What Is a Compromise or Arrangement?
Sections 230-232 of the Companies Act, 2013 provide the legal framework for compromises, arrangements, mergers, amalgamations, demergers, and reconstructions of companies — all through approval of NCLT (National Company Law Tribunal). A 'scheme of arrangement' is one of the most powerful tools in corporate law — it can restructure a company share capital, merge two or more companies, split a company into separate entities, convert debt to equity, or reorganize the entire business structure.
Unlike share purchase agreements (where one company acquires shares of another) or asset purchase (where specific assets are transferred), a scheme of arrangement under Section 230-232 operates as a court-sanctioned restructuring that is binding on ALL stakeholders — shareholders, creditors, employees, and regulatory bodies — once approved by the requisite majority and sanctioned by NCLT.
Types of Schemes Under Section 230-232
1. Merger/Amalgamation (Section 232)
Two or more companies merge into one. The transferor company (merging entity) ceases to exist. The transferee company (surviving entity) acquires all assets, liabilities, employees, contracts, and licenses of the transferor. Shareholders of the transferor receive shares of the transferee based on the swap ratio (determined by valuers).
Example: Company A merges into Company B. Company A is dissolved. Company B issues new shares to A's shareholders. B now has all of A's business, assets, and liabilities.
2. Demerger/Division (Section 232)
One company splits into two or more companies. The demerging company transfers one or more undertakings to the resulting company(ies). Shareholders of the demerging company receive shares in the resulting company proportional to their existing holding.
Example: Company X has two divisions — manufacturing and services. It demerges services division into a new Company Y. Company X shareholders receive shares of Company Y without paying anything.
3. Compromise with Creditors (Section 230)
A financially distressed company proposes a compromise with its creditors — e.g., paying 70% of dues in full settlement, converting debt to equity, extending repayment timelines. If approved by 75% majority of creditors (by value) and sanctioned by NCLT: binding on ALL creditors.
4. Arrangement with Members (Section 230)
Restructuring share capital — reducing face value, consolidating shares, converting preference shares to equity, reclassifying shares, squeeze-out of minority shareholders.
5. Cross-Border Merger (Section 234)
Merger of a foreign company with an Indian company (inbound) or Indian company with a foreign company (outbound — permitted under RBI-notified jurisdictions). Subject to RBI approval and compliance with FEMA regulations.
Merger Procedure — Step by Step
Step 1: Board Approval and Valuation
Boards of both transferor and transferee companies approve the merger proposal. Appoint independent valuers (registered valuers) to determine the swap ratio — how many shares of the transferee will each shareholder of the transferor receive. The swap ratio is based on: relative valuations of both companies (using DCF, NAV, market price, or combination).
Example swap ratio: If Company A is valued at Rs. 50 crore and Company B at Rs. 100 crore, and both have same face value shares: approximately 1 share of B for every 2 shares of A (1:2 swap ratio).
Step 2: File Application with NCLT
Either company files an application with NCLT requesting: (a) direction to convene meetings of shareholders and creditors, (b) approval of the scheme. The application includes: the scheme of arrangement (detailed document), Board resolution, valuation reports, fairness opinion (for listed companies), and explanatory statement.
Step 3: NCLT Orders Meetings
NCLT directs meetings of: (a) shareholders of each company (separately), (b) creditors of each company (separately). Meeting notice: 30 days. The notice must include: the scheme, explanatory statement, valuation reports, and fairness opinion.
Step 4: Meetings — Approval Threshold
At each meeting, the scheme must be approved by a majority in number representing 75% in value:
(a) Shareholders' meeting: majority of shareholders present and voting, representing 75% of total value of shares voted
(b) Creditors' meeting: majority of creditors present and voting, representing 75% of total value of debts voted
If ANY class does not approve with the required majority: the scheme fails (unless NCLT uses its discretion to override under certain conditions).
Step 5: Regulatory Approvals
After meeting approval: obtain NOCs from:
(a) ROC: No objection to the merger (ROC may raise concerns about pending proceedings or non-compliance)
(b) Official Liquidator: Report that the merger is not prejudicial to shareholders or public interest
(c) Income Tax: Section 230(5) — notice to Central Government/Income Tax authorities. Tax department can object if the merger is designed primarily for tax avoidance
(d) SEBI: For listed companies — compliance with SEBI Circular on schemes of arrangement
(e) CCI: If combined entity's assets/turnover exceeds CCI threshold — Competition Act approval required
(f) Sector regulators: RBI (banking/NBFC), IRDA (insurance), TRAI (telecom) — as applicable
Step 6: NCLT Sanction
NCLT considers: meeting results, regulatory objections (if any), fairness to all stakeholders, and public interest. If satisfied: NCLT sanctions the scheme. The order specifies: effective date (appointed date), share exchange details, property transfer, employee continuation, and other terms.
Step 7: Post-Sanction Compliance
(a) File certified copy of NCLT order with ROC (both companies) within 30 days
(b) Transfer/allot shares to shareholders of transferor company
(c) Update all registrations — PAN, GST, FSSAI, EPFO, ESIC, state licenses
(d) ROC dissolves the transferor company (without winding up)
(e) File updated MOA/AOA of transferee (reflecting merged entity)
Tax Implications of Merger
Income Tax
(a) No capital gains on share exchange: Section 47(vi) — shares received by shareholders of transferor in exchange for their shares in transferor are NOT treated as transfer. No capital gains tax at the time of merger — tax deferred until the shares of transferee are eventually sold.
(b) Cost basis: Cost of shares of transferee (received in exchange) = cost of shares of transferor. Holding period of transferor shares included for calculating LTCG/STCG.
(c) Accumulated losses: Under Section 72A, accumulated losses and unabsorbed depreciation of the transferor can be carried forward and set off by the transferee — subject to conditions (same business, holding of assets for specified period).
(d) Tax-neutral merger conditions: Section 2(1B) — amalgamation must satisfy: (i) all assets and liabilities of transferor become assets/liabilities of transferee, (ii) shareholders holding 75%+ in transferor become shareholders of transferee. If conditions not met: taxable as slump sale.
GST
Transfer of business as a going concern (merger): NOT a supply under Schedule II read with Notification 12/2017. ITC of the transferor can be transferred to the transferee through ITC-02 on the GST portal. GST registration of transferor must be cancelled after merger completion.
Stamp Duty
Varies by state — some states charge stamp duty on the transfer of immovable property as part of merger (treating it as a deemed conveyance). Other states provide exemption for court-sanctioned mergers. Maharashtra charges stamp duty at 3-5% on immovable property transferred. This can be a significant cost for asset-heavy mergers.
Fast-Track Merger — Section 233
For small companies and holding-subsidiary mergers: a simplified fast-track process is available WITHOUT NCLT involvement. The scheme is approved by: shareholders and creditors (90% majority in each class), ROC, and Official Liquidator. If no objection within 30 days: scheme is deemed approved. Timeline: 3-6 months (vs 6-18 months for NCLT merger). This is ideal for group restructuring (merging wholly-owned subsidiary into parent).