Scheme of Arrangement (SEBI Role)
SEBI's role in schemes of arrangement — mergers, demergers, amalgamations, and capital reductions — involves issuing a No-Objection Letter (NOC) or observation letter after reviewing the scheme for compliance with securities law, investor protection standards, and disclosure requirements before the scheme is filed with the National Company Law Tribunal (NCLT) for approval.
Schemes of arrangement are governed primarily by Sections 230-232 of the Companies Act, 2013, with the NCLT having jurisdiction to sanction them. However, since the entities involved are often listed companies and the schemes affect listed shares, SEBI has a distinct role as the securities markets regulator. SEBI's regulatory oversight was formalised through circulars, including SEBI circular SEBI/HO/CFD/DIL1/CIR/P/2021/0000000665 and predecessors, establishing the observation letter process.
The process typically followed this sequence: the listed company filed the scheme with the relevant stock exchanges under LODR Regulation 37, which required prior approval or observation letter from SEBI before the scheme could be filed with NCLT. SEBI reviewed the scheme and, if it found no adverse observations from a securities law perspective, issued a letter — commonly called a no-objection letter or observation letter — within thirty days of receipt of the complete application and all required documents.
SEBI's review focused on: whether the scheme involved any circumvention of securities law (for instance, schemes that achieved what would otherwise be a reverse merger to circumvent IPO norms were scrutinised); whether the share exchange ratio was fair and backed by a valuation report from an independent registered valuer and/or investment bank; whether adequate disclosures were made to shareholders; and whether the scheme protected the interests of non-promoter public shareholders.
In cases where the scheme appeared to circumvent IPO requirements — such as an unlisted shell company effectively listing through merger with a listed company at an inflated valuation — SEBI had the authority to raise objections that could prevent the scheme from proceeding. SEBI also monitored schemes for potential manipulation of the exchange ratio to benefit promoters at the expense of public shareholders.
After SEBI's observation letter, the listed company held a shareholder meeting (or sought court-convened meeting) to approve the scheme. SEBI required that independent shareholders (excluding promoters) voted on certain types of schemes. After shareholder approval, the scheme was filed with NCLT, which conducted its own review and issued the final sanctioning order.
The scheme became effective upon filing of the NCLT order with the Registrar of Companies. For listed entities, the post-approval steps included applying for listing of new shares issued under the scheme, updating depository records, and completing the required LODR disclosures.