As per provisions of Regulation 37 of SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR Regulations), every listed company proposing to undertake or being party to any scheme of arrangement is required to take no objection of stock exchanges to the draft of scheme of arrangement, before filing the same before the Tribunal. As per Regulation 94 of LODR Regulations, Stock Exchanges are in turn required to forward the said scheme to SEBI for its observation, if any.
A listed entity to comply with requirements of Regulation 37 as aforesaid, has to comply with provisions of “SEBI Master Circular on Scheme of Arrangement by Listed Entities” dated December 22, 2020 and amendments thereof (Master Circular) along with procedures /guidelines /circulars of stock exchanges if any.
Recently, to streamline the process of filing the schemes with Stock Exchanges, BSE & NSE have come out with Standard Operating Procedure (SOPs) on applications to be filed under Regulation 37 of the LODR Regulations vide their circulars dated November 2, 2021.
The Summary of SOPs so laid down by Exchanges on Scheme of Arrangement by Listed Entities are discussed herein below:
- As per the SOPs, the application under Regulation 37 of LODR regulations along with complete checklist of documents need to be filed with stock exchanges, within 15 working days of the board meeting approving the draft scheme of arrangement.
- If application is not filed within 15 days, then the company will have to obtain a fresh approval from its Board of Directors considering fresh financials and valuation report etc.
- It is further provided that the Board is to consider the scheme of arrangement within 7 days of issuance of Valuation Report.
- As far as Valuation is concerned, the Stock Exchanges have specifically provided that while preparing the Valuation Report for income approach, the valuer, for the unlisted entity, shall have to consider audited financials of last 3 years and financials not being more than 6 months old.
- The SOPs also specifically provides that that period under consideration for valuations, other than income approach, should not be older than 3 months.
- Before issuing observation letter to the listed entity, Stock Exchanges shall now, also be seeking an undertaking from such entity that financial of unlisted companies shall not be more than 6 months old at the time of submission of scheme to NCLT.
- As regard to filing of necessary documents and information as per the requirements of Master Circular, it is directed that the application to be filed complete in all respect with all the necessary documents and in case of any deficiency/inadequacy/non-compliance, only a period of 5 working days shall be allowed for rectification, failing which the fees will be forfeited and fresh application will have to be filed thereupon.
- Likewise, in case any query is raised by the Exchanges and response not submitted within the stipulated time, the Exchanges may ask for refiling with necessary rectification and fresh filing fees.
- Any fresh filing would require fresh Valuation Report, fairness opinion, recommendation of audit committee etc.
Within few days of issuance of SOPs by the Stock Exchanges, SEBI too have come out with some amendments in its aforementioned Master Circular by back-to-back two circulars dated November 16, 2021 and November 18, 2021, which too are of key importance for any listed entity proposing to undertake corporate restructuring. The Circulars become effective from the date of issuance itself.
The amendments brought in the Master Circular through these circulars are summarized below:
- As per the amendment circulars, following additional information /documents are required to be filed with the Stock Exchanges:
1.1 Along with Valuation Report, listed companies are further required to file an undertaking stating that no material event impacting the valuation has occurred during the intervening period of filing the scheme documents with stock exchanges and period under consideration for valuation.
1.2 A disclosure/declaration of any past defaults of listed debt obligations of the entities forming part of the scheme.
1.3 Also, a no objection certificate (NOC) are now required to be obtained from the lending scheduled commercial banks/ financial institutions/ debenture trustees before filing for the approvals with the stock exchanges and to be filed with the application.
2. It is now clarified that any fractional entitlement shall be now aggregated and held in a trust nominated by the board. This trust will sale these shares within 90 days from the date of allotment at such price as per the draft scheme submitted to SEBI. Subsequently, within 7 days of compensating the shareholders, reports from Auditors and from independent directors is needed to be submitted to the designated stock exchange certifying that listed company has compensated eligible shareholders.
Subsequently vide SEBI circular dated January 3, 2022, SEBI has come out with further clarification and as per this revised circular, NOC from lending scheduled commercial banks/ financial institutions/ debenture trustees are required to be submitted to the stock exchanges before the receipt of No Objection from stock exchanges in terms of Regulation 37(1) of SEBI LODR Regulation and not along-with the application for No Objection.
Conclusion:
The SOPs by stock exchanges and amendment vide SEBI circular has brought in clarity with respect to the period of financials to be considered in valuation for scheme of arrangements by factoring in the most recent financials and brought in further transparency with respect to disclosure of any material event post finalisation of valuation report till the filing of the scheme document with stock exchanges. However Stock Exchanges have further prescribed through their SOP that different period can be considered while applying different valuation approaches which is not practical as valuation is to be performed on a valuation date and so a view can be taken that for valuation under scheme of arrangement, period under consideration for valuations, should not be older than 3 months (being the lower period as prescribed in the SOP’s).
Also, the timelines so mandated by stock exchanges are very stringent and rigid in nature and does not provide for flexibility or express powers to officials to consider genuine difficulties,, this is going to prove difficult for the listed entities to get their schemes cleared from Stock Exchanges/SEBI and may also result in increased litigation before Securities Appellate Tribunal.
Moreover, compliance with the SOPs becomes more challenging in light with the further requirements of SEBI Circulars mandating NOCs from lender to be obtained before filing of schemes with Exchanges. As per SOPs, application is to be filed with exchanges within 15 days from obtaining Board approval of the scheme and obtaining NOCs from lenders including banks and financial institutions within these 15 days and making an application with Stock Exchanges within these 15 days seems practically difficult to be implemented. Although with its subsequent clarification, SEBI has eased this requirement, now requiring receipt of these NOCs before obtaining Stock exchanges approval. Still the requirement duplicates the already existing requirements under Companies Act requiring consent of creditors (representing 75% in value) under section 230 to 232 of the Companies Act.
The amendment w.r.t treatment of fractional entitlement is a welcome and fair move and will bring uniformity in dealing across entities and has also provided clarity to the shareholders for receipt of proceeds of fractional entitlement within stipulated timeframe.