The article is written by Abhishek Dubey from Indraprastha University. This article deals with the stock exchange approval and disclosure required for the merger and acquisition transaction.

Introduction

The rule for merger and acquisition varies for different companies. The governing legislation and statutory act for merger and acquisition in India are the Companies Act 2013, with the FEMA Act 1996, with the Competition Act 2002, the Income Tax Act 1961, and the Indian Stamp Act etc. but whenever there is merger and acquisition of public listed companies the rule is different for all the companies and so is the procedure. For doing the merger and acquisition transaction in a public listed company; first of all, the approval is required from the stock exchanges, for obtaining non-objection certificate or observation letter. After obtaining observation letter disclosure are also made in the stock exchange wherever the securities of the company are listed, after that the provision of section 230 to 232 of scheme of arrangement is applied.

According to the regulation of the listing obligation and disclosure requirement; if any of the schemes like a merger, demerger and sale of a unit of the subsidiary company are taking place; then the scheme of arrangement is needed to be disclosed to the shareholders of the company before giving the application to the stock exchanges. 

Private company vs. listed company – M&A can take place in any form

Why are listed companies required to secure approvals or make disclosures to the stock exchanges for merger or demerger?

The general form of business combination that is available to a private company is also applicable to the publicly listed companies. So whenever the transaction happens, such as the acquisition of assets where the acquirers prefer to acquire the assets rather than the whole business, and there can also be the share acquisition as it is the most prefered form of acquiring the public company or the acquirer can take over the 100 per cent of the capital rather than acquiring the assets. Also, merger and demerger is another method.

These are the transactions for when the approvals are required from the stock exchange, it is mandatory for the listed companies to obtain the no-objection certificate or the observation letter from the stock exchange before they go into further process of the scheme of arrangement. It is required for the stock exchange because in listed companies there is a stake of the general public that has to be taken care of, otherwise it will affect the public in a great way.

What are the approvals required?

Schemes involving publicly listed companies need to be pre-cleared by the relevant stock exchanges and has to be proved by the Securities and Exchange Board of India (SEBI), before submitting these scheme to the National Company Law Tribunal (NCLT) for approval, and additional conditions regarding disclosures and shareholder voting needs are to be complied with.

• Application has to be made to the stock exchange via electronic mode before filling with the NCLT for a scheme of arrangement under Section 230 to 232 for obtaining the observation letter or no objection from the stock exchange.
• After obtaining the no objection or observation letter the application has to be filed with NCLT.

Additional procedure specific to SEBI (Listing Obligation and Disclosure Requirements) Regulations 2015 (LODR) for merger and acquisition

According to Regulation 11

The listed company shall make sure that the scheme of arrangement should not violate the securities law requirements. But this regulation is not applicable to the fund management companies who manage issues for the mutual funds and are recognised by SEBI under the stock exchange.

According to Regulation 37

• The listed companies before filling the scheme of arrangement under Section 230 Section 231, Section 232 and other provisions of the Companies Act, 2013 applicable to the scheme of arrangement shall obtain the stock exchange approval or no objection certificate from the stock exchanges.
• The listed company shall never file the scheme of arrangement to the court or tribunal until and unless the observation letter has been obtained.
• After that, the listed company can make this observation letter to the court or tribunal for the approval of the scheme of arrangement scheme and observation letter or no objection certificate is valid for just six months from the date of issue.
• After the sanction or approval of the scheme from time to time, the listed companies have to submit the documents to the stock exchanges.

According to Regulation 24(1), there shall be one independent director from the listed and one from the unlisted entity during the scheme of arrangement between listed and the material subsidiary company.

When are approvals required?

The approval as per Regulation 37(1) of SEBI listing obligation and disclosure requirement 2015; the listed companies have to make the disclosure to the stock exchange in the beginning for obtaining the no-objection certificate or no observation letter, after that the procedure given under the companies act 2013 containing section 230 to 232 is followed.

According to Regulation 28, the requirement of obtaining in-principle approval of the recognised stock exchange is not applicable for a company’s scheme of arrangement for which the listed entity has already obtained a No-Objection Letter from the recognised stock exchange in accordance with Regulation 37.

The in-principle approval is required in the following cases according to Regulation 28,

The listed entity, before issuing securities, shall obtain an in-principle approval from the recognised stock exchange in the following manner: 

1. If the listed entities are on such stock exchanges which have nationwide terminals then from all the recognised stock exchanges.
2. Where the securities are not listed on any recognised stock exchange having nationwide trading terminals, from all the stock exchanges in which the securities of the issuer are proposed to be listed.
3. From all the recognised stock exchanges whether having nationwide terminals or not.

