Schemes of arrangement, share purchases and combinations in India

The choice determines what the buyer ends up with. In a share purchase the buyer acquires shares and steps into the shoes of the seller as a shareholder, and the company continues with its contracts, its licences, its tax history and its liabilities. In an asset purchase the buyer takes the assets and the business, and the seller is left holding the entity, so every contract, licence, permit, employee and tax position has to be dealt with separately. A scheme of arrangement is different again: it is a reorganisation sanctioned by the Tribunal, and section 230(1) carries an Explanation that brings within the word arrangement a reorganisation of the company's share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes, or by both.

Section 232(1) states the merger and amalgamation case in terms. Where an application is made to the Tribunal under section 230 for the sanctioning of a compromise or arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Tribunal that the compromise or arrangement has been proposed for the purposes of, or in connection with, a scheme for the reconstruction of the company or companies involving merger or the amalgamation of any two or more companies, and that under the scheme the whole or any part of the undertaking, property or liabilities of any company is required to be transferred to another company or is proposed to be divided among and transferred to two or more companies, the Tribunal may order a meeting of the creditors or class of creditors or the members or class of members to be called, held and conducted in the manner it directs.

The stamp duty consequence follows the route rather than the substance in practice, and it is a state question. A scheme sanctioned by the Tribunal and an order of the Tribunal on an amalgamation are each treated differently by the state stamp statutes from an ordinary conveyance, so the duty has to be checked against the state schedule rather than assumed from the label used in the scheme. The same caution applies to the choice between a share deal and an asset deal: an asset deal may attract a higher duty on the instruments executed and may require fresh registrations, and the comparison has to be made instrument by instrument.

Section 230(1) sets out who may apply and what the Tribunal may do. Where a compromise or arrangement is proposed between a company and its creditors or any class of them, or between a company and its members or any class of them, the Tribunal may, on the application of the company or of any creditor or member of the company, or in the case of a company which is being wound up, of the liquidator appointed under the Act or under the Insolvency and Bankruptcy Code, 2016, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the Tribunal directs.

Section 230(2) is the disclosure obligation and it is where a weak application is lost. The company or any other person making the application shall disclose to the Tribunal by affidavit all material facts relating to the company, such as the latest financial position of the company, the latest auditors report on the accounts of the company and the pendency of any investigation or proceedings against the company. It also requires disclosure of any reduction of share capital included in the compromise or arrangement, and, where there is a scheme of corporate debt restructuring, that it has been consented to by not less than seventy-five per cent. of the secured creditors in value, together with a creditors responsibility statement in the prescribed form, safeguards for the protection of other secured and unsecured creditors, and a report by the auditor on the fund requirements of the company after the restructuring.

Section 230(3) governs the notice where the Tribunal has directed the meeting. The notice must be accompanied by a statement disclosing the details of the compromise or arrangement, a copy of the valuation report if there is one, and an explanation of their effect on creditors, key managerial personnel, promoters and non-promoter members, and the debenture holders. The notice must also explain the effect of the compromise or arrangement on any material interests of the directors of the company or the debenture trustees, and set out such other matters as may be prescribed. Where the company has a website, the notice and the other documents must be placed on it, and in the case of a listed company they must be sent to the Securities and Exchange Board and the stock exchanges for placing on their websites and published in newspapers in the prescribed manner.

Section 230(4) sets the voting window and the standing to object. The persons to whom the notice is sent may vote in the meeting either themselves or through proxies or by postal ballot, within one month from the date of receipt of the notice. Any objection to the compromise or arrangement is to be made only by persons holding not less than ten per cent. of the shareholding or having outstanding debt amounting to not less than five per cent. of the total outstanding debt as per the latest audited financial statement. Section 230(5) is the list of people who receive the notice in addition to the members and the creditors: the Central Government, the income-tax authorities, the Reserve Bank of India, the Securities and Exchange Board, the Registrar, the respective stock exchanges, the Official Liquidator, the Competition Commission of India established under section 7 of the Competition Act, 2002 if necessary, and such other sectoral regulators or authorities likely to be affected. Their representations must be made within thirty days from the date of receipt of the notice, failing which it is presumed that they have no representations to make.

Section 230(6) is the sanction rule and the binding rule in the same provision. Where, at a meeting held in pursuance of sub-section (1), a majority of persons representing three-fourths in value of the creditors, or class of creditors, or members or class of members, voting in person or by proxy or by postal ballot, agree to any compromise or arrangement, and if that compromise or arrangement is sanctioned by the Tribunal by an order, the same is binding on the company, all the creditors or class of creditors or members or class of members, and, in case of a company being wound up, on the liquidator and the contributories of the company.

Section 230(7) lists what the Tribunal's order must provide for. It must provide for the protection of any class of creditors, and it must provide that where the compromise or arrangement results in a variation of the shareholders rights, that variation is given effect to under section 48. Where the compromise provides for the conversion of preference shares into equity shares, the order must give the preference shareholders an option either to obtain arrears of dividend in cash or to accept equity shares equal to the value of the dividend payable. Section 231 then gives the Tribunal the machinery to implement what it has sanctioned: it must have power to supervise the implementation of the compromise or arrangement, and may, at the time of making the order or at any time thereafter, give directions in regard to any matter or make such modifications in the compromise or arrangement as it considers necessary for the proper implementation.

