Introduction
In the financial market, many companies go through mergers to combine their businesses and create a new structure. But when you hold unlisted shares, a merger can create more questions because the process involves ownership, valuation, share entitlement, and your rights after the merger.
These matters are governed by the applicable SEBI regulations, RBI requirements where applicable, and the Companies Act and related corporate laws.
In this article, we will understand What Happens to Unlisted Shares During a Company Merger? and what an unlisted shareholder should check before and after the merger.
1. What Happens to Your Unlisted Shares When the Merger Is Approved?
When unlisted shares undergo a merger, they can go through specific structural and regulatory changes depending on the terms of the merger and whether the combined entity becomes listed or remains unlisted.
The important point for an unlisted shareholder is that the outcome is not the same in every merger. The merger scheme determines how your existing shares are treated and what you may receive after the merger becomes effective.
So, before assuming that your unlisted shares will simply continue as they are, I would first check the approved merger scheme and the resulting structure of the combined company.
Example of shareholder treatment described in an official merger scheme.
Source: SEBI – Official Merger Document
2. How Is the Swap Ratio for Unlisted Shares Decided?
The swap ratio is decided based on the applicable legal and regulatory requirements, along with the valuation of the companies involved in the merger. The merger process is governed by Sections 230 to 232 of the Companies Act, 2013, which provide the legal framework for schemes of compromise, arrangement and amalgamation. For an unlisted company, valuation becomes especially important because there is no regular market price to directly determine the value of its shares.
In simple terms, the swap ratio tells you how many shares of the new or acquiring company you may receive in exchange for your existing unlisted shares under the approved merger scheme.
3. What Happens If the Unlisted Company Becomes a Listed Company?
The first major change is that your unlisted shares can become listed shares if the merger results in a listed company and the shares are admitted for trading on the stock exchange. Instead of holding shares that are normally transferred through the off-market/OTC route, the shares can become visible in your existing demat account and become available for trading on the exchange, subject to the applicable listing and trading approvals.
However, there can be a lock-in period in certain merger or listing situations. During the lock-in period, you may hold the shares in your demat account but may not be allowed to sell them until the applicable restriction expires.
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SEBI circular on regulatory requirements for schemes of arrangement by listed entities. |
4. Can You Sell the Shares Immediately After the Merger?
You cannot necessarily sell the shares immediately after the merger is completed. First, the shares you are entitled to receive under the merger scheme need to be credited to your demat account. After that, the required listing and trading formalities also need to be completed before the shares can actually be sold through the stock exchange.
Another important thing to check is whether there is any lock-in period or other restriction applicable to the shares received through the merger. If the shares are under a lock-in, you may see them in your demat account, but you will not be able to sell them until the applicable lock-in period ends.
So, as an investor, I would not assume that merger completion = immediate selling. I would first check whether the shares have been credited to my demat account, whether trading has started on the exchange, and whether any lock-in or selling restriction applies.
5. What Happens to Your Shares If the Merger Does Not Go Through?
If a planned merger is cancelled or does not receive the required approvals, the existing shareholding generally remains unchanged because the merger itself has not become effective. Since the deal does not go through, your existing shares are not swapped, replaced, or converted under that merger scheme.
For example, if you held 100 unlisted shares before the proposed merger, you would generally continue to hold the same 100 shares if the merger is cancelled. The proposed exchange of shares does not take place simply because the merger was announced.
Similarly, if the proposed merger involved a cash payout or cash consideration to eligible shareholders, you would not receive that cash consideration if the transaction is cancelled and does not become effective.
So, in my view, the important thing is to distinguish between a merger announcement and a completed merger. Your shares are actually exchanged or replaced only when the approved scheme becomes effective and its terms are implemented.
6. How to Check Your Actual Entitlement in the Merger Documents
Your exact entitlement after a merger should be verified by carefully reviewing the Share Exchange Ratio (Swap Ratio), the Election Form, and the “Merger Consideration” section of the merger documents. These sections can tell you what you are entitled to receive in exchange for your existing shares and whether you need to make any election regarding the consideration.
I would not rely only on a news article or a broker notification to understand how many shares I will receive. The official merger documents contain the actual terms of the transaction, including the applicable exchange ratio and the consideration offered to eligible shareholders.
For example, if the merger document states a particular share exchange ratio, you can use that ratio with the number of shares you currently hold to understand your expected entitlement, subject to the exact terms and conditions of the approved scheme.
