Monday, May 20, 2013

Madras High Court on SEBI Circular for Scheme of Arrangement

A few months ago, I had discussed SEBI’s circular of February 4, 2013, which imposes more stringent oversight by SEBI and the stock exchanges on different types of schemes of arrangement.

Shortly thereafter, our guest contributor Yogesh Chande has pointed to issues relating to the scope of the SEBI circular, and specifically whether the circular applies only to such schemes that require exemption from Rule 19(7) of the Securities Contracts (Regulation) Rules, 1957 (SCRR), which principally relates to reverse listings, or whether it applies more widely to all types of arrangements. This ambiguity is caused because although the SEBI circular applies generally to all types of schemes, including schemes among listed companies and even capital reductions under section 100 of the Companies Act, the genesis for the circular can be related to a 2009 circular which is confined to reverse listings and was also repealed by the February 2013 circular.

In an unreported judgment dated April 1, 2013, the Madras High Court holds that SEBI’s circular is applicable only where an exemption is being sought from Rule 19 of the SCRR and not for other schemes. That case involved a merger of two companies both of which were listed on the stock exchanges. The companies made an application to the court for convening meetings under section 391 of the Companies Act. Since this was not a reverse listing, the court clarified in response that the SEBI circular is not applicable. The relevant portion containing the discussion on the point of law on the issue is extracted below:

5. The learned counsel for the applicant contended that the conditions laid down by the Securities and Exchange Board of India vide circular CIR/CFD/DIL/5/2013 dated 04.02.2013 are not applicable to the case of the applicant, as the applicant is not seeking exemption under Rule 19(7) of the Securities Contracts (Regulation) Rules, 1957, as the transferor company listed its shares in the recognised Stock Exchange after complying with the conditions laid down under the Securities Contracts (Regulation) Rules, 1957.

6. On consideration, I find force in this contention. Rule 19 of the Securities Contracts (Regulation) Rules, 1957 stipulates that a public company as defined under the Companies Act, 1956, desirous of getting securities listed with the recognised Stock Exchange are required to apply for the purpose to the Stock Exchange along with its application, document contained under the Rule.

7. A submitted by the learned counsel for the applicant, this already stood complied with, when the stock was listed with the recognised Stock Exchange.

8. The learned counsel for the applicant is also right that Rule 19(7) gives right to the Securities Exchange Board to waive or relax strict enforcement of any of the rules. In the present case, it is not a case where the applicant is to get the stock listed. In the case in hand, what is being done is that the stock which is already listed is being regulated without seeking any exemption, therefore, for the purpose of amalgamation of the companies, the provisions of Rule 19(7) would not be applicable, as no exemption under the rules is being sought therefore, the circular issued in exercise of power under Rule 19(7) will not be applicable to the applicant.

The court has adopted a narrow view of the circular. While it is understandable that the circular refers to Rule 19(7), that does not explain the wider objective of SEBI that is evident in the circular and also in the fact that it covers other schemes of the arrangement such as capital reduction that does not involve any listing of securities without following the usual disclosure process.

As Yogesh mentions in his post, there is some ambiguity regarding the scope of the circular, and this decision also underscores the type of issues that could arise in practice. Given this ambiguity, it is recommended that SEBI expressly state its intention regarding the scope of the circular. By issuing a clarification or a set of FAQs, possible uncertainties regarding the schemes of arrangement, which are a popular form of a transaction in India, can be avoided.

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).


Ravindra said...

Could you kindly provide details in relation to the Madras HC decision that you are referring to?

Vichar said...

Could you kindly provide a copy of this judgement?

Vichar said...

The order details are- C.A.No 332 of 2013