The regulator has drawn out a framework of rules and regulations to cover such transactions. Court-approved mergers and schemes of arrangements were exempt from the provisions of the takeover code. Therefore, many companies used this route to surreptitiously increase the promoters’ stakes and other such actions that affected minority investor interest.
In the recent past, governance groups have raised concerns and recommended institutional investors to vote against such proposals in court-convened shareholders’ meeting. Recently, restructuring activities by paint maker Akzo Nobel, Escorts Ltd and Elecon Engineering were under shareholder scrutiny.
Under the scheme of reconstruction or amalgamation being sanctioned by the High Court under certain sections the Companies Act, the listed companies desirous of getting their equity shares listed after merger/de-merger/amalgamation etc. were required to seek an exemption from Sebi under certain provisions of the Securities Contracts Regulation Act.
In the recent past, Sebi has received applications, seeking exemption, from certain entities containing, inter alia, (a) inadequate disclosures, (b) convoluted schemes of arrangement, (c) exaggerated valuations, etc. Sebi is of the view that granting listing permission or exemption from the requirements of Rule 19(2)(b) of SCRR, 1957 based on such applications may not be in the interest of minority shareholders. At the same time, if listing permission or such an exemption is delayed or denied, it would add to the uncertainty and would deprive shareholders of an exit opportunity. In order to avoid such situations, the existing requirements are being revised,” Sebi said in a circular.
The new rules will improve the process but may lead to delays, said experts. Manoj Kumar, Assistant vice president, Corporate Professionals said, “Sebi has drastically tightened the norms relating to approval of schemes of merger/demerger involving listed companies. Now every scheme would require clearance of SEBI besides stock exchanges. Approval of shareholders would also be through postal ballot and eVoting. Good moves towards wider participation and transparency. Only concern may be delay in approval process.”
Listed companies planning for a scheme of arrangement has to place before its Audit Committee the Valuation Report obtained from an Independent Chartered Accountant. “The Audit Committee shall furnish a report recommending the draft scheme, taking into consideration, inter alia, the aforementioned valuation report,” the circular said. After receiving the draft scheme, the concerned bourse should forward the same to Sebi within three working days.
Exchanges have to process the draft scheme — including seeking clarifications from company and/or opinion from Independent Chartered Accountant — and forward their ‘Objection/No-Objection’ letter to the market regulator.
Upon receipt of ‘Objection/No-Objection’ letter from the stock exchanges, Sebi shall provide its comments on the draft scheme to the stock exchanges. Sebi would endeavour to provide its comments on the draft scheme to the stock exchanges within 30 days, subject to certain conditions.
As per existing norms, a listed company should file any scheme/petition, proposed to be filed before any Court or Tribunal with the stock exchange for approval, at least a month before it is presented to the Court or Tribunal.
Companies are also required include the ‘Complaints Report’ in the notice sent to the shareholders while seeking approval of the scheme. The ‘Complaints Report’ should be given by the stock exchanges to Sebi before the market regulator communicates its comments on the draft scheme.
Shareholders voting against management/promoter moves:
- Feb 2012, 44.9 per cent of public shareholders voted against a merger proposal by Akzo Nobel
- October 2012, 18.4 per cent of the equity shareholders by value or about a third of public shareholders in Elecon Engineering voted against a restructuring proposal
- Jan 2013, some Spicejet shareholders vote against Promoters’ plan to hike stake