Schemes of mergers, demergers, and various other arrangements (hereinafter “Corporate Restructuring”) involving listed entities have been seen increasing at a greater pace in recent times. Listed entities involved in the scheme of arrangement have to seek a No Objection letter from stock exchanges¹. Corporate Restructuring involving listed entities, SEBI Registered Intermediaries, and certain individuals forming part of these listed entities, must comply with and ensure the ‘fit and proper’ person criteria. During corporate restructuring, stock exchanges check this criterion on behalf of the Securities and Exchange Board of India (‘SEBI’). Fit and Proper person criteria seek to check if the entities involved in the corporate restructuring are morally and ethically sound.

Fit and Proper checks have always been crucial in the eyes of SEBI. It has always placed provisions for checking ‘Fit and Proper’ person criteria for intermediaries registered with it. SEBI periodically checks fit and proper person criteria in the case of registered intermediaries. Hon’ble National Company Law Tribunal also screens the cases of Corporate Restructuring on the grounds of “Fit & Proper”.

Considering this, it is vital to understand what can be considered fit and proper while undergoing any corporate restructuring and to establish a few precedents in this regard

Fit and Proper Person Criteria as is stated by SEBI in Schedule II of SEBI (Intermediaries) Regulations, 2008 is also applicable for Corporate Restructuring. The criteria are as follows:

(a) integrity, honesty, ethical behaviour, reputation, fairness and character of the person;

(b) the person not incurring any of the following disqualifications:

• criminal complaint or information under section 154 of the Code of Criminal Procedure, 1973 (2 of 1974) has been filed against such person by the Board and which is pending;
• A charge sheet has been filed against such person by any enforcement agency in matters concerning economic offences and is pending;
• an order of restraint, prohibition or debarment has been passed against such person by the Board or any other regulatory authority or enforcement agency in any matter concerning securities laws or financial markets, and such order is in force.
• the Board has initiated recovery proceedings against such person and are pending;
• an order of conviction has been passed against such person by a court for any offence involving moral turpitude;
• any winding up proceedings have been initiated or an order for winding up has been passed against such person;
• such person has been declared insolvent and not discharged;
• such person has been found to be of unsound mind by a court of competent jurisdiction, and the finding is in force;
• such person has been categorised as a wilful defaulter; (x) such person has been declared a fugitive economic offender; or
• any other disqualification as may be specified by the Board from time to time.

Schedule II of SEBI (Intermediaries) Regulations, 2008 gives that “Fit and Proper” criteria shall apply to the following persons

• the applicant or the intermediary
• the principal officer, the directors or managing partners, the compliance officer and the key management persons by whatever name called; and
• the promoters or persons holding controlling interest or persons exercising control over the applicant or intermediary, directly or indirectly. Provided that in case of an unlisted applicant or intermediary, any person holding twenty per cent or more voting rights, irrespective of whether they have controlling interest or exercise control, shall be required to fulfil the ‘fit and proper person’ criteria.
• Explanation– For the purpose of this sub-clause, the expressions “controlling interest” and “control” in the case of an applicant or intermediary shall be construed with reference to the respective regulations applicable to the applicant or intermediary.

Precedents – ascertainment of Fit & Proper criteria and rejection of schemes

Recently, in a few cases, it is seen that stock exchanges have been rejecting schemes on the grounds of listed Intermediaries, and individuals forming part of these listed Intermediaries have not complied with the criteria of “Fit & Proper”. A couple of schemes that were rejected based on ‘Fit & Proper’ person criteria are as follows:

• In the case of the Proposed Scheme of arrangement between Motilal Oswal Financial Services Limited (transferor or resulting Company) and Glide Tech Investment Advisory Private Limited (transferee Company) and Motilal Oswal Wealth Limited (Demerged Company) and their respective shareholders. It was seen that the Stock exchange had denied the NOC under Regulation 37 of SEBI LODR on the grounds that one of the directors was named in the Chargesheet filled by “The Economic Offence Wing, Mumbai in the matter of their investigations into irregularities at National Spot Exchange Limited which was disqualifying him under “Fit & Proper Criteria” of Schedule II of SEBI (Intermediaries) Regulations, 2008
• In the Case of Scheme of arrangement between IIFL Securities Limited and 5Paise Capital Limited and their respective shareholders and Creditors: In this case, the chargesheet by Economic Offence Wing [‘EOW’] questioned the “Fit & Proper” status of one of the directors of IIFL Securities Limited, and since the matter was sub-judice, SEBI/ Stock exchange was keen to understand the impact of penal action on the scheme of arrangement. In this case, the NOC was not issued, and Companies were asked to refile the scheme with additional information. Considering both the above cases, it indicates that SEBI/ Stock Exchanges are very clear that any non-compliance of the “Fit & Proper” Criteria under SEBI (Intermediaries) Regulations, 2008 may result in not entertaining any application of any scheme of merger, demerger or any other arrangements for Intermediary. Stock Exchanges may look into this Fit& Proper criterion during Corporate Restructuring because of the first and second proviso to clause 6 of Schedule II of SEBI (Intermediaries) Regulations, 2008.

