A scheme of arrangement involving a listed company can result in the acquisition of control or of a substantial stake, triggering the mandatory open offer obligation under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. Regulation 10(1)(d)(ii) of the Takeover Regulations exempts an acquisition that is made pursuant to a scheme of arrangement "by an order of a court or a tribunal" from the open offer requirement. The exemption is the principal relief for an NCLT-approved scheme, but it is not available for every scheme.
The Scope of Regulation 10(1)(d)(ii)
The exemption applies where the acquisition is made by an order of a court or a tribunal. The NCLT is a tribunal within the meaning of the regulation, and an NCLT-sanctioned scheme therefore qualifies. The exemption is not automatic in the sense that it requires no disclosure; the acquirer must still comply with the disclosure requirements and the conditions attached to the exemption. But the acquirer is relieved of the obligation to make a mandatory open offer, which is the most significant cost of a control acquisition.
The Fast-Track Gap
The exemption does not extend to a scheme approved by the Regional Director under Section 233. The Regional Director is not a court or a tribunal; it is an administrative authority. A fast-track merger that results in a change of control therefore does not qualify for the Regulation 10(1)(d)(ii) exemption, and the acquirer may be required to make an open offer. This is a critical distinction that a company considering the fast-track route must factor into its planning. The procedural savings of the Section 233 route may be outweighed by the cost of a mandatory open offer.
The SEBI Observation Letter
For a listed-company scheme, SEBI's observation letter is a condition precedent to the NCLT's consideration of the scheme. The listed entity must file the draft scheme with the stock exchanges, which process it and communicate SEBI's observations. The company then files the scheme with the NCLT, and it is not required to send a fresh notice to SEBI under Section 230(5) after the observation letter has been issued. The observation letter is not an approval of the scheme; it is SEBI's statement of the securities law issues, and the NCLT will consider it along with the company's response.
The Strategic Coordination
A listed-company scheme must coordinate the NCLT process, the SEBI observation process, and the Takeover Code analysis. The scheme should be drafted with the open offer consequences in mind, and the acquirer should determine at the outset whether the Regulation 10(1)(d)(ii) exemption is available. Where the scheme involves a change of control and the exemption is not available, the acquirer must either structure the transaction to avoid the trigger or budget for the open offer.
Call to Action
Anuj Desai & Associates advises listed companies and acquirers on the SEBI Takeover Code implications of NCLT schemes—from the Regulation 10(1)(d)(ii) exemption and the fast-track gap to the SEBI observation letter and the coordination of the NCLT and SEBI processes. If your scheme involves a change of control, we can help you determine whether the open offer exemption applies.
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