Companies that are undertaking a delisting of equity shares must be prepared to endure an embargo that would prevent them from listing their shares for a further period of time (five or ten years, depending upon the circumstances). Such a restriction is contained in regulation 30(1) of the SEBI (Delisting of Equity Shares) Regulations, 2009. This is to prevent companies from retreating the capital markets and then accessing them again at relatively short spurts.
The scope of regulation 30(1) was called into question in a request for informal guidance that Arvind Limited made to the Securities and Exchange Board of India (SEBI). The shares of Arvind’s subsidiary, The Arup Engineering Limited, were listed on the Ahmedabad Stock Exchange (ASE). The shares were delisted in June 2015 in accordance with the Delisting Regulations, thereby attracting a five-year embargo on issue of further shares. However, the Arvind Group proposes to undertake a restructuring by which Arvind Limited will establish a wholly owned subsidiary (Newco) into which Arvind will demerge its engineering undertaking. In consideration for the same, Newco will issue shares to the shareholders of Arvind. The Group also proposes to either merge Arup Engineering with Newco or to demerge the engineering undertaking of Arup Engineering into Newco; in either scenario, Newco will issue shares to the shareholders of Arup Engineering in consideration for the merger or demerger, as the case may be. The transaction is proposed to be effected by way of a scheme of arrangement under sections 230-232 of the Companies Act, 2013.
The principal question posed for SEBI’s consideration was whether the embargo under section 30(1) of the Delisting Regulations would apply to the issue of shares by Newco to the shareholders of Arup Engineering within the five-year period following the delisting of Arup Engineering. The argument made by Arvind was that the embargo applies to the issue of the same kind of securities that were delisted, and indeed by the same company that had initially issued the delisted securities. In the present case, although the new shares were being issued to the shareholders of Arup Engineering, they were not being issued by the company whose shares were the subject matter of delisting. In other words, while there is some commonality among the shareholders whose shares were delisted and who are receiving new shares, the issuer is altogether different (namely Arup Engineering whose shares were delisted, and Newco which proposes to issue new shares).
In a somewhat cryptic but seemingly favourable response, SEBI provided informal guidance to the effect that the “issuance of equity shares of New Co to the shareholders of Arvind Mills Limited and [Arup Engineering Limited] would be permissible …”. This would in turn suggest that the embargo under regulation 30(1) of the Delisting Regulations would not apply to the situation. SEBI’s clearance is, however, subject to compliance with the relevant regulations relating to listing of shares pursuant to schemes of arrangement and more generally on issuance of capital.
Although a somewhat technical issue, SEBI has dealt with it from a broader perspective by not only interpreting the scope of regulation 30(1) of the Delisting Regulations but also considering the objective of the embargo, all of which can only be inferred since no reasons have been provided. At the same time, it may be imprudent to treat this as a loophole to surmount the embargo because the scheme of arrangement would not only have to pass muster with the stock exchanges and SEBI, but also with the National Company Law Tribunal. Any attempt to circumvent the embargo by devising a scheme for that purpose could be forestalled by any of these regulators or adjudicatory bodies, including at the instance of aggrieved parties.