Section 252(3) of the Companies Act, 2013 empowers the National Company Law Tribunal (NCLT) to restore a struck-off company and make just directions to place affected persons, as nearly as possible, in their position without the strike-off.

However, it is pertinent to note that restoration is often accompanied by cost. Rule 87A(4)(c) of the NCLT Rules, 2016 empowers the tribunal with discretion to pass a restoration order to direct the applicant or appellant to pay the Registrar of Companies “his costs of, and occasioned by, the appeal or application, unless the Tribunal directs otherwise”.

Restoration costs beyond making good the default:

The financial burden of restoration extends beyond making good the original default. The company must ordinarily complete its pending filings and pay the applicable filing fees and additional fees. Costs imposed as a condition of restoration are a further outlay, apart from the professional and procedural expenses of pursuing restoration. Rule 87A(4)(d) separately requires pending financial statements and annual returns to be filed within the time directed by the Tribunal. Payment of restoration costs does not replace those obligations or, by itself, extinguish liability for the underlying default.

It is therefore advisable for companies to comply with their filing requirements within the prescribed time. Eligible inactive companies should consider dormant status under Section 455, while continuing to meet the applicable requirements. A notice under Section 248(1) should also be addressed promptly with supporting documents within thirty days, to help avoid strike-off and the expense of seeking restoration.

If the company has already been struck off, restoration must be sought through the applicable remedy under Section 252. Where the NCLT allows restoration, but the applicant is aggrieved by the costs imposed, the cost direction may be challenged before the National Company Law Appellate Tribunal (NCLAT) under Section 421.

A power requiring a basis for assessment:

Rule 87A links the costs incurred by the Registrar of Companies with the proceedings and also preserves discretion of tribunal to direct otherwise. It specifies neither detailed assessment factors nor a monetary ceiling. A reasoned assessment should therefore consider the relevant expenditure, the facts and circumstances, and the identity and purpose of the person seeking restoration before fixing the cost condition.

The meaning of “costs” is therefore important to the exercise this discretion.

Definition of “Cost” – Law Lexicon :

Costs as meaning legal expenses. In the prosecution and defense of actions, the parties are necessarily put to certain expenses, or as they are commonly called costs; consisting of money paid to the Government for stamp duties to the officers of the Courts, and to the counsel and attornies for their fees, etc. (Tomlin)

For restoration, the question is what connected expenditure the applicant should reasonably bear.

Variation in restoration costs before NCLT Mumbai

The orders discussed below were passed between the period April’2026 to September 2026 by the NCLT, Mumbai bench. The cost imposed ranged between Rs. 25,000 to Rs. 3,00,000. The fourteen orders are grouped by the amount imposed.

These orders highlight the additional financial exposure that may accompany restoration. The variation does not, by itself, establish that the costs were excessive, since the facts and defaults differed. Some orders refer broadly to the company’s size, operations and conduct, or to continued business without statutory compliance. However, the orders do not consistently explain the computation or connect the particular amount with expenditure occasioned by the proceedings. Reasons for restoring a company, such as existing assets or pending litigation, do not by themselves explain the quantum of costs. These amounts relate only to the orders reviewed and do not represent a standard rate or cover all restoration orders passed by the Bench.

Reasonableness as the guiding consideration:

General Section 35 of the Code of Civil Procedure, 1908 (CPC) recognizes discretion over who pays costs and to what extent, subject to applicable law and rules.

A more detailed framework appears in Section 35 CPC as substituted for commercial disputes of specified value through Section 16 and the Schedule to the Commercial Courts Act, 2015, and in Section 31A of the Arbitration and Conciliation Act, 1996. Both expressly define costs by reference to “reasonable costs”.

These include witness expenses, legal fees and other connected expenditure; Section 31A additionally covers arbitration-specific expenses. Reasonableness calls for assessment of justified expenditure, rather than automatic recovery of the amount claimed.

Both provisions allow the court to decide whether costs should be paid, how much should be paid and when they should be paid. This is useful guidance when considering whether an applicant should bear restoration costs and, if so, what amount is justified.

The term “reasonable” as defined in Law Lexicon:

By the term “reasonable” is not meant expedient, nor that the conditions must be such as the Court would impose if it were called on to prescribe what should be the conditions. They are to be deemed reasonable where, although perhaps not the wisest and best that might be adopted, they are fit and appropriate to the end in view, and are manifestly adopted in good faith for that purpose.

The frameworks discussed above provides persuasive guidance; they do not directly govern Section 252. Rule 87A ordinarily places the costs incurred by the Registrar of Companies’ on the successful restoration applicant. An unsupported or disproportionate condition may be challenged before NCLAT.