Approval is required in the following cases for merger and acquisition

The scheme of arrangement or merger and acquisition should be disclosed without any application to the stock exchange according to regulation 30. When there is acquisition(s) (including an agreement to acquire), Scheme of Arrangement (amalgamation/ merger/ listed entity or any other restructuring.

Here, ‘acquisition’ means- 

• acquiring control, whether directly or indirectly; or,
• acquiring or agreeing to acquire shares or voting rights in a company, whether directly or indirectly, such that- 
  • The listed entity holds shares or voting rights aggregating to five per cent or more of the shares or voting rights in the target entity.
  • There has been a change in holding from the last disclosure made.

According to Regulation 24(5), the listed entity shall not dispose of its share in the  material subsidiary which will result in a reduction of shareholding at least 50 per cent of share has to be maintained. But if disinvestment has been made that means the process of selling off subsidiary business interest or investment under the scheme of arrangement then this is not necessary.

According to the Regulation 24(6), selling/ disposing/leasing of the assets more than 20 per cent requires the approval of the shareholder, but when there is the scheme of arrangement duly approved by Court/tribunal then for sale, dispose of or for lease permission of the shareholder is not required.

According to Regulation 94, the stock exchange after receipt of a scheme of arrangement from the board shall forward the same to the board as in the manner prescribed. Whether the draft is under the compliance of the securities law or not.

The stock exchange shall also submit the board its observation letter or no objection certificate.

The stock exchange shall issue the observation letter within 7 days from the receipt of the statement from the board and once the letter is issued it is valid for the six months.

The stock exchange shall also bring the scheme to the court or tribunal at the time of approval (demerger/restructuring), or sale or disposal of any unit(s), division(s) or subsidiary of the 

After sanction approval then the stock exchange shall forward the same to the board as per the regulation 37(5).

Which companies have to make disclosures?

Chapter 2 of listing obligation and disclosure requirement contains the principles governing disclosures.

According to Regulation 4(1) of the LODR (Listing Obligation and Disclosure Requirement), the listed entity which has listed securities shall make disclosure and abide by its obligation in accordance with the following principle:

1. Information shall be prepared and disclosed in accordance with the applicable standards of accounting and financial disclosure.
2. The listed entity shall implement the prescribed accounting standards in the letter with the consent of all the stakeholders and also shall ensure that the audit is done by the competent auditor.
3. The listed entity shall refrain from the misrepresentation and ensure that the information provided to the concerned stock exchange and investor is not misleading.
4. The listed entity shall also provide timely and adequate information to the stock exchange.

What are the disclosures that have to be made?

Serial Number	Regulations	Disclosures
1.	According to Regulation 69(2)	The listed companies have to file the following things to the stock exchange wherever the securities are listed in case of merger and amalgamation: Shareholding pattern. Pre and post arrangement shareholding pattern. Capital structure.
2.	According to Regulation 36(1)	The listed company has to send the document to the shareholder in the following manner: Soft copies of annual reports to the shareholders who have registered the email address for the purpose. A hard copy of the statement containing the salient feature of all the documents as mentioned three Companies Act section 136. Hardcopies of the full annual report should be given to the shareholder who wants it.
3.	According to Schedule IV, Part A: disclosure In Financial Result (K)	The listed entity shall disclose the effect on the financial results of material changes resulting from the business combinations, acquisitions or disposal of subsidiaries and long term investments, or any other form of restructuring and discontinuance of operations.
4.	According to Part C: Disclosure Of Material Events or Information: Indian Depository Receipts (A)(10)(d)	The listed entity shall inform the stock exchange for the merger and amalgamation and reconstruction and also it should issue the notice circular and other things to the public.
5.	According to Regulation 42(1)(e) Record date or date of disclosure of transfer books.	The listed entity shall inform the stock exchanges wherever it is listed for the issue like the bonus share, demerger and the merger.

Conclusion

Both the private companies and public companies can go for the merger and acquisition transaction, but public companies have to obtain observation letters from the Stock exchange and SEBI because the stake of the general public is also present, which can  get affected.

The public listed companies have to comply with the companies law also after obtaining the no-objection certificate from the stock exchange. The listed companies have to initiate the records date and shareholding pattern and other things to the stock exchange. The listed companies have to submit the financial change after the acquisition in the stock exchange. 

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