Takeover Offer Under Section 230 Scheme: Rules, Valuation & Minority Shareholders

Summary: Sections 230(11) and 230(12) of the Companies Act, 2013 provide a statutory framework for incorporating a takeover offer into a scheme of compromise or arrangement and for addressing grievances arising from such offers in companies other than listed companies. Brought into force on 3 February 2020, these provisions operate with Rules 3(5) and 3(6) of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. Rule 3(5) permits a member, together with other members holding not less than three-fourths of the voting shares, to apply for an arrangement to acquire any part of the remaining shares. Rule 3(6) requires a registered valuer’s report considering prescribed valuation parameters and the opening of a separate bank account containing not less than one-half of the total takeover consideration. For listed companies, takeover offers remain subject to applicable SEBI regulations. Section 230(12) allows an aggrieved party concerning a takeover offer of a company other than a listed company to approach the NCLT. The framework provides another statutory avenue for acquisition of minority shareholdings through a sanctioned scheme and incorporates safeguards concerning fair valuation, consideration and funding. It differs from a direct voluntary purchase of minority shares and from the mechanism under Section 235 for acquisition of shares of dissenting shareholders. Rule 80A of the NCLT Rules, 2016 provides the procedural mechanism for applications under Section 230(12).

Takeover Offer under scheme of compromise or arrangements under Section 230(11) and 230(12)

The provisions relating to compromises, arrangements and amalgamations are contained in Chapter XV of the Companies Act, 2013, comprising Sections 230 to 240. The provisions of Chapter XV were brought into force with effect from 15 December 2016, except Sections 230(11) and 230(12), which were notified subsequently on 3 February 2020.

Section 230 of the Companies Act, 2013 broadly corresponds to Sections 391, 393 and 394A of the Companies Act, 1956.

The Ministry of Corporate Affairs, vide notification dated 3 February 2020, brought Sections 230(11) and 230(12) into force. The Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2020 were also notified on the same date, amending the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016, including the insertion of Rules 3(5) and 3(6).

Section 230(11) — Takeover Offer

Section 230(11) provides:

“Any compromise or arrangement may include takeover offer made in such manner as may be prescribed:

Provided that in case of listed companies, takeover offer shall be as per the regulations framed by the Securities and Exchange Board.”

Thus, a scheme of compromise or arrangement under Section 230 may include a takeover offer. The provision creates a mechanism whereby a takeover offer can be incorporated into a scheme placed before the Tribunal.

In the case of a listed company, the takeover offer must comply with the applicable SEBI regulations. Therefore, Section 230(11) does not operate independently of the securities-market regulatory framework in the case of listed companies.

For companies other than listed companies, the manner in which such takeover offer is to be made is prescribed under the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.

Under the prescribed rules, where the takeover offer is made pursuant to Section 230(11), the relevant requirements relating to valuation, consideration and deposit of consideration are required to be complied with.

Section 230(12) — Grievance against Takeover Offer

Section 230(12) provides:

“An aggrieved party may make an application to the Tribunal in the event of any grievances with respect to the takeover offer of companies other than listed companies in such manner as may be prescribed and the Tribunal may, on application, pass such order as it may deem fit.”

Therefore, Section 230(12) provides a specific remedy to an aggrieved party in relation to a takeover offer made under Section 230(11).

Question: Can a takeover offer be included in a scheme of compromise or arrangement under Section 230 of the Companies Act, 2013?

Answer: Yes. Section 230(11) expressly provides that a compromise or arrangement may include a takeover offer, in the manner prescribed. However, in the case of a listed company, the takeover offer must be made in accordance with the applicable SEBI regulations.

Question: What remedy is available to a person aggrieved by a takeover offer under Section 230?

Answer: Under Section 230(12), an aggrieved party may make an application to the NCLT in respect of grievances relating to the takeover offer of a company other than a listed company, in the prescribed manner. The Tribunal may pass such order as it considers appropriate.

Question: What is the significance of Sections 230(11) and 230(12) in relation to the squeeze-out of minority shareholders?

Answer: Sections 230(11) and 230(12) were brought into force by the Ministry of Corporate Affairs vide notification dated 3 February 2020, along with the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2020 ,which inserted Rules 3(5) and 3(6) into the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.

These provisions provide another statutory avenue for majority shareholders to acquire the shares of minority shareholders through a takeover offer forming part of a scheme of compromise or arrangement under Section 230.

The framework is broadly consistent with the existing judicial approach to minority squeeze-outs through selective reduction of share capital under Section 66, particularly in relation to:

1. Fair valuation of the shares;

2. Fair consideration to be paid to minority shareholders;

3. Safeguarding and securing the consideration payable; and

4. Consideration of the views and approval of the shareholders.

In Sandvik Asia Limited v. Bharat Kumar Padamsi, the Bombay High Court recognised that where non-promoter shareholders are offered the fair value of their shares, and an overwhelming majority of non-promoter shareholders approve the proposal, the Court may sanction the selective reduction.

