This article has been written by Abhishek Nair pursuing the Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho. This article has been edited by Tanmaya Sharma (Associate, Lawsikho) and Smriti Katiyar (Associate, Lawsikho).


This article aims to analyse the statutory and legal provisions governing mergers between a listed transferor company and an unlisted transferee company. the author of the paper will briefly talk about mergers that are the other way round i.e., an unlisted transferor company and a listed transferee company. A rather challenging transactional structure always arises when there is a merger between one listed company and one unlisted company. It is far more of a headache for the regulatory authorities as this is usually a way of getting listed by circumventing the various statutory and regulatory compliances that need to be followed in order for a company to be listed. For this article, the author will be focusing upon mergers between a listed transferor company and an unlisted transferee company, but the author shall give some attention to the mergers between an unlisted transferor company and a listed transferee company to highlight the contrast between them.

Statutory and regulatory compliances

Section 232(h) of the Companies Act, 2013 states:

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where the transferor company is a listed company and the transferee company is an unlisted company, – 

(A) the transferee company shall remain an unlisted company until it becomes a listed company;

(B) if shareholders of the transferor company decide to opt-out of the transferee company, the provision shall be made for payment of the value of shares held by them and other benefits in accordance with a pre-determined price formula or after a valuation is made, and the arrangements under this provision may be made by the Tribunal.

This provision of the Companies Act, 2013 effectively allows a company to delist its shares by entering into a scheme of arrangement for merger or demerger by circumventing the SEBI(Delisting of Equity Shares) Regulations, 2009. Itis important to note at this point that the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR); and SEBI (Delisting of Equity Shares) Regulations, 2009 (Delisting Regulations) are the two key Regulations that come into play during a merger/amalgamation.  Regulation 37 of  SEBI (Listing Obligations and Disclosure Requirements) Regulations [hereinafter referred to as SEBI Listing Regulations, 2015 provides for prior approval of the stock exchanges in case a listed company proposes to undertake such a scheme of arrangement by filing the draft scheme to obtain a “No-Objection” certificate. Regulation 94 of the  SEBI Listing Regulations, 2015 requires the concerned stock exchange to send the draft schemes to the SEBI for further approval. The SEBI further issues a no-objection certificate or sends an observation letter for the judicial tribunals to consider. 

SEBI circulars

The 2017 SEBI Circular on ‘Schemes of Arrangement by Listed Entities was notified to alleviate SEBI’s primary concern with these schemes that do not provide for an exit opportunity to the public shareholders of the listed company. The Circular provides that voting needs should  be taken by the company before such scheme of the arrangement, and that the number of public shareholders voting in favour should be higher than the number of public shareholders voting against which has created the need for greater scrutiny and disclosures.

In case of a hive-off of a division of a listed entity into an unlisted entity, and a subsequent listing of the merged entity, the entire share capital of the pre-merger unlisted entity has to be locked in.

SEBI in its circular dated January 3, 2018, amended the 2017 circular. The lock-in mechanism was amended so that in case of a scheme involving a merger of a listed company or a division of it into an unlisted company, the lock-in mechanism on the pre merged unlisted entity are as follows:

(a) Lock-in up to three years from the listing of the shares held by the Promoters up to the extent of 20% of the post-merger paid-up capital of the unlisted issuer, 

(b) Lock-in for one year from the date of listing of the shares of the unlisted entity on the remaining shares

(c) No additional lock-in shall be applicable if the post scheme shareholding pattern of the unlisted entity is exactly similar to the shareholding pattern of the listed entity. 

The 2018 circular also provides for the ‘inter-se’ transfer of the locked-in shares. Inter-se transfer of shares refers to the transfer of shares amongst the promoters. Regulation 40 of the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, provides for the regulation on the transfer or transmission or transposition of securities. The Lock-in period will continue in this case, and the transferee cannot transfer the shares till the Lock-in period ends.

It is also mandatory for the listed entity to provide an abridged prospectus letter to the shareholders of the unlisted entity to seek their approval for the scheme of arrangement. The total percentage of the public shareholders of the listed entity and the qualified institutional buyers has to be at least 25% in the final post scheme final merged entity. The unlisted company can only merge with a listed entity on a listed nationwide trading stock exchange.

