Schemes of Arrangement under Sections 230 and 232 of the Companies Act, 2013: Analysis of the ITC Demerger

Executive Summary

This article examines the role of schemes of arrangement as a legal tool for corporate restructuring, through the lens of ITC Limited’s (‘ITC’ or "Demerged Company") demerger of its hotels business. By demerging its hotels division into a separate publicly listed entity, ITC Hotels Limited (‘ITC Hotels’ or ‘Resulting Company’), ITC has sought to sharpen operational focus, unlock shareholder value, and enable both entities to pursue distinct growth strategies. It also reflects on broader trends in India’s corporate landscape, where companies increasingly use this mechanism to restructure efficiently, attract sector-specific investment, and respond to market dynamics.

Introduction

Corporate restructuring plays a pivotal role in enabling businesses to navigate disruption, realign strategy, and unlock long-term value. One of the most effective legal mechanisms for such transformation is the scheme of arrangement, codified under Sections 230 to 232 of the Companies Act, 2013 (‘2013 Act’). This provision allows companies to restructure their financial and operational affairs with judicial oversight, ensuring transparency, compliance, and protection of stakeholder interests. It enables businesses to separate or combine businesses, streamline operations and access capital markets more effectively.

Notably, the Ministry of Corporate Affairs (‘MCA’) issued the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2024 (‘2024 Rules’) which introduced a fast track process for reverse-flip mergers where a foreign holding company merges into its wholly-owned Indian subsidiary by amending Rule 25A(5) of the 2016 Rules. The cross-border reverse merger process is now handled by a jurisdictional Regional Director on behalf of MCA instead of the NCLT, and requires only prior Reserve Bank of India (‘RBI') clearance, bypassing the cumbersome process under the 2013 Act and enabling swift, cost-effective cross-border consolidation. 

In the case of ITC, the hotels division contributed only about 3% to 4 % of the operating profit, it was capital intensive and consumed 20% of ITC’s capital. In 2017, ITC had moved to an “assets-right” strategy, which allowed the company to reduce capital expenditure and grow its hotel portfolio cost-effectively. Following this, creating ITC Hotels as a pure play focused entity gave it various advantages, including the ability to raise its own capital backed by a strong balance sheet, access hospitality‑specific valuation multiples, and operate with its own management KPIs. 

Schemes of Arrangement: Rationale and Legal Process 

A scheme of arrangement is a court-approved compromise or arrangement between a company and its stakeholders. It is commonly used for restructuring, mergers, amalgamations, demergers, capital reductions, or corporate reorganizations. The process of a scheme of merger is described under Sections 230 and 232 of the 2013 Act read with Companies (Compromise, Arrangement and Amalgamation) Rules, 2016 (‘2016 Rules’), and is designed to ensure fairness, transparency, and regulatory oversight. While Section 230 provides the general process for stakeholder arrangements, Section 232 specifically governs structural changes like mergers, amalgamations, and demergers. Further, Section 231 of the 2013 Act gives the National Companies Law Tribunal (‘NCLT’) the power to supervise, modify, and enforce the scheme of arrangement sanctioned under Section 230 or Section 232 of the 2013 Act. 

The process begins with the preparation of a draft scheme of arrangement. While it is prudent to verify whether the Memorandum of Association empowers the company to amalgamate, statutory powers under the Act permit amalgamation even if no specific clause exists. This process is carried out in two stages:

1. the filing of the First Motion application seeking permission and directions from the NCLT for convening meetings of members and creditors, and 

2. the filing of the Second Motion petition seeking the sanction of the scheme by the NCLT.

The steps envisioned under the 2013 Act are as follows: 

1. First Motion Application: Seeking Directions to Convene Meetings

   1. Responsibility of Filing: The company, or any of its creditors or members or liquidator, is required to make an application to NCLT to order a meeting of creditors or members (or any class of either). As per Rule 3 of the 2016 Rules, where multiple companies are involved, a joint application may be filed. 

   2. Filing of First Motion Application: An application is then filed in Form NCLT-1, supported by a notice of admission in Form NCLT-2, and verified by affidavit in Form NCLT-6 with a filing fee. Essential enclosures include, but are not limited to, a copy of the draft scheme, the latest financial statements of the company, valuation report determining the share exchange ratio, auditor’s certificate confirming conformity of the accounting treatment with section 133, and details of any ongoing investigation or proceedings against the company. 