Interestingly sub-section (3) of Section 35 of CPC as substituted for commercial disputes through Section 16 and the Schedule to the Commercial Courts Act, 2015 and Section 31A of the Arbitration and Conciliation Act, 1996 also provide factors that a court should consider while imposing the costs. The factors stated are stated below:

1. the conduct of the parties;
2. whether a party succeeded on part of its case, despite not being wholly successful;
3. whether a frivolous counterclaim caused delay;
4. whether a reasonable settlement offer was made and unreasonably refused; and
5. whether a frivolous claim was made and a vexatious proceeding instituted, wasting the court’s time.

The additional factor in (e) is expressly stated in commercial Section 35, but not separately listed in Section 31A(3). These factors should be adapted to restoration only where relevant.

In restoration proceedings, the useful guidance is to assess relevant conduct and the circumstances causing expenditure, while keeping Rule 87A’s specific wording and the applicant’s role in view.

Appellate relief from inadequately justified costs:

In the light of above, let us discuss some orders where appeal was preferred on the cost imposed while restoring the name.

NCLAT’s restoration decisions illustrate how these considerations can guide the assessment:

Income Tax Department v Registrar of Companies[13]

• Discretion based on the applicant’s role. NCLT Amaravati imposed Rs. 25,000 in each of four Income Tax Department applications for Gazette publication and counsel fees. NCLAT noted that the Department sought restoration for statutory tax assessments and was distinct from the defaulting companies. One government body was facilitating another’s functions. The amount also lacked adequate determination and justification. NCLAT quashed all four directions and ordered refund within four weeks, demonstrating the importance of the applicant’s identity and purpose.

Ganton Projects Private Limited v Registrar of Companies (NCT of Delhi and Haryana)[14]

• Determination before quantification. In Ganton Projects, NCLT Delhi imposed Rs. 10 lakh. The company challenged the amount as disproportionate and unreasoned, referring to additional filing fees, natural justice and the Companies Compliance Facilitation Scheme, 2026. NCLAT rejected inadvertence as an excuse for serious filing defaults but required a rational correlation between the costs imposed and those occasioned by the proceedings. It reduced the amount to Rs. 5 lakh because the original direction lacked a reasoned computation. The Rs. 2 lakh interim deposit was adjusted, leaving Rs. 3 lakh payable.

VIP Farms Private Limited v Registrar of Companies (NCT of Delhi and Haryana) [15]

• Rationality and proportionality in VIP Farms. NCLT Delhi imposed Rs. 7 lakh by multiplying Rs. 25,000 by the years considered for default. NCLAT found no explanation for that annual rate and no determination connecting it with the Registrar of Companies’ costs occasioned by the proceedings. Filing defaults were established but did not justify this calculation. Referring to section 35 CPC, NCLAT required reasons and logic and a balance between the magnitude of default and the financial burden. It reduced costs to a consolidated Rs. 4 lakh while retaining the finding of filing default. The reduction addressed an unsupported assessment however, the judgment gives no itemized calculation or formula explaining precisely why Rs. 4 lakh was chosen.

Conclusion:

The orders discussed offer a practical lesson: the cost of keeping a company compliant can be much lower than the cost of bringing it back onto the register. Timely action can therefore save companies’ avoidable expense. A Company Secretary plays an important role in this process by monitoring filing requirements, advising on dormant status where appropriate, and ensuring prompt responses to strike-off notices.

When restoration is sought, Tribunals should explain the basis for the costs imposed, taking guidance from the principles discussed above. This would help ensure that the amount reflects the circumstances of the case and places a reasonable and proportionate burden on the applicant.

The article is written by Ms. Kavita Dosani

The post Restoration Comes at a Cost: Reasonableness and Judicial Discretion under Rule 87A of the NCLT Rules, 2016 first appeared on MMJC.

Every word in a statute matters, but not every case is decided by its words alone. Knowing when courts apply the Literal Rule and when they adopt the Purposive Approach lies at the heart of judicial interpretation.

Imagine a law stating, “No vehicles are allowed inside the park.” Read literally, even an ambulance entering to save a life would violate the rule. Yet, no one would argue that the law intended to prevent emergency services from entering the park. The objective of the law is to prevent noise, pollution and disturbance, not to obstruct life-saving assistance.

Before examining how this debate played out in a recent tax dispute of 241 Crore, it is useful to understand these two principles.

•  Literal Rule

The Literal Rule requires courts to interpret a statute according to the ordinary and natural meaning of its words. Where the language is clear and unambiguous, the provision must be applied exactly as written, even if the outcome appears harsh or inconvenient.