Section 233 is the fast route, and it is confined to a narrow class of transactions. Notwithstanding sections 230 and 232, a scheme of merger or amalgamation may be entered into between two or more small companies, or between a holding company and its wholly owned subsidiary company, or such other class or classes of companies as may be prescribed, subject to four conditions. A notice of the proposed scheme inviting objections or suggestions from the Registrar and the Official Liquidators where the registered offices of the respective companies are situated, or from persons affected by the scheme, must be issued within thirty days by the transferor company or companies and the transferee company. The objections and suggestions received are then considered by the companies in their respective general meetings and the scheme must be approved by the respective members or class of members at a general meeting holding at least ninety per cent. of the total number of shares.

The two remaining conditions are the solvency declaration and the creditor approval. Each of the companies involved in the merger must file a declaration of solvency in the prescribed form with the Registrar of the place where the registered office of the company is situated, and the scheme must be approved by a majority representing nine-tenths in value of the creditors or class of creditors of the respective companies, indicated in a meeting convened by the company by giving a notice of twenty-one days along with the scheme, or otherwise approved in writing. Section 233(2) requires the transferee company to file a copy of the scheme so approved with the Central Government, the Registrar and the Official Liquidator where the registered office of the company is situated.

The public interest powers are separate and they belong to the Central Government. Section 237(1) provides that where the Central Government is satisfied that it is essential in the public interest that two or more companies should amalgamate, it may, by order notified in the Official Gazette, provide for the amalgamation of those companies into a single company with such constitution, with such property, powers, rights, interests, authorities and privileges, and with such liabilities, duties and obligations, as may be specified in the order. Section 237(2) allows the order to provide for the continuation of pending legal proceedings and for consequential and supplemental provisions. Section 237(3) protects the member or creditor: every member or creditor, including a debenture holder, of each of the transferor companies must have, as nearly as may be, the same interest in or rights against the transferee company as he had in the company of which he was originally a member or creditor, and if his interest or rights are less, he is entitled to compensation to that extent, assessed by the prescribed authority, published in the Official Gazette and paid by the transferee company.

Section 234 extends the chapter to a foreign element. Sub-section (1) provides that the provisions of the chapter, unless otherwise provided under any other law in force, apply mutatis mutandis to schemes of mergers and amalgamations between companies registered under the Act and companies incorporated in such jurisdictions as may be notified from time to time by the Central Government, and the Central Government may make rules, in consultation with the Reserve Bank of India, in connection with mergers and amalgamations under the section. Sub-section (2) provides that, subject to any other law in force, a foreign company may with the prior approval of the Reserve Bank of India merge into a company registered under the Act or vice versa, and the terms and conditions of the scheme may provide, among other things, for the payment of consideration to the shareholders of the merging company in cash, or in depository receipts, or partly in cash and partly in depository receipts, as the case may be, as per the scheme drawn up for the purpose.

Two features of the section are worth noting before the papers are drafted. The extension is not automatic: it operates through a Central Government notification naming the jurisdictions, and the rule-making power is exercised in consultation with the Reserve Bank of India, so the terms of the cross-border route are set outside the Act. And the consideration is not left entirely to the parties, since the section names cash and depository receipts as the forms in which the payment may be made, which in turn engages the foreign exchange rules that sit outside this guide.

The section 235 machinery applies to a cross-border scheme as it applies to any other, and the payment in foreign currency raises the question that the section 235 notice and the section 238 circular are designed to answer, which is whether the necessary cash will be available. That is a question for the scheme documents and for the filing, and it is the reason the sequencing of the clearances matters.

Section 235 is the statutory version of a drag, and it has a defined sequence. Where a scheme or contract involving the transfer of shares or any class of shares in a transferor company to a transferee company has, within four months after making of an offer by the transferee company, been approved by the holders of not less than nine-tenths in value of the shares whose transfer is involved, other than shares already held at the date of the offer by or by a nominee of the transferee company or its subsidiary companies, the transferee company may, at any time within two months after the expiry of the said four months, give notice in the prescribed manner to any dissenting shareholder that it desires to acquire his shares. The transferee company is then, unless on an application made by the dissenting shareholder to the Tribunal within one month from the date on which the notice was given and the Tribunal thinks fit to order otherwise, entitled to and bound to acquire those shares on the terms on which the shares of the approving shareholders are to be transferred.

Section 236 is the separate route, and it does not depend on a scheme. Where an acquirer, or a person acting in concert with the acquirer, becomes the registered holder of ninety per cent. or more of the issued equity share capital of a company, or any person or group of persons becomes a majority or holds ninety per cent. of the issued equity share capital by virtue of an amalgamation, share exchange, conversion of securities or for any other reason, that acquirer, person or group shall notify the company of the intention to buy the remaining equity shares, and shall offer to the minority shareholders at a price determined on the basis of valuation by a registered valuer in accordance with the prescribed rules. The minority shareholders have the mirror right to offer to purchase the minority equity shareholding of the company at the price determined under the same rules. The majority shareholders must deposit an amount equal to the value of the shares to be acquired in a separate bank account to be operated by the company whose shares are being transferred for at least one year for payment to the minority shareholders, and that amount must be disbursed to the entitled shareholders within sixty days.