Example– Suppose a company has: Promoters: 80% shares and Non-promoter shareholders: 20% shares. The company proposes to acquire/cancel the shares of the non-promoter shareholders at a fair value of ₹100 per share. If shareholders representing, say, 18% out of the 20% non-promoter shareholding approve the proposal, while only shareholders representing 2% oppose it, the Court may consider:

The minority shareholders are being offered fair value, and an overwhelming majority of the non-promoter shareholders have approved the proposal.

Therefore, the Court would not ordinarily withhold its sanction merely because some shareholders object to the compulsory acquisition/cancellation of their shares.

So, The Court should not refuse approval of the resolution merely because some minority shareholders oppose it, when the Court is satisfied that they are receiving fair value and the proposal has overwhelming support among the non-promoter shareholders.

Similarly, in Cadbury India Limited, the Bombay High Court laid down principles concerning the fairness of selective reduction, including the importance of fair valuation and relevant past acquisition/offer prices.

Thus, Sections 230(11) and 230(12), read with Rules 3(5) and 3(6), provide a separate statutory framework for a takeover offer through a scheme of compromise or arrangement, with safeguards concerning valuation and consideration for minority shareholders.

Takeover Offer under Section 230(11) read with Rule 3(5) and Rule 3(6)

Section 230(11) permits a compromise or arrangement to include a takeover offer, in the manner prescribed. The detailed requirements for such a takeover offer are provided in Rule 3(5) and Rule 3(6) of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.

Who can make a takeover offer?

Under Rule 3(5), a member of the company may make an application for an arrangement for the purpose of a takeover offer under Section 230(11) where:

1. such member along with any other member holds not less than three-fourths of the shares in the company; and

2. the application is made for acquiring any part of the remaining shares of the company.

For this purpose, “shares” means equity shares carrying voting rights and also includes securities such as depository receipts which entitle the holder to exercise voting rights.

However, Rule 3(5) does not apply to a transfer or transmission of shares through a contract, arrangement or succession, or to a transfer made pursuant to a statutory or regulatory requirement.

Valuation and funding requirement

Under Rule 3(6), an application for an arrangement involving a takeover offer must contain, among other things:

(a) Registered Valuer’s Report- The application must contain a report of a registered valuer setting out the valuation of the shares proposed to be acquired. The valuation must take into account:

• • the highest price paid by any person or group of persons for acquisition of shares during the preceding 12 months; and
  • the fair price of the shares, determined by the registered valuer after considering relevant valuation parameters, including:
    • return on net worth;
    • book value of shares;
    • earnings per share;
    • price-earning multiple vis-à-vis the industry average; and
    • such other customary valuation parameters applicable to companies of that nature.

(b) Deposit of consideration- The member must separately open a bank account and deposit an amount not less than one-half of the total consideration of the takeover offer in that account.

Question: Who can make an application for a takeover offer under Section 230(11)?

Answer: A member can make an application for an arrangement for the purpose of a takeover offer under Section 230(11) if the member, together with any other member or members, holds not less than three-fourths of the voting equity shares of the company, and the application is made for acquiring any part of the remaining shares.

Question: Is a registered valuer’s report required for a takeover offer under Section 230(11)?

Answer: Yes. Under Rule 3(6)(a), the application must contain a report of a registered valuer determining the valuation of the shares proposed to be acquired, taking into account specified valuation factors, including the highest price paid during the preceding 12 months and the fair value of the shares.

Question: Does the member have to deposit the entire takeover consideration before making the application?

Answer: No. Under Rule 3(6)(b), the member is required to open a separate bank account and deposit not less than 50% of the total consideration of the takeover offer before making the application.

Question: Does the three-fourths requirement mean that the member making the application must individually hold 75% shares?

Answer: No. The wording of Rule 3(5) specifically states “such member along with any other member”. Therefore, the requirement is that the member making the application, together with one or more other members, must hold at least three-fourths of the voting equity shares.

Question: What is the distinction between a takeover offer under Section 230(11) for a listed company and the remedy available under Section 230(12) for an unlisted company?

Answer: Section 230(11) provides that a compromise or arrangement may include a takeover offer. However, where the company is listed, the takeover offer must be made in accordance with the regulations framed by SEBI. Therefore, the Section 230 scheme mechanism for a listed company operates subject to the applicable SEBI takeover regulations.

In contrast, Section 230(12) specifically provides a remedy in respect of a takeover offer made for a company other than a listed company. An aggrieved party may make an application to the Tribunal in the prescribed manner, and the Tribunal may pass such order as it considers appropriate.

Question: Whether an application under Section 230(11) is a separate application from the application under Section 230(1) for compromise or arrangement?

Answer: No. A takeover offer under Section 230(11) is intended to be included as part of a compromise or arrangement under Section 230. Section 230(11) itself states that “any compromise or arrangement may include takeover offer”. Therefore, the takeover offer is incorporated into the scheme/application made under Section 230.