• Purposive Approach

The Purposive Approach requires courts to interpret a statute by considering the object and purpose behind the legislation. Instead of focusing solely on the literal wording, the court adopts the interpretation that best advances the legislative intent.

The significance of this distinction became evident in the recent Mumbai ITAT ruling in Sterling Holiday Resorts Ltd. v. ITAT, where the interpretation of a single statutory condition resulted in the denial of tax benefits relating to accumulated business losses of over ₹240 crore that were sought to be transferred from the Demerged Company to the Resulting Company.

In this case, the Mumbai ITAT examined whether the Resulting Company was entitled to carry forward the accumulated business losses of approximately ₹240.15 crore under Section 72A of the Income-tax Act. The dispute arose because, instead of the Resulting Company issuing shares to the shareholders of the Demerged Company, the shares were issued by the Holding Company of the Resulting Company. This raised the question of whether the condition prescribed under Section 2(19AA)(iv), which specifically requires the Resulting Company to issue its shares as consideration for the demerger, had been satisfied.

What Happened in Sterling Holiday Resorts India Ltd?

Under the Scheme of Arrangement, the Holiday Activity Undertaking of Sterling Holiday Resorts India Ltd. was transferred to Thomas Cook Insurance Services (India) Ltd., the Resulting Company. However, instead of the Resulting Company issuing shares,

Thomas Cook (India) Ltd., its Holding Company, issued shares to the shareholders of Sterling Holiday.

This raised an important question:

Can a demerger qualify under Section 2(19AA) when the Holding Company, and not the Resulting Company, issues the shares?

The Tribunal answered this question in the negative and holds that losses cannot be carried forward and set off in absence of satisfaction of conditions specified under section 2(19AA) IV of the Income Tax Act.

Before analysing the Tribunal’s reasoning, an obvious question arises: Was this the first time such a demerger structure, where shares as consideration were issued by an entity other than the Resulting Company, had been adopted? Surprisingly, the answer is “No”. Several similar schemes had already received approval from the NCLT.

B.     Asian Granito India Limited. *

The NCLT, Gujarat approved a scheme where the Adicon Tiles Manufacturing Undertaking was transferred to Adicon Ceramics Limited, while the consideration was discharged through the issue of shares by Asian Granito India Limited. The scheme also permitted the transfer of unabsorbed depreciation to the Resulting Company.

B.     Cello Group Restructuring. **

Wim Plast Ltd. transferred its undertaking to Cello Consumer Products Pvt. Ltd., a wholly owned subsidiary of Cello World Ltd. However, instead of the Resulting Company issuing shares, the consideration was discharged by Cello World Ltd., the Holding Company of the Resulting Company.

B.     Ajmera Realty & Infra India Ltd.***

An even more interesting structure was approved in the case of Ajmera Realty & Infra India Ltd. Here, the Resulting Company was a wholly owned subsidiary of the Demerged Company. Instead of the Resulting Company issuing shares, the Demerged Company itself, being the Holding Company, issued additional shares to its existing shareholders as consideration. This represented a significant departure from the conventional mechanics of a demerger.

These precedents demonstrate that commercially similar structures have been recognised and approved.

If similar demerger structures had already been approved by the NCLT, where shares were issued by an entity other than the Resulting Company, then why did the Mumbai ITAT still deny the benefit of carry forward and set-off of losses under Section 72A?

The answer lies in the Tribunal’s Literal interpretation of Section 2(19AA). While denying the benefit under Section 72A, the Mumbai ITAT made the following key observations:

• The Supreme Court has consistently held that tax statutes must be interpreted strictly. Where the language of a provision is clear and unambiguous, courts must apply it as written without adding or substituting words.
• Section 2(19AA) grants tax neutrality only if every prescribed condition is fulfilled, including the requirement that the Resulting Company must issue shares to the shareholders of the Demerged Company.
• In the present case, the shares were issued by the Holding Company of the Resulting Company instead of the Resulting Company Itself. Accordingly, the Tribunal held that the mandatory condition under Section 2(19AA) was not satisfied.
• The Tribunal further observed that a Holding Company and its subsidiary are separate legal entities. Therefore, a Holding Company cannot discharge a statutory obligation that the law specifically imposes upon its subsidiary.

Accordingly, the Tribunal held that the demerger did not satisfy the conditions prescribed under Section 2(19AA) and denied the benefit of carry forward and set-off of losses under Section 72A.

