Scheme of arrangement by listed companies - SEBI prescribes new norms
Securities and Exchange Board of India ("SEBI") has vide the circular dated February 4, 2013 (the "Circular"), streamlined and consolidated the requirements to be adhered to by listed companies for,
SEBI had issued the circular SEBI/ CFD/ SCRR/ 01/ 2009/ 03/ 09 dated September 3, 2009 (the "2009 Circular") enabling listed companies to seek specific permission of SEBI for listing, (i) equity shares of an unlisted company under a Scheme of Arrangement, (ii) equity shares with differential rights, and (iii) warrants stapled with non-convertible debentures, in each case without having to comply with the initial public offer requirements under Rule 19(2)(b) of SCRR1. While reviewing the applications received under the 2009 Circular, SEBI realized that such applications were generally supported by inadequate disclosures, convoluted schemes of arrangement, exaggerated valuations etc. that could adversely affect the interests of minority shareholders. As a remedial measure, SEBI has fully rescinded and replaced the 2009 Circular with the Circular.
While SEBI's attempt to rationalize the process is commendable, it appears that the language of the Circular suffers from certain ambiguities. To start with, the scope of the Circular is not absolutely clear. One view is that the Circular is a complete code applicable to all Schemes of Arrangement involving listed companies with certain provisions applicable only to Schemes of Arrangement requiring exemption from Rule 19(2)(b) of SCRR. The contrary view is that the Circular is the replacement of the 2009 Circular, intended to regulate only such Schemes of Arrangement that seek listing of securities of an unlisted company without fulfilling the norms under Rule 19(2)(b) of SCRR and is therefore, not applicable to any other Scheme of Arrangement involving listed companies. For instance, Clause 5.1 of the Circular obligates all listed companies desirous of undertaking a Scheme of Arrangement to file an application seeking in-principle approval of stock exchanges under Clause 24(f) of the listing agreement together with the prescribed supporting documents. However, the prescribed supporting documents include, pre and post amalgamation shareholding pattern of the unlisted company and audited financials of last 3 years of the unlisted company. It is not clear if this requirement would be applicable if the Schemes of Arrangement does not involve an unlisted company.
It would be helpful if SEBI clarifies whether the Circular is generally applicable to all Schemes of Arrangement involving listed companies with certain specific requirements that are applicable only to the Schemes of Arrangement that warrant waiver from the requirements under Rule 19(2)(b) of SCRR.
While the requirements for listing equity shares with differential rights and warrants stapled with non-convertible debentures are identical under the 2009 Circular and the Circular, certain additional requirements are prescribed with respect to Scheme of Arrangement by listed companies. The requirements applicable to Scheme of Arrangement by listed companies are as follows:
One more approval
It appears that the Circular prescribes mandatory prior approval of SEBI for all Schemes of Arrangement involving listed companies. This was not the case before for Schemes of Arrangements that did not require exemption from Rule 19(2)(b) of SCRR. However, this change appears to be in line with provisions of the Companies Bill, 2012. Clause 230 of the Companies Bill, 2012 provides that the companies involved in a scheme of arrangement shall send the notice of meeting of shareholders (along with the prescribed set of documents) to the statutory authorities including SEBI, Reserve Bank of India, Competition Commission of India, registrar etc. and such authorities are in turn obligated to provide their comments to the scheme within a span of 30 days.
Furthermore, it appears that listed companies are now required to approach the stock exchanges twice to get the Scheme of Approval sanctioned; first, before filing the Scheme of Arrangement with the High Court and then, after receipt of the final High Court approval. This two stage approval process is likely to make the process more time consuming and onerous for listed companies.
Submission of complaints report
Clause 5.15 of the Circular obligates listed companies to submit the 'complaints report' within 7 days of expiry of 21 days from the date of filing of Scheme of Arrangement with stock exchanges and the same 'complaints report' has to be filed with the stock exchanges after the Scheme of Arrangement is approved by the High Court. It is not clear why the process has to be repeated.
SEBI's attempt is to make the entire process of approval of Scheme of Arrangement more transparent. With the entire Scheme of Arrangement available on the websites of the listed company and the stock exchanges from a very early stage in the process, all the stake holders are given an opportunity to familiarize with the proposed scheme. Also, the introduction of 'complaints report' will enable the stakeholders to raise their concerns, if any, in the initial stages itself.
The requirement to compulsorily attach the 'complaints report' with the notice of the shareholders meeting could help the shareholders in understanding the grievances of other stakeholders against the Scheme of Arrangement and thereby take an informed decision on the Scheme of Arrangement.
