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Sebi board okays steps to make M&As easier

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Mumbai: The board of the Securities and Exchange Board of India (Sebi) Tuesday approved measures to make mergers and acquisitions of listed companies easier and allow the establishment of gold and social stock exchanges in the country. It also cleared proposals to tighten related party transactions, launch silver exchange-traded funds (ETFs) and relax rules on superior voting rights (SVRs) for promoters of new-age tech companies, to encourage Indian startups to list locally.

ET was the first to report on September 27 that the Sebi board was set to approve the measures cited above at its meeting on Tuesday.

Acquirers will be allowed to delist a target company seamlessly, as they will be able to launch open and delisting offers simultaneously, the regulator said. Currently, if an open offer is triggered by an M&A deal or an overseas amalgamation, then the entity has to implement three different public transactions to comply with Sebi rules. Following the board approval, Sebi will frame detailed guidelines to put these steps into effect.

Under existing takeover rules, following an open offer, the acquirer’s holding may cross 75% or even 90%. But to meet minimum public holding norms, the acquirer has to bring the holding below 75% within 12 months.

On the other hand, delisting rules require the buyer to reach 90% to take the company private.

“The delisting reform proposed by Sebi takes away a big hurdle in public M&As which until now disallowed acquirers from delisting a target company seamlessly,” said Vikram Raghani, partner, J Sagar & Associates. “The current requirement of first being required to sell down to 75% and then attempt a delisting process as per the reverse book-building process has been done away with.”

First-time acquirers can now attempt a delisting by offering what they believe is a commercially reasonable price without having to worry about an exorbitant one thrown up by the reverse book-building method, he said. “With increasing shareholder activism and sound guidance provided to minority shareholders on the reasonableness of the price offered, this should be an attractive proposition for public M&As,” Raghani said.

The regulator said that if an acquirer wants to delist the target company, then it must propose a higher price for this with a suitable premium over the open offer price. If the response to the open offer leads to the delisting threshold of 90% being met, all shareholders who tender their shares should be paid the same delisting price.

If the response to the offer doesn’t meet the 90% threshold, all shareholders who tender their shares should be paid the same takeover price, Sebi said.

“The process also allows the acquirer another bite at the cherry if the price offered for delisting is not attractive enough to get to the 90% response,” Raghani said. “It is unlikely that this second option will be used by too many acquirers since it would make the entire transaction fairly long from a timeline perspective. Nevertheless, the two options put together seem to balance the equation for acquirers and minority shareholders.”

Gold, Social Stock Exchanges

The Sebi board also approved the framework for setting up gold and social stock exchanges in the country. Retail investors, banks, foreign portfolio investors and jewellers will be able to trade on spot gold exchanges through a new instrument known as electronic gold receipts (EGRs), which will be notified as securities.

The regulator said any stock exchange, existing as well as new, can launch trading in EGRs in a separate segment. The EGR holder would be able to continue to hold the gold receipt as long as intended since they would have perpetual validity.

To lower the costs associated with withdrawal of gold from vaults, EGRs would be made fungible and interoperability between vault managers would be allowed, Sebi said.

The regulator said the exchanges, encompassing EGRs and physical delivery, are expected to create a vibrant gold ecosystem in the country.

“Having gold exchanges formalises an unstructured gold market and brings in efficient price discovery and portfolio diversification benefits to a larger investor base,” said Vivek Iyer, partner, Grant Thornton Bharat.

Existing stock exchanges can also launch social stock exchanges that would allow for-profit and not-for-profit organisations (NPOs) to tap public markets to raise funds.

They would have to demonstrate that social intent and impact are their primary goals, demonstrated through their focus on eligible social objectives for underserved or lessprivileged populations or regions. NPOs can raise funds through equity, zero-coupon, zeroprincipal bonds, development-impact bonds, social-impact funds and donations by investors through mutual funds.

The regulator has also proposed that reputed firms with expertise in the area of social impact should be allowed to carry out audits.

“The approval for creation of a social stock exchange is a significant step in the right direction to facilitate fundraising for NGOs in India, especially with the increasing importance of ESG (environmental, social, and corporate governance) globally and in India,” Iyer said.

Related Party Transactions, SVRs

The regulator has also proposed to tighten related party transactions (RPTs) for listed companies. The definition of related party has been expanded to include all persons or entities forming part of promoter or promoter groups irrespective of their shareholding. Also, any person or entity holding equity shares in the listed companies to the extent of 20% or more and 10% or more from April 1, 2023.

Sebi said prior approval of shareholders of listed companies would be required for material RPTs at Rs 1,000 crore or 10% of the consolidated annual takeover of the listed entity, whichever is lower. Also, all RPTs will have to be approved by the audit committee. The new rule will come into effect on April 1, 2022.

Related party transactions are misused in various ways, including siphoning of funds, and hence there was a need to tighten the framework and safeguard the interest of minority shareholders, Sebi chief Ajay Tyagi told reporters after the board meeting.

“It is an overhaul of disclosures on related party transactions,” said Sumit Agrawal, partner, Regstreet Law Advisors & former Sebi officer. “The concept itself has been tweaked to include non-promoter entities and shareholders. Audit committees will have to take a bigger role on scrutinising these.”

Sebi has had regulatory experience of dealing with at least 20 companies where there were complaints and forensic audits had shown misuse of related party transactions through the structure of subsidiaries and friendly shareholders, he said

The regulator has also relaxed two onerous requirements on issuance of superior voting right (SVR) shares, thereby easing the listing of startups in the technology space and helping promoters retain control even after dilution. The move is aimed at encouraging Indian startups to list locally rather than overseas.

Currently, the rules stipulate that SVR shareholders should not be part of promoter groups whose collective net worth is more than Rs 500 crore. That threshold has been doubled.

“Sebi’s decision to require that the SVR shareholder, as an individual, should not have net worth of more than Rs 1,000 crore, will definitely be well received by the industry,” said Manendra Singh, associate partner, Economic Laws Practice. “The requirement seems to have been now made applicable to the individual’s net worth rather than a larger gamut of entities or person which may have been a part of the promoter group.”

The other decision to reduce the minimum gap between issuance of such shares and filing of draft red herring prospectuses (DHRPs) to three months from the existing requirement of six months will also benefit the industry and push listings of such companies, he said.