In 2013, SEBI issued two circulars which required a listed company, intending to enter into a scheme of arrangement with another company, to obtain a no-objection letter from the stock exchange. Until then, mergers and acquisitions were purely in the domain of corporate laws. With the introduction of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, SEBI created more onerous obligations by directing the stock exchanges to seek SEBI’s comments on the draft scheme before granting it a ‘go-ahead’.
In its recent board meeting on January 14, SEBI has approved further proposals for regulating the scheme of arrangement in India. Some significant proposals are discussed here. First, unlisted companies proposing to merge with listed companies shall disclose the material information as required for the issue of abridged prospectus under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (ICDR Regulations). Two, in case of a merger of an unlisted company with a listed company, the total shareholding of public shareholders and qualified institutional buyers should not be less than 25% in the ‘merged’ company. This is in line with the mandatory minimum public shareholding requirement prescribed for listed companies. It was commonly seen that the unlisted companies tried to evade the formal process of listing by merging with a listed company and obtaining backdoor listing. Through these changes SEBI has tried to curb such misuse.
Three, for the merger of a wholly owned subsidiary with its parent company, a no-objection letter from stock exchange will not be required. The entities will merely have to provide disclosures necessary for due compliance with securities and companies law. Four, for issue of shares to select group of shareholders instead of all shareholders, the pricing formula as specified under the ICDR Regulations is to be followed. By prescribing a mathematical formula, SEBI has reduced the discretion of companies in deciding the share distribution ratio between a transferor and transferee company. However, the application of pricing formula remains vague in this press release; more clarity will be achieved once a detailed circular in this regard is issued by SEBI. The new norms will likely reduce misuse, but it is hoped that they will not introduce new red tape into a court driven, and thus an already scrutinised process.