(First published on Linkedin)
In a yet another perplexing informal guidance, SEBI has once again emphasized form over substance, deviating from the global trend that prioritizes the latter. This case involved a merger between a subsidiary, 99.09% owned by a listed company and 0.91% by public shareholders (presumably since they are unrelated/ unconnected with the promoters of the listed company), with the listed parent company itself. The promoters of the listed company held 75%, while the remaining 25% was with the public.
Post-amalgamation, the overall public shareholding would be 25.27%, slightly above the stipulated minimum of 25% public shareholding. However, the pre-scheme public shareholders’ stake would marginally dip to 24.91%. Despite the substance indicating compliance with the minimum public shareholding norm post-amalgamation, SEBI insisted that the 25% threshold be maintained vis-a-vis pre-scheme public shareholders, citing the provisions of SEBI Master Circular dealing with Schemes of Arrangement. To meet this formal requirement, SEBI mandated promoter dilution before filing the scheme with NCLT, effectively prioritizing the letter of the law over its spirit.
Key Observations:
1. Form Over Substance: SEBI’s insistence on meeting the pre-scheme public shareholding requirement, despite the overall public shareholding being compliant post-amalgamation, underscores an overemphasis on form rather than the broader intent of the regulation.
2. Inflexibility: The requirement for promoter dilution, despite the minimal difference in shareholding percentage, illustrates a rigid approach, which could lead to unnecessary complications and delays in corporate restructuring.
3. Global Disconnect: This ruling seems out of sync with the global shift towards substance over form, where the essence of compliance is given precedence over mere technical adherence.
This informal guidance serves as a reminder of the sometimes perplexing regulatory landscape, where strict adherence to form can overshadow the substance of corporate actions.