Nov 22, 2021

SEBI tightens the norms for M&A transactions

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Before the year 2013, all the listed Companies proposing to enter into any kind of Scheme of Arrangement were required to obtain prior approval of the concerned Stock Exchange(s) only. However, this scenario was changed when SEBI came up with a circular dated May 21, 2013 which mandated all the listed companies to seek no objection from SEBI also.

Thereafter, on 10th March, 2017, SEBI issued a circular which significantly revised the then existing regulatory framework for the Scheme of Arrangements. Since then, SEBI has been issuing various amendment/modification from time to time in addition to the said circular, laying down the additional requirements to be complied by listed entities while contemplating schemes of arrangements. Owing to the multiplicity of the circulars and in order to enable the users to have access to all the applicable Circulars at one place, SEBI issued its Master Circular on 22nd December, 2020 (“Master Circular”) on filing of Scheme of Arrangements by the listed entities. The Master Circular is a compilation of all the relevant, updated and operational circulars issued by SEBI which deal with scheme of arrangement.

Now, recently, on 16th November, 2021 and 18th November, 2021, SEBI has further made amendments to its Master Circular, through which new provisions are inserted and certain existing provisions are modified. The stock exchanges also issued its Standard Operating Procedure (“SOP”) to be followed by listed entities for seeking No Objection in addition to Master Circular.  The same has been discussed in detail herein below:

  1. Amendments in submission of Valuation Report

    Earlier, as per the Master Circular, 2020, there were no specific provisions with respect to the period under consideration for valuations, however, as per the SOP issued by the stock exchanges recently, the same has been fixed to be not older than 3 months from the date of performing valuation.

    As per the SOP issued by Stock Exchanges the Board of Directors of the listed entity has to consider the Scheme of Arrangement within 7 days from the issuance of Valuation Report.  

    Further, as per SEBI’s recent amendment, the valuation report will now be accompanied with an undertaking from the listed Company stating that no material event impacting the valuation has occurred during the intervening period of filing the scheme documents with Stock Exchange and period under consideration for valuation. Meaning thereby, if any substantial material event will take place during the intervening period of filing the scheme documents with Stock Exchanges and period under consideration for valuation then same has to be considered by Valuer and necessary amendments in the Valuation Report/Share Exchange Ratio are to be done. 

  2. Acknowledgement of Past Defaults of listed debts

    With a view to extend its helping hand to the investors to take an informed decision, SEBI has now mandated the listed Companies to disclose all their past defaults with respect to their listed debt obligations. Further, in case there is no such past defaults, the listed entity shall submit an undertaking confirming the same.

  3. Green Signal from the Lending Scheduled Commercial Banks and Financial Institutions and Debenture Trustees (‘lenders’)

    Through the amendments dated 16th November, 2021 and 18th November, 2021, SEBI has casted an obligation on listed Company to obtain prior NOC of the lenders and submit the same with Stock Exchanges while filing application for NOC. However, the language of the circular does not specify any percentage of the consent required from the said lenders. Apparently, it seems 100% NOC of the lenders would be required which is much beyond the threshold limit prescribed under the Companies Act, 2013 i.e. majority of persons representing three-fourths in value of the creditors. Further, the timeline introduced in this regard is also very stringent.

    We understand that the rationale behind inserting such a provision by SEBI is that earlier, even after getting a “No Objection” from the Stock Exchanges and SEBI, various Schemes got failed on account of non-receipt of the approval from the Secured lenders. This caused unintentional & unnecessary volatility in the price of shares of the concerned listed Company(ies) which ultimately was not in the interest of the common investors.

    However, practically, there are strong difficulties in implementation of the above directions of SEBI, as the SOP issued by Stock Exchanges provides that the Scheme of Arrangement seeking Stock Exchange’s NOC shall be submitted to the Exchange along with all the documents as per the Stock Exchange Checklist within 15 working days of board meeting approving the draft scheme of arrangement. In case the application is not submitted within 15 working days, the company shall take fresh approval from its board considering fresh financials, valuation report, etc. Also, the formats of the NOCs are entirely different i.e. for the purpose of filing the application with Stock Exchange, no specific format is prescribed. However, for the purpose of getting approval of the Scheme from NCLT, it is mandatory to file NOC by way of Affidavit from the creditors, else a meeting of the said creditors for approving the Scheme of Arrangements is required to be held in the supervision of NCLT.