Conclusion:

The Sterling Holiday ruling is a reminder that statutory interpretation is not merely a rule of construction but can determine the fate of an entire transaction. While the Tribunal preferred the Literal Rule, the existence of similar NCLT-approved schemes keeps the debate on purposive interpretation alive. As higher courts examine the issue, the decision may ultimately clarify whether, in tax law, words alone prevail or legislative intent also has a role to play.

*https://aglasiangranito.com/Intimations_Disclosures/Draft-Scheme-of-Arrangement.pdf

**https://nsearchives.nseindia.com/corporate/CELLO2023_15052026192852_C WL_Upload_Signed.pdf

***https://ajmera.com/wp-content/uploads/2024/07/NCLT-order-approving-the-Scheme-of-Arrangement.pdf?utm

Article by
Ankur Shukla

The post Lessons from the Sterling Holiday Ruling Denying Tax Benefits of Over ₹240 Crore by Income Tax Appellate Tribunal. first appeared on MMJC.

Do you mean Pachaas tola…?????

For those who have watched movie Vaastav, the dialogue immediately brings back the iconic scene where Sanju’s character proudly talks about the 50 tola gold chain.

But in the world of corporate restructuring, “pachaas tola” can have a very different meaning.

Here, it was not 50 tola of gold. It was ₹50 crore of stamp duty.

Stamp duty on merger / demergers is that climax which often can be unexpected twist in the story, while it’s thrilling to see such twist in Movies and OTT series but in real life corporate transactions it comes with consequences in terms of cost. One of such case where climax of the transaction was difficult to agree upon was taken up before Hon’ble Bombay High Court in Schaeffler India Limited v. Chief Controlling Revenue Authority, decided on 18 February 2026.

Schaeffler India Limited (“SIL”) filed a composite scheme under Sections 230–232 of the Companies Act, 2013, involving the amalgamation of two transferor companies, INA Bearings India Private Limited (“INA”) and LuK India Private Limited (“LuK”), with SIL.

SIL and INA were within the jurisdiction of the NCLT, Mumbai, whereas LuK was within the jurisdiction of the NCLT, Chennai. Consequently, the same composite scheme was placed before both Benches. The NCLT, Chennai sanctioned the scheme on 13 June 2018, followed by the NCLT, Mumbai sanctioning the scheme on 8 October 2018.

Maharashtra stamp authorities (MSA) while adjudicating the matter considered the stamp duty payable of ₹ 50 Cr subject to cap of ₹ 25 Cr pursuant to notification of 6 May 2002 and relied on section 5 of Maharashtra stamp act (herein after “the Act”) i.e,

“Any instrument comprising or relating to several distinct matters or transactions shall be chargeable with the aggregate amount of the duties with which separate instruments, each comprising or relating to one of such matters or transactions, would be chargeable under this Act.”

MSA considered following points of arguments:

1. NCLT, Mumbai in its order had considered the composite scheme which included the amalgamation of INA with SIL as well as LUK with SIL and therefore, the same constituted two different transactions.
2. Scheme of Amalgamation is Instrument since it considers two different transactions and not the order of NCLT
3. Implementation of the scheme is in Maharashtra, it would give jurisdiction to the Maharashtra stamp authorities to levy stamp duty on NCLT, Chennai order.

Arguments on behalf of SIL were

1. Section 3 of the Act contemplates payment of stamp duty on Instrument and not the underlying transaction and in given case instrument is NCLT Order and not Scheme of amalgamation (Relied on Chief Controlling Revenue Authority, Pune And Another vs Reliance Industries Limited, Mumbai And Another)
2. Multiple transactions in same scheme cannot be charged for Stamp duty separately (Relied on Ambuja Cement Limited vs Chief Controlling Revenue Authority 2)

Bombay High Court Relied on the judgements in case of Reliance Industries Limited and Ambuja cement limited and validated following points

1. Stamp duty is on the instrument, not the underlying transaction: The Court held that the stamp authorities cannot assess stamp duty by dissecting the underlying commercial transactions when the statute makes the NCLT sanction order the chargeable instrument. Therefore, the fact that two transferor companies were being amalgamated into SIL did not, by itself, mean that the single NCLT Mumbai order could be treated as two separate transaction /instruments for stamp-duty purposes.
2. Section 5 cannot be used to split a composite NCLT order: The Court examined Section 5 and held that its application requires an examination of whether an instrument comprises several distinct matters or transactions. However, applying Section 5 in the present circumstances would necessarily require the stamp authorities to look behind the NCLT order and segregate the underlying amalgamations.

The Court held that such an approach was impermissible because the instrument chargeable to stamp duty is the order of sanction, and not the underlying scheme or each individual amalgamation contained within it.

