The Securities Exchange Board of India (SEBI) recently issued a Circular (‘Circular 2020’) [1] amending certain provisions of the existing circular (‘Circular 2017’)[2], which provides for framework for the Scheme of Arrangement involving listed companies. Now, with the Circular 2020, detailed requirements have been listed down which needs to be complied with by the listed entities while undertaking schemes of arrangement or while being involved in a schemes of arrangement.
Under the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘the Listing Regulations’), any listed company entering into or is a part of any scheme of arrangement or scheme of amalgamation/ merger or scheme of reconstruction or reduction of capital (‘the Scheme’), must comply with the applicable provisions of the securities laws. The Listing Regulations, inter alia, provides that a listed entity involved in a Scheme or desirous of undertaking a Scheme, shall obtain an observation letter or a no objection letter, as the case may be, from the stock exchanges before filing the Scheme with the relevant bench of National Company Law Tribunal (‘Jurisdictional NCLT’).
In order to strengthen the scrutiny and compliance and for ensuring that Scheme is referred to SEBI only after the review by stock exchange(s), the Circular 2020 has been issued. It shall be applicable to all the listed companies proposing to enter into any arrangement listed above or are part of any arrangement listed above, with effect from November 17, 2020, except para 7 of the Circular 2020 which shall be effective from November 3, 2020.
The key amendments specified in Circular 2020 are as under:
Report from the Committee of Independent Directors of the listed companies to consider and recommend the Scheme:
The Circular 2020 requires for a report from the Committee of Independent Directors recommending that the draft Scheme is not detrimental to the shareholders of the listed company. With this amendment, now, Independent Directors will have to dive deeper into the Scheme of Arrangement before issuing its report. This is a substantial change and it puts significant responsibility on the Independent Directors. The term “detrimental to the interest of shareholders” can be interpreted in diverse manner and is a very subjective concept.
Audit committee of the listed entities to consider additional parameters for issuing its report on the draft Scheme:
The Audit Committee will now have to take into consideration the following additional parameters before issuing their report on the draft scheme of arrangement:
– Need for merger/demerger/ amalgamation/ Arrangement;
– Rationale of the Scheme;
– Synergies of business of entities involved in scheme;
– Impact of the Scheme on the shareholders;
– Cost benefit analysis of the Scheme;
SEBI has widened the scope of scrutiny of the audit committee of the listed entities proposing the Scheme. This also imposes significantly additional responsibility on the Audit Committee.
Submission of valuation report from the registered valuer a necessity
The valuation report now needs to be issued by a “registered valuer” as specified in Section 247 of the Companies Act, 2013 and the applicable rules. This amendment synchronizes the amendment made in Insolvency and Bankruptcy Code.
Under the Circular 2017, listed companies were required to obtain a valuation report from an Independent Chartered Accountant, whereas under the Companies Act, 2013 a valuation report was required to be obtained from a registered valuer. The Circular 2020 enables a registered valuer who may or may not be a chartered accountant to provide a valuation report in relation to the Scheme. This amendment has been made in line with the requirements of Section 247 of the Companies Act, 2013, leaving no ambiguity.
Stock exchanges to refer the Schemes to SEBI post providing ‘No-objection’ letter
The Stock exchanges are required to analyze the documents pertaining to the Schemes of Arrangement in greater detail. The burden of examining and approving a draft scheme of arrangement has been placed primarily on the stock exchanges. The Circular 2017 provided flexibility to stock exchanges to provide either an ‘observation letter’ or ‘no-objection letter’ in relation to the draft Scheme. The Circular 2020 directs the stock exchanges to provide their ‘no-objection letters’ in coordination with each other, instead of providing their observations on the Scheme.
Additional disclosures to be provided in the newspaper
The Circular 2020 provides certain additional disclosures to be provided by the entity seeking listing of its specified securities on the stock exchanges. Disclosures in connection with latest restated audited financials, summary table of related party transactions in last 3 years, business model/ overview and strategy, internal risk factors, criminal proceedings against the promoters, disciplinary action taken by SEBI or stock exchanges against the promoters in the last 5 financial years etc. shall also be required to be disclosed in the newspaper prior to making final listing application to SEBI/ stock exchanges.
The dual criterion for transfer of substantial undertaking, done away with
Circular 2017 provided that in case, where the scheme involves the transfer of the whole/substantially the whole of an undertaking of the listed entity and the consideration is not in the form of listed equity shares, majority of minority vote of public shareholders is required. In this context, the term “substantially” the whole of an undertaking prescribed a dual criterion being:
– 20% or more of the consolidated Net worth as per the last audited balance sheet or,
– 20% or more of the consolidated total income.
Now, the Circular 2020, removes the dual criterion as above. Under Circular 2020, the benchmark is linked to 20% of the “value” of the undertaking as per the last audited balance sheet [Reference to Section 180(1)(i) has been replaced by reference to Section 180(1)(ii)]. The definition of value has not been provided and again leads to various interpretations.
Repealing provisions for listing of equity shares with differential voting rights
SEBI at its board meeting held on 27 June 2019 had proposed a framework (DVR Framework) for issuance of equity shares with differential voting rights (DVRs) based on the consultation paper which had been circulated for public comments in March 2019 (Consultation Paper). In the Consultation Paper, SEBI had categorically stated that DVRs with superior voting rights if issued to promoters in promoter led companies will enable such promoters in retaining decision-making powers and rights vis-à-vis other shareholders.
The Circular 2017 provided that listed entities may make an application to SEBI to seek relaxation from complying with provisions of Rule 19(2)(b) of the Securities Contracts Regulation Rules, 1957, for listing of DVRs on the stock exchanges pursuant to a Scheme, subject to fulfillment of certain conditions. The Circular 2020 has repealed the aforesaid provisions to bring the Circular 2017 in line with the amendments notified in the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2018, Listing Regulations, Regulations, the SEBI (Buy-back of Securities) Regulations 2018, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011, SEBI (Delisting of Equity Shares) Regulations 2009.
For detailed discussion on the above amendments, please feel free to connect at contact@devadhaantu.in
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[1] SEBI Circular Ref No. : SEBI/HO/CFD/DIL1/CIR/P/2020/215 dated November 3, 2020
[2] SEBI Circular Ref No. : CFD/DIL3/CIR/2017/21 dated 10 March 2017