NCLT & NCLAT Rejection due to Fit & Proper

In the matter of Hotel City Plaza Private limited v. Union of India in reference to the scheme of amalgamation, NCLT and NCLAT rejected the scheme on the grounds of violation of Sections 73 to 76A of the Companies Act, 2013, i.e. prohibiting the private limited companies from accepting or renewing any deposits from shareholders in excess of the aggregate of the paid-up capital, free reserves, and securities premium amount. Further, the Registrar of Companies had issued ‘Show Cause Notices’, and appellants had not responded. NCLAT, while passing the order, expressly stated as follows:

“Taking note of the surrounding facts and circumstances of the present case comes to an ‘inevitable’, ‘inescapable’ and ‘irresistible’ conclusion that the ‘Appellants’, had not made out a fit and proper case, for ‘Sanctioning the Scheme of Amalgamation’, in accordance with ‘Law’. Looking“

Considering the above case, the Hon’ble tribunals have clearly outlined that any non-compliance with the Companies Act, 2013, especially related to public deposits and the ignorance of show cause notices, is not a case of “Fit & Proper” for a scheme of merger.

Conclusion

The Conduct and actions of the Companies and the directors play an important role in demonstrating the “Fit & Proper” criteria before any corporate restructuring. Any violation of the criteria results in a loss of confidence by the regulator in the company and the intent of the transactions. Therefore, a pre- “Fit & Proper Criteria check” has become the unavoidable action point before any corporate restructuring.

This article has been published on Taxmann. The link for the same

https://www.taxmann.com/research/company-and-sebi/top-story/105010000000024216/fit-proper-criteria-impact-on-scheme-of-mergers-demergers-experts-opinion

The post “Fit & Proper Criteria”: Impact on Scheme of Mergers & Demergers first appeared on MMJC.

Regulation 37 of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘SEBI LODR’) mandates every listed entity desirous of undertaking a scheme of arrangement or involved in a scheme of arrangement under sections 230–234 and section 66 of Companies Act, 2013 to file the draft scheme of arrangement with the designated stock exchange(s) for obtaining the no-objection certificate, before filing such scheme with National Company Law Tribunal.

The designated stock exchange’s approach for granting the no-objection certificate is based on certain parameters identified by the stock exchanges. Designated stock exchange may issue an observation letter pursuant to which it shall direct modifications or omissions to be done in the respective scheme(s) filed with it or give mandates to adhere to specific provisions and circulars as specified by designated stock exchanges. It may also direct to incorporate its observations or comments in the scheme.

However, in certain circumstances Stock Exchanges may reject and return the scheme absolutely or subject to compliance of certain conditions. In this article, we shall study the list of schemes rejected by stock exchange and the reasons for rejecting the schemes.

Schemes rejected by the stock exchanges on repeated grounds:

• The stock exchange has rejected schemes on various occasions owing to breach of the Fit and Proper Status. Compliance with ‘fit and proper status’ is checked only when companies involved in scheme of arrangement are SEBI registered intermediaries. The reason of such rejections are as follows:
  • The scheme was rejected due to the chargesheet filed by the Economic Offence Wing against the Managing Director of the company proposed to be merged and the ongoing investigation into their ‘fit and proper’ status under the Securities and Exchange Board of India (Intermediaries) Regulations, 2008¹. Given the potential legal ramifications and the uncertainty surrounding the Managing Director’s future, it was deemed necessary to assess the potential impact on the businesses of the Transferor, Transferee companies, and the proposed scheme of arrangement. This clarity was essential to ensure investors could make informed decisions regarding the viability and potential risks associated with the merger.
  • In another case the scheme was rejected owing to ongoing prosecution proceedings against the directors on the board of the Transferor Company and Transferee Company. Stock exchanges also directed the company to examine the impact of the proceedings on the scheme, companies, and investors.

Schemes rejected by the stock exchanges due to other miscellaneous reasons–

• The entities involved in scheme of arrangement have not meet the minimum public shareholding requirement under SEBI (LODR) and para (A)(3)(b) of Part – I of SEBI Master Circular dated 20^th June 2023². Further, SEBI advised to file fresh application by complying with the SEBI Circular.
• Draft scheme was not in compliance with clause III(A)(1)(a) of Annexure I of the SEBI Circular No. CFD/DIL3/CIR/2017/21³, i.e. the equity shares to be allotted by the Transferee company to the shareholders of the transferor companies was not sought to be listed, basis which SEBI has returned the draft scheme, and the company was advised to re-submit the same after ensuring compliance with the provisions mentioned in the circular.
• The draft Scheme was contingent upon the successful completion of a concurrent scheme, the timeline for which is currently uncertain. As a result, stock exchange decided to defer approval of the draft Scheme until the outcome of the concurrent Scheme is determined or until it receives NCLT approval.
• The Company executed a Slump Sale Agreement on September 6, 2023, and subsequently approved a Scheme of Amalgamation on September 25, 2023. The Scheme was contingent upon the successful completion of the Slump Sale. However, the Stock Exchange returned the Scheme as the Slump Sale condition precedent was not fulfilled at the time of applying for the No Objection Certificate under Regulation 37 of the SEBI (LODR).
• The Scheme for reduction of share capital between a company and its shareholders was rejected because incomplete information was submitted at first instance and even after repeated emails being sent for same by regulatory authorities.
• One of the companies to the scheme of merger had not applied for registration as NBFC under Section 45-1A of the RBI Act, 1934 and was wrongfully disclosing in its financial statement regarding having applied for registration as an NBFC. Further, the company was conducting NBFC activities without holding a certificate of registration issued by RBI, which is in violation of Reserve Bank of India Act, 1934. In view of the aforesaid, SEBI returned the draft scheme.
• SEBI has rejected the scheme basis the unresolved complaint of another company against the captioned scheme before the Hon’ble High Court, Kerala. SEBI has returned the scheme and has advised to re-submit the same upon resolution of the complaint and disposal of the case.
• The rationale of the scheme was based on the fact of the company having negative retained earnings however by the time the scheme of merger came for consideration before the stock exchange, the negative retained earnings had progressed to positive retained earnings owing to significant profits because of which the justification for the proposed scheme was no longer warranted and hence rejected by the exchange.
• As per NSE’s standard operating procedures dt: December 20, 2022⁴, draft scheme shall be filed within 15 days of approval of Scheme by the Board of Directors of the company but the same has been filed after 15 days which is in non-compliance of SEBI Standard Operating Procedures. Consequently, the scheme has been rejected.

Key Learnings for Successful Filling of Schemes with BSE

• Address any outstanding legal proceedings, financial instability, or unresolved disputes before filing a scheme.
• Conduct a thorough due diligence process to identify and address potential risks and issues.
• Keep abreast of any changes in SEBI guidelines to avoid non-compliance.
• Ensure strict adherence to SEBI regulations, particularly those related to minimum public shareholding, disclosure requirements.
• Reduce the risk of rejection, companies should strive to structure schemes independently, without making them contingent upon other transactions or schemes. This eliminates uncertainties and potential delays that could hinder approval.
• Companies should conduct a thorough analysis of the fit and proper status of their promoters, directors, and other key personnel. This involves assessing factors like legal ongoing proceedings, past legal records, financial history, and any potential conflicts of interest
• Assurance on Compliance with the SEBI Mater Circulars is a pre-requisite to mitigate the risk of rejection due to regulatory non-adherence.
• Companies should provide complete and accurate disclosures in their applications to stock exchanges. This includes details about the scheme, rationale for the merger, financial projections, and any potential risks or uncertainties.
• Avoiding Misleading / wrong information to Stock Exchange as along with rejection it can also lead to legal consequences.
• Ensuring that the Rationale for undertaking the scheme matches the current facts, situations, and circumstances.

