SEBI Proposes Relaxation In Delisting Norms For Listed Firms’ Merger

Capital markets regulator Securities and Exchange Board of India on Monday proposed to exempt a listed company from following delisting regulations in case of its merger with a listed holding firm if the shareholders of the subsidiary entity get shares of the parent.

Floating a consultation paper for amendments to the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 for schemes of arrangements, the regulator said this would apply to cases where a listed holding company is merging its listed subsidiary and the subsidiary is desirous of getting delisted without following the provisions of delisting regulations. SEBI said there are cases of listed companies with listed subsidiaries and equity shares of both the companies being actively traded on stock exchanges.

"In a number of these cases, both the listed subsidiary and its listed parent company are in the same or similar business, with significant synergies by working together and creating significant incremental shareholder value for both companies," SEBI said.

While a full merger of a listed subsidiary with its listed parent entity would help achieve the intended synergies, it may not be favourable for some reasons. These include industry-specific constraints such as licence conditions; and value destroying transaction costs such as transfer costs, stamp duties and state level constraints.

There can also be cultural differences, for example, where the listed subsidiary was acquired by the listed holding company, and not set up by it organically. As per the proposal, for which public comments have been sought till April 15, 2020, the listed parent entity will need to integrate the business of the listed subsidiary with that of its own by providing a share swap to all shareholders of the listed subsidiary through a scheme of arrangement. The listed subsidiary will become an unlisted wholly-owned subsidiary of the parent listed entity, in this case, SEBI has proposed.

As per the existing delisting regulations, the listed subsidiary desirous of getting delisted is required to follow the delisting norms in terms of the SEBI regulations, which include reverse book building process. However, in the proposed scenario, the listed subsidiary would be delisted without following the delisting regulations. The shareholders of the listed subsidiary company will be offered shares of the listed parent company and the listed subsidiary will continue to exist, albeit as a wholly-owned subsidiary of the parent company.

Giving an illustrative example to explain the envisaged proposal, Sebi said there could be a listed parent company (P), which is an integrated steel producer, and it has a listed subsidiary company (S), a flat steel producer, with P holding 60 percent equity in S and the balance 40 percent held by public shareholders. Also, the promoter group 'XYZ' holds 53 percent equity shareholding in P, with a balance of 47 percent being held by public shareholders.

Through a scheme of arrangement to be approved by NCLT under the Companies Act, all public shareholders of S will be allotted equity shares of P in lieu of their shareholding in S. This allotment would be based on a share swap ratio, on exactly the same lines as in the case of a scheme of arrangement.

On approval of scheme of arrangement, S would become a wholly-owned subsidiary of P, and the equity shareholding of XYZ Promoter Group in P would reduce from the current 53 percent to the extent of the increase in equity shareholding of the public shareholder in P on account of allotment of equity shares to the public shareholders of S in lieu of their shareholding in S.

Since S would become a wholly-owned subsidiary of P, it would be delisted from the exchanges. SEBI has also proposed a number of safeguards to ensure that the proposed route is not used for taking undue advantage and is not detrimental to the investors. The exemption from delisting regulations would be confined to only a scheme of arrangement between a listed subsidiary and its listed parent, as per the proposed safeguards.

Also, the process of this proposed scheme will be identical to a process followed in a merger wherein the holding listed company and the listed subsidiary would need to seek no objection from stock exchanges and SEBI for the proposed merger, as per the rules. Thereafter, the holding listed company and the listed subsidiary company would need to file applications before the National Company Law Tribunal.

The independent valuation of shares of the listed subsidiary and the listed parent for the share swap will ensure that the share exchange ratio based on which all shareholders of listed subsidiary (except the parent company) receive shares of the listed parent in lieu of the shares they hold in the listed subsidiary.

The votes cast by public shareholders in favour of the proposal would need to amount to at least two times the number of votes cast by public shareholders against it. Also, a minimum vintage of 3 years of listing of the shares of the listed subsidiary would be required, while the companies should not have had any adverse order or direction from SEBI.

Also, no further restructuring by the listed holding company for a period of three years from the date of the NCLT order would be allowed. The matter was deliberated at a meeting of SEBI’sPrimary Market Advisory Committee, which recommended that the regulator should seek public comments on whether a specific exemption can be provided in the delisting regulations for delisting of the listed subsidiary pursuant to such a scheme of arrangement.