SEBI Clarifies on Schemes of Arrangement

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:
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,
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
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
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.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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