Conclusion

In hindsight, study of the cases rejected by the stock exchange is crucial to anticipate the observations or reasons for rejection when preparing to file a scheme of arrangement. Study of these reasons would help stakeholders draft schemes in a better manner. In navigating the grounds behind scheme rejections by stock exchanges, it becomes evident that these decisions are not merely regulatory hurdles but essential safeguards for market integrity. By scrutinizing schemes thoroughly, stock exchanges aim the mitigation of risks, promotion of accountability and prevention of contingencies among other things.

This article has been published on Taxmann. The link for the same

https://www.taxmann.com/research/company-and-sebi/top-story/105010000000024474/deciphering-stock-exchanges-observation-in-giving-noc-to-draft-schemes-of-arrangement-experts-opinion

The post Deciphering Stock Exchange’s Observation in giving NOC to Draft Schemes of Arrangement first appeared on MMJC.

SEBI Master circular dated 20 June 2023 on (i) Scheme of Arrangement by Listed Entities and (ii) Relaxation under Sub-rule (7) of rule 19 of the Securities Contracts (Regulation) Rules, 1957 already covers certain points(1) that should be looked into by audit committee (irrespective whether the transaction is with related party or not ) while recommending the draft scheme to the board of directors as follows:

• Need for the merger/demerger/amalgamation/arrangement
• The rationale of the scheme
• Synergies of business of the entities involved in the scheme
• Impact of the scheme on the shareholders
• Cost-benefit analysis of the scheme.

Now, since there is a specific SEBI Circular dealing with the Scheme of arrangement by Listed entities will it be sufficient only to comply with SEBI Master circular dated 20 June 2023?

RPT Industry Standards specifically does not cover any disclosures with regards to a transaction of merger/ demerger between related parties. 

The definition of related party transaction under 2(1) (zb) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR’) is wide enough to cover the Merger / Demerger transactions.

Let us understand what is Related party Transaction in case of Merger / Demergers?

There may be two scenarios

• First, the transaction of merger/demerger itself is a related party transaction i.e, the consideration of merger/ demerger will have to be looked into and therefore disclosure under A1 to A5 and B1 may be warranted.
• Secondly, in case of Merger/ Amalgamations and demerger, all the assets and liabilities of the transferor company becomes the assets and liabilities of transferee company (under 2(1B) & 2(19AA) of Income tax Act,1961) and therefore disclosures related to all the balance sheet items i.e., B3 to B7 will be required to be disclosed to audit committee if those balance sheet items i.e., loans, Investments, Guarantees and borrowings of the transferor companies are with related parties of transferee company, as all this transactions will come under transferee company post-merger/demerger. 

What are Balance sheet item as per RPT Industry Standards?

• B (3) – Loans, inter-corporate deposits or advances given by the listed entity or its subsidiary.
• B (4) – Investment made by the listed entity or its subsidiary.
• B (5) – Guarantee (excluding performance guarantee), surety, indemnity or comfort letter, by whatever name called, made or given by the listed entity or its subsidiary.
• B (6) – Borrowings by the listed entity or its subsidiary; and
• B (7) – Sale, lease or disposal of assets of subsidiary or of unit, division or undertaking of the listed entity, or disposal of shares of subsidiary or associate.

SEBI Master circular dated 20 June 2023 relating to the scheme of arrangement by listed entities does not cover the aspects of disclosures to athe udit committee from the context of Merger /Demerger with related parties and therefore in case of a transaction of Merger/Demerger between a Listed Entity and the Company where shareholder to whom shares will be allotted is a related party or Loans, Investment, Guarantee and Borrowing is with related parties, the Listed entities will have to consider minimum information as per RPT Industry Standards.

The Regulators steps for increased disclosures around related party transactions is a clear message that Listed entities should follow the most Ethical and Transparent Business operations.

Under RPT Industry Standards, audit committee is expected to give justifications while approving certain transactions, further the comments of audit committees shall be recorded in the minutes of the meetings. It all indicates that Companies should run the business operations mutually exclusive and avoid overlapping of horizontal business operations with common resources within multiple entities increasing related party transactions or avoid entities within the group having no incomes or no businesses and the toll of which are taken up by the other companies within the groups increasing the related party transactions.

Restructuring of Business Operations including mergers/ demerges may become a common trend with the Growing Governing provisions around related party transactions and its disclosures.

