Registration of a Scheme Offer: Section 238

Registration of a scheme offer is a gate that sits before a takeover circular can reach shareholders. Section 238 of the Companies Act, 2013 says that where a transferee company makes an offer under section 235 to acquire shares in a transferor company, the circular carrying that offer must be presented to the Registrar and registered before it goes out. This page reads section 238 as printed, including the 2019 rewrite of its penalty.

What does registration of a scheme offer require?

Three things, and the third is the gate. Sub-section (1) applies in relation to every offer of a scheme or contract involving the transfer of shares or any class of shares in the transferor company to the transferee company under section 235, and then requires:

• Clause (a): every circular containing such offer and recommendation to the members of the transferor company by its directors to accept such offer shall be accompanied by such information and in such manner as may be prescribed.
• Clause (b): every such offer shall contain a statement by or on behalf of the transferee company, disclosing the steps it has taken to ensure that necessary cash will be available.
• Clause (c): every such circular shall be presented to the Registrar for registration and no such circular shall be issued until it is so registered.

Clause (b) is the funding disclosure. It does not require the bidder to prove it holds the cash, only to disclose the steps it has taken to ensure that necessary cash will be available, which is a statement about arrangements rather than about a balance.

When can the Registrar refuse registration?

On two grounds, and only with reasons on record. The proviso says the Registrar may refuse, for reasons to be recorded in writing, to register any such circular which does not contain the information required to be given under clause (a) or which sets out such information in a manner likely to give a false impression, and communicate such refusal to the parties within thirty days of the application.

The second ground is the substantive one. A circular that carries every prescribed item can still be refused if the presentation is likely to give a false impression, which puts the Registrar's judgement on the manner of disclosure and not just on its completeness. A refusal is appealable: sub-section (2) provides that an appeal shall lie to the Tribunal against an order of the Registrar refusing to register any circular, to the body described in the National Company Law Tribunal.

What is the penalty, and what did it replace?

A flat civil penalty that used to be a criminal fine. Sub-section (3) now reads that the director who issues a circular which has not been presented for registration and registered under clause (c) of sub-section (1) shall be liable to a penalty of one lakh rupees.

The bracketed words were substituted by Act 22 of 2019, s. 32, for punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees, with effect from 2 November 2018. Two things changed together. The character of the liability moved from a fine on conviction to a penalty, and the amount moved from a range with a floor and a ceiling to a single fixed figure.

The commencement date is worth noting on its own. The substituting Act is of 2019 and the change takes effect from a date in 2018, so the consolidation prints an amendment whose effect predates the Act that made it.

How does section 238 fit with section 235?

It polices the paperwork of an offer that section 235 makes possible. Section 235 is the squeeze out route, under which a transferee that has secured approval from holders of not less than nine-tenths in value of the shares whose transfer is involved may give notice to a dissenting shareholder that it desires to acquire the shares. The thresholds and the pricing comparison with the alternative route are set out in section 235 vs section 236.

Section 238 does not change those thresholds. It works on the document that solicits the approval, by requiring prescribed information, a cash availability statement and registration before issue. Where the combination is a merger rather than a share purchase, the disclosure list is the different one in a merger under section 232, and the Chapter's own preservation rule for the acquired company's records is in preservation of books after amalgamation.

Flock reports the filings themselves, each stamped with its date and linked back to the exchange or regulator that published it. What any of it means for you is your call to make.