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  • Aanchal Jain

In the Web of Listed and Unlisted Companies Merger

[Aanchal Jain is a fifth-year student at RMLNLU Lucknow.]

Mergers and acquisitions have turned into a prominent strategy for corporates across the globe to accomplish quick inorganic growth. In an era of globalization, developing markets such as India have also witnessed growing M&A arrangements in various sectors. In order to achieve better synergies, various schemes of mergers and amalgamations are being undertaken for successful implementation of the final output.

A listed company may at times opt for backdoor listing, a process which gets commercial enterprises on to a stock exchange listing without having to issue an initial public offer (IPO).[1] This resulted in inadequate public disclosures and, therefore, SEBI undertook measures to avoid such a scenario. The Companies Act, 2013 (Act), envisaged a new scenario wherein a listed company, (transferor) would merge with an unlisted company (transferee). Section 232(2)(h) of the Act states that, where the transferor company is a listed company and the transferee company is an unlisted company, the transferee company shall remain an unlisted company until it becomes a listed company. This implies that such a merger will not ipso facto make the unlisted company listed. It will continue to be unlisted until the applicable SEBI regulations in relation to issue of shares to the public are not followed.

SEBI Regulations and Compliances

The following SEBI Regulations are triggered whenever a merger or an amalgamation takes place between an unlisted company and a listed company -

  • SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR); and

  • SEBI (Delisting of Equity Shares) Regulations, 2009 (Delisting Regulations).

SEBI, in its role as a securities regulator and the protector of the interests of the investors, has been mindful of corporate governance risks associated with certain schemes of arrangement. When an unlisted company mergers with a listed company (surviving entity being the listed company), prior approval of the stock exchanges for the scheme of arrangement is required.[2] Upon an assessment of the merits of the scheme of arrangement, SEBI will issue either a no-objection certificate or, in case the scheme appears to be irregular, an observation letter for the judicial authorities to consider.[3] While SEBI has not strayed away from this position, the extent of scrutiny and disclosures has expanded by virtue of various circulars which have been issued for bringing about changes in the schemes of arrangement by listed entities. In 2017, SEBI issued a circular dated March 10, 2017, it rolled out certain changes in relation to schemes of arrangements by listed entities:

  1. The listed entity is required to provide information in relation to the unlisted entity in the format specified for abridged prospectus in the explanatory statement / notice / proposal sent to the shareholders for seeking their approval for the scheme of arrangement which is similar to the manner undertaken in an initial public offering.

  2. The percentage of shareholding of pre-scheme public shareholders of the listed entity and the qualified institutional buyers of the unlisted entity shall not be less than 25% of the post-merger shareholding pattern of the ‘merged’ company.

  3. Unlisted entities can be merged only with the listed entities listed on stock exchanges having nationwide trading terminals.

The LODR and various circulars issued by SEBI as mentioned above are mindful of a scenario of merger of an unlisted company with a listed company (resulting entity being an unlisted company). However, when a listed company (transferor) merges with an unlisted company (transferee), it remains uncertain whether such mergers are subject to the conditions imposed on entities under the Delisting Regulations. It remains to be seen whether the conditions prescribing the eligibility and qualifications therein have to be complied with by an entity to undertake a delisting merger under the Act, or there is a loophole in law, with an authoritative escape clause for the companies to delist without complying with the regulatory compliances of the aforementioned regulations.

SEBI may have failed to take notice of the possible outcomes offered by section 232(3)(h) of the Companies Act, 2013 on the backdoor delistings, and directed its focus primarily on defining conditions that would prevent entities from evading listing requirements (by opting for backdoor listing) through a scheme of arrangement. This omission raises questions on the main purpose of inserting section 232(3)(h) of the Act itself.

Lock-in Requirements

The LODR provides that a scheme of arrangement/ amalgamation/ merger/ reconstruction/ reduction of capital undertaken by a listed entity must be in compliance with the applicable securities laws.[4] SEBI vide its circular dated January 3, 2018 modified certain provisions of its earlier circular dated March 10, 2017. The earlier provision provided that in case of a scheme involving a hiving-off of a division of a listed entity into an unlisted entity and its subsequent listing, the entire pre-scheme share capital of the unlisted entity will be locked-in, but the 2018 one brought certain changes which recognized the delisting of mergers. It now states that –

In case of a scheme involving merger of a listed company or its division into an unlisted entity, the entire pre-scheme of the unlisted issuer seeking listing shall be locked in as follows:(a) Shares held by Promoters up to the extent of 20% of the post-merger paid-up capital of the unlisted issuer, shall be locked-in for a period of three years from the date of listing of the shares of the unlisted issuer; (b) The remaining shares shall be locked-in for a period of one year from the date of listing of the shares of the unlisted issuer. (c) No additional lock-in shall be applicable if the post scheme shareholding pattern of the unlisted entity is exactly similar to the shareholding pattern of the listed entity.

The 2018 circular is a move in the positive direction, as SEBI has formally recognized a scenario wherein a listed company may merge with an unlisted company and has provided formalities for it to comply with, unlike the questionable compliance under the Delisting Regulations.

Inter-se Transfer of Securities among Promoters

In a scenario where a listed entity merges with an unlisted entity and subsequently the entity gets listed, one may ask whether the promoters of the newly listed company may transfer shares amongst themselves subject to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 and to the locked-in securities in the hands of the transferee.

The 2018 circular provides that the shares locked-in may be transferred ‘inter-se’ amongst the promoters in accordance with the conditions specified under regulation 40 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, subject to the condition that a lock-in on such specified securities shall continue for the remaining period with the transferee and such transferee shall not be eligible to transfer them till the lock-in period stipulated in these regulations has expired.


SEBI, vide its 2018 circular, has broadened its scope of relaxations. This is expected to make the regulatory framework relating to schemes of arrangement by listed and unlisted companies more robust and is likely to assist in the smooth functioning of businesses and development of the economy. Clarity on the aspect of delisting mergers is anticipated since no known delisting merger has been proposed as of date. While most of the SEBI’s proposals are appreciable, it is expected that a definitive view is taken for mergers under section 232(h) of the Companies Act, 2013.

[1] Erik P.M. Vermeulen, High-Tech Companies and the Decision to “Go Public”: Are Backdoor Listings (Still) an Alternative to “Front-door” Initial Public Offerings? 4 Penn. St. J.L. & Int'l Aff. 421 (2015).

[2] Regulation 3, SEBI Circular CFD/DIL3/CIR/2017/21 dated March 10, 2017.

[3] Regulation 37, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

[4] Regulation 11, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

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