Sebi tightens merger and amalgamation norms

Mumbai: The Securities and Exchange Board of India or Sebi, on Saturday tightened the rules for mergers and amalgamations by Indian companies in an effort to make listing process more transparent and give public shareholders a bigger say in consolidations of companies.

Following a board meeting, Sebi said that in case of merger of an unlisted company with a listed company, the unlisted company will have to disclose all the material information in the form of an abridged prospectus, similar to what companies file before launching initial public offering (IPO).

Additionally, Sebi said, the resultant public shareholding holding post such mergers or amalgamations between an unlisted entity and a listed entity cannot be less than 25%, which is similar to what all listed entities need to follow at present.

Sebi said the effective total of the public shareholding of the listed entity plus the qualified institutional buyers (QIBs) of the unlisted company has to be at least 25% after the two companies merge and the unlisted entity gets automatically listed.

“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,” Sebi said in a statement.

Also, to ensure that all classes of shareholders get an equitable treatment during mergers and acquisitions, Sebi directed companies to follow the pricing formula for stocks as per Sebi’s ICDR norms (issue of capital and disclosure requirements) during mergers. This will prevent companies from issuing shares to select group of shareholders instead of all shareholders during mergers and amalgamations between listed and unlisted entities.

According to Sumit Agrawal, partner, Suvan Law Advisor & ex-Sebi official, “Sebi was concerned because there were instances where route of Scheme of Arrangements or Merger was being used to get an indirect listing for an unlisted company. There were another category of misuse where under an arrangement; securities were being issued to promoter related persons only.”

“There was an issue on electronic voting requirement as well,” he said.

In an effort to discourage unfair mergers between listed and unlisted entities, Sebi said that an approval of public shareholders will be mandatory for any merger between a listed and an unlisted entity if such a merger results in reducing the voting share percentage of pre-scheme public shareholders by more than 5% in the total capital of the merged entity.

Public shareholders’ approval will be mandatory for those schemes too which involve transfer of substantial undertaking of a listed entity and if a consideration for such a transfer is not in the form of listed equity shares.

A favouring vote from public shareholders will also be compulsory for the mergers of unlisted subsidiaries with their listed holding companies if the shares of the unlisted subsidiary have been acquired by the holding company from the promoters.

The latest amendments will also take care of recent challenges in high courts, Agrawal feels.

“At least two High Courts had frowned upon Sebi’s jurisdiction over scheme of arrangements in the recent past. Government recently brought into force section 230(5) of Companies Act, 2013 which would also lend support to Sebi’s efforts in regulating such convoluted schemes,” Agrawal said.

In another development, Sebi gave stock exchanges the power to act against listed firms through imposition of fines, suspension of trading, and so on for violating certain sections of ICDR norms.Sebi said this will also reduce the cost of undertaking adjudication or quasi-judicial actions in case of minor violations for listed entities.

To encourage brokers to bring in more investors in the listed space, Sebi reduced the fees payable by brokers by 25%, from Rs20 per crore of turnover to Rs15 per crore of turnover.

For mutual funds, Sebi said no fund manager can invest more than 5% of the net asset value of a scheme in the units of a single issuer of real estate investment trusts or infrastructure investment trusts. Further no mutual fund scheme can invest in total more than 10% of its NAV in units of REITs and InvITs.

The regulator said the features of such instruments are more like equity securities, while the concentration and liquidity risks remain to be addressed. However, the limits will not be applied to index funds or sector or industry specific schemes.

Furthermore, Sebi said it will start charging interest from alleged capital market defaulters if there is an inordinate delay in filing of applications or payment of settlement amounts in case of consents.

The IAB took note of the recent developments on corporate governance related issues in India. The IAB made following observations in this context:

In a separate development, Sebi’s international advisory board said after a meeting that in order to improve corporate governance standards in the listed space, companies should constitute their boards with members of varying expertise so that the board is diverse, balanced and is in tune with the company’s functioning.

Also, the advisory board felt there has to be more transparency in board appointments and removal processes, adding that companies in the listed space should introduce stricter evaluation processes for the board’s performance.

“The process of evaluation of the performance of the board has to go beyond a box-ticking exercise,” the advisory board said in a statement.

“The best evaluation is actually an exercise in self evaluation of the company’s own performance and effectiveness in terms of its mission, financial returns, strategy, business model and social responsibility, and in this context whether the standards expected from the board are being realized. It would be a good practice if the result of the evaluation of the board as a whole is disclosed to the shareholders,” the statement added.