NCLT Scheme of Arrangement: When Foreign Companies Use It for Restructuring

Why Foreign Companies Use NCLT Schemes of Arrangement

A scheme of arrangement is the most flexible restructuring tool available under Indian corporate law. Unlike a statutory merger (which follows a prescribed formula), a scheme of arrangement allows companies to design bespoke restructuring transactions — mergers, demergers, slump sales, capital reductions, debt compromises, share swaps, and hybrid transactions — and seek NCLT sanction for the entire package.

Foreign companies engage with NCLT schemes in several contexts:

• Merging a foreign parent with its Indian subsidiary (inbound cross-border merger under Section 234)
• Merging an Indian subsidiary into a foreign parent (outbound cross-border merger — legally complex and rarely executed)
• Restructuring Indian joint ventures — demerging or amalgamating Indian entities that have foreign shareholding
• Post-acquisition integration — merging acquired Indian companies into existing Indian subsidiaries to create a single operating entity
• Pre-exit restructuring — demerging valuable divisions before selling stake to a third party

As of March 2025, over 15,000 cases are pending before the NCLT across all its benches, and companies must typically wait 9-12 months from filing to final NCLT approval. Understanding the process, timeline, and pitfalls is essential for any foreign company contemplating restructuring in India.

Legal Framework: Sections 230, 232, and 234

Section 230: Compromise or Arrangement

Section 230 of the Companies Act, 2013 provides the foundational mechanism. Any company — or its creditors or members — may apply to the NCLT to convene meetings of creditors or members (or any class thereof) to consider a proposed compromise or arrangement. The NCLT will order meetings if it is satisfied that the application discloses a prima facie case for the arrangement.

For the scheme to be approved, it must receive the consent of a majority in number representing 75% in value of the creditors or members (or class thereof) present and voting at the meeting. This dual threshold — majority in number AND 75% in value — is among the strictest globally and can be challenging for foreign-held companies where shareholding is concentrated.

Section 232: Merger and Amalgamation

Section 232 builds on Section 230 to specifically address mergers, amalgamations, and demergers. It provides for:

• Transfer of the whole or any part of the undertaking, property, or liabilities of one company to another
• Allotment or appropriation of shares, debentures, or other interests in the transferee company to the members of the transferor company
• Continuation of pending legal proceedings by or against the transferor company in the name of the transferee company
• Dissolution of the transferor company without winding up

The NCLT must be satisfied that the scheme is fair and reasonable and not contrary to public policy. It also considers the interests of creditors, employees, and minority shareholders. For companies with foreign direct investment, the NCLT will verify that the scheme complies with FEMA regulations and sectoral FDI caps.

Section 234: Cross-Border Mergers

Section 234 — notified by the MCA and brought into effect alongside the Companies (Compromise, Arrangements and Amalgamations) Rules, 2016 — authorises mergers and amalgamations between companies registered under the Companies Act, 2013 and companies incorporated in jurisdictions specified by the Central Government.

Key requirements for cross-border mergers under Section 234:

1. Prior RBI approval: Mandatory before filing the scheme with the NCLT. The RBI evaluates the scheme for compliance with FEMA regulations, foreign exchange implications, and valuation adequacy
2. Valuation submission: The valuation of the surviving entity must be submitted to the RBI, prepared using internationally accepted valuation methodologies
3. Compliance with Sections 230-232: The cross-border merger must follow the same procedural steps as a domestic scheme — application, NCLT directions, stakeholder meetings, approval, and sanction
4. Consideration structure: Shareholders of the merging company may receive consideration in cash, depository receipts, or a combination — NOT in shares of a foreign company directly (for inbound mergers)
5. Permitted jurisdictions: The foreign company must be incorporated in a jurisdiction that India's Central Government has notified as a permitted jurisdiction for cross-border mergers

Step-by-Step Process for NCLT Scheme Approval

Phase 1: Pre-Filing (4-8 Weeks)

1. Board resolution: The boards of all companies involved pass resolutions approving the draft scheme of arrangement and authorising the filing of the NCLT application
2. Draft scheme preparation: Lawyers prepare the detailed scheme document specifying the transfer of assets, liabilities, employees, contracts, and the consideration structure. For cross-border schemes, FEMA compliance clauses are embedded
3. Valuation report: An independent registered valuer prepares a fairness opinion on the share exchange ratio (for mergers) or the transfer consideration (for demergers/slump sales)
4. RBI approval (if cross-border): For Section 234 schemes, the prior approval of the RBI is obtained before filing with the NCLT. The RBI typically takes 4-8 weeks to process the application
5. Regulatory pre-clearances: Sector-specific approvals (SEBI for listed companies, IRDAI for insurers, RBI for banks/NBFCs) are obtained or confirmed as not required

Phase 2: First Motion (4-6 Weeks)

