Merger of step-down subsidiary with Holding Company

SEBI has released informal guidance to Renaissance Jewellery Limited (RJL) under the Informal Guidance Scheme read with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI LODR) whereby two wholly owned subsidiaries of RJL were desirous of getting merged with it.

Facts of the case are as follows:

·    Renaissance Jewellery Limited (RJL) is a Public limited company listed on BSE and NSE.

·     RJL has an unlisted wholly owned subsidiary (WOS) known as N Kumar Diamond Exports Limited (NKDEL)

·     NKDEL has a subsidiary House Full International Limited (HFIL) wherein NKDEL holds 55% of share capital and RJL holds the remaining 45%

·        NKDEL and HFIL are getting merged with RJL

RJL raised a query to SEBI seeking informal guidance whether the proposed amalgamation is exempted under Regulation 37 of SEBI LODR

Provisions of SEBI LODR:

As per Regulation 37(1) and 37(2) of LODR, a listed entity desirous of getting involved in a scheme of arrangement shall file the draft scheme of arrangement proposed to be filed before any Court or Tribunal, with the stock exchange to obtain an NOC or observation letter before filing the draft scheme of arrangement with any Court or Tribunal and without obtaining the NOC or Observation Letter it shall not file any scheme of arrangement with any court or Tribunal

Regulation 37(6) of LODR states that:

Nothing contained in this regulation shall apply to draft schemes which solely provide for merger of a wholly owned subsidiary with its holding company:

Provided that such draft schemes shall be filed with the stock exchanges for the purpose of disclosures

It implies that, Regulation 37(6) exempts NOC/observation letter from stock exchange in case of merger of a wholly owned subsidiary with its holding company. However, draft scheme is be required to file with stock exchange for the purpose of disclosure.

SEBI’s view

SEBI has stated that since whole of share capital of HFIL is held directly by NKDEL and indirectly, through NKDEL, by RJL also hence HFIL shall be considered WOS of NKDEL as well as RJL.

Hence, the proposed amalgamation would be governed by Regulation 37(6) of SEBI LODR and hence the proposed amalgamation of NKDEL and HFIL with RJL would be exempted under regulation 37(6) of SEBI LODR

Importance of Capital Vs. Debt

The debt-to-equity ratio measures the amount of debt capital a firm uses compared to the amount of equity capital it uses.

The following table represents debt equity ratio as well as PBT margin percentage of top 5 companies by market capitalisation of various Industries.

Sr. No.	Name of Company	Type of Industry	Debt Equity Ratio*	PBT margin %
	Reliance Industries Ltd.	Refineries	0.70	11.79
2.	Tata Consultancy Services Ltd.	Software	-	28.25
3.	ITC Ltd.	Cigarrates	-	26.49
4.	Hindustan Unilever Ltd.	Personal Care products	0.04	17.93
5.	Maruti Suzuki India Ltd.	Cars and Jeeps	0.01	12.72

*Debt Equity ratio = Debt/Total Equity

From the above table it can be seen that the larger companies have lower debt equity ratio of less than 1. It indicates that the company's lenders have less money in the company than its equity holders.

It also indicated good companies have profit before tax in range of 12-28% and hence they claim better valuation.

These numbers may inspire/give guidance to SME entrepreneur who are planning for IPO.

MCA UPDATE

Ministry of Corporate Affairs (MCA) is in the process of revising the procedure for DIN allotment.

DIN will now be allotted only at the time of appointment of directors, except for those directors who already possess DIN.

Form DIR-3, with respect to allotment of DIN to individuals, shall be filed only by the existing companies and shall be filed by such existing companies in which the proposed Director is to be appointed.

With respect to new companies, DIN of the proposed first directors will be applied mandatorily in SPICE forms, subject to the ceiling of 3 new DINs only.

With respect to Producer companies, allotment of 2 new DINs shall be allowed in Form DIR-3

Allotment of new DINs for Designated Partners or Partners of LLP shall be temporarily suspended from 26^th January, 2018 to 31^st March, 2018. It means incorporation of new LLP won’t be possible from 26^th January, 2018 to 31^st March, 2018 with Designated Partners or Partners who do not possess DIN.

Hence it is advised for LLPs to apply for DIN of Designated Partners or Partners before 26^th January, 2018.

A separate notification would be issued for the same by MCA

Can ex-gratia payment (profit) be shared with senior management as a token of Appreciation?

SEBI issues informal guidance to PNB Housing Finance Limited (PNBHFL) under the Informal Guidance Scheme and under SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR).

SEBI stated that PNBHFL would have to comply with Regulation 26(6) of LODR which deals with certain obligations with respect to employees including senior management, key managerial persons, directors and promoters.

