Scheme of Arrangement: Notice to Central Government

Since a scheme of arrangement, once
sanctioned, becomes binding on all shareholders and creditors a company and
also has wider impact, company law prescribes a stringent process for the same.
One such is the requirement that the court must issue notice to the Central
Government under section 394-A of the Companies Act, 1956 and take into
consideration any representations that the Government may make. This power of
the Central Government has been delegated to the Regional Directors (RDs).
In practice, there have been some areas of
uncertainty regarding the role of the RDs. For example, often the RDs raise
issues pertaining to the substantive aspects of the scheme such as valuation
and share exchange ratio, while in other cases the issues are confined to
procedural or administrative aspects. Moreover, there has also been some level
of variation in different regions as to the manner in which the RDs respond to
the scheme in terms of substance as well as process. Often, the RD is also
required to represent the position of other governmental authorities such as the
Income Tax Department.
In order to streamline the process of representation
by the RD, the Ministry of Corporate Affairs has issued a general
to all RDs requiring them to invite specific comments from the Income
Tax Department within 15 days of receipt of the notice before filing the representations
in court. In case of lack of response from the Income Tax Department, it may be
presumed that there are no objections. The RD is also required to seek the
objections of other sector regulators as may be applicable. It has also been
clarified that the RD must merely put forward the objections of the other
departments/regulators before the court and not determine the correctness or
otherwise of their views.
The scope of the RD’s role has therefore
been circumscribed to the extent of representing other government departments,
although its role on the substantive aspects of the scheme is untouched by this
Once the provisions of the Companies Act,
2013 with reference to scheme of arrangement are notified, a different approach
would be adopted. In that case, it is the duty of the company to notify all
government departments along with the notice of the court-convened meetings.
Section 230(5) provides as follows:
(5) A notice
under sub-section (3) along with all the documents in such form as may be prescribed
shall also be sent to the Central Government, the income-tax authorities, the
Reserve Bank of India, the Securities and Exchange Board, the Registrar, the
respective stock exchanges, the Official Liquidator, the Competition Commission
of India established under sub-section (1) of section 7 of the Competition Act,
2002, if necessary, and such other sectoral regulators or authorities which are
likely to be affected by the compromise or arrangement and shall require that representations,
if any, to be made by them shall be made within a period of thirty days from
the date of receipt of such notice, failing which, it shall be presumed that
they have no representations to make on the proposals.
Under the new Act, the notice will be sent
individually to the various authorities rather than through the RDs. Those
authorities may make their representation directly. Again, if there is no timely
response from the authorities (i.e. within 30 days from the receipt of notice),
then it is presumed that they have no representations.

This approach
provides an appropriate balance as it makes the process transparent by giving each
authority the access to the relevant information, but at the same time prevents
any undue delay in the implementation of the scheme due to the lack of a timely
response from the authorities. 

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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