Scheme of Arrangement (Detailed)

A scheme of arrangement is one of the most versatile and consequential corporate restructuring tools available under Indian law. Governed by Sections 230 to 232 of the Companies Act 2013, a scheme allows a company to effect virtually any form of reorganisation — merger, amalgamation, demerger, compromise with creditors, or combination thereof — in a single court-supervised process. Unlike a simple board resolution or shareholder approval under other sections, a scheme has the force of a court order once sanctioned and is binding on all stakeholders, including dissenting minorities.

The NCLT process begins when the applicant company (or companies, in the case of a merger) files a petition seeking directions for convening meetings of shareholders and creditors. The NCLT scrutinises the scheme for compliance with legal requirements, fair disclosure, and absence of fraud on any class of stakeholders. If satisfied, it issues an order directing the company to convene separate meetings of each class of equity shareholders, preference shareholders, secured creditors, and unsecured creditors. The requirement for class-wise meetings ensures that each group of stakeholders with distinct legal rights votes separately.

At each class meeting, the scheme must be approved by a majority in number (headcount) representing three-fourths in value of those present and voting. Both the majority in number and the supermajority in value must be satisfied simultaneously. Dissenting shareholders or creditors cannot veto the scheme if these thresholds are met, but they retain the right to appear before the NCLT and oppose sanction on grounds of unfairness or illegality.

Following approval at class meetings, the company files a second petition with the NCLT for sanction of the scheme. The NCLT hears objections from dissenting members or creditors, the Regional Director of the Ministry of Corporate Affairs, and the Official Liquidator. SEBI and stock exchanges are also consulted for listed companies. If the NCLT is satisfied that the scheme is fair, reasonable, and compliant with law, it sanctions the scheme by an order, which is then filed with the Registrar of Companies. The scheme becomes effective from the appointed date specified in the scheme document.

For shareholders of listed companies, the procedural protections include mandatory independent valuation, fairness opinions, and in many cases a public announcement process analogous to an open offer if the scheme involves a change in control. SEBI has issued detailed circulars governing the information to be disclosed in scheme notices, the conditions for stock exchange no-objection, and the listing of shares issued pursuant to the scheme.