Scheme of Arrangement: What It Means When a Listed Company Restructures

Every few weeks a listed company announces that its board has approved a scheme of arrangement. Sometimes it is a merger of a group company, sometimes a demerger of a division, sometimes a quiet reshuffle of share capital. The stock moves, the headlines say “board approves”, and most retail shareholders assume the deal is done. It isn’t. A board nod is only the first step in a process that runs through the stock exchanges, SEBI, a shareholder vote and finally the National Company Law Tribunal, and it can take many months.

This guide walks through what a scheme of arrangement is under Indian law, who has to approve it, where your vote actually counts, and how to read the numbers in a scheme document. We’ll use two hypothetical worked examples so the arithmetic is clear.

What a scheme of arrangement means

In plain terms, a scheme of arrangement is a court-approved agreement between a company and its shareholders or creditors. Around the world it is used for mergers and amalgamations, for rescheduling debt, for takeovers and for returning capital. The key feature is that once the court (in India, the tribunal) sanctions it, the scheme binds everyone in the relevant class, including those who voted against it.

In India, the law sits in Sections 230 to 232 of the Companies Act, 2013. Section 230 covers a compromise or arrangement between a company and its creditors or members, or any class of them. Its explanation says an arrangement includes a reorganisation of the company’s share capital by consolidating shares of different classes, dividing shares into different classes, or both. Section 232 then deals with the specific case where the scheme involves a merger or amalgamation, or where the undertaking, property or liabilities of one company (the transferor) move to another (the transferee), or are divided among two or more companies. That last bit is how demergers work.

So when you read “scheme of arrangement” in an exchange filing, it is an umbrella term. The actual deal could be any of these:

• Merger of a subsidiary or a group company into the listed parent.
• Demerger of a business into a new company whose shares are given to existing shareholders. We have covered how that plays out for investors in our guide to demerger of company shares.
• Reorganisation or reduction of share capital.
• A compromise with creditors, such as a debt restructuring.

The legal route: tribunal, meetings and the three-fourths rule

The Companies Act route has a fixed shape. Here is how it runs, step by step, based on the text of Section 230 and the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.

1. Application to the NCLT

The company, a creditor, a member or a liquidator applies to the tribunal, which can then order meetings of the relevant creditors or members (or classes of them). The application has to disclose, by affidavit, all material facts about the company, including its latest financial position, the latest auditor’s report and any pending investigation or proceedings. If the scheme includes a corporate debt restructuring, it must have the consent of not less than 75% of the secured creditors in value, and the company must file a valuation report by a registered valuer, among other documents. Under the rules, the fee for this application is Rs 5,000.

2. Notice to shareholders, creditors and regulators

Everyone in the affected classes, plus debenture holders, gets an individual notice with a statement explaining the scheme and a copy of the valuation report, if any. The statement must explain the effect on creditors, key managerial personnel, promoters, non-promoter members and others. People can vote in person, by proxy or by postal ballot within one month of receiving the notice.

The same notice goes to a long list of authorities: the Central Government, the income-tax authorities, the Reserve Bank of India, SEBI, the Registrar of Companies, the stock exchanges, the Official Liquidator, the Competition Commission of India if needed, and other sectoral regulators likely to be affected. They have 30 days to make representations.

3. Who can object

This is the part retail investors often miss. Section 230(4) says any objection to the scheme can be made only by persons holding not less than 10% of the shareholding, or having outstanding debt of not less than 5% of the total outstanding debt as per the latest audited financial statements. A small shareholder on their own cannot file a formal objection. You still get to vote, though, and that vote matters.

4. The vote

Under Section 230(6), the scheme passes a meeting if a majority of persons representing three-fourths in value of the creditors or members (or the class) voting in person, by proxy or by postal ballot agree to it. Two tests, in other words: a headcount majority of those voting, and 75% by value.

A board approval is the starting gun, not the finish line. Until the tribunal sanctions the scheme, nothing binds you.

5. Petition and sanction

Once the meetings approve, the company has seven days from the filing of the chairperson’s report to petition the tribunal for sanction. The tribunal fixes a hearing date, and notice of the hearing is advertised not less than ten days before it. When the tribunal sanctions the scheme by an order, it binds the company and all the creditors or members of the class, whichever way they voted. The order can include protection for any class of creditors and an exit offer to dissenting shareholders where the tribunal thinks it necessary. No scheme can be sanctioned unless the company’s auditor has certified to the tribunal that its accounting treatment follows the accounting standards. A certified copy of the order goes to the Registrar of Companies within 30 days of receipt.