1. Part I, Para A (2) (c) of SEBI Master Circular SEBI/HO/CFD/POD-2/P/CIR/2023/93 – dated June 20, 2023

The post Merger / Demerger – Related Party Transactions Minimum Disclosures to Audit Committee and Shareholders. first appeared on MMJC.

When it comes to interpretating   the law and resolving any confusion related to legal provision, the court’s judgement play a crucial role., The judiciary’s fundamental duty is to interpret the law to ensure justice. Consequently, court judgments serve as the most authoritative interpretations of legal principles. Landmark judgments set by courts are considered precedents and are followed when adhering to the law. In the context of the Supreme Court of India, its judgments are regarded as the paramount interpretations of the law and carry the same binding force as legislation.

In this article, we delve into a notable judgment delivered by the honourable Supreme Court of India on April 5, 2024. The Court analysed Article 10 of Schedule 1 of the Bombay Stamp Act, 1958, in conjunction with Sections 31(2) and 97 of the Companies Act, 1956. The objective was to determine the stamp duty payable by a company following an increase in its authorized share capital.

Facts of the case.

• Company: National Organic Chemical Industries
• Initial Authorized Capital: Rs. 36 Crores
• Increase in 1992: Authorized capital raised to Rs. 600 Crores (Stamp duty paid: Rs. 1.2 Crores)
• Amendment in 1994: Maharashtra government inserted a maximum cap of Rs. 25 Lakhs on stamp duty for share capital increases. At that time, the relevant provision stated:

• In 1994, the Maharashtra state government amended the Stamp Act to introduce a maximum cap of Rs. 25 Lakhs on stamp duty payable by companies upon an increase in share capital. The amendment read as follows:

“In exercise of the powers conferred by clause (a) of Section 9 of the Bombay Stamp Act, 1958, the Government of Maharashtra, having satisfied that it is necessary to do so in the public interest, hereby reduces, with effect from the 1st August, 1994, the maximum duty chargeable on Articles of Association of a Company under Article 10 of Schedule-I to the said Act, to Rs. Twenty Five Lakhs.”

• Further Amendment in 1995: Company increased capital to Rs. 1200 Crores (Stamp duty paid: Rs. 25 Lakhs)
• However, the company realized that this payment was inadvertent because the maximum stamp duty of Rs. 25 Lakhs payable on Articles of Association had already been paid by them in 1992. Consequently, the company sought a refund of the stamp duty from the Deputy Superintendent of Stamps, Maharashtra.

The honourable High Court ruled in favour of the company, ordering the refund of the duty along with interest. However, the State of Maharashtra challenged this decision before the Supreme Court.

State of Maharashtra’s Argument:

• Section 14A of the Bombay Stamp Act stipulates that any material modification to an instrument necessitates fresh payment of stamp duty.
• The state contended that each increase in share capital constitutes a new taxing event, even if the stamp duty had already exceeded the maximum cap.
• Further emphasized that the stamp duty exceeding the cap was paid before the amendment that introduced the limit, and therefore, the amendment should not have retrospective effect.

Company’s Counterargument:

• The company asserted that Form-5, which serves to notify the Registrar of Companies (ROC) about the increase in share capital, is not an instrument as per the Bombay Stamp Act.
• Furthermore, the company argued that an increase in share capital does not qualify as a material modification to the instrument.
• The company cited a precedent from the Allahabad High Court in the case of New Egerton Woollen Mills, In re, 1899 SCC OnLine All 22. The Allahabad High Court had addressed a similar question regarding stamp duty payable on a document that altered Articles of Association.

Looking at these arguments, the Court formed 2 questions of law. They are as follows:

1. whether the notice sent to the Registrar in Form No.5 is an “instrument” as defined under Section 2(l) of Bombay Stamp Act? And

• whether the maximum cap on stamp duty is applicable every time there is an increase in the share capital or it is a one-time measure.

