Board releases circular on schemes of arrangement

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The Securities and Exchange Board of India (SEBI) issued a circular dated 3 January 2018 giving effect to certain relaxations in the regulatory framework governing schemes of arrangements (which includes mergers/demergers) involving listed companies, which comprised a SEBI circular dated 10 March 2017 and SEBI circular dated 21 September 2017.

The March 2017 circular prescribed the requirements and process to be followed before a scheme of arrangement is submitted for the sanction of the National Company Law Tribunal (NCLT), and once the sanction has been obtained from the high court or NCLT, as the case may be.

The 2018 circular provides certain clarifications and certain amendments for easing of processes and operation for listed entities, which include the following: (1) the exemption from the application of the March 2017 circular, which had previously been available to schemes of merger of wholly owned subsidiaries (WOS) with their parent companies, has now also been made available, by way of the 2018 circular, to schemes of merger of divisions of the WOS with the parent company. (2) Under the March 2017 circular, public shareholders (of the listed entity) and the qualified institutional buyers (of the unlisted entity) should hold not less than 25% in the combined entity pursuant to the proposed scheme of arrangement. The 2018 circular clarifies that the 25% threshold will apply on a fully diluted basis. (3) The promoter of an unlisted entity into which a listed company or its division is merging is required to lock in their shares in the manner specified in the March 2017 circular. The 2018 circular has relaxed this requirement in respect of: (a) any pledge of shares in favour of scheduled commercial banks/public financial institutions, as collateral security for loans; and (b) transfer of shares among promoters, as long as the lock-in period continues after the transfer.

The business law digest is compiled by Nishith Desai Associates (NDA). NDA is a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley and Munich. It specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.