The Bombay High Court quashed the orders demanding stamp duty of ₹50 crore. It held that stamp duty was payable on the NCLT Mumbai order dated 8 October 2018, under Article 25(da) of the Maharashtra Stamp Act, 1958, subject to the applicable maximum cap of ₹25 crore.

It is interesting to learn following Principles out of this case and the cases referred therein

• Stamp Duty is always levied on Instrument and in case of Merger & Demergers Instrument is Order Sanctioned by NCLT, so if scheme and Order differs in any way, NCLT Order will be considered as Instrument for Stamp Duty Purpose.
• Two Different NCLT Orders will result in Stamp Duty in Two Different States and neither of the state stamp Authorities has power to levy stamp duty on the NCLT order of other state.
• Where Multiple Transactions are involved through one document it needs to be looked into in the context of whether each transaction is leviable for Stamp Duty and that may not be possible in case of scheme matters.

For composite schemes of merger and Demergers, the judgment provides important protection against artificially multiplying stamp-duty liability merely because more than one transferor company is involved.

The Article is written by Partner – Mr. Omkar Dindorkar.

The post Pachaas Crore Ki Stamp Duty…. first appeared on MMJC.

Schemes of mergers, demergers, and various other arrangements (hereinafter “Corporate Restructuring”) involving listed entities have been seen increasing at a greater pace in recent times. Listed entities involved in the scheme of arrangement have to seek a No Objection letter from stock exchanges¹. Corporate Restructuring involving listed entities, SEBI Registered Intermediaries, and certain individuals forming part of these listed entities, must comply with and ensure the ‘fit and proper’ person criteria. During corporate restructuring, stock exchanges check this criterion on behalf of the Securities and Exchange Board of India (‘SEBI’). Fit and Proper person criteria seek to check if the entities involved in the corporate restructuring are morally and ethically sound.

Fit and Proper checks have always been crucial in the eyes of SEBI. It has always placed provisions for checking ‘Fit and Proper’ person criteria for intermediaries registered with it. SEBI periodically checks fit and proper person criteria in the case of registered intermediaries. Hon’ble National Company Law Tribunal also screens the cases of Corporate Restructuring on the grounds of “Fit & Proper”.

Considering this, it is vital to understand what can be considered fit and proper while undergoing any corporate restructuring and to establish a few precedents in this regard

Fit and Proper Person Criteria as is stated by SEBI in Schedule II of SEBI (Intermediaries) Regulations, 2008 is also applicable for Corporate Restructuring. The criteria are as follows:

(a) integrity, honesty, ethical behaviour, reputation, fairness and character of the person;

(b) the person not incurring any of the following disqualifications:

• criminal complaint or information under section 154 of the Code of Criminal Procedure, 1973 (2 of 1974) has been filed against such person by the Board and which is pending;
• A charge sheet has been filed against such person by any enforcement agency in matters concerning economic offences and is pending;
• an order of restraint, prohibition or debarment has been passed against such person by the Board or any other regulatory authority or enforcement agency in any matter concerning securities laws or financial markets, and such order is in force.
• the Board has initiated recovery proceedings against such person and are pending;
• an order of conviction has been passed against such person by a court for any offence involving moral turpitude;
• any winding up proceedings have been initiated or an order for winding up has been passed against such person;
• such person has been declared insolvent and not discharged;
• such person has been found to be of unsound mind by a court of competent jurisdiction, and the finding is in force;
• such person has been categorised as a wilful defaulter; (x) such person has been declared a fugitive economic offender; or
• any other disqualification as may be specified by the Board from time to time.

Schedule II of SEBI (Intermediaries) Regulations, 2008 gives that “Fit and Proper” criteria shall apply to the following persons

• the applicant or the intermediary
• the principal officer, the directors or managing partners, the compliance officer and the key management persons by whatever name called; and
• the promoters or persons holding controlling interest or persons exercising control over the applicant or intermediary, directly or indirectly. Provided that in case of an unlisted applicant or intermediary, any person holding twenty per cent or more voting rights, irrespective of whether they have controlling interest or exercise control, shall be required to fulfil the ‘fit and proper person’ criteria.
• Explanation– For the purpose of this sub-clause, the expressions “controlling interest” and “control” in the case of an applicant or intermediary shall be construed with reference to the respective regulations applicable to the applicant or intermediary.