Accordingly, where a member proposes a takeover offer under Section 230(11), the relevant requirements prescribed under Rule 3(5) and Rule 3(6)—such as the three-fourths shareholding requirement, registered valuer’s report and deposit of at least 50% of the total consideration—are to be complied with as part of the Section 230 scheme process.

A takeover offer under Section 230(11) is not a separate standalone takeover proceeding before the NCLT; it forms part of the compromise or arrangement placed before the Tribunal under Section 230, subject to the additional requirements prescribed under Rule 3(5) and Rule 3(6).

Question: Give an example of a Scheme of Arrangement incorporating a takeover offer under Section 230(11).

Answer: A majority/promoter shareholder group holding at least three-fourths of the voting equity shares of an unlisted company may propose a Scheme of Arrangement under Section 230 whereby it offers to acquire the remaining shares held by minority shareholders at a price determined in accordance with Rule 3(6). The Scheme may provide for transfer of the minority shares to the promoter/acquirer upon sanction of the Scheme by the NCLT and payment of the prescribed consideration. Such a structure was considered by the Chennai NCLT in Dipak Raj Sood & Anr. v. India Forge & Drop Stampings Private Limited, where the Scheme involved acquisition of the remaining shares of public shareholders by the promoter group under Section 230(11)

Example: India Forge & Drop Stampings Ltd.

In Dipak Raj Sood & Anr. v. India Forge & Drop Stampings Private Limited, the Chennai Bench of the NCLT dealt with a Scheme of Arrangement involving takeover of shares belonging to the public shareholders. The order was pronounced on 31 July 2024.

The basic structure was as follows:

Company: India Forge & Drop Stampings Private Limited

Existing shareholders: Promoter Group + public/minority shareholders

Applicants: Members of the Promoter Group

Objective: Acquisition of the remaining shares held by public/minority shareholders through a Scheme of Arrangement under Section 230(11).

The NCLT recorded that the Scheme was specifically proposed for the takeover of shares belonging to the public shareholders.

In the actual India Forge matter, the Scheme provided that the Promoter Group, holding more than three-fourths of the equity shares, would acquire the remaining equity shares from the public shareholders at an offer price of ₹1,156 per share. The Scheme further provided that sanction of the Scheme by the NCLT would constitute deemed acceptance of the takeover offer by the public shareholders.

Question: What is the difference between purchase of shares from minority shareholders and acquisition of minority shares through a takeover offer incorporated in a Scheme of Compromise or Arrangement under Section 230 of the Companies Act, 2013?

Answer: The principal difference lies in the legal mechanism through which the minority shares are acquired.

Example: If a company has 20% minority shareholding, a purchaser may individually approach minority shareholders and purchase their shares. Those who do not agree to sell ordinarily continue as shareholders.

Alternatively, the company/acquirer may formulate a Scheme of Compromise or Arrangement under Section 230 containing a takeover offer for the minority shares. The proposal is then considered under the statutory scheme process and, if sanctioned by the NCLT and made effective, the acquisition is implemented in accordance with the terms of the sanctioned scheme.

In short: Direct purchase of shares is essentially a voluntary share-transfer transaction, whereas a takeover offer incorporated in a Section 230 Scheme is a statutory corporate arrangement subject to the Section 230 approval and NCLT process.

Question: Whether a takeover under Section 230(11) of the Companies Act, 2013 is different from acquisition of shares under Section 235?

Answer: Yes. Section 230(11) provides for a takeover offer as a part of a compromise or arrangement, whereas Section 235 provides a specific mechanism for acquiring the shares of dissenting shareholders after a scheme or contract for transfer of shares has been approved by the requisite majority.

Question: Did the Companies Act, 1956 contain a provision corresponding to Section 230(11) of the Companies Act, 2013, permitting a takeover offer as part of a Scheme of Compromise or Arrangement?

Answer: No. Section 230(11) is a new provision under the Companies Act, 2013 and had no direct equivalent in the Companies Act, 1956.

Section 230(11) of the Companies Act, 2013 introduced an express statutory provision permitting a takeover offer to be included in a compromise or arrangement. The Companies Act, 1956 did not contain a corresponding provision; however, Section 395 (Now Section 235 of the companies act 2013) provided a mechanism for acquisition of shares of dissenting shareholders where a scheme or contract involving transfer of shares had been approved by holders of the requisite majority.

Question: What is the significance of Rule 80A of the NCLT Rules, 2016?

Answer: Rule 80A was inserted in the NCLT Rules, 2016 to prescribe the manner in which applications relating to Sections 230(12) of the Companies Act, 2013 are to be made before the Tribunal. Thus, while Sections 230(11) and 230(12) provide the statutory framework, Rule 80A provides the corresponding procedural mechanism for approaching the NCLT.

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