Scheme of arrangement
A court-monitored settlement, under Section 230 of the Companies Act 2013, between a company and its creditors or shareholders — covering everything from debt restructuring to mergers.
In plain language
Sometimes a company and the people it owes money to cannot resolve a disagreement on their own. A scheme of arrangement is how the law lets them settle it under court supervision instead.
It is broader than it sounds — the workbook treats it as an umbrella covering many kinds of corporate restructuring, not only companies in financial distress.
How it works
The workbook: "Scheme of arrangement is a court monitored settlement process between the company and its creditors or members. It typically involves reorganization of the share capital of the company." It can be sought by the company itself or by its creditors or members, and "the term Scheme of Arrangement refers to all types of corporate restructuring, including Mergers and Acquisition" — bankruptcy is only one route into it. The person seeking it approaches the National Company Law Tribunal (NCLT), which then orders a meeting between the company and the affected creditors or members to reach a compromise.
Worth flagging: the same section describes a scheme as possibly involving "consolidation or division of class of shares" — a reorganisation of share classes. That is a different use of the word "consolidation" from the reverse-stock-split sense in Chapter 9.6 and the merger sense in Chapter 9.7. All three appear in this workbook; read the surrounding sentence, not just the word.
A worked example
Illustrative. A company unable to redeem Rs 200 crore of preference shares on schedule proposes a scheme of arrangement to the NCLT, offering preference shareholders a choice: an extended 3-year redemption timeline at a raised 9% coupon (up from 7%), or conversion into equity at a fixed price of Rs 45 a share.
The NCLT convenes a meeting of the affected preference shareholders to vote on the proposed compromise before it can be sanctioned and take effect.
Why NISM asks about it
Chapter 9.9 (Scheme of arrangement) sets out the NCLT process. Expect a question on which body approves a scheme of arrangement, or one testing that it covers mergers and acquisitions, not just distressed-debt settlements.
Common exam traps
- A scheme of arrangement is not limited to financially distressed companies. The workbook is explicit it covers all types of corporate restructuring, including M&A.
- This section's use of "consolidation" (reorganising share classes) is a third meaning of the word in this workbook, alongside the reverse-stock-split sense (Chapter 9.6) and the merger sense (Chapter 9.7) — do not assume a question using the word means the same thing every time.
Where this is taught
Free preparation for NISM Series XVRelated terms
- ConsolidationA corporate action that reduces a company's outstanding shares by raising their face value in a fixed ratio — the exact reverse of a stock split, done to lift a low share price.
- Renunciation of rightsA shareholder's choice to transfer their rights-issue entitlement to someone else, for payment or as a gift, instead of subscribing to the new shares themselves.
- Share swapExchanging one company's shares for another's at an agreed ratio, typically used to pay for a merger or acquisition with stock instead of cash.
- Spin-offA corporate action where a company carves out one of its existing businesses into a separate, newly listed company, giving existing shareholders shares in the new entity too.
- MergerA combination of two or more companies into a single entity in which one or both lose their identity — not necessarily between companies of equal or comparable stature.
- National Company Law TribunalThe quasi-judicial authority constituted under section 408 of the Companies Act, 2013 from 1 June 2016 to decide civil corporate disputes under the Companies Act and the Insolvency and Bankruptcy Code.