Section 238 is the disclosure discipline that sits on top of the offer. In relation to every offer of a scheme or contract involving the transfer of shares or any class of shares in the transferor company to the transferee company under section 235, every circular containing the offer and the directors' recommendation to accept it must be accompanied by the prescribed information, the offer must contain a statement by or on behalf of the transferee company disclosing the steps it has taken to ensure that necessary cash will be available, and the circular must be presented to the Registrar for registration, and no such circular may be issued until it is so registered. The Registrar may refuse to register a circular that does not contain the required information or sets it out in a manner likely to give a false impression, and must communicate the refusal within thirty days, and an appeal lies to the Tribunal. A director who issues a circular that has not been presented for registration and registered is liable to a penalty of one lakh rupees.

Section 5 of the Competition Act, 2002 defines a combination, and it has four routes. The acquisition of one or more enterprises by one or more persons, or the merger or amalgamation of enterprises, is a combination where the acquirer and the enterprise, whose control, shares, voting rights or assets have been acquired, jointly have, either in India, assets of the value of more than rupees one thousand crores or turnover more than rupees three thousand crores, or in India or outside India in aggregate, assets of the value of more than five hundred million US dollars including at least rupees five hundred crores in India, or turnover more than fifteen hundred million US dollars including at least rupees fifteen hundred crores in India. The same test applies to the group to which the enterprise would belong after the acquisition. There is a separate test for the acquisition of control over an enterprise where the acquirer already has control over an enterprise engaged in the production, distribution or trading of similar or identical or substitutable goods or the provision of a similar or identical or substitutable service.

Section 5(d) is the deal-value route that the 2023 amendment added. The value of any transaction in connection with the acquisition of any control, shares, voting rights or assets of an enterprise, merger or amalgamation exceeds rupees two thousand crore, provided that the enterprise which is being acquired, taken control of, merged or amalgamated has such substantial business operations in India as may be specified by regulations. Section 5(e) excludes a transaction where either the value of assets or turnover of the enterprise being acquired, taken control of, merged or amalgamated in India is not more than such value as may be prescribed.

Section 6(1) is the substantive rule and it carries a nullity: no person or enterprise shall enter into a combination which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India, and such a combination shall be void. Section 6(2) requires the person or enterprise proposing the combination to give notice to the Commission, in the form specified and the fee determined by regulations, disclosing the details of the proposed combination, after the approval of the merger or amalgamation proposal by the board of directors of the enterprises concerned, or the execution of the agreement or other document for an acquisition or the acquisition of control, and in any event before consummation of the combination. Section 6(2A) then imposes the standstill: no combination shall come into effect until one hundred and fifty days have passed from the day on which the notice has been given to the Commission or the Commission has passed orders under section 31, whichever is earlier. Section 6(4) and (5) provide a separate notice route for a combination that fulfils such criteria as may be prescribed, on which the proposed combination is deemed to have been approved by the Commission and no other approval is required.

The sequence of clearances is what decides whether a deal can close, and the scheme statute supplies the checklist. Section 230(5) requires the notice to go to the Central Government, the income-tax authorities, the Reserve Bank of India, the Securities and Exchange Board, the Registrar, the respective stock exchanges, the Official Liquidator, the Competition Commission if necessary and such other sectoral regulators or authorities likely to be affected, with a period of thirty days for representations. The competition clearance is a separate condition and section 6(2A) prevents the combination from coming into effect until the earlier of the expiry of one hundred and fifty days from the notice and the Commission's orders under section 31. Section 238(1)(c) requires the circular to be registered before it is issued, and section 238(1)(b) requires the transferee company to disclose the steps it has taken to ensure that necessary cash will be available, which is the point at which the funding is placed on the record.

The order that closes the transaction is the Tribunal's order under section 230(6), and section 231(1) gives the Tribunal power to supervise the implementation and to give directions or make modifications for the proper implementation of the scheme at any time after the order. So the effective date, the vesting of the assets, the transfer of the undertakings, the treatment of the employees and the extinguishment of the old security are not left to the parties' own timetable: they are matters the Tribunal can regulate, and a scheme that is not implemented in accordance with its terms gives the Tribunal a jurisdiction it will use.

The post-closing filings then follow. The transferee company has to file the scheme with the Registrar, and where the fast route under section 233 was used, with the Central Government and the Official Liquidator as well. The companies have to register the change in the board, the register of members has to be closed and reopened in the way section 91 permits, and the register of charges has to be dealt with under section 83 where the property transferred carried a charge. For a listed company, the stock exchanges and the Securities and Exchange Board have already been part of the notice stage under section 230(5), and the takeover regulations and the disclosure requirements of the listed-company regime are a separate set of rules that the corpus does not carry.