SEBI Enhances Oversight on Schemes of Arrangement

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
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:
       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
       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
       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
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

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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