A scheme of arrangement involving a listed entity is not solely an NCLT process. It is a dual-track process in which SEBI and the stock exchanges exercise a parallel jurisdiction over the scheme's compliance with the securities laws. The NCLT is the sanctioning authority, but SEBI's observation letter is a condition precedent to the NCLT's consideration of the scheme.
The SEBI Observation Letter
SEBI's Master Circular on Scheme of Arrangement by Listed Entities requires the listed entity to file the draft scheme with the stock exchanges before it files the scheme with the NCLT. The stock exchanges review the scheme for compliance with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018, and the Master Circular. The exchanges issue an observation letter, which may contain conditions that the listed entity must satisfy.
The observation letter is not an approval of the scheme; it is a statement of the exchanges' observations. The NCLT considers the observation letter and the listed entity's response to it before it sanctions the scheme. A scheme that does not have the observation letter is a scheme that the NCLT will not consider.
The Conditions for Merging Unlisted Entities
Where a scheme involves the merger of an unlisted entity with a listed entity, the Master Circular imposes additional conditions. The listed entity must include the applicable information about the unlisted entity in the explanatory statement in the format specified for an abridged prospectus, and the accuracy and adequacy of the disclosure must be certified by a SEBI-registered merchant banker. The post-scheme public shareholding of the listed entity and the QIB shareholding of the unlisted entity must be at least twenty-five per cent on a fully diluted basis.
These conditions are designed to protect the public shareholders of the listed entity. A merger that results in a dilution of the public shareholding below twenty-five per cent requires a relaxation from SEBI, which is granted only in exceptional circumstances.
The NCLT's Role
The NCLT does not substitute its judgment for SEBI's on securities law issues. The Tribunal's role is to determine whether the scheme is fair and whether the procedural requirements have been satisfied. The observation letter is evidence that the securities law requirements have been considered, but it is not a conclusive determination.
The composite scheme is the most complex form of the scheme process. It requires a coordinated approach across the NCLT, SEBI, the stock exchanges, and the sectoral regulators.
Call to Action
Anuj Desai & Associates advises listed entities on composite schemes of arrangement—from the SEBI observation letter process and the merchant banker certification to the NCLT sanction and the post-scheme compliance. If you are planning a scheme involving a listed entity, we can help you manage the regulatory overlap.
📧 office@anujdesaiassociates.com
📞 9619456656
🌐 https://anujdesaiassociates.com
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