1. Application filing: An application is filed with the NCLT in Form NCLT-1 (for Section 230) or the prescribed company application form, along with the draft scheme, valuation report, auditor's certificate, and supporting affidavits
2. NCLT admission hearing: The NCLT examines the application for completeness and prima facie validity. If satisfied, it issues directions for convening meetings of creditors and members
3. NCLT directions include: Who must be convened (classes of creditors, classes of members), time and place of meetings, appointment of chairperson for each meeting, quorum requirements, mode of voting (physical, postal ballot, or electronic), notice timelines, and the deadline for the chairperson's report

Phase 3: Stakeholder Meetings (6-8 Weeks)

1. Notice dispatch: Meeting notices must be sent at least one month prior to the meeting date to all members, creditors, and debenture holders via registered post, speed post, courier, email, or as directed by the NCLT
2. Newspaper publication: Notice must be published in at least one English-language newspaper and one vernacular newspaper having wide circulation in the area where the registered office of the company is situated
3. Voting: The dual threshold must be met — majority in number (more than 50%) AND 75% in value of each class present and voting. For wholly owned subsidiaries of foreign parents, this is typically straightforward since the foreign parent holds 100% of shares
4. Chairperson's report: After the meeting, the chairperson files a report with the NCLT confirming the results of the vote, quorum compliance, and any objections raised

Phase 4: Second Motion — NCLT Sanction (8-16 Weeks)

1. Petition filing: A second application (petition) is filed with the NCLT seeking sanction of the scheme, accompanied by the chairperson's report, minutes of meetings, and statutory declarations
2. Notice to regulators: The NCLT directs notice to the Central Government (through the Regional Director), the Registrar of Companies, and the Income Tax authorities. The Regional Director files a representation within 30 days
3. NCLT hearing: The Tribunal considers the scheme, the regulators' representations, any objections from creditors or members, and the overall fairness of the arrangement
4. Sanction order: If satisfied, the NCLT passes an order sanctioning the scheme. The order specifies the appointed date (the effective date of the transfer), the effective date (the date from which the scheme takes effect), and any conditions imposed

Phase 5: Post-Sanction (4-8 Weeks)

1. Filing with ROC: Certified copies of the NCLT order are filed with the Registrar of Companies within 30 days of the order
2. Stamp duty payment: Stamp duty is payable on the NCLT sanction order as an instrument of conveyance. Rates vary by state — typically 0.5-1% for share-only consideration, 2-5% where immovable property transfers
3. Tax filings: Updated returns reflecting the restructured entity are filed with income tax authorities
4. FEMA reporting: For cross-border schemes, post-merger FEMA filings including updated FC-GPR and FLA Return are submitted to the RBI through the AD bank
5. Asset and contract transfers: Physical transfer of assets, novation of contracts, and employee transfers are executed in accordance with the scheme

Stamp Duty: State-Level Variations and Exemptions

Chargeability

The NCLT sanction order is treated as an instrument under the Indian Stamp Act, 1899 (or the relevant state stamp act), and stamp duty is levied accordingly. The rationale is that the order effects a conveyance of property — whether movable or immovable — from the transferor to the transferee company.

Rate Structure by State

Composite Scheme Implications

In composite schemes involving multiple restructuring exercises — such as a simultaneous merger, demerger, and capital reduction — the revenue authority may treat each leg as a distinct transaction under Section 52 of the Indian Stamp Act and levy stamp duty separately on each transaction. This can significantly increase the total stamp duty burden. Foreign companies should structure composite schemes carefully, with legal advice on stamp duty optimisation by state.

Tax Implications of NCLT Schemes

Income Tax

Under the Income Tax Act, 1961, a scheme of arrangement that qualifies as an "amalgamation" under Section 2(1B) receives several tax benefits:

• No capital gains tax for shareholders: Shares received in exchange for shares in the transferor company are not treated as a transfer under Section 47(vii), provided the transferee is an Indian company and shareholders receive shares in the transferee
• Carry-forward of losses: Accumulated losses and unabsorbed depreciation of the amalgamating company can be carried forward and set off by the amalgamated company, subject to the conditions in Section 72A — including continuity of the amalgamating company's business for at least 5 years and holding of at least 75% of book value assets for 5 years
• No tax on transfer of assets: Transfer of capital assets between amalgamating companies is exempt under Section 47(vi)

For demergers, similar exemptions apply under Sections 47(vib), 47(vic), and 47(vid), provided the resulting company issues shares to shareholders of the demerged company in proportion to their existing shareholding.

GST Implications

Under GST law, the transfer of a business as a going concern — including transfer of assets, liabilities, and workforce as part of an NCLT-sanctioned scheme — is exempt from GST under Entry 2 of Schedule II read with Notification No. 12/2017-CT (Rate). However, the transferee must register for GST in the states where the transferor was registered, and input tax credits of the transferor are transferred to the transferee through the GST portal.

Transfer Pricing Considerations

The Income Tax Bill 2025, effective from April 1, 2026, explicitly includes business restructurings and reorganisations in the expanded definition of international transactions. This means that if a foreign parent directs the restructuring of its Indian subsidiaries — through mergers, demergers, or function/risk transfers — the restructuring itself must be priced at arm's length. The tax authorities can challenge whether the consideration paid (or not paid) for the transfer of functions, assets, and risks is commercially justified.

