SEBIs’ circular on Scheme of Arrangement: Aligning the compliances with the Companies Act, 2013, by Barsha Dikshit and Trupti Upadhyay
Introduction
After such a long wait of around 3 months since the enforcement of provisions of the Companies Act, 2013 (‘Act, 2013’) dealing with Compromise or arrangements, Securities of Exchange Board of India (‘SEBI’) finally came up with a Circular [1]dated March 10, 2017 (‘the Circular’) aligning the provisions to be followed by listed companies pertaining to the Scheme of Arrangements with the provisions of the Act, 2013. Provisions of the Act, 2013 dealing with the Compromise and arrangements have already been enforced by MCA. However, since nothing had been clarified by SEBI regarding provisions to be followed by listed companies, listed companies were following the norms specified in the Circular dated November 30, 2015 [2] (‘the Erstwhile Circular’) while stepping ahead with Compromise or arrangements. The Erstwhile Circular was in conformity with the provisions of the Companies Act, 1956, hence, it became very difficult for the listed companies to narrow down the steps to be followed in compliance with the provisions of the Companies Act, 2013, in the absence of any clarification from SEBI. Though SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015 (hereinafter referred to as “Listing Regulations”) contains obligations with respect to Scheme of Arrangement on Listed Entities in Regulation 11, 37 and 94, there was a need of detailed circular containing the requirements to be followed by listed companies.
This write up contains the detailed analysis of the Circular and its impact on the listed entities.
Applicability of the Circular
The Circular, although effective from the immediate effect, is applicable on the schemes of arrangements filed after the date of the Circular i.e. after 10th March, 2017, whereas, the schemes filed on or before the date of the Circular, shall still be governed by the Erstwhile Circular. Of course only listed companies are bound to follow the provisions specified by SEBI.
Comparison between the Circular and the Erstwhile Circular:
| Sl No. | Particular | The Circular dated 10.03.2017 | The Erstwhile Circular dated 30.11.2015 | Remarks |
| 1. | Non- Applicability of Circular on the schemes of merger which provides for merger of wholly owned subsidiary with parent company | The Provisions of present circular shall not apply to schemes which solely provides for merger of a wholly owned subsidiary with the parent company. However, such draft schemes shall be filed with the Stock Exchanges for the purpose of disclosures and the Stock Exchanges shall disseminate the scheme documents on their websites. The relevant amendment to ICDR Regulations in this regard has been notified on February 15, 2017.
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No Provision | Like relaxation provided vide section 233 under the Companies Act, 2013 to the wholly owned subsidiaries getting merged with the parent company, SEBI has also relaxed the merger schemes involving wholly owned subsidiary with parent company from following the norms of SEBI Circular. |
| 2. | Applicability of pricing provisions of SEBI (ICDR) Regulations, 2009 | The issuance of shares under schemes in case of allotment of shares only to a select group of shareholders or shareholders of unlisted companies pursuant to such schemes shall follow the pricing provisions of Chapter VII of SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. Relevant amendment to ICDR Regulations in this regard has been notified on February 15, 2017. | No provision | Now, the listed companies shall have to follow pricing provisions of SEBI (ICDR) Regulations while issuing shares to the shareholders of unlisted companies or to the selected group of persons. |
| 3. | Fee to be paid by listed entities | The listed entity shall pay a fee to SEBI at the rate of 0.1% of the paid-up share capital of the listed / transferee / resulting company, whichever is higher, post sanction of the proposed scheme, subject to a cap of Rs.5, 00,000. | No provision | Unlike the Erstwhile Circular, the listed companies are now under the obligation to pay fee to the SEBI subject to the upper limit of Rs. 5,00,000/- |
| 4. | Submission of Compliance Report | 2. Submission of Documents-
(h) Detailed Compliance Report as per the format specified in Annexure IV duly certified by the Company Secretary, Chief Financial Officer and the Managing Director, confirming compliance with various regulatory requirements specified for schemes of arrangement and all accounting standards. |
3. Submission of Documents-
(h) Compliance with requirements of Regulation 17 to 27 of Listing Regulations; |
Earlier, only the compliance report stating the compliance with the Regulation 17 to 27 of LODR regulations was required to be submitted to the stock exchange. Now, SEBI has prescribed the format of the compliance report to be submitted to the stock exchange and also provided that the said report shall be duly certified by the CS, CFO and MD of the Company. Thus, the KMPs of the Company are now under obligation to ensure the compliance of various regulatory requirements including Accounting standard while entering into scheme of arrangement. |
| 5. | Mandatory requirement of providing e-voting facility to the shareholders of the listed entities | 9. Approval of Shareholders to Scheme through e- Voting:
(a) The Listed entities shall ensure that the Scheme of Arrangement submitted with the NCLT for sanction, provides for voting by public shareholders through e voting, after disclosure of all material facts in the explanatory statement sent to the shareholders in relation to such resolution. |
