SEBI revises eligibility conditions for exemptions to listed companies merging with unlisted companies
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:
(1Rule 19(2)(b) of the SCRR: The minimum offer and allotment to public in terms of an offer document shall be:
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.)
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:
All other conditions given in the 10 March 2017 circular remain unchanged.
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.
© 2017 KPMG, an Indian Registered Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.