19 November 2021
SEBI tightens processing of schemes of arrangement

Stock market regulator Securities and Exchange Board of India (SEBI) issued a circular on 16 November 2021 (the circular) concerning the processing of schemes of arrangement by listed entities.

The circular states that SEBI has laid down the framework for schemes of arrangement by listed entities on 22 December 2020. Through this circular, SEBI has provided further clarification on guidelines for processing draft schemes and made certain amendments to the existing framework as well.
We have summarized the gist of the circular as follows:

Provision Comments
Valuation report along with an undertaking The listed entity is required to submit a valuation report. As per the revised guidelines, this report needs to be accompanied by an undertaking from the listed entity, stating that no material event impacting the valuation has occurred during the intervening period of filing the scheme documents with exchange and period under consideration for valuation.
Declaration on past defaults The listed entity is required to submit a declaration that if any past defaults of listed debt obligations of the entities forming part of the scheme.
No objection from lenders The listed entity will be required to submit a no objection certificate from the lending scheduled commercial banks/financial institutions as well as debenture trustees.
Fractional entitlement
In case of fractional entitlements in the scheme, the circular provides as follows:
  • fractional entitlements, if any, shall be aggregated and held by the trust, nominated by the Board in that behalf;
  • the trust shall sell such shares in the market at such price, within a period of 90 days from the date of allotment of shares, as per the draft scheme;
  • the listed company has to submit a report from its audit committee and the independent directors certifying that the listed entity has compensated the eligible shareholders;
  • both the reports will be submitted within 7 days of compensating the shareholders;
  • stock exchange to ensure compliance with the guidelines and the non-compliance, if any, has to be submitted to the regulator on a quarterly basis;
  • any misstatement or furnishing of false information will make the listed entity liable for punitive action
Applicability This circular shall be applicable for all the schemes filed with the stock exchanges from the date of the circular.
Our Comments
Certain requirements need to be fulfilled before the scheme of arrangement is submitted for sanction by the National Company Law Tribunal. This includes that listed entities choose a stock exchange with nationwide trading terminals as the designated stock exchange to coordinate with SEBI. Approval of the scheme by SEBI is pre-cursor for approval by the Tribunal. SEBI stated that the amendments aim to ensure that the recognized stock exchanges refer draft schemes to SEBI only upon being fully convinced that the listed entity complies with SEBI regulatory framework. However, the requirement of a no objection certificate from lenders tightens the scheme process, and it increases one more layer of scrutiny. This is likely to increase the timeline substantially as onboarding of lenders is a prerequisite. The amendments further cast additional onus on the audit committee and independent directors who are required to submit their reports.
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