Under the extant rules governing listed companies, a scheme of arrangement can be undertaken only pursuant to a no-objection from SEBI and sanction by the National Company Law Tribunal. SEBI’s powers in this regard have been provided under Rule 19(7) of the Securities Contract (Regulation) Rules, 1957 (“SCRR”), which empowers SEBI to exempt companies from strictly complying with listing norms (for instance, exemption from making an IPO to list shares on a stock exchange), the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”), and various circulars issued from time to time. The SEBI circular dated March 10, 2017 issued under the LODR Regulations lays down the procedure that will have to be followed by listed companies while undertaking a scheme of arrangement. However, the March 10, 2017 circular deals only with issuance of equity shares and warrants. In a recent circular, SEBI has prescribed similar norms for listing of non-convertible debentures and preference shares (NCDs/NCRPS) issued pursuant to a scheme of arrangement.

The circular dated May 26, 2017 provides that where NCRPS/NCDs are issued in place of specified securities (equity shares) by a listed entity under a scheme of arrangement, then, certain additional conditions specified under the circular will have to be complied with, which are: (i) In case of a demerger where the listed entity demerges a unit and transfers it to another company and that other company issues NCRPS/NCDs to the holders of specified securities as a consideration under the scheme of arrangement; (ii) In case of amalgamations where a listed company (amalgamating entity) is merged with another entity (amalgamated entity), and the amalgamated entity issues NCRPS/NCDs to the holders of equity shares of amalgamating entity as a consideration under the scheme of arrangement.

It has been clarified that only those NCRPS/NCDs which are issued to the holders of specified securities (prior to the scheme of arrangement), under the scheme of arrangement, are eligible for seeking listing and if the same series/class of NCRPS/NCDs are also allotted to other investors, other than the allotment made to the holders of specified securities as per the scheme of arrangement, then such NCRPS/NCDs would not be eligible for seeking listing. These clarifications have been inserted to ensure that companies do not use this route to circumvent the listing requirements specified under the SCRR.

There are certain other conditions which have to be followed, like the minimum tenure of such NCRPS/NCDs has to be one year; the issuers will need to obtain credit rating for the NCRPS/NCDs; and relevant provisions of the Companies Act, 2013 pertaining to creation and maintenance of capital redemption reserve / debenture redemption reserve will have to be complied with.

This circular allows listed companies to offer securities other than equity shares and compulsorily convertible securities through a scheme of arrangement. It is natural that the risk profile of a company tends to change pursuant to corporate restructuring and it is beneficial for investors if they have the freedom to choose between different classes of securities commensurate with their risk appetite. This circular is certainly beneficial to investors from that perspective.