Facts of the case are as follows:

• PNBHFL is listed on BSE and NSE pursuant to its IPO on 7^th November, 2016
• M/s Destimoney Enterprises Limited, Mauritius (DEL-Mauritius) acquired 49% of the share capital of PNBHFL in 2009. The shares were acquired by DEL Mauritius through its subsidiary M/s Destimoney Enterprises Limited (DEL-India). Principal assets of DEL-India were shares of PNBHFL
• In 2015, DEL-Mauritius’s holding in DEL-India was acquired by Quality Investments Holdings, Mauritius (QIH)
• After the sale, DEL-Mauritius received excellent returns on its investment in PNBHFL
• As a result, DEL Mauritius decided to make ex-gratia payments to the senior management of PNBHFL as a token of appreciation
• However, the proposal was put on hold as there was no clarity on the legality of such payments
• DEL-Mauritius decided to revive the proposal when the Company got listed

However, the proposal was put on hold as there was no clarity on the legality of such payments DEL-Mauritius decided to revive the proposal when the Company got listed NBHFL has raised query with SEBI seeking informal guidance whether the aforesaid transaction (receipt of ex-gratia payments) would require prior approval of the board of directors and shareholders.

Regulation 26(6) of LODR was introduced via amendment on 4^th January, 2017 with immediate effect. It states that:

No employee including key managerial personnel or director or promoter of a listed entity shall enter into any agreement for himself or on behalf of any other person, with any shareholder or any other third party with regard to compensation or profit sharing in connection with dealings in the securities of such listed entity, unless prior approval for the same has been obtained from the Board of Directors as well as public shareholders by way of an ordinary resolution..

The shares of DEL-India have been transferred from DEL-Mauritius to QIH in 2015. There was no direct dealing in shares of PNBHFL by DEL Mauritius or by DEL-India

But, the primary assets of DEL-India were shares of PNBHFL and hence there is an indirect dealing.

The sale of shares from DEL-Mauritius to QIH took place in 2015 when PNBHFL was an unlisted company.  PNBHFL was listed in November, 2016.  However, the proposal to make payments was revived when the company is listed and Regulation 26(6) of LODR is effective.

Hence, the SEBI concluded that the above transaction would be covered under Regulation 26(6) of LODR and PNBHFL would require approval from board of directors and shareholders before accepting ex-gratia payments from DEL-Mauritius.

Condonation of Delay Scheme 2018

Ministry of Corporate Affairs (MCA) has issued circular dated 29^th December, 2017 wherein it has introduced a scheme known as “Condonation of Delay Scheme 2018.

In September, 2017 MCA had identified directors associated with companies which had not filed financial statements or annual returns for a continuous period of three financial years and such directors were disqualified and barred from accessing the online registry

After the said action by MCA, certain affected persons have filed writ petitions before High Courts seeking relief from disqualification. Hence, MCA has brought the Condonation of Delay Scheme 2018.

The Scheme shall be effective from 01.01.2018 to 31.03.2018.

Applicability:

The scheme is applicable to all defaulting companies except those whose names have been struck off or removed from the register of companies under Section 248(5) of Companies Act, 2013.

Procedure under the scheme for companies whose names have not been removed from the register of companies:

·         The DIN of the disqualified director shall be temporarily activated during the validity of the scheme.

·         The defaulting company can then file the overdue documents in the prescribed eforms by paying the statutory filing fee and additional fee as per Section 403 of the Act.

·            After filing the documents, the company shall seek condonation of delay by filing form e-CODS         2018 along with filing fee of Rs. 30,000/-

·         After 31^st March, 2018, DIN of those directors will be deactivated who are associated with companies which have not filed their overdue documents and e-CODS

For the companies whose names have been removed and which have filed applications for revival upto the date of this scheme, the DIN of the director shall be reactivated only upon NCLT order of revival subject to filing of all overdue documents by the company.

 The scheme is applicable to filing of following overdue documents:

·         Form 20B/MGT-7: -Form for filing Annual return by a company having share capital.

·         Form 21A/MGT-7: Form for filing Annual return by a company not having share capital.

·         Form 23AC, 23ACA, 23AC-XBRL, 23ACA-XBRL, AOC-4, AOC-4 CFS, AOC-4 XBRL, AOC-4 (non-XBRL)

·         Form 66: Submission of compliance certificate with Registrar of Companies.

·         Form 23B/ADT-1: Appointment of Auditor

After the filing of documents, Registrar can withdraw the pending prosecutions, if any. However, the scheme is without prejudice to action under Section 167(2) of the Act or civil and criminal liabilities, if any, of such disqualified directors during the period they remained disqualified.

After the expiry of the scheme, Registrar shall take necessary actions against the companies who have not availed the scheme and have not filed the overdue documents.