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The Securities and Exchange Board of India's (Sebi's) power to block merger transactions could act as a measure, albeit temporarily, to address a potential regulatory grey area created by the new Companies Act provision that appears to be paving the way for back-door delistings.
The Act allows an unlisted company to be merged with a listed company where the resultant entity can be an unlisted one. This essentially allows a company listed on the bourses to be delisted through such a merger, though this is not in line with Sebi's delisting regulations, according to some experts.
Section 232 of the Act allows scenarios allowing unlisted companies to merge with listed ones, with the resultant company remaining unlisted. It says: "…where the transferor company is a listed company and the transferee company is an unlisted company… the transferee company shall remain an unlisted company until it becomes a listed company."
According to Tejesh Chitlangi, partner at IC Legal, "There seems to be a conflict between the merger provisions under the new Companies Act and Sebi's delisting norms. Merger of a listed company with an unlisted company with the merged entity permitted to remain unlisted till compliance with the Sebi and exchange listing norms might lead to back-door delisting of entities."
The provision could create a bypass for the current process of delisting. "This is likely to be the case since such mergers might result, with shareholders'/creditors' super-majority approvals and with the tribunal's consent, without following Sebi's delisting norms. For instance, the promoters might not need to hold a minimum threshold shareholding in the company before going for such mergers. This, otherwise, is required in the case of delisting," adds Chitlangi.
"The Companies Act seems to allow for such delistings… there should be alignment between the two regulations," says a senior official with a domestic investment bank.
A Sebi circular issued in February requires all schemes of arrangement to get the regulator's approval. Otherwise, proceeding could be initiated to block such delistings for the time being.
"Each merger scheme involving a listed company requires pre-clearance from Sebi and the stock exchange. So, if the scheme neither provide for listing with Sebi's approval nor provides for proper exit plan, it is not approved by Sebi," says Pavan Kumar Vijay, managing director of Corporate Professionals, a financial consultancy firm.
The relevant section of the Companies Act, which has yet to be notified, also requires companies to offer exit to shareholders. This depends on a Sebi-determined pricing formula.
"…if shareholders of the transferor company decide to opt out of the transferee company, provision shall be made for payment of the value of shares held by them and other benefits in accordance with a pre-determined price formula or after a valuation is made, and the arrangements under this provision may be made by the Tribunal," it says.
This will help protect minority shareholders on the valuation of their shares, says J N Gupta, founder & managing director of Stakeholders Empowerment Services, a corporate governance research firm. He feels Sebi regulations would not allow for such delistings, in spite of the provision.
"The proviso overrides anything under the section and makes the Sebi regulation supreme for price calculation," he says.
Interestingly, the number of delisting offers has hit a nine-year low this financial year, with only 11 offers. This is the lowest since 2003-04, when there had been three such offers.
