Since 2013, the Securities and Exchange Board of India (SEBI) has exercised oversight in respect of schemes of arrangement proposed by listed companies, including schemes such as amalgamation, demerger, reduction of capital and the like (see here and here). Such oversight has now been enshrined in regulations 11, 37 and 94 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. By virtue of this, SEBI and the stock exchanges possess and exercise the power of reviewing schemes of arrangement in order to ensure that they comply with the appropriate securities and listing regulations. Such a power was expressly provided for in view of previous uncertainties in case law that questioned the jurisdiction of SEBI over schemes of arrangement that are otherwise implemented under the Companies Act.
In a more recent development, the board of SEBI extended its oversight to schemes arrangement such as mergers and demergers between listed companies and unlisted companies. Furthermore, SEBI has sought to impose additional conditions on schemes of arrangement between listed and unlisted companies. The motivation behind the enhanced jurisdiction of SEBI is largely to prevent backdoor listings by unlisted companies through mergers with listed companies in a manner that might adversely affect the interests of the public shareholders of the listed companies.
In this regard, the board of SEBI has proposed various measures as follows:
1. In the case of the merger of an unlisted company with a listed company, the unlisted company is required to comply with the requirement of disclosing material information as specified in the format for abridged prospectus. This is essentially to ensure that unlisted companies do not circumvent the disclosure requirements (and attendant legal risks and liabilities) that accompany an initial public offering (IPO) of such a company.
2. Following the merger, the public shareholders of the listed entity and the qualified institutional buyers (QIBs) of the unlisted company must together not less than 25% shares in the merged company. This is to ensure that the shareholding following the merger is widespread, and would accordingly prevent the merger of a very large unlisted company into a small listed company.
3. The merger would have to ensure that the listed company is listed on the stock exchange having nationwide terminals.
4. The issue of shares as part of the scheme of arrangement must comply with the pricing formula prescribed under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009. This is to prevent select groups of shareholders from receiving undue benefits under the scheme.
5. Lastly, public shareholders have been given additional rights whereby their approval through e-voting must be obtained in the following cases:
a. Where an unlisted company is merged into a listed company, which results in a reduction of the shareholding percentage of the pre-scheme public shareholders to less than 5% of the merged entity;
b. Where the scheme involves the transfer of whole or substantially the whole of the undertaking of a listed company where the consideration is provided in a form other than listed equity shares;
c. Where the scheme involves the merger of an unlisted subsidiary with a listed holding company and the shares of the unlisted subsidiary have been acquired by the holding company from the promoters.
The above three scenarios involve transactions that might impinge upon the rights and interests of public shareholders, and hence the requirement for obtaining their specific approval.
In all, these efforts by SEBI would enhance the scrutiny of reverse mergers such as those between unlisted companies and listed companies that are carried out with a view to achieving a backdoor listing of such unlisted companies. In several jurisdictions, these issues are dealt with specifically through stock exchange listing rules. It is somewhat surprising that the situation remained exposed in the Indian context, but at least now it has received specific treatment, both from the perspectives of securities regulation generally and minority shareholder protection specifically.