Independent Directors role strengthened further by SEBI in merger-demerger cases

SEBI has further enhanced the role of independent directors in the scheme of arrangements. In a circular issued Tuesday the capital market regulator said that independent directors must ensure the interest of minority shareholders is protected. The SEBI circular says “Report from the Committee of Independent Directors recommending the draft Scheme, taking into consideration, interalia, that the scheme is not detrimental to the shareholders of the listed entity”. Experts believe that independent directors will have a very crucial role in such schemes. Vikram Raghani, Partner at J Sagar Associates says “ This is quite different from open offer situations whether independent directors are merely required to give their recommendations on the offer. Independent directors may find it challenging to provide such a recommendation virtually signing off on a scheme on such unequivocal terms.” SEBI has also empowered Stock Exchanges to further streamline the processing of draft schemes filed with them. Ensuring that the recognized stock exchanges refer draft schemes to SEBI only upon being fully convinced that the listed entity is in compliance with SEBI Act, Rules, Regulations and circulars. Regulator said stock exchanges shall provide the ‘No-Objection’ letter to SEBI on the draft scheme; in co-ordination with each other. SEBI shall issue Comment letter only upon receipt of ‘‘No-Objection’ letter from stock exchanges. Purpose is exchanges being first line of regulator are more empowered and the same process is not repeated at the exchange and SEBI level again and again. Audit committee will also have to justify the scheme of arrangement. As per SEBI valuation report is required to be placed before the Audit Committee of the listed entity. The Audit Committee report shall comment on the need for the merger/demerger/amalgamation/arrangement, rationale of the scheme, synergies of business of the entities involved, impact of the scheme on the shareholders and also the cost benefit analysis of the scheme. Valuer has to be a registered valuer and have qualification and experience as defined under Companies Act 2013. SEBI said listing and trading of specified securities commences within 60 days of receipt of the order of high court or NCLT on all the stock exchanges where the equity shares of the listed entity (or transfer entity) are/were listed, earlier it was 45 days. Before commencement of trading, in addition to disclosing the information on the website of the exchanges, transferee entity will have to give advertisement in newspapers giving details about the business model, reason for the amalgamation and internal risk factors. It will have to also give details of shareholding of promoter group, group companies, names of its 10 largest shareholders and%age of shares held by them. Even the experience and educational qualification of the promoters is required to be published in advertisement. Will also have to disclose regulatory action, if any, taken by SEBI or exchanges against the promoters in last five financial years; and provide brief details of outstanding criminal proceedings against the promoters if any. Regulator said the changes will be applicable for entities seeking listing and/or trading approval from the stock exchanges after November 3, 2020.