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SEBI ensures greater say for public shareholders in merger cases

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MUMBAI: As part of its attempts to safeguard the interests of the public shareholders, the Securities and Exchange Board of India (SEBI) has tightened the norms for merger of an unlisted company with a listed entity.

The board of the capital market regulator, which met at Jaipur, decided that the holding of public shareholders post the merger cannot be less than 25 per cent. Further, the watchdog has stipulated a similar threshold for institutional shareholders of the unlisted entity as well post the merger.

“The objective is to have wider public shareholding and to prevent very large unlisted company to get listed by merging with a very small company,” said a statement issued by SEBI.

The regulator has also decided that an unlisted company can be merged with a listed company only if the latter is listed on a stock exchange having nationwide trading terminals.

To ensure larger say for the public shareholders, the regulator has also made their e-voting mandatory in cases wherein the stake of such shareholders reduces by more than 5 per cent in the merged entity.

“The regulations attempt to ensure the rights of the public shareholders are protected and also get them greater look-in on mergers with unlisted subsidiaries,” said Sanjeev Krishan, Partner and Leader – Deals, PwC India.

Sumit Agrawal, Partner, Suvan Law Advisors and a former SEBI law officer, says that the regulator was concerned because there have been instances where the route of merger was used to get an indirect listing for an unlisted company.

“There was another category of misuse where under an arrangement; securities were being issued to promoter related persons only. There was an issue on electronic voting requirement as well. This amendment would also take care of recent challenges in high courts,” he says adding that at least two high courts had frowned upon SEBI’s jurisdiction over scheme of arrangements in the recent past.

Among other issues, the regulator also reduced the broker fees by 25 per cent from Rs.20 per crore of turnover to Rs.15. This will result in reduction of overall cost of transactions and will benefit the investors and promote the development of securities market, said the statement.

In order to help mutual fund investors take better informed decisions, SEBI has decided that fund houses will have to include in their advertisements, the performance of the scheme in terms of CAGR for the past one year, three years and five years and since inception.

Currently, the fund house only publishes the scheme’s returns for as many twelve month periods as possible for the past three years.

The regulator has also allowed mutual funds to invest in hybrid instruments like REITs and InvITs but has laid down certain criteria on the cap for such investments.

A mutual fund scheme cannot invest more than five per cent of its net asset value (NAV) in units of a single REITs/InvITs issuer. Further, the overall exposure of a scheme in REITs/InvITs has been capped at 10 per cent.

However, such limits will not be applicable for investments in case of index fund or sector or industry specific scheme pertaining to REITs and InvITs.

“Allowing mutual funds to invest in a new class of ‘alternative securities’ would help in attracting more number of investors into REITs and InvITs. SEBI’s preference has been that retail investors should invest through mutual funds rather than directly. This is a welcome move for fund management community and an indirect route for small investors to get exposure to these securities,” says Mr Agrawal.