The Securities and Exchange Board of India (SEBI) issued a circular on 4 February, withdrawing its earlier circular dated 3 September 2009, setting stringent requirements for listed companies and stock exchanges in relation to a scheme of arrangement under the Companies Act, 1956. Subsequent to this, a circular clarifying the applicability and various provisions of the February circular was issued by SEBI on 21 May.
The February circular spurred debate mostly premised on lack of clarity and detachment from the practical reality of most corporate restructurings. The laudable objective behind the circular was to remedy inadequate disclosures, convoluted schemes of arrangement and exaggerated valuations, to protect the interests of minority shareholders and other stakeholders. The key question is whether the provisions in the February circular are essential to achieve the objective underlying it or whether they onerously limit the autonomy of companies to conduct business in accordance with shareholders’ democracy.
The May circular clarifies that the provisions apply to all listed companies undertaking a scheme of arrangement, irrespective of whether exemption is sought under the Securities Contracts Regulation Rules, 1957. It also clarifies other contentious issues, such as when a valuation report from an independent chartered accountant (CA) has to be obtained and the requirement that a majority of public shareholders vote in favour of the draft scheme. These clarifications have brought breathing space for companies. But the February circular is still fettered with conflicting legal standards.
Firstly, the importance of a fairness opinion provided by a CA is overemphasized. A plethora of judicial decisions establish that courts sanctioning a scheme should refrain from interfering in the valuation arrived at, unless there is apparent illegality. Business prudence is given precedence. Nonetheless, the February circular dictates repeatedly that the valuation report (VR) has to be scrutinized and subjected to a fairness opinion by the CA. Additionally, to obtain an authenticated VR, companies will need to disclose confidential business information, which may lead to business prudence being ignored and sidelined. Seeking the CA’s opinion on the VR by the stock exchange and SEBI is a time consuming process which will delay the filing of the draft scheme before the court. This is a matter that merits reconsideration.
Secondly, an applicant cannot file a scheme with the court until and unless SEBI provides its comments on the draft scheme. Under the February circular, SEBI “shall endeavour” to provide its comments within 30 days. Surprisingly, SEBI has moved away from its earlier prescription as contained under clause 24(f) of the Listing Agreement, which imposed a 30-day time frame.
This also is at loggerheads with clause 230(3) of the Companies Bill, 2012, which requires that SEBI or any such regulator will have to furnish its representations within 30 days and if no representation is made, it would be considered as a deemed consent to the scheme. The indefiniteness involved would be a matter of concern and immense practical inconvenience.
Thirdly, the February circular enables a minority of public shareholders to block a scheme, even if it is approved by the majority in accordance with Companies Act or the Companies Bill. The bill requires approval by three-quarters in value and one-half in number of the members present and voting on the scheme, while the act requires approval by a majority in number representing three-quarters in value of the persons present and voting. This is a stark deviation from the ideology of shareholders’ democracy, which is at the base of corporate structure.
Lastly, as per the February circular, the observation letter issued by the stock exchange is valid for 180 days. But this may clash with the timeline under the competition law regime, which requires the Competition Commission of India to approve a scheme within 210 days from the day of the company’s board resolution in that regard. This could lead to the entire process followed by a company under the circular being futile.
It is imperative that SEBI not only acts as a regulator but also as a facilitator. The anomalies that the February circular contains could stifle the process of synergy in manifold ways. SEBI undoubtedly should protect the interests of minority shareholders and other stakeholders. However, this objective cannot be detached from the practical nuances faced by companies in India that respect shareholders’ democracy and seek maximum benefit for all involved. Adequate consideration should be provided to the underlying objectives of companies undergoing the restructuring process. A holistic approach is indeed the need of the hour.
Inder Mohan Singh is a partner and Arya Tripathy is an associate at Amarchand & Mangaldas & Suresh A Shroff and Co, New Delhi. The views expressed in this article are those of the authors and do not reflect the position of the firm.
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