Precedents – ascertainment of Fit & Proper criteria and rejection of schemes

Recently, in a few cases, it is seen that stock exchanges have been rejecting schemes on the grounds of listed Intermediaries, and individuals forming part of these listed Intermediaries have not complied with the criteria of “Fit & Proper”. A couple of schemes that were rejected based on ‘Fit & Proper’ person criteria are as follows:

• In the case of the Proposed Scheme of arrangement between Motilal Oswal Financial Services Limited (transferor or resulting Company) and Glide Tech Investment Advisory Private Limited (transferee Company) and Motilal Oswal Wealth Limited (Demerged Company) and their respective shareholders. It was seen that the Stock exchange had denied the NOC under Regulation 37 of SEBI LODR on the grounds that one of the directors was named in the Chargesheet filled by “The Economic Offence Wing, Mumbai in the matter of their investigations into irregularities at National Spot Exchange Limited which was disqualifying him under “Fit & Proper Criteria” of Schedule II of SEBI (Intermediaries) Regulations, 2008
• In the Case of Scheme of arrangement between IIFL Securities Limited and 5Paise Capital Limited and their respective shareholders and Creditors: In this case, the chargesheet by Economic Offence Wing [‘EOW’] questioned the “Fit & Proper” status of one of the directors of IIFL Securities Limited, and since the matter was sub-judice, SEBI/ Stock exchange was keen to understand the impact of penal action on the scheme of arrangement. In this case, the NOC was not issued, and Companies were asked to refile the scheme with additional information. Considering both the above cases, it indicates that SEBI/ Stock Exchanges are very clear that any non-compliance of the “Fit & Proper” Criteria under SEBI (Intermediaries) Regulations, 2008 may result in not entertaining any application of any scheme of merger, demerger or any other arrangements for Intermediary. Stock Exchanges may look into this Fit& Proper criterion during Corporate Restructuring because of the first and second proviso to clause 6 of Schedule II of SEBI (Intermediaries) Regulations, 2008.

NCLT & NCLAT Rejection due to Fit & Proper

In the matter of Hotel City Plaza Private limited v. Union of India in reference to the scheme of amalgamation, NCLT and NCLAT rejected the scheme on the grounds of violation of Sections 73 to 76A of the Companies Act, 2013, i.e. prohibiting the private limited companies from accepting or renewing any deposits from shareholders in excess of the aggregate of the paid-up capital, free reserves, and securities premium amount. Further, the Registrar of Companies had issued ‘Show Cause Notices’, and appellants had not responded. NCLAT, while passing the order, expressly stated as follows:

“Taking note of the surrounding facts and circumstances of the present case comes to an ‘inevitable’, ‘inescapable’ and ‘irresistible’ conclusion that the ‘Appellants’, had not made out a fit and proper case, for ‘Sanctioning the Scheme of Amalgamation’, in accordance with ‘Law’. Looking“

Considering the above case, the Hon’ble tribunals have clearly outlined that any non-compliance with the Companies Act, 2013, especially related to public deposits and the ignorance of show cause notices, is not a case of “Fit & Proper” for a scheme of merger.

Conclusion

The Conduct and actions of the Companies and the directors play an important role in demonstrating the “Fit & Proper” criteria before any corporate restructuring. Any violation of the criteria results in a loss of confidence by the regulator in the company and the intent of the transactions. Therefore, a pre- “Fit & Proper Criteria check” has become the unavoidable action point before any corporate restructuring.

This article has been published on Taxmann. The link for the same

https://www.taxmann.com/research/company-and-sebi/top-story/105010000000024216/fit-proper-criteria-impact-on-scheme-of-mergers-demergers-experts-opinion

The post “Fit & Proper Criteria”: Impact on Scheme of Mergers & Demergers first appeared on MMJC.

Regulation 37 of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘SEBI LODR’) mandates every listed entity desirous of undertaking a scheme of arrangement or involved in a scheme of arrangement under sections 230–234 and section 66 of Companies Act, 2013 to file the draft scheme of arrangement with the designated stock exchange(s) for obtaining the no-objection certificate, before filing such scheme with National Company Law Tribunal.

The designated stock exchange’s approach for granting the no-objection certificate is based on certain parameters identified by the stock exchanges. Designated stock exchange may issue an observation letter pursuant to which it shall direct modifications or omissions to be done in the respective scheme(s) filed with it or give mandates to adhere to specific provisions and circulars as specified by designated stock exchanges. It may also direct to incorporate its observations or comments in the scheme.

However, in certain circumstances Stock Exchanges may reject and return the scheme absolutely or subject to compliance of certain conditions. In this article, we shall study the list of schemes rejected by stock exchange and the reasons for rejecting the schemes.