Supreme Court’s Decision:

• The honourable Supreme Court concurred with the Allahabad High Court’s ruling.
• According to the Supreme Court, Form No. 5 serves as a prescribed method for sending notice of an increase in share capital or members to the Registrar within 30 days of passing such a resolution.
• The Registrar then records the increase in share capital or members and carries out necessary alterations in the articles.
• Stamp duty is affixed to Form No. 5 for practical convenience because a company cannot independently carry out alterations and record share capital changes in its Articles of Association.
• Ultimately, it is the articles themselves that qualify as an “instrument” within the meaning of Section 2(l) of the Stamp Act, and they are specifically mentioned in Article 10 of Schedule-I of the Stamp Act
• The Bombay Stamp Act is a fiscal statute and must be construed strictly. The court analyzed Article 10 and its placement in the schedule.  Column 1 describes the instrument on which stamp duty is levied.  Column 2 prescribes the stamp duty payable.
• Three situations are described in Column 1: “where the company has no share capital or nominal share capital or increased share capital” . The effect of adding “increased share capital” is that stamp duty will be charged on subsequent increases in the authorised share capital, subject to the maximum cap.
• In other words, the ceiling of Rs. 25 lakhs in Column 2 is applicable on Articles of Association and the increased share capital therein, not on every increase individually. In case stamp duty equivalent to or more than the cap has already been paid, no further stamp duty can be levied.”

As a result, the court in its order upheld the order of the lower court and ordered the state government to refund the stamp duty mistakenly paid by the company.

Position as on date:

As of the present date, the Supreme Court has provided clarity regarding the payment of stamp duty on increases in share capital. Although the case in question pertains to events from 1992 and 1994, it remains relevant today.

In 2015, the Bombay Stamp Act underwent an amendment through the Bombay Stamp Amendment Act 2015. This amendment introduced the term “increase” into Column 2 of Article 10 in Schedule I of the original Act. Consequently, the provision now stipulates that stamp duty should be paid on articles of association at a rate of 0.2% or a maximum of 50 lakhs for each individual increase in share capital1.

This legal development ensures greater clarity and consistency in the application of stamp duty provisions for companies undergoing changes in their authorized capital.

This article is published in Taxmann. The link to the same is as follows: –

https://www.taxmann.com/research/company-and-sebi/top-story/105010000000023905/deciphering-stamp-duty-analyzing-the-supreme-courts-verdict-on-share-capital-augmentation-experts-opinion

This article is written by CS Vrushali Bhave – Senior Manager – RND Team – vrushalibhave@mmjc.in and Ms Rutuja Umadikar – Research Associate – RND Team – rutujaumadikar@mmjc.in

The post Deciphering Stamp Duty: Analyzing the Supreme Court’s Verdict on Share Capital Augmentation first appeared on MMJC.

Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements), Regulations, 2015 [‘SEBI LODR’] requires disclosure of material events or information to stock exchanges. Materiality for disclosure of events or information to stock exchanges is determined pursuant to Reg. 30(4) of SEBI LODR[1]. There are certain events specified in Para A, Part A of schedule III of SEBI LODR that are required to be disclosed by listed entity without applying materiality thresholds. In this write up we will see as to when disclosure requirement would be triggered if a listed entity has decided to sell stake in associate company? Sale of stake in associate company is a deemed material event as per Para A, Part A of schedule III of SEBI LODR.

Disclosure of stake sale in associate company

Schedule III Part A, Para A, Point I of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements), Regulations, 2015 [‘SEBI LODR’] states as follows:

“Acquisition(s) (including agreement to acquire), Scheme of Arrangement (amalgamation, merger, demerger, or restructuring), sale or disposal of any unit(s), division(s), whole or substantially the whole of the undertaking(s) or subsidiary of the listed entity, sale of stake in associate company of the listed entity or any other restructuring.

Explanation (2) mentions that “sale or disposal of subsidiary” and “sale of stake in associate company” shall include-

(i) an agreement to sell or sale of shares or voting rights in a company such that the company ceases to be a wholly owned subsidiary, a subsidiary, or an associate company of the listed entity; or

(ii) an agreement to sell or sale of shares or voting rights in a subsidiary or associate company such that the amount of the sale exceeds the threshold specified in subclause (c) of clause (i) of sub-regulation (4) of regulation 30.”

It is clearly mentioned in the Point I, Para A of Schedule III that the listed entity is required to make disclosure to the stock exchange for sale of stake in associate company if it is exceeding the threshold specified in subclause (c) of clause (i) of sub-regulation (4) of regulation 30 or if due to stake sale the associate company ceases to be so of the listed entity.  

The threshold specified in subclause (c) of clause (i) of sub-regulation (4) of regulation 30 is the materiality threshold determined by the company every year for the purpose of giving disclosure to stock exchange under Para B of Schedule III of SEBI LODR. So, if the consideration on sale of stake in associate company exceeds the materiality threshold determined by company pursuant to SEBI LODR, then disclosure would be required to stock exchange.   

