Sebi's New Year's gift to India Inc on scheme of arrangement
ET CONTRIBUTORS|
Updated: Jan 22, 2018, 03.58 PM IST
By Jinesh Shah and Rashmin Pandya
The Securities and Exchange Board of India (Sebi) already seems to have some positive news for listed companies for 2018. Sebi issued a circular in the very first week of the new year simplifying and relaxing some of the norms for the Scheme of Arrangement, required to be filed by listed companies with stock exchanges or the regulator.
Sebi had earlier issued a circular on March 10, 2017, laying down the framework for regulating the Scheme of Arrangement (scheme) entered by listed entities. The latest circular, which came out on January 3, 2018, has amended some of the provisions of the erstwhile one after carefully considering various representations for improving the existing regulatory framework of the scheme. The circular is intended to expedite the processing of draft schemes and preventing any misuse to bypass regulatory requirements.
While the erstwhile circular provided exemption for filing of Clause 37 application only for the scheme of merger of wholly-owned subsidiary (WOS) with the parent company, the new one clarifies that Clause 37 filing requirements would not be applicable to merger of WOS or its division with the parent company.
Accordingly, the transfer of a division by way of demerger / slump sale / slump exchange by WOS to its parent also gets exemption from Clause 37 filing requirements.
By definition, a scheme of arrangement is a court-approved agreement between a company and its shareholders or creditors. It may affect mergers and amalgamations and may alter shareholder or creditor rights. Schemes of arrangement are used to execute arbitrary changes in the structure of a business and thus are used when a reorganisation cannot be achieved by other means. They may be used for rescheduling debt, takeovers and for return of capital, among other purposes.
Having said that, a listed company would now need to file the draft scheme with stock exchanges for disclosure purposes. The market watchdog has also clarified that valuation report and fairness opinion need to be obtained from an independent chartered accountant (CA) and an independent Sebi-registered merchant banker, respectively. They shall not be treated as independent in the case of existence of any material conflict of interest among themselves or with the company, including that of common directorships or partnerships.
As per the previous circular, post approval of the scheme by the National Company Law Tribunal (NCLT), a listed company would be required to file various scheme related documents like NCLT-approved scheme, voting results of shareholders, and the like with stock exchanges. The same has been done away with by the new circular to avoid duplication of certain filings, which are anyway required to be done with stock exchanges.
Also, earlier in the case of the scheme involving listed and unlisted entities, for computing 25 per cent of public shareholding in the merged entity, the post-scheme percentage of shareholding of public shareholders of the merged entity was to be calculated without considering dilution on account of outstanding convertible securities.
Now, the percentage of shareholding of pre-scheme public shareholders of the listed entity and qualified institutional buyers (QIBs) of the unlisted entity shall not be less than 25 per cent on fully diluted basis in the merged entity. What is interesting is that only QIBs in the unlisted entity will now be considered for public shareholding excluding other categories such as private equity and strategic investors.
The previous circular seemed to cover the lock-in of shares only in case of demerger of a listed entity into an unlisted one whereas the new circular specifies that lock-in shall apply to reverse merger -- merger of a listed entity into an unlisted entity -- and demerger of a listed company into an unlisted entity.
Further, it has now been provided that shares so locked in could now be pledged with banks / public financial institutions and such locked-in shares could also be transferred inter-se among promoters. The lock-in shall continue in hands of transferee promoter entity for the balance period.
What this will actually do is create more flexibility for promoters to raise money or internal shuffling of shareholding when shares are so locked in.
Moving forward, the earlier circular provided a time limit of 30 days from the date of receipt of NCLT order for completing the steps of listing and limit of 45 days from the NCLT order for commencement of trading in securities of the transferee company. This was relevant in case of the listing happening pursuant to a reverse merger or listing of the unlisted entity, which has acquired the undertaking of the listed entity by way of a demerger.
The new circular, however, combines both the time limit stating that steps for listing and actual commencement of trading shall now happen within 60 days of the receipt of an NCLT order. This will provide some breather to entities to complete the entire process of listing and trading.
To sum it up, Sebi's new circular is quite pragmatic and a welcome move in speeding up the process for obtaining approval under the scheme by listed entities.
