Analysis of circular shows SEBI is being too cautious

The Securities and Exchange Board of India (SEBI) issued a circular on 4 February, withdrawing its earlier circular dated 3 September 2009, setting stringent requirements for listed companies and stock exchanges in relation to a scheme of arrangement under the Companies Act, 1956. Subsequent to this, a circular clarifying the applicability and various provisions of the February circular was issued by SEBI on 21 May.

The February circular spurred debate mostly premised on lack of clarity and detachment from the practical reality of most corporate restructurings. The laudable objective behind the circular was to remedy inadequate disclosures, convoluted schemes of arrangement and exaggerated valuations, to protect the interests of minority shareholders and other stakeholders. The key question is whether the provisions in the February circular are essential to achieve the objective underlying it or whether they onerously limit the autonomy of companies to conduct business in accordance with shareholders’ democracy.

The May circular clarifies that the provisions apply to all listed companies undertaking a scheme of arrangement, irrespective of whether exemption is sought under the Securities Contracts Regulation Rules, 1957. It also clarifies other contentious issues, such as when a valuation report from an independent chartered accountant (CA) has to be obtained and the requirement that a majority of public shareholders vote in favour of the draft scheme. These clarifications have brought breathing space for companies. But the February circular is still fettered with conflicting legal standards.

Inder Mohan Singh is a partner and Arya Tripathy is an associate at Amarchand & Mangaldas & Suresh A Shroff and Co, New Delhi. The views expressed in this article are those of the authors and do not reflect the position of the firm.