When a merger or acquisition involves an unlisted share, the journey of that share right from ownership, valuation to post-merger rights, all this is tightly governed by regulations set by SEBI, RBI, and the Companies Act. Here’s how the process unfolds for shareholders.
Regulatory Framework and Due Diligence
SEBI’s oversight ensures that mergers involving listed and unlisted entities maintain market integrity and protect shareholders. Key requirements include:
- Shareholding thresholds: When an unlisted company merges with a listed one, the resulting entity must ensure that public shareholders of the listed company plus Qualified Institutional Buyers of the unlisted company hold at least 25% on a fully diluted basis.
- Lock-in conditions: If an unlisted company becomes listed post-merger, promoter shares up to 20% of the paid-up capital are locked-in for 3 years, and the remaining pre-merger share capital is locked-in for 1 year.
- Documentation and approvals: Schemes of arrangement must include valuation reports by registered valuers, fairness opinions, audited financials, and detailed compliance reports. These are scrutinized by SEBI before court filing.
RBI Valuation Guidelines for Transfer of Unlisted Shares
Transfers of unlisted shares, especially in FDI or cross-border mergers require fair valuation using the Discounted Cash Flow (DCF) method, performed by a SEBI-registered Category I Merchant Banker or a Chartered Accountant. This ensures transfer prices are aligned with fair value, avoiding manipulation.
What Shareholders Can Expect
- Share Conversion: In mergers or acquisitions, your unlisted shares may convert into shares of the acquiring entity, depending on the agreed exchange ratio and valuation.
- Lock-in Periods: If your unlisted company now becomes listed post-merger, your shares may be subject to mandatory lock-ins as defined above.
- Regulatory Clearance: SEBI’s approval of the scheme is essential to ensure fair treatment of shareholders and compliance with minimum shareholding norms.
- Value Determination: Especially for non-resident transfers or cross-border deals, valuation must follow DCF guidelines, ensuring fair compensation.
Summary Table: What Shareholders Need to Know
| Aspect | What to Expect |
| Valuation Method | Must use DCF by approved professionals for fair price determination. |
| Share Lock-in | Promoters: 20% for 3 years; others: balance for 1 year if unlisted entity lists post-merger. |
| Shareholding Norms | Public + QIB shareholding must be ≥ 25% on fully diluted basis. |
| Approval Process | Requires detailed disclosures, valuations, fairness opinions, and SEBI observations. |
Final Thoughts
When you hold an unlisted share and your company merges or is acquired, your share may:
- Convert into shares of the new entity,
- Be subject to regulatory lock-ins,
- Be valued via rigorous, regulated methods,
- And become listed, depending on structural outcomes.
All of this unfolds under SEBI’s and RBI’s watchful eyes to ensure fairness and transparency. For unlisted share holders, understanding these rules helps you anticipate your rights, timelines, and value expectations.
Sources
- Mondaq – Revised SEBI Guidelines for Schemes of Arrangements by Listed Entities
- TaxGuru – SEBI Master Circular on Scheme of Arrangement & Relaxation Rules
- IRCCl – In the Web of Listed and Unlisted Companies Merger
- Nishith Desai Associates – SEBI’s Merger & Acquisition Guidelines
- Mondaq – RBI Revises Pricing Guidelines Applicable to Equity Transfers Between Residents and Non-Residents
- AffairsCloud – SEBI Tightens Merger & Acquisition Norms Among Unlisted Firms
