The Securities and Exchange Board of India (Sebi) will make it mandatory for listed companies undergoing a merger or acquisition to first take clearance from the market regulator before approaching any court or the National Company Law Tribunal with a scheme of arrangement, said two people with direct knowledge of the matter, including a Sebi official, on condition of anonymity.
Sebi will finalize this rule when its board meets on 14 January, these people said.
The move is expected to reduce litigation in M&A deals. Sebi’s oversight early on in the process will also ensure that minority shareholders aren’t short-changed in such transactions, said experts.
Under current regulations, every listed entity undertaking a merger or acquisition has to file a draft of its so-called scheme of arrangement (a court-approved agreement between a firm and its shareholders or creditors) with the stock exchanges for a no-objection letter. Then, it files this scheme with a court or tribunal.
In 2013, Sebi stepped in and said that it would also issue observations and review the scheme. The observations could include dilution of public shareholding, an unlisted entity achieving listed status, swap ratio being skewed towards the unlisted entity, among others, said the regulator.
However, there was no clarity on whether the regulatory nod was needed before a high court or a tribunal cleared a scheme of arrangement.
“In some cases, companies also bypassed certain regulatory requirements which led to litigations,” said one of the people quoted earlier.
In December, Sebi chairman U.K. Sinha said that the regulator was framing provisions to ensure that companies obtain Sebi approval before they go to a high court or a tribunal.
“There has been an observation from one of the high courts questioning the locus of Sebi in asking companies to first come to it and then move the high courts… It is not provided in any Sebi regulations that listed companies should come to Sebi first before moving the courts,” said Sinha.
“We are going to amend our regulations and make (a) specific provision for that,” he added.
Experts said that such clarity from Sebi could reduce the possibility of litigations.
“The lack of clarity regarding pre-approval from Sebi/stock exchanges under the existing laws has resulted in litigants questioning the very requirement of approving such schemes already pending with a court,” said Kaushik Mukherjee, partner, BMR Legal, a law firm.
“A clear rule in relation to pre-approval of such schemes with strict penal action in case of contraventions shall go a long way in reducing disputes on this point of law,” he added.
Separately, the Sebi board will also finalize appointments for the posts of two executive directors (EDs) which have been vacant for at least two months, the two people quoted above added.
R.K. Padmanabhan, an officer from the Indian Police Service (IPS) who was heading the market intermediaries regulation and supervision department at Sebi, stepped down in September last year and Gyan Bhushan, an officer from the Indian Economic Services, who headed the surveillance department, left in October.
Sebi has floated advertisements for these two posts.
“Sebi board has finalized two candidates for the post. Both are likely from outside Sebi,” said the second person, cited earlier in the story.
There are eight ED posts and this is the highest post to which Sebi officials can be promoted.
These posts are being filled even as the Sebi Employee Association filed a writ petition in court, questioning the policy of appointments at the ED level from outside Sebi.
The Bombay high court heard the matter on 21 December and reserved its order. The court is likely to pronounce the order after it reopens later this month.
Source: Mint