1. Bouquet of Changes
The Securities and Exchange Board of India (SEBI) on Tuesday met with a platter full of agenda. They made major announcements of easing the delisting framework to boosting merger and acquisition (M&A) activity in the country. Delisting is the process of removing shares of the company from the stock exchange permanently. It also cleared the framework to roll out social stock exchanges and gold spot exchanges. The Board of SEBI in its meeting yesterday also approved SEBI (Vault Managers) Regulations, 2021 and tightened the norms on related-party transactions (RPTs) to prevent their abuse.
2. Gold Exchange
The Gold Exchange, encompassing the entire ecosystem of trading of Electronic Gold Receipts (EDR) and physical delivery of gold, is expected to create a vibrant gold ecosystem in India commensurate with India’s large share of global gold consumption. The Gold Exchange would be a national platform for buying and selling EGRs with underlying standardized gold in India and also create a national pricing structure for gold.
3. Social Stock Exchange (SSE)
Social Enterprises eligible to participate in SSE shall be entities (Non-Profit Organization – NPO and For-Profit Social Enterprise – FPE) having social intent and impact as their primary goals. Social Enterprises will have to engage in a social activity out of the list of 15 broad eligible social activities approved by the Board.
4. RPT norms get tougher
SEBI tightened the definition of what would qualify as RPTs and also extended it to transactions with shareholders holding 10 per cent or more in the company.
I. The definition of the related party shall include:
a. all persons or entities forming part of promoter or promoter group irrespective of their shareholding;
b. any person/entity holding equity shares in the listed entity, as below, either directly or on a beneficial interest basis at any time during the immediately preceding financial year:
i. to the extent of 20 % or more
ii. to the extent of 10% or more w.e.f. April 1, 2023.
India has one of the most detailed sets of laws and regulations governing disclosures and approvals of related party transactions (RPT) regulating both listed and unlisted companies. The provisions of Section 188 of the Companies Act, 2013 (the Act) are applicable if:
- a company enters into a transaction with a ‘related party’ as defined under Section 2(76) of the Act;
- such transaction falls under any of the categories specified under sub-clause (a) to (g) of Section 188(1) of the Act, approval of the board of directors will be required prior to entering into such transaction; and
- such transaction exceeds the monetary thresholds prescribed under Rule 15(3) of the Companies (Meeting of Board and its Powers) Rules, 2014, prior approval of the shareholders will also be required by way of an ordinary resolution.
SEBI had implemented the Kotak Committee recommendations on Related Party Transactions (RPTs) by making amendments to the Listing Obligations and Disclosure Requirements Regulations, 2015 (“LODR”) on May 9, 2018. In less than two years, in November 2019, SEBI constituted a Working Group (WG) to re-examine the RPT provisions of the LODR, against the backdrop of new corporate scandals, which surfaced, where certain abusive RPTs were undertaken by the listed entity at a subsidiary level, which was not captured by the LODR provisions.
India has one of the most elaborate sets of rules and regulations for disclosures and approval of RPT by both listed and unlisted companies. Historically, the Companies Act, 1956 did not specifically regulate RPTs. It had provisions that only restricted certain types of transactions.
The Companies Act, 2013 (CA, 2013) enacted Section 188, which for the first time began regulating certain types of transactions between companies and its “related parties” (as defined in CA 2013) and provided for the approval of such transactions (exceeding a prescribed monetary threshold) by non-related parties.
The Ministry of Corporate Affairs (MCA) regulates transactions between two unlisted companies, while SEBI looks at transactions when at least one of the parties to the transaction is a listed entity. Listed companies are required to follow stricter rules because public money is at play.
Section 188 of the CA, 2013 came into force on April 1, 2014. The MCA has been diluting the rigours of RPT provisions ever since by issuing various clarificatory circulars and also amendments to CA 2013 and the Rules. It changed the special resolution required to an ordinary resolution (2015 Amendment). Further, the MCA circular dated July 17, 2014, clarified that only concerned related parties could not vote on the resolution for approval of RPT. It also clarified that the schemes of arrangement under Section 230-234 of CA, 2013 need not comply with Section 188. This circular goes against the scheme of Section 188 and its legal validity is doubtful. Moreover, Section 188 exempts transactions in the “ordinary course of business” and at “arm’s length” without adequately defining those terms. Many transactions are therefore escaping shareholder scrutiny.
The MCA recently amended the Rules and removed the numerical threshold of Rs 100 crore for approval of RPT by the shareholders. The Company Law Committee (CLC), constituted by the MCA, in its November 2019 report has recommended decriminalisation of RPT offence under Section 188 of CA, 2013, and has proposed only a monetary penalty of Rs 25 lakh for listed companies and Rs 5 lakh for unlisted companies.
5. Review of delisting framework pursuant to open offer
Under the existing framework, if an open offer is triggered, compliance with Takeover Regulations could take the incoming acquirer’s holding to above 75% or perhaps even 90%, however, to ensure compliance with Securities Contract (Regulation) Rules, 1957 (SCRR) the acquirer would be forced to first bring his stake down to 75% as the SEBI (Delisting of Equity Shares) Regulations, 2021 (Delisting Regulations) would not let the acquirer even to attempt at delisting unless the holding is first brought down to 75%. Such directionally contradictory transactions in a sequence pose complexity in the takeover of listed companies, especially where the acquirer desires to get the company delisted pursuant to his take over. The revised details are mentioned below:
1. The framework shall be made available in the case of open offers under the Takeover Regulations for an incoming acquirer who is seeking to acquire control under Regulation 3(1) or Regulation 4 or Regulation 5.
2. If the acquirer is desirous of delisting the target company, the acquirer must propose a higher price for delisting with suitable premium over open offer price.
3. If the response to the open offer leads to the delisting threshold of 90% being met, all shareholders who tender their shares shall be paid the same delisting price and if the response to the offer leads to the delisting threshold of 90% not being met, all shareholders who tender their shares shall be paid the same takeover price.
4. If a company does not get delisted pursuant to the open offer under this framework, and the acquirer crosses 75% due to the open offer, a period of 12 months from the date of completion of the open offer will be provided to the acquirer to make further attempts to delist the company under the Delisting Regulations using the reverse book building mechanism. If delisting during this extended 12-month period is not successful, the acquirer then must comply with the minimum public shareholding norm within a period of 12 months from the end of such period.
5. If the acquirer at the time of open offer, states upfront that it would opt for remaining listed, and the total stake at the end of the tendering period reaches above 75%, then the acquirer may opt for either proportionately scaling down of purchases made under both, i.e. the underlying share purchase agreement and the shares tendered under open offer, in such a manner that the 75% threshold is never crossed or alternatively, the acquirer shall have to become compliant with minimum public shareholding within the time stipulated under SCRR.
6. While undertaking delisting under this framework, all the provisions of the Delisting Regulations shall be applicable mutatis-mutandis, save otherwise provided in this framework