The SEBI layer for listed companies

For a listed company, there is a whole step before the tribunal. SEBI’s Master Circular on Scheme of Arrangement dated June 20, 2023 pulls these rules together. Regulation 37 of the SEBI listing regulations requires the listed company to file the draft scheme with the stock exchanges and get an Observation Letter or No-objection Letter before it goes to the court or tribunal. Regulation 94 requires the exchanges to forward the draft to SEBI.

The documents the company files with the exchanges include:

• The draft scheme itself.
• A valuation report from a registered valuer.
• A report from the audit committee recommending the scheme, which must comment on the need for the deal, its rationale, the synergies, its impact on shareholders, and a cost-benefit analysis.
• A fairness opinion from an independent SEBI-registered merchant banker on the valuation.
• A report from the committee of independent directors recommending the scheme, taking into account that it is not detrimental to the listed company’s shareholders.
• A no-objection certificate from lending banks, financial institutions or debenture trustees representing not less than 75% of secured creditors in value.
• A compliance report certified by the company secretary, CFO and managing director.

The designated exchange forwards the draft and documents to SEBI within three working days, and SEBI endeavours to give its comments within 30 days of the later of several dates, such as receipt of satisfactory replies to its queries or receipt of the exchanges’ no-objection letter. After the draft is filed with SEBI, the company cannot change it without SEBI’s written consent, except where a regulator, authority or the tribunal mandates the change.

There is one big carve-out. The circular does not apply to schemes that solely provide for the merger of a wholly owned subsidiary (or its division) with the parent. Such schemes are still filed with the exchanges for disclosure, and the exchanges put the documents on their websites.

The listed company also pays SEBI a fee of 0.1% of the paid-up share capital of the listed, transferee or resulting company, whichever is higher, after sanction, subject to a cap of Rs 5 lakh. A company with Rs 20 crore of paid-up capital would pay Rs 2 lakh; one with Rs 100 crore of paid-up capital works out to Rs 10 lakh, so it hits the cap and pays Rs 5 lakh.

When public shareholders get the deciding vote

This is the most investor-friendly rule in the whole framework, and it is worth understanding properly. Under the master circular, the scheme must allow public shareholders to vote through e-voting. In certain cases, the scheme can be acted upon only if the votes cast by public shareholders in favour are more than the votes cast by public shareholders against it. Promoter votes don’t count for this test. The cases are:

• Additional shares are allotted to the promoter or promoter group, their related parties, associates or subsidiaries.
• The scheme involves the listed company and another entity involving the promoter group, its related parties, associates or subsidiaries.
• The listed parent bought shares of a subsidiary from promoter-linked shareholders, and that subsidiary is now being merged into the parent.
• A merger with an unlisted entity cuts the voting share of pre-scheme public shareholders in the merged company by more than 5% of its total capital.
• The listed company transfers the whole or substantially the whole of its undertaking, and the consideration is not listed equity shares. “Substantially the whole” here means 20% or more of consolidated net worth or consolidated total income in the previous financial year.

In all other cases, the company furnishes an auditor-certified, board-approved undertaking explaining why the public-shareholder vote does not apply, and that undertaking is displayed on the exchanges’ and company’s websites. If you hold shares in a company announcing a group merger, look for this undertaking or the voting clause in the scheme. It tells you straight away whether your vote can block the deal.

Worked example 1: a promoter-group merger, by the numbers

All figures below are hypothetical and only illustrate the rules.

Say ListedCo has 10 crore shares. The promoter group holds 6 crore (60%) and public shareholders hold 4 crore (40%). The promoter group also owns UnlistedCo, which has 2 crore shares, and it proposes merging UnlistedCo into ListedCo.

The registered valuer puts ListedCo’s value at Rs 200 a share and UnlistedCo’s at Rs 500 a share. The swap ratio follows from that: 500 divided by 200 is 2.5, so UnlistedCo’s shareholders get 5 ListedCo shares for every 2 UnlistedCo shares. (If the ratio logic is new to you, our explainer on the merger swap ratio goes deeper.) With 2 crore UnlistedCo shares, ListedCo issues 2 × 2.5 = 5 crore new shares, all to the promoter group.

After the merger, ListedCo has 15 crore shares. The promoter group holds 6 + 5 = 11 crore, or 73.33%. Public shareholders still hold 4 crore, now 26.67% of the company.

Now run the SEBI checks:

• Minimum public plus QIB holding: in a listed-unlisted merger, the pre-scheme public shareholders of the listed company and the QIBs of the unlisted company must together hold at least 25% of the merged company on a fully diluted basis. Here UnlistedCo has no QIBs, so the test rests on the public’s 26.67%. It passes, but only just.
• Public-shareholder vote: new shares are being allotted to the promoter group, and the other entity in the scheme is promoter-owned, so the scheme needs more public votes for it than against it. The public’s voting share also falls from 40% to 26.67%, a drop of 13.33 percentage points, so the dilution test is triggered too.