    Considering the above SOP of Stock Exchange, conclusively the listed companies are expected to get the NOC from the lending scheduled commercial banks/financial institutions/debenture trustees within 15 working days of board meeting approving the draft scheme of arrangement, which is practically very difficult.

    Hence, SEBI must take note of the practical challenges which may arise. SEBI may relax the above provisions by introducing the requirement to give an undertaking that the listed Company will get consent of banks/financial institutions/debenture trustees as required under the provisions of the Companies Act, 2013 for approval of the Scheme of Arrangement from the National Company Law Tribunal, so that all the laws governing the Scheme of Arrangements could be aligned with each other.

  4. Treatment of Fractional Entitlements

    Earlier, there were no prescribed provisions to deal with the fractional entitlements, say if as per the Share Entitlement/Exchange Ratio, the no. of shares to be allotted to a shareholder comes to be “1.3” shares for every “1” share he holds¸ there were no particular provisions to deal with the fraction of “0.3” shares. Accordingly, the Companies used to follow ways as per their convenience, like:

    1. Rounding off the fraction to the nearest integer;
    2. Lapse the fractional part;
    3. Transferring the fractional part into a trust/fund nominated by the board of Directors and then distributing the shares money evenly to all the shareholders for their benefits;

    SEBI found the third way to be “Just and Fair” and thus, has now mandated that the fractional entitlements, if any, shall be aggregated and held by the trust, nominated by the Board in that behalf, who shall sell such shares in the market at such price, within a period of 90 days from the date of allotment of shares, as per the draft scheme submitted to SEBI.

    Now, SEBI has also made it compulsory for the Audit Committee and the Independent Directors of the listed Company to look after that the eligible shareholders have been duly compensated and to report the same to SEBI within 7 days of compensating the shareholders.

    Further, to ensure that the compliances are being followed in true spirit, SEBI has asked the Stock Exchanges to intimate any non-compliance on quarterly basis. Any misstatement or furnishing of false information with regard to the said information shall make the listed entity liable for punitive action as per the provisions of applicable laws and regulations.

  5. Forfeiture of Processing fee paid by the Company for processing of Application

    The Stock Exchanges has clarified that in case the documents are incomplete or any clarification needed or any material inadequacies / non-compliances with SEBI Master Circular or Stock Exchange checklist / SOP on submission of documents are observed in the documents by the Exchange, the Scheme shall be returned to the Company for necessary rectifications. Further, the exchange will give only a period of 5 days to the Company for rectification of same. It is important to note that on expiry of aforesaid timelines if the company is unable to make submissions, then any fees paid by the Company for processing of the application shall be forfeited by the Exchange / Regulator and the Scheme documents shall be returned to the Company.

    This is good move to reduce the long timeline for issuance of No objection to the Scheme of Arrangement however, many times due to technical glitches and due to nature of question the reply cannot be reached to Stock Exchange, in such case exchange has to take proper call and should allow company to take appropriate time to respond the query of exchange.   


    In nutshell, the new provisions introduced with respect to the timelines of submission of Valuation Report, the period to be considered for valuations, timeline of taking approval of the Board of Directors and filing application with the Stock Exchange, treatment of Fractional Entitlements are welcome moves and have served a better clarity. However, the provisions with respect to the requirement of approval from all the lending scheduled commercial banks/financial institutions/debenture trustees within 15 working days from the date on which Board approving the Scheme of Arrangement is practically very difficult. It will be a big challenge for the listed entity as no bank and financial institution has such kind of fast processes in which they can analyse the Scheme and issue the NOC in such a stringent time period. The NOC provisions of Master Circular (including recent amendments) must be aligned with the provisions of Companies Act, 2013 and must facilitate listed entities in “Ease of doing business” in cases of Scheme of Arrangements. Further, we feel in M&A Transactions, many practical procedural difficulties are existing in the present applicable laws and in such situation any provision which may create further obstacles will be a set-back for M&A Transactions in India and it will derail the growth of different growing sectors of the country. Thus, we believe SEBI will consider the practical difficulties and will make necessary amendments in this regard.

Important Links:

  1. Master Circular
  2. SEBI Circular dated 16th November, 2021
  3. SEBI Circular dated 18th November, 2021
  4. Standard Operating Procedure issued by the NSE
  5. Standard Operating Procedure issued by the BSE
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