9. Approval of Shareholders to Scheme Through Postal Ballot And e- Voting:
(a) The Listed companies shall ensure that the Scheme of Arrangement submitted with the Hon’ble High Court for sanction, provides for voting by public shareholders through postal ballot and e-voting, after disclosure of all material facts in the explanatory statement sent to the shareholders in relation to such resolution, in the following cases:
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Earlier, listed companies were required to provide e voting facility to the public shareholders of the company only if any of the cases mentioned in the SEBI circular gets triggered. Now, it has become mandatory for the listed companies to provide e voting facility to the public shareholder of the company while entering into scheme of arrangement. |
| 6. | Requirement for Ordinary resolution from public shareholders | 9. (b) The Scheme of arrangement shall be acted upon only if the votes cast by the public shareholders in favour of the proposal are more than the number of votes cast by the public shareholders against it, in the following cases:
i. Where additional shares have been allotted to Promoter / Promoter Group, Related Parties of Promoter / Promoter Group, Associates of Promoter / Promoter Group, Subsidiary/(s) of Promoter / Promoter Group of the listed entity , or ii. Where the Scheme of Arrangement involves the listed entity and any other entity involving Promoter / Promoter Group, Related Parties of Promoter /Promoter Group, Associates of Promoter / Promoter Group, Subsidiary/(s) of Promoter / Promoter Group. iii. Where the parent listed entity has acquired, either directly or indirectly, the equity shares of the subsidiary from any of the shareholders of the subsidiary who may be Promoter / Promoter Group, Related Parties of Promoter / Promoter Group, Associates of Promoter / Promoter Group, Subsidiary/(s) of Promoter / Promoter Group of the parent listed entity, and if that subsidiary is being merged with the parent listed entity under the Scheme. iv. Where the scheme involving merger of an unlisted entity results in reduction in the voting share of pre-scheme public shareholders of listed entity in the transferee / resulting company by more than 5% of the total capital of the merged entity; v. where the scheme involves transfer of whole or substantially the whole of the undertaking of the listed entity and the consideration for such transfer is not in the form of listed equity shares; |
9 (a) The Listed companies shall ensure that the Scheme of Arrangement submitted
with the Hon’ble High Court for sanction, provides for voting by public shareholders through postal ballot and e-voting, after disclosure of all material facts in the explanatory statement sent to the shareholders in relation to such resolution, in the following cases: i. Where additional shares have been allotted to Promoter / Promoter Group, Related Parties of Promoter /Promoter Group, Associates of Promoter / Promoter Group, Subsidiary/(s) of Promoter / Promoter Group of the listed entity , or ii. Where the Scheme of Arrangement involves the listed entity and any other entity involving Promoter / Promoter Group, Related Parties of Promoter / Promoter Group, Associates of Promoter / Promoter Group, Subsidiary/(s) of Promoter / Promoter Group. iii. Where the parent listed entity, has acquired the equity shares of the subsidiary, by paying consideration in cash or in kind in the past to any of the shareholders of the subsidiary who may be Promoter / Promoter Group, Related Parties of Promoter / Promoter Group, Associates of Promoter / Promoter Group, Subsidiary/(s) of Promoter / Promoter Group of the parent listed entity company, and if that subsidiary is being merged with the parent |
Now, apart from the cases mentioned in the Erstwhile Circular, listed companies shall also have to take approval of the majority of public shareholders while getting merged with an unlisted entities in the following two cases:
i. When scheme of merger involves provisions that would results in reduction od share capital of public shareholders of listed entity in the transferee company by more than 5%; ii. When listed company will get merged with the unlisted company and the shares to be issued by unlisted transferee company in consideration of merger will not entitled to be listed. |
Conclusion
Earlier, large numbers of unlisted companies were listing themselves by merging with small listed companies meritoriously avoiding their listing obligations and disclosures. Thus, to ensure greater public participation and to protect the interest of public shareholders, SEBI came up with updated circular containing stringent norms for the listed entities getting merged with unlisted entities and for unlisted entities intended to list their shares on stock exchange post approval of the scheme. The Circular has increased compliance burden on the listed companies. However, SEBI has also been careful while aligning the norms with the Act, such as it has modified the approval requirement of wholly owned subsidiary getting merged with parent company to a mere disclosure norms. Thus, all the ambiguous interpretation of section 230 to 233 of the Act have been reduced. Overall the circular can be said to be a festive gift for the public shareholders.
[1] http://www.sebi.gov.in/cms/sebi_data/attachdocs/1489148947403.pdf
[2] https://www.nseindia.com/content/equities/SEBI_Circ_30112015_5.pdf
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