25 January 2017

SEBI ISSUES GUIDELINES FOR MERGERS BETWEEN LISTED AND UNLISTED COMPANIES

Listed companies which propose to enter into a Scheme of Arrangement such as Mergers, Amalgamations and Demergers under the Companies Act, require prior approval from SEBI and the Stock Exchanges on which the securities of the concerned company are listed under the SEBI (Listing and Obligations and Disclosure Requirements) Regulations 2015 ("LODR Regulations").

Under the LODR Regulations, the listed company shall ensure that the Scheme of Arrangement does not violate the Securities Laws or the requirements of the Stock Exchange. The Stock Exchanges review the Scheme of Arrangement filed with it by the listed company, and thereafter, issue a No-Objection Letter or Observation Letter approving the Scheme of Arrangement, after incorporating the comments from SEBI in respect of the same.

However, in order to avoid the formalities attached to fresh listing of securities of a company, unlisted companies amalgamate with a listed company to dodge the disclosure requirements and the time consuming process of an Initial Public Offering (IPO). Therefore, SEBI has, in its recent Press Release, proposed additional conditions to be followed for the scheme of arrangement s between listed and unlisted companies to prevent backdoor listing by unlisted companies through mergers with listed companies.

SEBI has proposed the following measures:

• In case of merger of an unlisted company with a listed company, the unlisted company shall comply with the requirement of disclosure of material information as specified in the format for abridged prospectus. This is to ensure that the unlisted company makes full and proper disclosures as is required under an IPO.
• The pre-scheme public shareholders of the listed company and the Qualified Institutional Buyers (QIBs) of the unlisted company, shall, together, hold not less than 25% of the total shareholding in the merged company. The objective is to have wider public shareholding and to prevent very large unlisted company to get listed by merging with a very small company.
• The unlisted company can be merged with a listed company if it is listed on a stock exchange having nationwide trading terminals.
• The pricing of the shares issued shall be as per the pricing formula specified under the SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009 (“ICDR Regulations”). This is to prevent issue of shares to select group of shareholders instead of all shareholders pursuant to the scheme.
• To ensure larger participation of public shareholders, their approval through e-voting is required in the following cases:
  • When the merger of an unlisted company with a listed company results in reduction of the shareholding of the pre-scheme public shareholders of the listed company to less than 5% of the merged company.
  • When the scheme of arrangement involves transfer of whole or substantially the whole of the undertaking of a listed company and consideration for such transfer is not in the form of listed equity shares.
  • When the scheme of arrangement involves merger of unlisted subsidiary with listed holding company where the shares of the unlisted subsidiary have been acquired by the holding company directly or indirectly from the promoters/promoter group.
• Companies would be required to submit compliance report confirming compliance with the circular and Accounting Standards duly certified by Company Secretary, CFO and Managing Director.
• With a view to simplify the process, schemes which provide for merger of a Wholly owned Subsidiary (WoS) with the parent company shall not be required to be filed with SEBI. Such schemes shall be filed with stock exchanges for the limited purpose of disclosures only.

MHCO COMMENT:

The aforesaid guidelines issued by SEBI are a positive step towards minimizing back door listing by unlisted companies. The stringent disclosure requirements by unlisted companies shall help to protect the interests of the public shareholders and strict adherence to the pricing guidelines prescribed under ICDR Regulations, shall ensure that the valuation and pricing of shares is not skewed in favour of the unlisted company.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.