Real Example: HDFC Ltd–HDFC Bank Merger
A good example is the merger of HDFC Ltd with HDFC Bank, which became effective on July 1, 2023. Under the approved scheme, HDFC Ltd shareholders received 42 HDFC Bank shares for every 25 HDFC Ltd shares held on the record date. HDFC Bank's official documents also confirm that the new shares were issued to eligible HDFC Ltd shareholders according to this exchange ratio. HDFC Bank
So, for example, if an eligible shareholder held 100 HDFC Ltd shares, the exchange ratio would result in 168 HDFC Bank shares before considering any specific treatment of fractional entitlements under the scheme.
7. Real Example: What an Unlisted Shareholder Receives After a Merger?
A good real-world example is the merger of HDFC Ltd with HDFC Bank, which became effective on July 1, 2023. Under the approved merger scheme, eligible HDFC Ltd shareholders received 42 equity shares of HDFC Bank for every 25 fully paid-up equity shares of HDFC Ltd held by them. HDFC Bank
This means that the number of shares a shareholder received was determined by the share exchange ratio mentioned in the approved merger scheme. For example, if an eligible shareholder held 100 HDFC Ltd shares, the 42:25 ratio would result in 168 HDFC Bank shares, subject to the exact terms of the scheme and treatment of any fractional entitlement.
The merger was sanctioned by the National Company Law Tribunal (NCLT) under the applicable provisions, and the scheme became effective on July 1, 2023. HDFC Bank subsequently allotted the new shares to eligible HDFC Ltd shareholders according to the approved exchange ratio. HDFC Bank
What This Example Shows
The important lesson for an unlisted-share investor is that you should not try to guess your final entitlement from the share price alone. The approved merger scheme and its share exchange ratio determine what shareholders are entitled to receive.
For any merger involving your unlisted shares, check:
- The share exchange ratio
- The record date
- The effective date
- The merger consideration
- The number of shares to be allotted
- Any applicable lock-in or other restrictions
In the HDFC example, the official shareholder FAQ specifically confirms the 42:25 share exchange ratio and explains how the new HDFC Bank shares were allotted to eligible shareholders.
Conclusion : What Happens to Unlisted Shares During a Company Merger?
When you hold unlisted shares, a merger does not automatically mean that your shares will simply disappear or become listed overnight. The actual outcome depends on the approved merger scheme, share exchange ratio, valuation, regulatory requirements, and the structure of the resulting company.
As an investor, I would focus on the actual merger documents rather than relying only on news or market discussions. Check what happens to your existing shares, the swap ratio, the merger consideration, the record date, when the new shares will be credited to your demat account, and whether any lock-in or other restriction applies.
The most important thing is to understand your actual entitlement before assuming what you will receive after the merger. A merger can change the form of your investment, but the exact treatment of your shares is determined by the terms of the approved scheme.
In short, don't guess what happens to your unlisted shares during a merger—check the official merger documents and understand exactly what you are entitled to receive.
Frequently Asked Questions : What Happens to Unlisted Shares During a Company Merger?
1. What happens to unlisted shares when a company merges?
It depends on the terms of the approved merger scheme. Your existing unlisted shares may be exchanged for shares of another company, converted into shares of the resulting company, or dealt with according to the specific merger consideration mentioned in the scheme.
2. How is the swap ratio decided for unlisted shares?
The swap ratio is generally determined based on the valuation of the companies involved, along with the applicable legal and regulatory requirements and the terms of the approved merger scheme. For unlisted companies, valuation is particularly important because there may be no regular market price.
3. Can I sell my shares immediately after the merger?
Not necessarily. The shares generally need to be credited to your demat account, and the required listing and trading formalities must be completed before they can be sold on the stock exchange. You should also check whether any lock-in period or other selling restriction applies.
4. What happens if the proposed merger is cancelled?
If the merger does not receive the required approvals or is cancelled before becoming effective, your existing shares generally remain unchanged. The proposed share exchange or cash consideration under the merger would not take place simply because the merger was announced.
5. Where can I check what I will receive after a merger?
Check the official merger scheme and related documents. Pay particular attention to the Share Exchange Ratio (Swap Ratio), Merger Consideration, Election Form, Record Date, and Effective Date to understand your actual entitlement.
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