New SEBI regulations on Indian Companies Mergers and acquisitions
In February 2017, in order to protect the interests of public shareholders, the Securities and Exchange Commission of India (SEBI) approved a number of proposals to modify and streamline the merger and merger rules of listed and unlisted entities. Such new regulations of SEBI will target some large-scale Of non-listed companies hope to achieve the goal of going public through reverse merger of a small listed company.
In addition, SEBI has also
raised the disclosure standards. Non-listed companies that merge with listed
companies must meet the requirements for disclosure of materials and
information.
SEBI, as the security regulator in India and the protector of the interests of public shareholders, has been paying attention to the risks associated with the governance of certain corporate mergers and acquisitions. In order to achieve the above objectives, SEBI revised the company’s listing-related agreements, requiring the stock exchange to pre-approve all mergers and acquisitions plans of listed companies and formulating strict guidelines for listed companies.
At the board meeting held in February 2017,
SEBI has revised the existing management framework of the merger and spin-off
plan. At the same time, it also stated that in order to streamline and strengthen
regulations, mergers and acquisitions of listed companies can only be
classified as listed companies when they are listed on stock exchanges with
national trading terminals.
After further testing and analysis of the latest trends and
arrangements proposed by listed companies, SEBI has now approved the
arrangements for approval of listed and non-listed entities mergers and
mergers. According to the revised specifications, SEBI stated that the purpose
of modifying such regulations is to "expand the proportion of public
shareholding and prevent non-listed companies from adopting reverse
mergers—namely, backdoor listings."
Proposed outstanding features
Involve more public shareholders
a. The shareholding ratio of expected shareholders of listed
companies and qualified institutional buyers of non-listed companies shall not
be less than 25% of the combined listed company.
b. The following plans need to be approved by public
shareholders, and need to be voted through the electronic voting mechanism:
1) The merger plan/plan of the unlisted company will reduce
the proportion of the total assets of the merged company by more than 5%, which
requires public shareholders to vote;
2) The consideration for transferring all or substantially
all of the business of a listed company in a form other than the listed equity;
3) The unlisted subsidiary is merged with the listed holding
company, and the shares of the unlisted subsidiary are acquired by the holding
company from the promoter/sponsor group.
Tighter disclosure standards
a. Non-listed companies must compulsorily disclose all
important information in the form of a brief prospectus before merging with a
listed company.
b. Issuing shares to a larger audience. In order to ensure
that all types of shareholders receive fair treatment in such plans, listed
companies must strictly follow the "ethical and law-abiding" pricing
methods.
c. The wholly-owned subsidiary (WOS) merges with its parent
company. SEBI also believes that it is necessary to relax certain procedures
concerning the arrangement of the merger between WOS and its parent company.
This scheme does not require submission or pre-approval from SEBI. These plans
will need to be submitted directly to the stock exchange for the limited
purpose of disclosure.
Other key recommendations
a. Non-listed companies can only merge with listed companies
if they are listed on a stock exchange with a national trading terminal.
b. The company needs to submit a compliance report to confirm
compliance with the SEBI circular, and the accounting standards need to be
certified by the company secretary, chief financial officer, and managing
director.
Recent reports in the press indicate that SEBI has
effectively avoided listing obligations and disclosed an alarming number of
large non-listed companies through mergers with small listed companies. In
order to alleviate concerns, the SEBI Board of Directors has approved these
recommendations to ensure greater public participation and review of these
plans, thereby protecting the interests of public shareholders.
Generally speaking, these recommendations will increase the compliance burden of listed companies merging with non-listed companies. However, certain suggestions, such as the nature of important information that non-listed companies need to disclose in a simplified prospectus, will require SEBI to be more clarified. This is because at present, non-listed companies need to provide an information memorandum in order to obtain approval for the listing of their shares. But the exact distinction needs to be refined by SEBI.
Of
course, in this new regulation, SEBI is likely to over-regulate all types of
mergers.
In addition, in accordance with Article 233 of the Indian
Companies Act 2013, the SEBI board of directors agreed to amend the “approval
requirements” to only “disclosure specifications” for wholly-owned subsidiaries
(WOS) that quickly merged with their parent companies. This distribution will
reduce any ambiguity in sections 230 and 233 of the 2013 Act.
Although SEBI’s regulatory intent may be clear, there has not
been any formal amendment to the relevant SEBI regulations and therefore does
not have legal effect. The specific rules will be promulgated from July to
September 2017. At that time, the revised regulations need to be further
analyzed to understand the extent to which SEBI's intentions are reflected.
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