SEBI Streamlines Process for Schemes of Arrangement

SEBI has streamlined the process for filing of draft schemes of arrangement by listed entities for approval of the stock exchanges with effect from November 17, 2020. The key changes made by SEBI are set out below:

1.     Report of the Audit Committee and Independent Directors

As per the Securities and Exchange Board of India (SEBI) circular on Schemes of Arrangement by Listed Entities dated March 10, 2017 (2017 Circular), the listed entity is required to submit a report from the Audit Committee recommending the draft scheme, taking into consideration, inter alia, the valuation report. The circular dated November 3, 2020 (2020 Circular) issued by SEBI now requires the Audit Committee to also comment on the need for the merger/ demerger/ amalgamation/ arrangement, the impact of the scheme on the shareholders and cost benefit analysis of the scheme. It has also added a requirement for listed entities to submit a report from the Committee of Independent Directors recommending the draft scheme, taking into consideration, inter alia, that the scheme is not detrimental to the shareholders of the listed entity.

2.     Valuation Report

The 2020 Circular requires the valuation report to be prepared by a registered valuer i.e. a person registered as a valuer under the Companies Act, 2013, instead of any chartered accountant.

3.     No-Objection Letter

The 2017 Circular permitted stock exchanges to provide either an ‘observation letter’ or a ‘no-objection letter’ to SEBI in relation to the draft scheme. The 2020 Circular has specified that the stock exchanges have to provide their ‘no-objection letter’ in coordination with each other.

4.     Newspaper Disclosures

The 2020 Circular requires certain additional disclosures to be provided in the newspapers before commencement of trading, such as business model, latest restated audited financials, summary table of related party transactions in last three years, internal risk factors, outstanding criminal proceedings against the promoters, disciplinary action taken by SEBI or stock exchanges against the promoters in the last five financial years, etc. These additional disclosures are required from all entities seeking listing / trading approval from the stock exchanges after November 3, 2020.

5.     Repealing Provisions for Listing of Equity Shares with Differential Voting Rights

The 2017 Circular permitted a listed entity to apply for listing of its equity shares with differential rights as to dividend, voting or otherwise pursuant to a scheme, without making an initial public offer of such equity shares by applying to SEBI for seeking relaxation from compliance with Rule 19(2)(b) of the Securities Contracts (Regulation) Rules, 1957, subject to certain conditions. This provision has now been repealed.

Way Forward

Going forward, listed companies proposing to file a draft scheme of arrangement with stock exchanges will have to comply with these additional disclosure requirements. The Audit Committee and Committee of Independent Directors are expected to take a more active role in evaluation of the impact of the scheme on the interest of the shareholders of the listed company.

Date: November 23, 2020