Timing of filing application under Rule 19(7) of SCRR
Clause 1 of Part A of Annexure I prescribes that listed companies may file an application under Rule 19(7) of SCRR seeking exemption from requirements under Rule 19(2)(b) of SCRR for listing shares without undertaking initial public offer subject to prescribed conditions. One of the prescribed conditions under Part A is that the equity shares sought to be listed are proposed to be allotted by the unlisted issuer (transferee entity) to the holders of securities of a listed entity (transferor entity) pursuant to a Scheme of Arrangement. Clause 1 of Part B of Annexure I obligates stock exchanges to ensure that an unlisted issuer may make an application to SEBI under Rule 19(7) of SCRR seeking exemption from requirements under Rule 19(2)(b) of SCRR subject to prescribed conditions. The prescribed conditions under Part B include, (i) the equity shares sought to be listed have been allotted by the unlisted issuer (transferee entity) to the holders of securities of a listed entity (transferor entity); and (ii) the share certificates have been dispatched to the allottees pursuant to the Scheme or their names have been entered as beneficial owner in the records of the depositories.
Part A refers to equity shares proposed to be issued by unlisted company while Part B refers to already issued and delivered equity shares. This could impact the timing of making the application under Rule 19(7) of SCRR seeking exemption from requirements under Rule 19(2)(b) of SCRR. It may not be logical to seek approval of SEBI after the shares are already issued and delivered. Also, Part A requires listed company to file the application under Rule 19(7) of SCRR but Part B requires stock exchanges to ensure that such application is filed by the unlisted issuer.
Lock-in on promoter shareholding
The Circular requires 'the shares held by the promoters to be locked in to the extent of 20% of the post-merger paid up capital of the unlisted company, for a period of 3 years from the date of listing of shares of the unlisted company and the balance of the entire pre-merger capital of the unlisted company to be locked in for a period of 3 years from the date of listing'. The Circular does the clarify consequence of promoters' shareholding post-merger being less than 20% of the total paid up capital.
The Circular mandates every listed company to file with the stock exchange, a report of its audit committee recommending the Scheme of Arrangement after evaluating, inter alia, the valuation report of the independent chartered accountant. This would lead to the audit committees assuming a larger responsibility, since it will now be expected to carefully examine the Scheme of Arrangement and attendant documents before putting down its recommendations to the stock exchanges.
Further, unlike the prevalent practice where a listed entity merging with an unlisted entity, was required to file a copy of the fairness opinion with the stock exchange, the Circular seems to be casting the impression that going forward all listed companies shall be required to file a copy of fairness opinion with the stock exchanges, irrespective of whether they are entering into a Scheme of Arrangement with a listed entity or an unlisted entity.
The compulsory requirement that at least 25% of the post-scheme share capital of the transferee entity should be held by the public shareholders in the transferor entity is retained in the Circular as it was under the 2009 Circular. While the requirement is meant to ensure requisite participation of public/ retail shareholders in the resultant company, substantial difference in the valuations of the transferor and transferee companies can make compliance with this requirement extremely difficult.
The Circular is a commendable attempt to rationalize the procedure for seeking exemption from the requirements under SCRR and protect the interests of the minority shareholders but the exact scope of the Circular may need more clarity. If the Circular is meant to apply to all Schemes of Arrangement involving listed companies then the drafting ambiguities in the Circular need to be resolved.
It is expressly clarified under the Circular that it is even applicable to the Schemes of Arrangement for which in-principle approval of the stock exchanges have already been sought, or received, but is pending submission to the high court for approval. This could pose procedural difficulties for listed companies that have already applied for or obtained the approval of the stock exchanges for their Scheme of Arrangement.
1 Rule 19(2) (b) of the SCRR deals with the requirements with respect to the listing of securities on a recognized stock exchange: (1)- (2) Apart from complying with such other terms and conditions as may be laid down by a recognised stock exchange, an applicant company shall satisfy the stock exchange that:-¦-¦-¦-¦-¦.. At least 10 per cent of each class or kind of securities issued by a company was offered to the public for subscription through advertisement in newspapers for a period not less than two days and that applications received in pursuance of such offer were allotted subject to the following conditions: (a) minimum 20 lakh securities (excluding reservations, firm allotment and promoters' contribution) was offered to the public; (b) the size of the offer to the public, i.e., the offer price multiplied by the number of securities offered to the public was minimum Rs. 100 crores; and (c) the issue was made only through book building method with allocation of 6 per cent of the issue size to the qualified institutional buyers as specified bythe Securities and Exchange Board of India: Provided that if a company does not fulfil the conditions, it shall offer at least 25 per cent of each class or kind of securities to the public for subscription through advertisement in newspapers for a period not less than two days and that applications received in pursuance of such offer were allotted: Provided further that a recognised stock exchange may relax any of the conditions with the previous approval of the Securities and Exchange Board of India, in respect of a Government company within the meaning of section 617 of the Companies Act, 1956 (1 of 1956), and subject to such instructions as that Board may issue in this behalf from time to time.