In India, M&A is primarily governed by Sections 230 to 240 of the Companies Act 2013 and the rules prescribed thereunder. Although the term 'merger' is not defined in the act, as a concept, it refers to the transfer of an undertaking or the properties or liabilities of one or more companies to another company.
Before a scheme of merger, demerger, amalgamation or arrangement (scheme) is effectuated, the transferor and transferee must obtain certain regulatory approvals from various government authorities depending on the type of entity involved and the sector in which the transferor and transferee operate, including:
- the registrar of companies;
- the regional director;
- the official liquidator;
- the Income Tax Department;
- the sectoral regulator (if any); and
- the National Company Law Tribunal.
In addition to these regulatory approvals, where a scheme involves a company whose securities are listed on a stock exchange, an additional layer of regulatory compliance is required under the Securities and Exchange Board of India Act 1992 and the rules and regulations framed thereunder. A scheme is undeniably a significant event for a listed company and its investors. In order to protect the interests of such stakeholders, enhanced transparency, timely disclosures and stringent checks by the company's committees are crucial.
In order to achieve greater transparency in this respect, on 10 March 2017 India's capital market regulator, the Securities Exchange Board of India (SEBI), issued a circular on this matter. However, owing to market dynamics and in an attempt to clear certain regulatory cobwebs, SEBI has now issued an additional circular (SEBI/HO/CFD/DIL1/CIR/P/2020/215), dated 3 November 2020, which applies to all schemes filed with a stock exchange after 17 November 2020.
Enhanced obligations for audit committees
Before proceeding with a scheme, a company's audit committee must assess the scheme's viability and note any red flags in its report. In line with the stakeholder-centric objective of the 2020 circular, an audit committee must now consider the following additional factors when assessing a scheme:
- the need for the merger, demerger, amalgamation or arrangement;
- the rationale for the scheme;
- the synergy of the business of the entities involved in the scheme;
- the scheme's impact on shareholders; and
- a cost-benefit analysis of the scheme.
Stock exchanges to issue no-objection letters
Previously, stock exchanges had to submit an observation letter on a draft scheme to SEBI. Now, the novel concept of issuing a no-objection letter has been introduced.
Stock exchanges must coordinate among themselves when issuing a no-objection letter in case the company is listed on multiple stock exchanges.
On receipt of a no-objection letter from a stock exchange, SEBI will issue a comment letter on the draft scheme. Hence, unless the draft scheme is free from qualifications from the stock exchange, SEBI will not proceed further. In other words, SEBI will issue a comment letter only on receipt of a no-objection letter from a stock exchange.
Recognition of registered valuers
Previously, listed entities had to submit a valuation report from an independent chartered accountant. Pursuant to the 2020 circular, this valuation report must now be obtained from a registered valuer.
In this regard, a 'registered valuer' is a person who has the required qualifications and experience and is a member of the Registered Valuer Organisation, as specified in Section 247 of the Companies Act read with the applicable rules issued thereunder.
Listing timeline extended
The timeline for listing a transferee pursuant to a scheme has been extended from 45 days to 60.
Thus, within 60 days of receipt of the order of the National Company Law Tribunal, the steps for listing specified securities should be completed and trading in securities should commence simultaneously on all stock exchanges on which the equity shares of the listed entity (or transfer entity) are listed.
Insight from independent directors required
A recommendation in the form of a report from the listed company's committee of independent directors is now required to provide an independent and unbiased judgement with respect to a scheme's credibility.
When giving such recommendation, stakeholder' interests will be the paramount factor to be considered by the independent directors.
Although independent directors may find it challenging to sign off a scheme, from a stakeholder's perspective, the 2020 circular has created an additional security net to ascertain whether a scheme will be detrimental to their interests.
Additional disclosures required
In line with the 2020 circular's objective of protecting stakeholders' interests and providing maximum disclosure pertaining to a scheme, SEBI has extended the list of information that a transferee must disclose in a newspaper ad to include, among other things:
- internal risk factors;
- regulatory action, if any;
- disciplinary action taken by SEBI or stock exchanges against the promoters in the past five years; and
- brief details of any outstanding criminal proceedings against the promoters.
The transferee must also provide:
- details of the shareholding of the promoter group and any group companies;
- the names of its 10 largest shareholders; and
- the percentage of shares held by such shareholders.
The experience and educational qualifications of the promoters must also be included in the newspaper ad.
The 2020 circular primarily aims to streamline the process of filing a draft scheme with the stock exchanges and ensuring that the latter refer a draft scheme to SEBI only once they are convinced that the listed entity is in compliance with the SEBI Act 1992 and the rules, regulations and circulars issued thereunder.
While the 2020 circular will undoubtedly ensure higher levels of transparency and disclosure with respect to a proposed scheme, the audit and independent directors' committees of listed companies now have an additional responsibility to assess the rationale and implications of a proposed scheme and make a recommendation in that regard.