Precedent draft schemes

Prior to the 2017 SEBI Circular

  1. Sterlite Technologies Limited (STL) and Sterlite Power Transmission Limited (STPL): –

STL, a listed company, wished to demerge its power products and transmission grid business into SPTL, an unlisted company. SEBI in its observation letter dated 28 August 2015 objected to the scheme of arrangement over concerns of a lack of exit mechanism for the public shareholders in the partial delisting.

  1. Zodiac Ventures Limited (ZVL) and Developers Private Limited (ZDPL): –

ZVL, a listed company, and its amalgamation to ZDPL, an unlisted company, along with the further dissolution of ZVL, was objected to by SEBI in its observation letter dated 4 August 2015 observing that the scheme of amalgamation does not provide an exit opportunity to the public shareholders.

  1. Emami Realty Limited and Zandu Realty Limited: –

Emami Realty Limited, an unlisted company, wished to merge with Zandu Realty Limited, a listed company.  SEBI objected to the scheme of arrangement of merger identifying the issue of the nature of backdoor listing as the final entity was trying to attain listing benefits without following the requirements provided in the Securities Contracts (Regulations) Rules, 1957 and SEBI (Issue of Capital and Disclosure Requirements)Regulations, 2009.

  1. ACE TC Rentals Private Limited and Action Construction Equipment Limited: –

Similar to the issue of Emami Realty Limited and Zandu Realty Limited, SEBI objected to the same kind of scheme of arrangement on the same ground of getting listed through the backdoor without following the listing requirements.

Post-2017 Circular

Post the 2017 Circular most of the draft schemes submitted to SEBI have provided for creating a listed final entity, by following the directions issued in the circular. This meant that SEBI to a huge extent can solve its issue regarding public shareholders and at the same time is able to approve mergers of the type listed in Section 232(h) of the Companies Act, 2013.

  1. Alembic Limited, Shreno Limited and Nirayu Limited: –

A composite scheme of arrangement was filed with the stock exchanges on 20 November 2018 regarding the above mentioned three parties. The real estate undertaking of Alembic Limited, a listed company, was to be demerged and transferred to Shreno Limited, an unlisted company. Non-cumulative redeemable preference shares were to be issued to the shareholders of Alembic Limited as consideration for the transfer and shares were not going to be listed on the stock exchange. NSE issued a no objection letter for the scheme on 25 January 2019.

  1. Idea Cellular Limited and Vodafone India: – 

One of the key questions of backdoor listing arose in 2017, when Telecom giants, Vodafone India, an unlisted company, and Idea Cellular Limited, a listed company, planned to merge. The final entity Vodafone Idea was going to be listed and therefore there were claims that Vodafone was attempting to bypass the delisting regulations. SEBI had given conditional approval to the merger deal between Idea Cellular and Vodafone India stating that the deal would  be subject to the regulator’s ongoing probe and approvals from public shareholders and the National Company Law Tribunal (NCLT).

It is  to be noted that while I have extensively discussed the observation letters from SEBI, these objections are merely advisory and such objections cannot stop the companies from sending their schemes to the NCLT for approval. SEBI’s objections merely create guidelines for the companies to incorporate so that there is a higher chance for NCLT approval and inform NCLT of the objections if the company does not wish to alter its scheme. 


Going back into the earlier discussion of Backdoor Listing vs. Backdoor Delisting, it is quite   evident that clarity is missing from the SEBI statutory and regulatory frameworks. A large chunk of knowledge on this topic comes from analyzing and looking into precedent draft schemes that have been approved, and what has been objected to. It is still unclear to what extent a final entity listed after a merger between an unlisted and a listed company will be subject to the regulations under Delisting Regulations. It has to be observed that the statutory and regulatory provisions were only providing for the instance of a merger of an unlisted company with a listed company resulting in an unlisted entity, not a listed final entity. 

SEBI through its 2017 and 2018 circulars has created a better regulatory framework regarding schemes of arrangement by listed and unlisted companies and created a more efficient path for companies to merge, and at the same time is protecting the rights of the shareholders. However, I believe circulars and press releases only go so far as this complicated issue needs an entirely separate set of rules and regulations to tackle the multilateral issues of rights/ obligations of transferor companies, transferee companies, public shareholders, in listing mergers and demergers, and delisting mergers and demergers. 

SEBI’s failure to understand the scope of Section 232(h) of the Companies Act, 2013 needs to be rectified immediately and it should make the scope and applicability of the delisting regulations  clearer for companies that undertake such a scheme of arrangement. Without such a step, Section 232(h) itself proves to be a moot point.

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