Sebi's merger veto to block backdoor delistings

Companies Act allowing delisting through merger with unlisted company creates regulatory gray area

The Securities and Exchange Board of India’s power to block merger transactions may help act as a temporary measure to address a regulatory gray area created by a provision in the new Companies Act, which seems to pave the way for backdoor delistings.

The Companies Act allows an unlisted company to be merged with a listed company where the resultant entity can be an unlisted one. This would essentially allow any listed company on the bourses to be delisted through such a merger, which is not in line with Sebi regulations for delisting, according to experts.

“The Companies Act seems to allow for such delistings. Sebi’s power to block mergers can probably be used to block such deals for the time being, however, there should be alignment between the two regulations,” said a senior official with a domestic investment bank.

A lawyer specialising in securities law too said that there is a lack of alignment between the two which can potentially create an avenue for backdoor delistings.

Sebi had required companies mulling mergers or demergers to seek approval from it, in addition to the stock exchanges in a circular issued in 2013. The move was seen to be a step towards helping to protect minority shareholders from arrangements which are not in their interest.