Special Provisions for Delisting a Listed Subsidiary Company of a Listed Holding Company through a Scheme of Arrangement

The Securities and Exchange Board of India (SEBI) has on 11 June 2021, repealed the SEBI (Delisting of Equity Shares) Regulations, 2009 (Erstwhile Delisting Regulations) and notified the SEBI (Delisting of Equity Shares) Regulations, 2021 (Delisting Regulations 2021). As per Regulation 37 of the Delisting Regulations 2021, the equity shares of a listed subsidiary company (Listed Sub Co) of a listed holding company (Listed Hold Co) may be delisted from the stock exchanges, pursuant to a scheme of arrangement under Sections 230 to 232 of the Companies Act, 2013 (Act).

Background

On 16 March 2020, the SEBI had issued a consultation paper on “Amendment to Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 for Schemes of Arrangement”. In terms of the consultation paper, SEBI was assessing a proposal relating to a scheme of arrangement between a Listed Hold Co and Listed Sub Co, wherein the Listed Sub Co, is desirous of getting delisted without following the provisions of the Erstwhile Delisting Regulations, which includes reverse book building process.

The SEBI observed that there are several listed companies which have listed subsidiaries, engaged in the same line of business, and equity shares of both are actively traded on stock exchanges. Both, the Listed Hold Co and the Listed Sub Co could attain significant synergies by working together and create significant incremental shareholder value.

While a full merger of the Listed Sub Co with the Listed Hold Co could help achieve the intended synergies, it may not be favourable for the following reasons:

Further, on 29 September 2020, the SEBI at its board meeting decided to grant exemption from the reverse book building process for delisting of Listed Sub Co, if it becomes the wholly owned subsidiary of the Listed Hold Co pursuant to a scheme of arrangement.

The SEBI has now, notified the much awaited Delisting Regulations 2021 which, inter alia, provide for exemption from the reverse book building process for delisting of equity shares of a Listed Sub Co (of a Listed Hold Co), pursuant to a National Company Law Tribunal (NCLT) approved scheme of arrangement under Sections 230 to 232 of the Act (Scheme). Upon the Scheme becoming effective, the Listed Sub Co will become a wholly owned subsidiary of the Listed Hold Co (the said exemption shall hereinafter be referred to as “Delisting Exemption”).

Eligibility criteria:

Conditions for effectiveness of such Scheme:

Conditions subsequent to the Scheme:

Comment

The Delisting Regulations 2021 is a welcome step by the SEBI and the same is in-line with its policy objective of regulating exit options for the minority shareholders of listed companies. The Delisting Exemption will help the Listed Hold Co to achieve the intended synergies arising from consolidation of value of businesses, without having to, undertake the rigors of reverse book building process, too many regulatory compliances and incurring significant costs. However, going further, it remains to be seen, whether the requirement of lock-in, on further restructuring by Listed Hold Co for a period of three years, acts as a deterrent from undertaking the benefit of this Delisting Exemption, as such restrictions should have been confined to the Listed Sub Co and not to the Listed Hold Co.

While the Delisting Exemption has been introduced to promote the interests of listed holding companies having listed subsidiaries, the SEBI has also reinstated the threshold for obtaining approval of public shareholders of Listed Sub Co akin to delisting provisions. Accordingly, it is clear that the SEBI intends to strike balance amongst the market participants inter-se, and further promote growth of capital markets.

-     Mehul Shah (Partner), Aman Yagnik (Principal Associate), Rushabh Gala (Senior Associate) and Jamsheed Dadachanji (Senior Associate).

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