Here’s the practical bit. Suppose public shareholders cast 1.5 crore votes, with 0.7 crore in favour and 0.8 crore against. The scheme fails the public-shareholder test even though the promoter group’s 6 crore votes would easily have carried an ordinary resolution. The valuation of Rs 500 for UnlistedCo is exactly what public holders should be scrutinising, because a higher valuation means more new shares for the promoter group and more dilution for everyone else.

In a promoter-group merger, the valuation report is where your money is decided. Read it before you read the press release.

Worked example 2: the three-fourths test at a creditor meeting

Again, these are hypothetical figures.

A company proposes a scheme with one class of its unsecured creditors. The class has 120 creditors owed a total of Rs 400 crore. At the tribunal-convened meeting, 80 creditors owed Rs 300 crore vote. Of these, 50 creditors owed Rs 240 crore vote in favour.

• Headcount: 50 of 80 voting creditors is 62.5%, which is a majority.
• Value: Rs 240 crore of the Rs 300 crore voting is 80%, which clears the three-fourths mark.

Both tests are met on the votes cast, so the class approves the scheme. If the 50 creditors had been owed only Rs 210 crore, value would have been 70% and the scheme would have failed the class, even with a comfortable headcount majority. Now flip it: a single creditor owed Rs 240 crore could carry the value test alone but would fail the headcount test if 79 others voted against.

Note also the objection threshold. Any creditor here owed less than 5% of the company’s total outstanding debt, per the latest audited accounts, cannot file a formal objection alone. Several creditors can club together to cross it.

What else to look for in a scheme document

When a scheme lands on the exchange website, we would read these pieces, roughly in this order:

• The rationale and the audit committee report. Is the stated reason specific, such as simplifying a group structure, or vague?
• The valuation report and fairness opinion. Which methods did the valuer use, and how much weight went to each? A merchant banker’s fairness opinion is not independent if there is a material conflict of interest, including common directorships or partnerships.
• Pre- and post-scheme shareholding. The explanatory statement sent to shareholders must disclose the expected capital structure and shareholding pattern before and after the deal.
• Fractional entitlements. Swap ratios rarely divide neatly. Under the circular, fractional entitlements are pooled and held by a trust nominated by the board, which sells the shares in the market within 90 days of allotment and passes on the proceeds.
• The timeline. Observation letter, shareholder meeting, NCLT hearing, sanction order, then the record date for new shares. Each step can slip. Our guide to analysing quarterly results helps you check whether the merged entity’s numbers justify the story once the deal closes.

Why the scheme of arrangement route matters for your portfolio

The scheme route exists because some reorganisations simply cannot be done by an ordinary board or shareholder resolution. It is powerful precisely because it binds dissenters once the tribunal signs off. That is also why the safeguards matter: the valuation, the independent directors’ report, the regulators’ notice period and, for listed companies, the public-shareholder vote.

For a retail investor, the takeaway is simple. Treat the board announcement as the opening of a long review, not a done deal. Check whether your vote can decide the outcome. Read the valuation. And if the scheme is a promoter-group merger, pay close attention to how much of the company you will own on the other side.

Key points to remember

• A scheme of arrangement is a tribunal-sanctioned deal between a company and its members or creditors, covering mergers, demergers, capital reorganisation and debt compromises, under Sections 230 to 232 of the Companies Act, 2013.
• Approval needs a majority in number representing three-fourths in value of those voting in each class, followed by NCLT sanction.
• Formal objections need at least 10% of the shareholding or at least 5% of total outstanding debt.
• Listed companies must first get an exchange observation letter after SEBI’s review, backed by a valuation report, fairness opinion, audit committee and independent directors’ reports.
• In promoter-linked deals and some other cases, the scheme goes ahead only if public shareholders’ votes in favour exceed their votes against.

Sources

• Companies Act, 2013, Section 230 and related CAA Rules, 2016 (CAIRR)
• Companies Act, 2013, Section 232 and related CAA Rules, 2016 (CAIRR)
• SEBI Master Circular SEBI/HO/CFD/POD-2/P/CIR/2023/93 dated June 20, 2023 (PDF on NSE)
• Wikipedia: Scheme of arrangement

Disclaimer: This article is for education only and is not investment or legal advice. The companies and figures in the worked examples are hypothetical. Rules on schemes of arrangement change from time to time; check the latest SEBI circulars, exchange notices and the scheme documents themselves, and consult a SEBI-registered adviser or a qualified professional before acting.