Wednesday, May 22, 2013

SEBI Clarifies on Schemes of Arrangement


Following SEBI’s circular of February 4, 2013 imposing stringent requirements for oversight of schemes of arrangement, there were certain issues that required clarification (discussed here and here).

Now, by way of another circular dated May 21, 2013, SEBI has clarified some of the outstanding issues and also made some modifications to the previous circular. In this post, we discuss some of the key items:

1. Applicability of the Circular

SEBI has now clarified that the February 4 circular is applicable to all types of schemes of arrangement including amalgamation, reconstruction and reduction of capital. It is not limited to reverse listings or other schemes that may require an exemption under Rule 19(7) of the Securities Contracts (Regulation) Rules, 1957.

The wide applicability of the circular would mean that all schemes of arrangement will now be closely scrutinized and will require review by the stock exchanges and SEBI.

2. Majority Requirements for Voting

The February 4 circular provided that proposal for a scheme will pass muster only “if the votes cast by public shareholders in favor of the proposal amount to at least two times the number of votes cast by public shareholders against it.” In other words, in addition to the usual majority the scheme must also receive the approval of 2/3rds of the public shareholders. This requirement has now been done away with.

A more stringent majority requirement as well as voting through postal ballot and e-voting and greater disclosure measures are now limited to schemes of arrangement that are undertaken where promoters are a party or are affected by it. Examples of this are where promoters are allotted further shares under the scheme, or where a group company is a party to the transaction. In such cases, there must be a majority of public shareholders voting in favour of the scheme, in addition to the normal majority required by the Companies Act. The stringent majority requirements therefore apply only to related party transactions undertaken through schemes of arrangement and not to all transactions (which are carried out at arm’s length).

It appears that the earlier circular treated all transactions with the same level of circumspection and imposed high burden on companies that would have made obtaining the requisite majority cumbersome, but now that is limited only to related party transactions that require greater protection for minority shareholders.

3.         Others

Under the revised circular, while valuation reports are required to be submitted in all types of schemes, they are required to be obtained from an independent chartered accountant only if there is a change in the shareholding of the listed company / resultant company. What amounts to change in shareholding pattern is defined with specificity along with illustrations.

The revised circular achieves two results. On the one hand, it clarifies the scope of applicability of the previous circular. On the other hand, it lessens the stringency of the previous circular by making some of the onerous requirements applicable to specific types of schemes where minority interests are likely to vulnerable rather than to all types of schemes.

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