   3. NCLT Directions: Upon satisfaction with the contents of the application, the NCLT issues directions under Rule 5 of the 2016 Rules concerning the stakeholders with respect to who the meeting is to be conducted, the time and place of the meeting, appointment of chairperson, quorum and mode of voting, notice of meeting, timelines for submission of chairperson’s report, and any other matter which the NCLT may deem necessary. Importantly, Section 230 (9) of the 2013 Act permits the meeting of creditors to be dispensed with upon obtaining 90% value consent via notarized affidavit; there is no provision for dispensing with members’ meetings.

   4. Convening of Meetings:

      1. A notice of the meeting must be sent at least one month prior to the meeting to members, creditors, and debenture holders by registered post, speed post, courier, email, or as directed by the NCLT.

      2. The notice must be accompanied by an explanatory statement which includes but is not limited to a copy of the scheme, valuation summary, disclosures of any ongoing investigations or proceedings, details of material interests of directors and key managerial personnel, proxy forms and other relevant documents.

      3. The notice must also be published in at least one English and one vernacular newspaper, and on the company’s website. For listed companies, notices are additionally published on Securities and Exchange Board of India (‘SEBI’) and stock exchange portals.

      4. Notices with the scheme and explanatory statement, are also sent to statutory authorities (Registrar of Companies, Central Government, Income Tax, SEBI, Reserved Bank of India, etc.) who may file representations within 30 days. Absence of a representation is deemed as no objection.

   5. Voting & Meeting Outcome: Voting on the scheme takes place at the meeting through poll, proxy, postal ballot, or electronic means within 30 days of the receipt of notice. For approval, the scheme must be sanctioned by a majority representing three-fourths in value of creditors or members present and voting. Any person holding at least 10% of shareholding or with at least 5% of the outstanding debt is entitled to object to the scheme under Section 230(4) of the 2013 Act. The chairperson shall then submit a report to the NCLT within the stipulated timeline detailing the summary of proceedings, attendance, voting results, and mode of voting.

2. Second Motion Petition: Seeking Sanction of the Scheme

   1. Filing of Petition: The company shall, within 7 days of filing of the chairperson's report, file a petition for a sanction of the scheme by the NCLT, via Form No. CAA5, after which the NCLT shall fix a date for hearing of the petition. 

   2. Notice and Publication: The NCLT shall serve notice of the petition hearing on all objectors, the Central Government, and any other authority that made representations. Additionally, the notice is advertised in the same newspapers in which the meeting notices were published, at least 10 days prior to the hearing.

Case Study: ITC Group Demerger

Founded on 24th August, 1910 as Imperial Tobacco Company of India Limited, the firm was renamed India Tobacco Company Limited in 1970, and finally became ITC Limited in 2001. Today, it ranks among India’s top conglomerates, with listings on Bombay Stock Exchange (‘BSE’), National Stock Exchange (‘NSE’) and Calcutta Stock Exchange (‘CSE’). ITC’s portfolio includes: 

1. Fast Moving Consumer Goods (‘FMCG’) & Tobacco: Market leader with brands like Gold Flake, Aashirvaad, Sunfeast, Savlon, and Classmate. Tobacco remains its major revenue and profit driver.

2. Hospitality: Under ITC Hotels, it manages over 140 properties across luxury brands like ITC Hotels, Mementos, and Fortune. The unit emphasizes sustainability and holds 23 LEED Platinum certifications.

3. Paperboards and Packaging: Produces eco-friendly paperboards and packaging for diverse markets, supported by renewable energy investment.

4. Agri-Business: Operates the e‑Choupal initiative, supporting six million farmers, and positioning itself as a prominent exporter of agri-commodities.

5. IT & Others: Includes ITC Infotech, stationery, and lifestyle products, leveraging innovation in multiple consumer segments.

Transaction Details

On 14th August, 2023, the board of ITC proposed a Scheme of Arrangement (‘Scheme’) to demerge its hotels business into a separate legal entity. Pursuant to this, ITC Hotels was incorporated as a wholly-owned subsidiary of ITC Ltd. The Scheme encompassed the issuance of equity shares of the Resultant Company to the Demerged Company. Pursuant to the demerger becoming effective on 1st January, 2025, the Demerged Company now holds 40% ownership in the Resultant Company, and the remaining 60% has been distributed to existing shareholders of the Demerged Company in proportion to their existing holdings.

