SEBI Guidelines for Mergers

Securities and Exchange Board of India (SEBI) is the primary regulatory authority overseeing securities markets in India. It plays a vital role in governing mergers and amalgamations, especially when they involve listed companies. Through its various regulations and circulars, SEBI aims to ensure fairness, transparency, and protection of minority shareholders during the process of corporate restructuring, including mergers.

SEBI guidelines help prevent misuse of merger provisions to bypass regulatory requirements and ensure that restructuring activities are carried out in a structured and investor-friendly manner.

Legal Framework for SEBI Guidelines:

The following laws, regulations, and circulars form the core of SEBI’s merger-related guidelines:

1. SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations)

2. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Code)

3. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations)

4. SEBI Circular dated March 10, 2017, revised February 3, 2023, regarding Schemes of Arrangement by Listed Entities

These guidelines are in addition to the provisions of the Companies Act, 2013, which regulates the overall process of mergers and amalgamations.

Purpose of SEBI Guidelines:

• To protect the interests of minority and public shareholders

• To ensure disclosure and transparency

• To maintain market integrity

• To prevent unfair practices and regulatory arbitrage

• To promote standardization and accountability in the merger process

Provisions of SEBI Guidelines:

1. Pre-Filing Requirements

Before filing any scheme of arrangement (including mergers) with the National Company Law Tribunal (NCLT), a listed company must:

• Submit the draft scheme to stock exchanges for review.

• Obtain a no-objection letter from the stock exchange based on SEBI’s comments.

• Appoint a SEBI-registered merchant banker to oversee the valuation and fairness opinion.

2. Draft Scheme Submission

The draft scheme must include:

• Detailed background of the merger

• Valuation report prepared by an independent registered valuer

• Fairness opinion issued by a SEBI-registered merchant banker

• Report from the Audit Committee recommending the scheme

• Report from the Board of Directors explaining rationale

This scheme is examined by the stock exchange and forwarded to SEBI for comments.

3. Valuation and Fairness

• The valuation report must be based on internationally accepted valuation methods.

• The fairness opinion must confirm that the share exchange ratio is fair to all shareholders.

• SEBI scrutinizes the valuation methodology, especially in cases where listed and unlisted entities are involved.

4. Disclosures and Transparency

The company must make disclosures to shareholders and stock exchanges, including:

• Summary of the scheme

• Capital structure pre- and post-merger

• Shareholding pattern

• Financials of the merging entities

• Rationale and expected benefits of the merger

These disclosures are made available on the company’s website and in the explanatory statement to shareholders.

5. E-Voting by Public Shareholders

SEBI mandates approval from public shareholders (excluding promoter and related parties) in the following cases:

• When an unlisted company merges into a listed company, and the resulting public shareholding falls below 25%

• When a listed company merges with another company where the promoter group has substantial interest

• In cases involving material changes in the shareholding or control structure

This ensures that the merger is not detrimental to public shareholders.

6. Minimum Public Shareholding (MPS)

Post-merger, the company must maintain the minimum public shareholding of 25% as required by SEBI. If MPS falls below the required threshold, it must be restored within a stipulated timeframe (generally 12 months) through methods such as offer for sale, rights issue, etc.

7. Lock-in of Shares

New shares issued to promoters or related parties during a merger may be subject to lock-in periods to prevent speculative gains. This provision especially applies when unlisted companies merge with listed ones, and the promoters of the unlisted company receive shares of the listed entity.

8. Accounting Treatment and Auditors’ Certificate

The scheme must comply with accounting standards, and a certificate from the statutory auditor confirming such compliance must be submitted to stock exchanges and SEBI.

9. Redressal of Complaints

A provision must be included in the scheme to address any complaints or objections raised by stakeholders. Stock exchanges also place the scheme for public comments on their websites, and SEBI considers these while giving its observations.

10. Listing of Shares Post-Merger

In case of issue of new shares under the scheme, SEBI guidelines under the ICDR Regulations must be followed to ensure smooth listing of the new shares. The company must file an application with the stock exchange for listing approval of new shares within a specified period after receiving NCLT approval.

Recent Developments:

SEBI Circular dated February 3, 2023 introduced significant changes, such as:

• Tightened norms for valuation and disclosures

• Stricter review for mergers involving distressed companies

• Enhanced scrutiny of financials of unlisted entities

• Increased emphasis on minority shareholder protection