(Jinesh Shah is Partner Tax at KPMG in India, and Rashmin Pandya is Director for Deal Advisory, M&A Tax, KPMG in India. Views and theirs)
The Securities and Exchange Board of India (Sebi) already seems to have some positive news for listed companies for 2018. Sebi issued a circular in the very first week of the new year simplifying and relaxing some of the norms for the Scheme of Arrangement, required to be filed by listed companies with stock exchanges or the regulator.
Sebi had earlier issued a circular on March 10, 2017, laying down the framework for regulating the Scheme of Arrangement (scheme) entered by listed entities. The latest circular, which came out on January 3, 2018, has amended some of the provisions of the erstwhile one after carefully considering various representations for improving the existing regulatory framework of the scheme. The circular is intended to expedite the processing of draft schemes and preventing any misuse to bypass regulatory requirements.
While the erstwhile circular provided exemption for filing of Clause 37 application only for the scheme of merger of wholly-owned subsidiary (WOS) with the parent company, the new one clarifies that Clause 37 filing requirements would not be applicable to merger of WOS or its division with the parent company.
Accordingly, the transfer of a division by way of demerger / slump sale / slump exchange by WOS to its parent also gets exemption from Clause 37 filing requirements.
By definition, a scheme of arrangement is a court-approved agreement between a company and its shareholders or creditors. It may affect mergers and amalgamations and may alter shareholder or creditor rights. Schemes of arrangement are used to execute arbitrary changes in the structure of a business and thus are used when a reorganisation cannot be achieved by other means. They may be used for rescheduling debt, takeovers and for return of capital, among other purposes.
Having said that, a listed company would now need to file the draft scheme with stock exchanges for disclosure purposes. The market watchdog has also clarified that valuation report and fairness opinion need to be obtained from an independent chartered accountant (CA) and an independent Sebi-registered merchant banker, respectively. They shall not be treated as independent in the case of existence of any material conflict of interest among themselves or with the company, including that of common directorships or partnerships.
As per the previous circular, post approval of the scheme by the National Company Law Tribunal (NCLT), a listed company would be required to file various scheme related documents like NCLT-approved scheme, voting results of shareholders, and the like with stock exchanges. The same has been done away with by the new circular to avoid duplication of certain filings, which are anyway required to be done with stock exchanges.
Also, earlier in the case of the scheme involving listed and unlisted entities, for computing 25 per cent of public shareholding in the merged entity, the post-scheme percentage of shareholding of public shareholders of the merged entity was to be calculated without considering dilution on account of outstanding convertible securities.
Now, the percentage of shareholding of pre-scheme public shareholders of the listed entity and qualified institutional buyers (QIBs) of the unlisted entity shall not be less than 25 per cent on fully diluted basis in the merged entity. What is interesting is that only QIBs in the unlisted entity will now be considered for public shareholding excluding other categories such as private equity and strategic investors.
The previous circular seemed to cover the lock-in of shares only in case of demerger of a listed entity into an unlisted one whereas the new circular specifies that lock-in shall apply to reverse merger -- merger of a listed entity into an unlisted entity -- and demerger of a listed company into an unlisted entity.
Further, it has now been provided that shares so locked in could now be pledged with banks / public financial institutions and such locked-in shares could also be transferred inter-se among promoters. The lock-in shall continue in hands of transferee promoter entity for the balance period.
What this will actually do is create more flexibility for promoters to raise money or internal shuffling of shareholding when shares are so locked in.
Moving forward, the earlier circular provided a time limit of 30 days from the date of receipt of NCLT order for completing the steps of listing and limit of 45 days from the NCLT order for commencement of trading in securities of the transferee company. This was relevant in case of the listing happening pursuant to a reverse merger or listing of the unlisted entity, which has acquired the undertaking of the listed entity by way of a demerger.
The new circular, however, combines both the time limit stating that steps for listing and actual commencement of trading shall now happen within 60 days of the receipt of an NCLT order. This will provide some breather to entities to complete the entire process of listing and trading.
To sum it up, Sebi's new circular is quite pragmatic and a welcome move in speeding up the process for obtaining approval under the scheme by listed entities.
(Jinesh Shah is Partner Tax at KPMG in India, and Rashmin Pandya is Director for Deal Advisory, M&A Tax, KPMG in India. Views and theirs)
