Sebi cracks down on 'scheming' promoters

Elaborate disclosure norms and scrutiny by exchanges for schemes of arrangements

The Securities and Exchange Board of India (Sebi) has cracked down on mergers and schemes of arrangement by listed companies. The regulator has drawn out a framework of rules and regulations to cover such transactions. Court-approved mergers and schemes of arrangements were exempt from the provisions of the takeover code. Therefore, many companies used this route to surreptitiously increase promoters’ stakes and other such actions that affect minority investor interest. In the recent past, governance groups have raised concerns and recommended institutional investors to vote against such proposals in court-convened shareholders’ meetings. Recently, restructuring activities by paintmaker Akzo Nobel, Escorts and Elecon Engineering were under shareholder scrutiny.

According to the scheme of reconstruction or amalgamation being sanctioned by the high court under certain sections of the Companies Act, the listed companies desirous of getting their equity shares listed after merger/demerger/amalgamation, etc are required to seek an exemption from Sebi under certain provisions of the Securities Contracts (Regulation) Rules (SCRR).

In the recent past, Sebi has received applications, seeking exemption, from certain entities containing, inter alia, (a) inadequate disclosures, (b) convoluted schemes of arrangement and (c) exaggerated valuations. Sebi is of the view that granting listing permission or exemption from the requirements of Rule 19(2)(b) of SCRR, 1957 based on such applications may not be in the interest of minority shareholders. “At the same time, if listing permission or such an exemption is delayed or denied, it would add to the uncertainty and would deprive shareholders of an exit opportunity. In order to avoid such situations, the existing requirements are being revised,” Sebi said in a circular.

The new rules will improve the process, but may lead to delays, said experts. “Sebi has drastically tightened the norms relating to approval of schemes of merger/demerger involving listed companies. Now, every scheme would require clearance of Sebi, besides stock exchanges. Approval of shareholders would also be through postal ballot and e-voting. Good moves towards wider participation and transparency. Only concern may be delay in the approval process,” said Manoj Kumar, assistant vice-president, Corporate Professionals, a corporate services provider.

Listed companies planning for a scheme of arrangement has to place a valuation report obtained from an independent chartered accountant before its audit committee. “The audit committee shall furnish a report recommending the draft scheme, taking into consideration, inter alia, the aforementioned valuation report,” the Sebi circular said. After receiving the draft scheme, the concerned bourse should forward the same to Sebi within three working days. Exchanges have to process the draft scheme — including seeking clarifications from company and/or opinion from an independent chartered accountant — and forward their ‘objection/no-objection’ letter to the market regulator.

Upon receipt of the letter, Sebi will provide its comments on the draft scheme to the stock exchanges. Sebi would endeavour to provide its comments on the draft scheme to the stock exchanges within 30 days, subject to certain conditions.

According to existing norms, a listed company should file any scheme/petition, proposed to be filed before any court or tribunal with the stock exchange for approval, at least a month before it is presented to the court or tribunal. Companies are also required to include the ‘complaints report’ in the notice sent to the shareholders, while seeking their approval of the scheme. The report should be given by the stock exchanges to Sebi before the market regulator communicates its comments on the draft scheme.