Timing of disclosure of stake sale in associate company

Once it is decided that sale of stake on associate company shall be disclosed the next question arises is as to when shall this disclosure be made to stock exchange? With respect to disclosure of events or information to stock exchange guidance is given in annexure III, of SEBI circular dt: July 13, 2023, relating toDisclosure of material events / information by listed entities under Regulations 30 and 30A of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015[‘July 2023 circular’][1]. As per annexure III of July 2023 Circular events or information that are subject to approval of board of directors and shareholders shall be disclosed to stock exchange when accord is received from both. However, if event or information is price sensitive then disclosure to stock exchange shall be given within thirty minutes of the approval of board of directors mentioning that it is subject to shareholders approval.

In case of sale of stake in associate company once the board of directors have given its accord for sale of stake then disclosure shall be given. Further if this sale of stake in the associate company is subject to approval of shareholders, then disclosure shall be given stating that it is subject to approval of members of the company.

Disclosure on actual sale of stake in associate company: As per regulation 30 sub- regulation (7) of SEBI LODR states as follows, “The listed entity shall, with respect to disclosures referred to in this regulation, make disclosures updating material developments on a regular basis, till such time the event is resolved/closed, with relevant explanations”  Once sale of stake in associate company is approved by the board of directors till the actual sale happens updates needs to be given to the stock exchange. Intimation shall also be given to stock exchange when the stake is actually sold by the listed entity.

Minimum information for sale of stake in associate company

As per July 2023 Circular, the listed entity shall provide minimum details stated below alongwith regarding sale of stake in associate company. These details shall be provided either when it is approved by board of directors or shareholders or when actual sale happens, as the case may be:

• the amount and percentage of the turnover or revenue or income and net worth contributed by such unit or division or undertaking or subsidiary or associate company of the listed entity during the last financial year.
• date on which the agreement for sale has been entered into.
• the expected date of completion of sale/disposal.
• consideration received from such sale/disposal.
• brief details of buyers and whether any of the buyers belong to the promoter/

promoter group/group companies. If yes, details thereof.

• whether the transaction would fall within related party transactions? If yes, whether

the same is done at “arm’s length”.

• whether the sale, lease or disposal of the undertaking is outside the Scheme of Arrangement? If yes, details of the same including compliance with regulation 37A of LODR Regulations.
• additionally, in   case   of   a   slump   sale, indicative   disclosures   provided   for

amalgamation/merger, shall be disclosed by the listed entity with respect to such slump sale.

Conclusion

The sale of a stake in an associate company by a listed entity underscores the critical importance of disclosure requirements. Ensuring that such material information is accurately and promptly communicated to the stock exchange is not just a regulatory obligation, but a cornerstone of maintaining information symmetry in the market. By adhering to the principles set forth in SEBI’s LODR regulations, listed entities play a vital role in keeping market participants informed and fostering transparency, which is essential for the integrity and efficiency of the financial markets.

[1] The listed entity shall consider the following criteria for determination of materiality of events/ information:

• the omission of an event or information, which is likely to result in discontinuity or alteration of event or information already available publicly; or
• the omission of an event or information is likely to result in significant market reaction if the said omission came to light at a later date; or
• the omission of an event or information, whose value, or the expected impact in terms of value, exceeds the lower of the following:

(1) two percent of turnover, as per the last audited consolidated financial statements of the listed entity.

(2) two percent of net worth, as per the last audited consolidated financial statements of the listed entity, except in case the arithmetic value of the net worth is negative.

(3) five percent of the average of absolute value of profit or loss after tax, as per the last three audited consolidated financial statements of the listed entity

In case where the criteria specified in sub-clauses (a), (b) and (c) is not applicable, an event or information may be treated as being material if in the opinion of the board of directors of the listed entity, the event or information is considered material:

[2] https://www.sebi.gov.in/legal/circulars/jul-2023/disclosure-of-material-events-information-by-listed-entities-under-regulations-30-and-30a-of-securities-and-exchange-board-of-india-listing-obligations-and-disclosure-requirements-regulations-201-_73910.html

The post Sale of stake in Associate Company by a listed entity– Disclosures requirement first appeared on MMJC.