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“FIT & PROPER” Impact on Scheme of Mergers & Demergers - MMJC
Introduction
Scheme of mergers, demergers, and various other arrangements (herein after “Corporate Restructuring”) involving listed entities are seen increasing at a greater pace in recent times. Listed entities involved in scheme of arrangement have to seek No Objection letter from stock exchanges[i]. Corporate Restructuring involving listed entities which are SEBI Registered Intermediaries and certain individuals forming part of this listed entities have to comply and ensure the ‘fit and proper’ person criteria. This criterion is checked by stock exchanges on behalf of Securities and Exchange Board of India (‘SEBI’) during any corporate restructuring. Fit and Proper person criteria seeks to check if the entities involved in the corporate restructuring are morally and ethically sound.
Fit and Proper check has 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. Fit and proper person criteria is periodically checked by SEBI in 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 as Fit & Proper under while going for any corporate restructuring and 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[ii]. The criteria are as follows:
- integrity, honesty, ethical behaviour, reputation, fairness and character of the person;
- 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;
- 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;
- recovery proceedings have been initiated by the Board 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 categorized 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 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 percent or more voting rights, irrespective of whether they hold 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 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 few cases it is seen that stock exchanges have been rejecting schemes on the grounds of listed Intermediaries and individuals forming part of this listed Intermediaries have not complied with criteria of “Fit & Proper”. Couple of schemes which were rejected on the basis of ‘Fit & Proper’ person criteria is as follows:
1. In case of 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 Stock exchange has 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.
2. In Case of Scheme of arrangement between IIFL Securities Limited and 5Paise Capital Limited and their respective shareholders and Creditors: In this casethe 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 gives indication 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 Intermidiary. Stock Exchanges may look into this Fit& Proper criterion at the time of Corporate Restructuring because of 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 vs Union of India[iii] in reference to 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, Registrar of Companies had issued ‘Show Cause Notices’ and appellants had not responded to it. 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, Hon’ble tribunals has clearly outlined that any non-compliances of Companies Act, 2013 especially related to public deposits and the ignorance of show cause notices is not a case of “Fit & Proper” for scheme of merger.
Conclusion
The Conduct and the actions of the Companies and the directors play an important role to demonstrate the “Fit & Proper” criteria before any corporate restructuring. Any violation to the criteria results in loss of confidence by the regulator on the company as well as the intent of the transactions. Therefore, a Pre “Fit & Proper Criteria check” has become the unavoidable action point before any corporate restructuring.
[i] Regulation 37 of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations 2015 read with SEBI Master circular dated 20 June 2023 SEBI/HO/CFD/POD-2/P/CIR/2023/93.
The article was written by Mr. Omkar Dindorkar, a partner of MMJC!
The article is published in Taxmann and the same be accessed at the following link: