing the draft scheme of arrangement with High Court(s)/ NCLT. In consonance with Regulation 37 of Listing Regulations and while replacing circulars dated February 04, 2013 and May 21, 2013, SEBI released yet another circular dated November 30, 2015 which pretty much covered all aspects covered under erstwhile two circulars.

However, as the legal framework such as with the introduction of Companies Act, 2013 and new concepts such as Fast Track merger, SEBI held its Board Meeting on January 14, 2017 to discuss on changes required in the existing legal framework operating within its purview and various recommendations and decisions were thus made by the SEBI.

In order to substantiate the decisions taken in the Board meeting, SEBI has come out with various amendment notifications and circular as detailed below:

• SEBI (LODR) (Amendment) Regulations, 2017 dated February 15, 2017 – SEBI has modified Regulation 37 of Listing Regulations by adding sub-regulation 6 which reads as follows:

“(6) Nothing contained in this regulation shall apply to draft schemes which solely provide for merger of a wholly owned subsidiary with its holding company;

Provided that such draft schemes shall be filed with the stock exchanges for the purpose of disclosures.”

Regulation 37 was so far applicable to all the listed entities proposing any and every type of scheme of arrangement including those between Holding and Wholly-owned subsidiary companies (WOS) , that is, where beneficial ownership in WOS is already held by the shareholders of the Holding Company. Such applicability essentially defeated the legislature’s intend behind envisaging the provision of Fast Track Merger under Section 233 of Companies Act, 2013 as obtaining Observation Letter/ No Objection Letter from SEBI took substantial time that was not in agreement with the FAST TRACK concept of Fast Track Merger.

However, with the introduction of sub-regulation 6, SEBI has provided explicit exemption to the schemes of arrangement between Holding Company and WOS from complying the provision of Regulation 37. Thus, obtaining Observation Letter/ No Objection Letter from SEBI is no more a pre-condition for such schemes before filing with NCLT. Though, filing before Stock Exchange only for disclosure purpose is still mandatory.

• SEBI (LODR) (Amendment) Regulations, 2017 dated February 15, 2017 – SEBI has added a proviso to Regulation 70(1)(b) of SEBI (ICDR) Regulations, 2009 which reads as follows:

“Provided that the pricing provisions of this Chapter shall apply to the issuance of shares under schemes mentioned in clause (b) in case of allotment of shares only to a select group of shareholders or shareholders of unlisted companies pursuant to such schemes;”

Thus, in cases where shares are to be allotted by the listed company to a select group of individuals or shareholders of unlisted company pursuant to merger, the minimum allotment price shall be as followed under preferential issue; that is –

Frequently Traded Shares*
Listed for a period of 26 weeks or more as on the relevant date#	Listed for a period less than 26 weeks as on the relevant date#
Minimum Allotment Price shall be higher of the following: Average of weekly high and low  of the VWAP of the equity shares  during 26 weeks preceding the relevant date; Or Average of weekly high and low of the VWAP of the equity shares during 2 weeks preceding the relevant date.	Minimum Allotment Price shall be higher of the following: Issue Price at IPO or Value per share arrived at the time of scheme of arrangement pursuant to which shares are listed, as the case may be; Or Average of weekly high and low  of the VWAP of the equity shares during the period shares have been listed preceding the relevant date; Or Average of weekly high and low of the VWAP of the equity shares during 2 weeks preceding the relevant date. The price calculated as above shall be recomputed based on average of weekly high and low of the VWAP on completion of 26 weeks from the date of listing, the differential higher price shall be payable by the allottees to the issuer.

Infrequently Traded Shares

The price determined by the issuer shall take into account valuation parameters including book value, comparable trading multiples, and such other parameters as are customary for valuation of shares of such companies.

*Frequently Traded Shares – means shares of an issuer, in which the traded turnover on any stock exchange during the 12 calendar months preceding the relevant date is at least 10% of the total number of shares of the issuer;

 #Relevant Date – 30 days prior to the date of EGM.

Further, in consultation with stock exchanges and market participants, SEBI on March 10, 2017 came out with a circular that is more robust, inclusive and more dynamic than the circular released on November 30, 2015. The new circular essentially covered all the aspects stated under November 30 circular with additions as mentioned below:

• Arrangement between Listed Companies and Unlisted Companies
• The notice and explanatory statement to be sent to the shareholders while seeking their approval shall contain the information pertaining to the unlisted companies as contained in the format specified  for abridged prospectus in Part D of Chapter VIII of SEBI (ICDR) Regulations. Part D contains a detailed list of disclosures that are now required to be made by the Listed Company in regards to the unlisted entity that is party to the scheme of arrangement. Further, the adequacy and accuracy of such disclosures shall be certified by a Registered Merchant Banker;

It appears that the requirement of detailed disclosures about the unlisted company is mandated as Unlisted Company are purposed to be listed post implementation of scheme and all the existing stakeholders of the listed entity should be in a enhanced position to understand the details and structure of the unlisted company, thus, take decision accordingly;  

• Unlisted Companies can only be merged with companies listed on Stock Exchanges having nationwide terminal;
• Minimum 25% shareholding of Pre-scheme Public Shareholders of Listed Entity and QIB’s of Unlisted Companies combined in the Post-scheme merged company.
• Approval of shareholders through e-voting

Previous circular mandated the approval of shareholders through e-voting and Postal Ballot, however, the requirement of Postal Ballot has been dispensed with in the new circular, Thus, only e-voting is required. Further, e-voting is also required now for Public shareholders approval in the following cases:

• Reduction of voting shares by more than 5% of the total capital of Pre-merger Public Shareholders in the Post-merged entity;
• Transfer of whole or substantially the whole of undertaking of listed entity for consideration other than listed equity shares.
• Lock-in Requirement

The lock-in requirement in case of hiving-off of a division of listed entity into unlisted company and subsequent listing of shares shall be as follows:

• Promoters shareholding upto 20% of the post-scheme capital of the resulting Company in the pre-scheme capital of the resulting company shall be locked for 3 years from the date of listing of shares of resulting entity;
• Remaining shares in the pre-scheme capital of the resulting company shall be locked-in for one year;
• No additional lock-in in case shareholding pattern in the resulting entity is same as the listed demerged entity.
• SEBI shall provide ‘Observation Letter’ only after receiving Comment Letter from the Designated Stock Exchange(s) (Stock Exchange(s) having nationwide trading terminals) even in the cases where entities are listed exclusively on Regional Stock Exchange; Thus, such companies shall liaison and follow with the Regional Stock Exchange and follow the requirement envisaged under Regulation 37 of Listing Regulations through Designated Stock Exchange(s) only.
• Once the draft scheme is filed with SEBI, no changes shall be made unless specific written permission from SEBI is obtained except for the changes made pursuant to the instructions of any authorities/regulators or Tribunal.
• Report on Complaints and Compliance Report are to be mandatorily uploaded by the listed company on the Stock Exchange(s) and Company’s website.