M&A by listed companies: SEBI’s grip

12 November 2020

by Shikha Thakkar Sudish Sharma


Mergers and acquisitions in India are primarily governed by Section 230 to Section 240 of the Companies Act, 2013 (‘Companies Act’) and rules prescribed thereunder. Although the term ‘merger’ is not defined under the Companies Act, however, as a concept, merger refers to the transfer of an undertaking, properties and/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 company are required to knock the doors of governmental authorities and obtain various regulatory approvals from the Registrar of Companies, Regional Director, Official Liquidator, Income Tax Department, sectoral regulator, if any, National Company Law Tribunal, etc., depending on the type of entity and the business sector that the transferor and transferee company are engaged in.

In addition to aforementioned regulatory approvals, in case of a Scheme of a listed company, an additional layer of regulatory compliance is required to be complied with by such listed company under the Securities and Exchange Board of India Act, 1992 and the rules and regulations framed thereunder. A Scheme is unarguably a material event for the listed company and for the stakeholders who have deployed their investments in such listed company.  In order to protect the interest of such stakeholders, various crucial factors such as enhanced transparency, timely disclosures by the listed company and stringent checks by the committees formulated by the company become important.

In the wake of achieving greater transparency with respect to Schemes, the capital market regulator, Securities Exchange Board of India (‘SEBI’) had earlier issued a circular dated 10 March 2017. However, owing to the market dynamics and to clear certain regulatory cobwebs, SEBI has further issued a circular number SEBI/HO/CFD/DIL1/CIR/P/2020/215 dated 3 November 2020 (‘2020 Circular’) that will be applicable for a Scheme filed with stock exchanges after 17 November 2020.

The key implications of the 2020 Circular are discussed hereunder:

  • Empowering the audit committee:

Before proceeding with a Scheme, the audit committee of the company is required to assess the viability of such Scheme and red flag concerns, if any, in its report. In line with the stakeholder centric objective of the 2020 Circular, following additional factors have been introduced, which are to be analysed by the audit committee while considering the Scheme:

  • Need for the merger/demerger/amalgamation/arrangement;
  • Rationale of the Scheme;
  • Synergies of business of the entities involved in the Scheme;
  • Impact of the Scheme on the shareholders; and
  • Cost benefit analysis of the Scheme.
  • Insight from the independent directors:
  • A recommendation in the form of a report from the committee of independent directors of the listed company will now be required and, while giving such recommendation, the stakeholder interest will be the paramount factor to be considered by such independent directors.
  • Although the independent directors may find it challenging to sign off a Scheme, however, from the stakeholder standpoint, the 2020 Circular has established an additional security net to ascertain that a Scheme will not be detrimental to their interests.
  • Recognising registered valuers:
  • Before the introduction of 2020 Circular, the listed entities were required to submit a valuation report received from an Independent Chartered Accountant. However, pursuant to the 2020 Circular, this valuation report is now required to be obtained from a registered valuer.
  • In this regard, it be noted that a registered valuer will be a person, registered as a valuer, having such qualifications and experience and being a member of the Registered Valuer Organisation, as specified in Section 247 of the Companies Act read with the applicable rules issued thereunder.
  • No-objection from the stock exchange:
  • Unlike the ‘observation letter’ that was previously required to be submitted on the draft Scheme by the Stock Exchanges to SEBI, a new concept of issuing ‘no-objection letter’ has now been introduced. Stock Exchanges have to co-ordinate with each other while issuing this letter.
  • Upon receipt of this ‘no-objection letter’ from stock exchanges, SEBI will issue a ‘comment letter’ on the draft Scheme. Hence, unless the draft Scheme is free from qualification(s) from the stock exchange, SEBI will not proceed further. In other words, SEBI shall issue ‘comment letter’ upon receipt of the ‘no-objection letter’ from the stock exchange.
  • Listing timeline:
  • SEBI has increased the timeline of listing of transferee entity pursuant to the Scheme from 45 to 60 days.
  • Thus, the steps for listing of specified securities should be completed and trading in securities should commence within 60 days of receipt of the order of the National Company Law Tribunal, simultaneously on all the stock exchanges where the equity shares of the listed entity (or transfer entity) are/were listed.
  • Additional disclosures:
  • In line with the objective of 2020 Circular, to protect the interest of stakeholders, SEBI has extended the list of information that is required to be disclosed by the transferee company in the newspaper advertisement such as internal risk factors, regulatory action, if any, disciplinary action taken by SEBI or Stock Exchanges against the promoters in preceding 5 financial years, brief details of outstanding criminal proceedings against the promoters, etc.
  • The transferee company will also have to provide details of shareholding of promoter group, group companies, names of 10 largest shareholders and percentage of shares held by such shareholders.
  • Additionally, the experience and educational qualification of the promoters is also required to be published in the advertisement.


The 2020 Circular primarily aims at streamlining the process of filing draft Schemes with the stock exchanges and ensuring that the stock exchanges further refer such draft Schemes to SEBI only upon being fully convinced that the listed entity is in compliance with the provisions of SEBI Act, 1992, rules, regulations and circulars issued thereunder.

While the 2020 Circular will, undoubtedly, ensure higher levels of transparency and disclosures with respect to the proposed Scheme, a responsibility has now been imposed on audit and independent directors’ committees of the listed company to assess the rationale and implications of the proposed Scheme and give their recommendation on the same.

[The authors are Associate and Executive Partner respectively in the Corporate and M&A practice at Lakshmikumaran & Sridharan Attorneys, Gurugram]

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