Mumbai, June 26

The Securities and Exchange Board of India (SEBI) may overhaul norms for scheme of arrangement for merger of listed and unlisted entities.

The regulator could widen the number of circumstances under which majority of minority shareholder approval is required, tweak contingency provisions and valuation parameters.

Increase of promoter shareholding beyond 75 per cent on a fully diluted basis (say, if the scheme provides for issuance of convertible instruments) and the rise of promoter liabilities in listed entities are areas of concerns.

In 2018, for instance, an issuance of convertible preference shares by Fortune Financial would have exceeded the 75 per cent promoter holding threshold. The scheme was rejected back then.

“SEBI’s concerns are largely around fairness of the scheme to public shareholders. The more complex a scheme, the more cautious the regulator will be,” said Vaibhav Gupta, Partner, Dhruva Advisors.

Companies deploy contingency schemes during restructuring exercises that are sometimes complex in nature. These are frowned upon by the regulator as it is difficult to envisage the end result of the schemes.

“In cases where the scheme is contingent upon a certain event, there is scope for substantial changes in share price or volume during the announcement and withdrawal of the scheme, adversely impacting small shareholders,” said Manoj Kumar, Partner & Head - M&A and Investment Banking, Corporate Professionals.

“Lately, there have been cases where SEBI has mandated public shareholders’ nod even for situations which do not require such approval. The regulator has been asking questions on valuations, especially in instances where the promoter entity is merging into a listed one,” said an official.

He said the regulator may prescribe parameters basis which valuations and the share swap ratio will have to be undertaken, in addition to the net book value, DCF and market approach parameters used today.

An email sent to SEBI did not get a response.

Enough safeguards?

At present, if a promoter entity is involved in a scheme, majority of minority approval is required, where promoters are not permitted to vote.

“Such approval is required in five circumstances, mainly dealing with the promoter entity being involved, dilution of public shareholding by more than 5 per cent and divestment of substantial undertaking. Since the majority of cases are covered in these scenarios, it may not be prudent to increase the ambit of public shareholders’ approval at this stage,” said Binoy Parikh, Executive Director, Katalyst Advisors.

Further, under corporate law, all schemes require shareholder approval from at least the majority of shareholders, constituting 75 per cent in value of the shareholders present and voting on the scheme. Such approval is usually sought in an NCLT-convened meeting with NCLT-appointed Chairperson and scrutinisers, said Gupta.

“Both the corporate law and the SEBI regulations are already quite robust to have the public shareholders’ views adequately represented during the approval process,” he said. “Shareholder proxy advisory firms also issue their advisories on schemes of arrangement, which the public shareholders can use to evaluate the scheme.”

According to Parikh, valuation parameters are relevant when there are related parties involved and not when there is a deal scenario between unrelated parties. In such cases, the parameters under the DCF method (like the veracity of the projections or discount rate) or use of comparable companies with similar size or business under the market approach, could be prescribed in further detail to make it more robust, he said.

“Though a detailed SOP relating to valuation is already there, SEBI and stock exchanges try to go deep into the valuation parameters, specially the matrix applied to the valuation of unlisted companies vis-a-vis the listed one,” said Kumar.

There have been cases in the past where a particular scheme of arrangement is linked to another restructuring exercise. This is primarily undertaken for commercial parameters and optimisation of timelines. For example, a restructuring not involving a listed entity is kept outside the purview of a scheme involving a listed company.

“If, in the ultimate analysis, it can be demonstrated that in no circumstance would the promoter holding go beyond 75 per cent, and any increase in shareholding is backed by a valuation report having contingency provisions, would ease and facilitate a lot of complex group restructurings,” Parikh said.