The Securities and Exchange Board of India (“SEBI”), vide circular no. SEBI/HO/CFD/DIL1/CIR/P/2020/215 dated November 3, 2020 (“Circular”), has notified a streamlined framework for processing of draft schemes filed with stock exchanges. This Circular amends the circular dated March 10, 2017 (“2017 Circular”) issued by SEBI which laid down the framework for schemes of merger, demerger, amalgamation or arrangement by listed entities and relaxation under Rule 19(7) of the Securities Contracts (Regulation) Rules, 1957. The changes are aimed at ensuring that the recognized stock exchanges refer draft schemes to SEBI only upon being fully convinced that the listed entity is in compliance with the regulatory norms. Some of the key changes introduced are as follows:
a) The Circular provides for the comments of the audit committee on the valuation report regarding the need for merger/ demerger/ amalgamation/ arrangement, the rationale for the scheme, the synergies of business of the entities involved, the impact on shareholders and a cost benefit analysis of the scheme.
b) The Circular also provides for a report from the committee of independent directors recommending the draft scheme, considering, inter alia, whether the scheme is detrimental to the shareholders.
c) The Circular amends para 4 (a) of the 2017 Circular and lays down the definition of a ‘registered valuer’. According to this amendment, the registered valuer shall be a person, registered as a valuer, having such qualifications and experience and being a member of an organization recognized, as specified in Section 247 of the Companies Act, 2013 read with the applicable rules.
d) The Circular also amends the explanation to para 9(b)(v) of the 2017 Circular and provides that the expression “substantially the whole of the undertaking” in any financial year shall mean twenty percent or more of value of the company in terms of consolidated net worth or consolidated total income during previous financial year as specified in Section 180(1)(a)(ii) of the Companies Act, 2013, instead of Section 180(1)(a)(i) of the Companies Act, 2013 as stated in the 2017 Circular.
e) The stock exchanges will have to provide the ‘no-objection’ letter to SEBI on the draft scheme in co-ordination with each other. Further, SEBI will issue comment letter upon receipt of ‘no-objection’ letter from exchanges having nationwide trading terminals.
f) The Circular has removed the term ‘observation letter or’ in paragraph C of the 2017 Circular which provided for the observation letter or no-objection letter to be given to SEBI by stock exchanges.
g) According to the Circular, listing and trading of specified securities commences within 60 (sixty) days of receipt of the order of High Court or National Company Law Tribunal simultaneously on all the stock exchanges where the equity shares of the listed entity (or transfer entity) are/ were listed. Earlier, this timeline was 45 (forty-five) days.
h) Before commencement of trading, the transferee entity, in addition to disclosing the information in the form of an information document on the website of the exchanges, will have to give an advertisement in newspapers giving details about the business model, reason for the amalgamation and internal risk factors.
i) In addition, the transferring entity will have to give details of shareholding of promoter group, group companies, names of its 10 (ten) largest shareholders and percentage of shares held by each of them. Among others, they will have to announce the regulatory action, if any, taken by SEBI or stock exchanges against the promoters in last five financial years; and provide brief details of outstanding criminal proceedings against the promoters.
j) The Circular has removed Paragraph III(B) of the 2017 Circular which provided for ‘Application by a listed entity for Listing of Equity Shares with Differential Rights as to Dividend, Voting or Otherwise’.
The new framework will be applicable for all the schemes filed with the stock exchanges after November 17, 2020. With regard to the framework on listing, the changes will be applicable for entities seeking listing and/or trading approval from the stock exchanges after November 3, 2020.
Please find a copy of the Circular here.
This update has been contributed by Adity Chaudhury (Partner) and Aditi Gupta (Associate).
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