Thursday, February 7, 2013

Scheme of Arrangement – Revised requirements for the stock exchanges and listed companies

[Yesterday, we had the opportunity to provide a brief analysis here on SEBI’s new circular on the topic.

In the following post, Yogesh Chande points to some ambiguities regarding the scope of SEBI’s new circular. Yogesh is a Consultant, Economic Laws Practice, Advocates & Solicitors. Views expressed by the author are personal]

This post pertains to the circular issued by Securities and Exchange Board of India (SEBI) on 4 February 2013 (2013 Circular)[1] titled “Scheme of Arrangement under the Companies Act, 1956 – Revised requirements for the Stock Exchanges and Listed Companies”, rescinding circular dated 3 September 2009 (2009 Circular)[2].

The 2013 Circular, provides for stringent requirements to be followed like:

(a) seeking comments of SEBI on the draft scheme; and             
(b) a special resolution of the company is passed by postal ballot and e-voting approving the scheme where: (i) at least three-fourths of the total number of votes and (ii) two-thirds of the total number of votes cast by public shareholders are in favour of the resolution.

The 2009 Circular [Clause 8.3.5 of the erstwhile SEBI (Disclosure and Investor Protection) Guidelines, 2000] never had within its purview, a petition involving “capital reduction” under section 100-101 of the Companies Act, 1956 (Act). However, the 2013 Circular also makes reference to “capital reduction” in clause A (5.1) on page 2 and also in clause 2(a) of part A of Annexure I on page 6.

Though the 2013 Circular rescinds the 2009 Circular, it is not clear whether the intent is also to bring within its purview the following, which though attracts the provisions of clause 24(f) of the equity listing agreement[3], but does not warrant seeking exemption of SEBI under rule 19(7) of SCRR:

(a) petition under section 101 (capital reduction) not involving allotment of shares; or
(b) scheme involving amalgamation of an unlisted company with a listed company, which results in further allotment of shares by the listed company.

Hopefully, we can expect some clarity on the above from SEBI or stock exchanges.

- Yogesh Chande

Update - May 22, 2013: SEBI has since clarified that the circular is applicable to all types of schemes of arrangement and not only those that require an exemption under Rule 19(7).

[3] The company agrees that it shall file any scheme/petition proposed to be filed before any Court or Tribunal under sections 391,394 and 101 of the Companies Act, 1956, with the stock exchange, for approval, at least a month before it is presented to the Court or Tribunal.


V. Umakanth said...

Yogesh, thanks for your post. Although the initial part of SEBI's new circular refers to reverse listings and the 2009 circular, the operative portion relates to schemes of arrangements in general (including reduction of capital and mergers into listed companies as you have pointed out). If that is so, then clause 24(f) and (g) would have to be amended to reflect this new position, and it remains to be seen whether SEBI will initiate amendments on that count.

Somasekhar Sundaresan said...

Agree with Umakanth. And the Circular clearly suggests that these changes would be made.