Wednesday, February 5, 2014

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 circular 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 circular.

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. 

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