Schemes rejected by the stock exchanges on repeated grounds:

• The stock exchange has rejected schemes on various occasions owing to breach of the Fit and Proper Status. Compliance with ‘fit and proper status’ is checked only when companies involved in scheme of arrangement are SEBI registered intermediaries. The reason of such rejections are as follows:
  • The scheme was rejected due to the chargesheet filed by the Economic Offence Wing against the Managing Director of the company proposed to be merged and the ongoing investigation into their ‘fit and proper’ status under the Securities and Exchange Board of India (Intermediaries) Regulations, 2008¹. Given the potential legal ramifications and the uncertainty surrounding the Managing Director’s future, it was deemed necessary to assess the potential impact on the businesses of the Transferor, Transferee companies, and the proposed scheme of arrangement. This clarity was essential to ensure investors could make informed decisions regarding the viability and potential risks associated with the merger.
  • In another case the scheme was rejected owing to ongoing prosecution proceedings against the directors on the board of the Transferor Company and Transferee Company. Stock exchanges also directed the company to examine the impact of the proceedings on the scheme, companies, and investors.

Schemes rejected by the stock exchanges due to other miscellaneous reasons–

• The entities involved in scheme of arrangement have not meet the minimum public shareholding requirement under SEBI (LODR) and para (A)(3)(b) of Part – I of SEBI Master Circular dated 20^th June 2023². Further, SEBI advised to file fresh application by complying with the SEBI Circular.
• Draft scheme was not in compliance with clause III(A)(1)(a) of Annexure I of the SEBI Circular No. CFD/DIL3/CIR/2017/21³, i.e. the equity shares to be allotted by the Transferee company to the shareholders of the transferor companies was not sought to be listed, basis which SEBI has returned the draft scheme, and the company was advised to re-submit the same after ensuring compliance with the provisions mentioned in the circular.
• The draft Scheme was contingent upon the successful completion of a concurrent scheme, the timeline for which is currently uncertain. As a result, stock exchange decided to defer approval of the draft Scheme until the outcome of the concurrent Scheme is determined or until it receives NCLT approval.
• The Company executed a Slump Sale Agreement on September 6, 2023, and subsequently approved a Scheme of Amalgamation on September 25, 2023. The Scheme was contingent upon the successful completion of the Slump Sale. However, the Stock Exchange returned the Scheme as the Slump Sale condition precedent was not fulfilled at the time of applying for the No Objection Certificate under Regulation 37 of the SEBI (LODR).
• The Scheme for reduction of share capital between a company and its shareholders was rejected because incomplete information was submitted at first instance and even after repeated emails being sent for same by regulatory authorities.
• One of the companies to the scheme of merger had not applied for registration as NBFC under Section 45-1A of the RBI Act, 1934 and was wrongfully disclosing in its financial statement regarding having applied for registration as an NBFC. Further, the company was conducting NBFC activities without holding a certificate of registration issued by RBI, which is in violation of Reserve Bank of India Act, 1934. In view of the aforesaid, SEBI returned the draft scheme.
• SEBI has rejected the scheme basis the unresolved complaint of another company against the captioned scheme before the Hon’ble High Court, Kerala. SEBI has returned the scheme and has advised to re-submit the same upon resolution of the complaint and disposal of the case.
• The rationale of the scheme was based on the fact of the company having negative retained earnings however by the time the scheme of merger came for consideration before the stock exchange, the negative retained earnings had progressed to positive retained earnings owing to significant profits because of which the justification for the proposed scheme was no longer warranted and hence rejected by the exchange.
• As per NSE’s standard operating procedures dt: December 20, 2022⁴, draft scheme shall be filed within 15 days of approval of Scheme by the Board of Directors of the company but the same has been filed after 15 days which is in non-compliance of SEBI Standard Operating Procedures. Consequently, the scheme has been rejected.

Key Learnings for Successful Filling of Schemes with BSE

• Address any outstanding legal proceedings, financial instability, or unresolved disputes before filing a scheme.
• Conduct a thorough due diligence process to identify and address potential risks and issues.
• Keep abreast of any changes in SEBI guidelines to avoid non-compliance.
• Ensure strict adherence to SEBI regulations, particularly those related to minimum public shareholding, disclosure requirements.
• Reduce the risk of rejection, companies should strive to structure schemes independently, without making them contingent upon other transactions or schemes. This eliminates uncertainties and potential delays that could hinder approval.
• Companies should conduct a thorough analysis of the fit and proper status of their promoters, directors, and other key personnel. This involves assessing factors like legal ongoing proceedings, past legal records, financial history, and any potential conflicts of interest
• Assurance on Compliance with the SEBI Mater Circulars is a pre-requisite to mitigate the risk of rejection due to regulatory non-adherence.
• Companies should provide complete and accurate disclosures in their applications to stock exchanges. This includes details about the scheme, rationale for the merger, financial projections, and any potential risks or uncertainties.
• Avoiding Misleading / wrong information to Stock Exchange as along with rejection it can also lead to legal consequences.
• Ensuring that the Rationale for undertaking the scheme matches the current facts, situations, and circumstances.

