SEBI revises eligibility conditions | KPMG | IN

First Notes - 3 October 2017

SEBI revises eligibility conditions

SEBI revises eligibility conditions for exemptions to listed companies merging with unlisted companies

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Background

A listed entity that desires to undertake a scheme of arrangement with an unlisted entity under the requirements of the Companies Act, 2013 (2013 Act) is required to obtain a no objection letter or an observation letter from the stock exchange. The stock exchange is required to forward the scheme and relevant documents to the Securities and Exchange Board of India (SEBI). Additionally, the stock exchange has to ensure that the draft scheme of arrangement is in compliance with securities laws.

The Securities Contracts (Regulation) Rules, 1957 (SCRR), inter alia, lay down the rules for issuers for listing of securities on a recognised stock exchange. Specifically, Rule 19(2)(b)1 of the SCRR provides requirements for minimum offer and allotment to public in terms of an initial public offer. It specifically requires that offer size should be 25 per cent of equity or debenture convertible into equity.

A listed company under a scheme of arrangement with an unlisted company can get an exemption from Rule 19(2)(b) by applying to SEBI under Rule 19(7) of the SCRR. The SEBI’s circular (relating to relaxation under Rule 19(7)) issued on 10 March 2017 provides detailed conditions that have to be fulfilled by a company for taking an exemption from Rule 19(2)(b). These conditions are specified in Clause III(A)(1) (of SEBI circular dated 10 March 2017) and are as follows:  

  • The equity shares sought to be listed are proposed to be allotted by the unlisted issuer (transferee entity) to the holders of securities of a listed entity (transferor entity) pursuant to a scheme of reconstruction or amalgamation (scheme) sanctioned by National Company Law Board (NCLT) under Section 230-234 of the 2013 Act
  • At least 25 per cent of the post-scheme paid up share capital of the transferee entity shall comprise of shares allotted to the public shareholders in the transferor entity
  • The transferee entity will not issue/reissue any shares, not covered under the draft scheme of arrangement
  • As on date of application, there are no outstanding warrants/instruments/ agreements which give right to any person to take the equity shares in the transferee entity at any future date. If there are such instruments stipulated in the draft scheme, the percentage referred to in para (b) above shall be computed after giving effect to the consequent increase of capital on account of compulsory conversions outstanding as well as on the assumption that the options outstanding, if any, to subscribe for additional capital will be exercised and
  • The shares of the transferee entity issued in lieu of the locked-in shares of the transferor entity will be subject to lock-in for the remaining period. (Emphasis added)

(1Rule 19(2)(b) of the SCRR: The minimum offer and allotment to public in terms of an offer document shall be:

  • At least 25 per cent of each class or kind of equity shares or debenture convertible into equity shares issued by the company, if the post issue capital of the company calculated at offer price is less than or equal to INR1,600 crore,
  • At least such percentage of each class or kind of equity shares or debentures convertible into equity shares issued by the company equivalent to the value of INR400 crore, if the post issue capital of the company calculated at offer price is more than INR1,600 crore but less than or equal to INR4,000 crore,
  • At least 10 per cent of each class or kind of equity shares or debentures convertible into equity shares issued by the company, if the post issue capital of the company calculated at offer price is above INR4,000 crore:

Provided that the company referred to in sub-clause (ii) or sub-clause (iii), shall increase its public shareholding to at least 25 per cent within a period of three years from the date of listing of the securities, in the manner specified by the SEBI:

Provided further that this clause shall not apply to a company whose draft offer document is pending with the SEBI on or before the commencement of the Securities Contracts (Regulation) Third Amendment Rules, 2014, if it satisfies the conditions prescribed in clause 19(2)(b) of the SCRR as existed prior to the date of such commencement.)

New development

The SEBI, through its circular dated 21 September 2017 revised Clause III (A)(1)(b) of the aforementioned requirement and has provided one year’s time to increase the public shareholding to 25 per cent if a company meets certain conditions. The new requirement is as follows:

“At least 25 per cent of the post-scheme paid up share capital of the transferee entity shall comprise of shares allotted to the public shareholders in the transferor entity:

Provided that an entity which does not comply with the above requirement may satisfy the following conditions:

  • The entity has a valuation in excess of INR1,600 crore as per the valuation report
  • The value of post-scheme shareholding of public shareholders of the listed entity in the transferee entity is not less than INR400 crore
  • At least ten per cent of the post-scheme paid up share capital of the transferee entity comprises of shares allotted to the public shareholders of the transferor entity and
  • The entity shall increase the public shareholding to at least 25 per cent within a period of one year from the date of listing of its securities and an undertaking to this effect is incorporated in the scheme.”

(Emphasis added)

All other conditions given in the 10 March 2017 circular remain unchanged.

Our comments

The revised norms have eased the eligibility requirements for entities seeking exemption from stringent conditions of Rule 19(2)(b) for a scheme of arrangement between listed and unlisted entities. Now they have one year’s time to increase public shareholding from 10 per cent to 25 per cent provided certain conditions are met.

To access the text of the SEBI circular, please click here.

 

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