September 2025 Fast-Track Merger Amendments

What Changed

The Ministry of Corporate Affairs notified amendments to the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, effective from September 8, 2025. The key changes include:

• Expanded scope of fast-track mergers: Section 233 fast-track mergers — previously limited to small companies, holding-subsidiary mergers, and startup mergers — now include additional categories based on financial thresholds
• Financial threshold for unlisted companies: Unlisted companies meeting prescribed financial thresholds can now pursue fast-track mergers, bypassing the NCLT entirely and obtaining sanction from the Regional Director
• Reduced timeline: Fast-track mergers can be completed in 3-4 months compared to 9-12 months for NCLT-routed schemes
• Simplified procedural requirements: Reduced documentation, fewer regulatory submissions, and streamlined approval process

Impact on Foreign Company Restructuring

For foreign companies with wholly owned subsidiaries in India, the expanded fast-track merger framework is significant. A merger of a wholly owned Indian subsidiary with another wholly owned Indian subsidiary (both held by the same foreign parent) can now potentially be completed through the fast-track route — saving 5-8 months compared to the NCLT process. However, the fast-track route does not cover cross-border mergers under Section 234, which still require NCLT sanction and prior RBI approval.

Practical Considerations for Foreign Companies

Appointed Date vs Effective Date

The scheme specifies an "appointed date" — the date from which the transfer of assets, liabilities, and employees is deemed to take effect for accounting and tax purposes. This is often a date prior to the NCLT sanction (typically April 1 of the financial year). The "effective date" is the date on which the NCLT order is filed with the ROC, making the scheme legally operative.

For foreign companies, the gap between appointed date and effective date has practical implications: during this interim period, the transferor company continues to operate and file returns, but its accounts are later restated as if the transfer occurred on the appointed date. Withholding tax obligations, FEMA reporting, and intercompany transactions during this gap period require careful planning.

Employee Transfer and Labour Law

Under Indian labour law, employees of the transferor company automatically transfer to the transferee company on the terms specified in the scheme. The scheme typically provides that service continuity is maintained, and existing employment terms (including gratuity, provident fund, and leave balances) are preserved. For foreign companies with employees on expatriate packages, the scheme must address visa and work permit implications.

Listed Company Schemes

If any company involved in the scheme is listed on an Indian stock exchange, additional requirements apply:

• Prior filing with SEBI under Regulation 37 of the SEBI LODR Regulations, which includes a detailed scheme document and valuation report
• SEBI's observations must be obtained before the NCLT application
• Stock exchange compliance, including trading halt announcements and record date notifications
• National Stock Exchange and BSE circulars on scheme-related corporate actions

Regulatory Objections

The Regional Director (representing the Central Government) files a representation with the NCLT within 30 days of receiving notice. Common objections include:

• Inadequacy of the share exchange ratio or consideration
• Non-compliance with accounting standards in the scheme
• Potential prejudice to minority shareholders or creditors
• Tax avoidance concerns — where the scheme appears structured primarily to obtain tax benefits without genuine commercial rationale

For foreign companies, the RBI also reviews the scheme for FEMA compliance. If the scheme involves issuance of shares to foreign shareholders, FC-GPR pricing guidelines must be met — shares must be issued at not less than the fair market value determined by a SEBI-registered merchant banker.

Cost Breakdown for NCLT Scheme

Stamp duty can be the single largest cost item. For a scheme involving INR 500 crore of immovable property in Maharashtra, stamp duty at 3% would be INR 15 crore — dwarfing all other costs combined.

Key Takeaways

• NCLT schemes under Sections 230-232 take 9-12 months on average — with over 15,000 cases pending as of March 2025, timeline management is critical. The September 2025 fast-track merger amendments offer a 3-4 month alternative for qualifying transactions
• Cross-border mergers under Section 234 require prior RBI approval — adding 4-8 weeks to the timeline. The foreign company must be incorporated in a jurisdiction notified by the Central Government as a permitted jurisdiction
• The dual approval threshold is 50%+ in number and 75%+ in value — straightforward for wholly owned subsidiaries but challenging for joint ventures with multiple shareholder classes
• Stamp duty varies dramatically by state — from complete exemption in Delhi (for qualifying parent-subsidiary mergers) to 3-7% in Tamil Nadu for immovable property transfers. State selection can save crores in transaction costs
• The Income Tax Bill 2025 expands transfer pricing scrutiny to restructurings — from April 2026, business reorganisations involving foreign parents are explicitly treated as international transactions requiring arm's length pricing

For expert guidance on structuring NCLT schemes involving foreign companies, explore our FDI advisory services. For FEMA compliance on cross-border restructuring transactions, see our FEMA-RBI compliance services. For branch office vs subsidiary decisions that precede restructuring, our comparison guide provides a detailed framework.