Conclusion

In hindsight, study of the cases rejected by the stock exchange is crucial to anticipate the observations or reasons for rejection when preparing to file a scheme of arrangement. Study of these reasons would help stakeholders draft schemes in a better manner. In navigating the grounds behind scheme rejections by stock exchanges, it becomes evident that these decisions are not merely regulatory hurdles but essential safeguards for market integrity. By scrutinizing schemes thoroughly, stock exchanges aim the mitigation of risks, promotion of accountability and prevention of contingencies among other things.

This article has been published on Taxmann. The link for the same

https://www.taxmann.com/research/company-and-sebi/top-story/105010000000024474/deciphering-stock-exchanges-observation-in-giving-noc-to-draft-schemes-of-arrangement-experts-opinion

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SEBI Master circular dated 20 June 2023 on (i) Scheme of Arrangement by Listed Entities and (ii) Relaxation under Sub-rule (7) of rule 19 of the Securities Contracts (Regulation) Rules, 1957 already covers certain points(1) that should be looked into by audit committee (irrespective whether the transaction is with related party or not ) while recommending the draft scheme to the board of directors as follows:

• Need for the merger/demerger/amalgamation/arrangement
• The rationale of the scheme
• Synergies of business of the entities involved in the scheme
• Impact of the scheme on the shareholders
• Cost-benefit analysis of the scheme.

Now, since there is a specific SEBI Circular dealing with the Scheme of arrangement by Listed entities will it be sufficient only to comply with SEBI Master circular dated 20 June 2023?

RPT Industry Standards specifically does not cover any disclosures with regards to a transaction of merger/ demerger between related parties. 

The definition of related party transaction under 2(1) (zb) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR’) is wide enough to cover the Merger / Demerger transactions.

Let us understand what is Related party Transaction in case of Merger / Demergers?

There may be two scenarios

• First, the transaction of merger/demerger itself is a related party transaction i.e, the consideration of merger/ demerger will have to be looked into and therefore disclosure under A1 to A5 and B1 may be warranted.
• Secondly, in case of Merger/ Amalgamations and demerger, all the assets and liabilities of the transferor company becomes the assets and liabilities of transferee company (under 2(1B) & 2(19AA) of Income tax Act,1961) and therefore disclosures related to all the balance sheet items i.e., B3 to B7 will be required to be disclosed to audit committee if those balance sheet items i.e., loans, Investments, Guarantees and borrowings of the transferor companies are with related parties of transferee company, as all this transactions will come under transferee company post-merger/demerger. 

What are Balance sheet item as per RPT Industry Standards?

• B (3) – Loans, inter-corporate deposits or advances given by the listed entity or its subsidiary.
• B (4) – Investment made by the listed entity or its subsidiary.
• B (5) – Guarantee (excluding performance guarantee), surety, indemnity or comfort letter, by whatever name called, made or given by the listed entity or its subsidiary.
• B (6) – Borrowings by the listed entity or its subsidiary; and
• B (7) – Sale, lease or disposal of assets of subsidiary or of unit, division or undertaking of the listed entity, or disposal of shares of subsidiary or associate.

SEBI Master circular dated 20 June 2023 relating to the scheme of arrangement by listed entities does not cover the aspects of disclosures to athe udit committee from the context of Merger /Demerger with related parties and therefore in case of a transaction of Merger/Demerger between a Listed Entity and the Company where shareholder to whom shares will be allotted is a related party or Loans, Investment, Guarantee and Borrowing is with related parties, the Listed entities will have to consider minimum information as per RPT Industry Standards.

The Regulators steps for increased disclosures around related party transactions is a clear message that Listed entities should follow the most Ethical and Transparent Business operations.

Under RPT Industry Standards, audit committee is expected to give justifications while approving certain transactions, further the comments of audit committees shall be recorded in the minutes of the meetings. It all indicates that Companies should run the business operations mutually exclusive and avoid overlapping of horizontal business operations with common resources within multiple entities increasing related party transactions or avoid entities within the group having no incomes or no businesses and the toll of which are taken up by the other companies within the groups increasing the related party transactions.

Restructuring of Business Operations including mergers/ demerges may become a common trend with the Growing Governing provisions around related party transactions and its disclosures.

1. Part I, Para A (2) (c) of SEBI Master Circular SEBI/HO/CFD/POD-2/P/CIR/2023/93 – dated June 20, 2023

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