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Analysis of the new SEBI circular on schemes of arrangement

Finsec Law Advisors

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Based on the experience of having dealt with, studied and approved over 600 schemes of arrangement over the last 4 years, SEBI has recently issued a circular amending the norms governing schemes of arrangements. The circular will be applicable only to those schemes filed after the date of the circular, i.e., March 10, 2017. A few of the significant changes are discussed below.

Merger of listed and unlisted entities: In the past, large unlisted entities could merge into small listed companies and become listed entities, without going through the IPO route and without complying with the disclosure requirements under the ICDR Regulations. To address this, it is now stipulated that the listed entity shall provide its shareholders with information pertaining to the unlisted entity in the same format prescribed for issuing an abridged prospectus in Part D of Schedule VIII of the ICDR Regulations, as part of the explanatory statement of the notice that would be sent to the shareholders for passing of the resolution to approve the scheme of arrangement. Further, the accuracy and adequacy of the disclosures made therein would have to be certified by a registered merchant bank after conducting due diligence on the unlisted entity. Furthermore, the new norms also mandate that the shareholding of the public shareholders of the listed entity and the QIB shareholders of the unlisted entity in the post scheme shareholding pattern of the combined entity shall not be less than 25%. The enhanced disclosures and verification of the disclosures made by a merchant banker will provide shareholders with additional information and will help them make better choices when voting.

Shareholder approval: The erstwhile norms required the approval of a majority of the public shareholders in certain circumstances for a scheme to be given effect to. This list has been expanded to include schemes where: (a) a listed and unlisted entity propose to merge resulting in the reduction of the voting share of the pre-scheme public shareholders in the combined entity by more than 5%; and (b) the whole or substantially the whole of an undertaking of the listed entity is to be transferred as part of the scheme and the consideration for such transfer is not in the form of listed equity shares.

Lock-in: In the case of a scheme involving hiving off of a division from a listed entity into an unlisted entity whose shares are proposed to be listed, the new norms stipulate that the entire pre-issue share capital of the unlisted entity will be locked-in from the date of listing of its shares, for one year. However, the burden on the promoters is slightly heavier in that the shares held by them in the unlisted entity prior the scheme of arrangement upto 20% of the entire post scheme of arrangement share capital will be locked in for a period of three years. The new lock-in provisions introduced by the circular are similar to regulations 36 and 37 of the ICDR Regulations which specify similar lock-in restrictions in the case of public issues.