Date	Event
14th August, 2023	The Board of Directors of ITC Ltd. and ITC Hotels approve the Scheme
22nd April, 2024	The Kolkata Bench of the NCLT passed an Order disposing C.A. (CAA) No.56/KB/2024 filed by ITC Limited and ITC Hotels under Section 230(1) read with Section 232(1) of the 2013 Act issuing directions for the Scheme
June 2024	Shareholders approve the demerger
04th October, 2024	NCLT Kolkata sanctions the demerger
16th December, 2024	ITC receives certified NCLT order
01st January, 2025	Demerger becomes effective
29th January, 2025	ITC Hotels listed on NSE and BSE

Strategic Rationale for the Demerger

1. Housing the hotel business in a separate publicly listed entity allows for an independent market valuation of ITC Hotels. This creates opportunities for existing shareholders to benefit from a pure-play hospitality entity while maintaining their investment in ITC’s diversified portfolio.

2. Ensures continued interest of ITC in the hotels entity in line with its corporate strategy of multiple drivers of growth.

3. Creates a strong foundation for accelerating growth and sustained value creation by providing long-term stability and strategic support to the hotel’s business. With a dedicated focus on the hospitality industry, ITC Hotels can implement strategies that are specifically aligned with market dynamics and customer preferences in the hospitality sector.

4. Despite the demerger, ITC Hotels will continue to benefit from ITC’s institutional strengths, including brand equity, goodwill, and operational excellence.

Structure of the Demerger

Equity shares of ITC Hotels issued to ITC shareholders were based on a pre-determined share entitlement ratio of 1:10, which means shareholders received 1 share of ITC Hotels for every 10 shares of ITC. The transfer of the hotel business is on an ongoing basis, ensuring uninterrupted operations. Fundamental factors include:

1. As per Clause 5.1 (xxi) of the Scheme, ITC’s investments in subsidiaries and joint ventures related to hospitality were also transferred to ITC Hotels, including: (i) Srinivasa Resorts Limited; (ii)  Bay Islands Hotels Limited; (iii) Fortune Park Hotels Limited; (iv) Land base India Limited (v) Maharaj a Heritage Resorts Limited; (vi) Gujarat Hotels Limited; (vii) International Travel House Limited, and (viii) Welcom Hotels Lanka (Private) Limited, Sri Lanka. 

2. All assets, liabilities (including loans, borrowings, and obligations), and operations related to the hotel's business shall vest into ITC Hotels.

3. The demerger adheres to tax regulations, ensuring a tax-neutral transaction under Section 2(19AA) of the Income-tax Act, 1961.

4. All intellectual property specific to hospitality, including registered/unregistered IP and associated goodwill vested fully with ITC Hotels under the scheme, ensuring operational continuity. The transfer safeguards branding and service expertise, anchoring the standalone entity’s market positioning.

5. Employee stock options granted by ITC remain valid post-demerger. For every 10 existing ITC options, employees receive 1 option in ITC Hotels, preserving their benefits under a special ESOP scheme.

6. All employees of the hotels division became employees of ITC Hotels from the appointed date, with continuity in service and benefits recognized, including PF, gratuity, and leave entitlements. Employee rights and tenure are maintained under existing agreements to ensure morale and stability.

7. ITC Hotels was listed on the BSE and NSE on 29th January, 2025, enabling shareholders to trade the new company’s shares independently. The separate listing enhances transparency, liquidity, and valuation discovery for investors in pure-play hospitality.

Broader Implications

The ITC Hotels demerger underscores the broader trend of corporate restructuring in India aimed at optimizing operations and unlocking shareholder value by creating focused entities. This strategic move highlights the maturity of Indian corporate governance practices and reliance on clearly defined legal frameworks, specifically schemes of arrangement under the Companies Act, 2013, as effective mechanisms to navigate complex business reorganizations and align strategically with evolving market conditions. In a highly competitive market, companies like ITC are leveraging such mechanisms to optimize their operations, respond to sector-specific challenges, and strengthen stakeholder confidence. This trend is supported by India's robust legal framework, particularly under the Companies Act, 2013, which provides clear guidelines for seamless restructuring.

Notably, the Ministry of Corporate Affairs (‘MCA’) issued the Companies (Compromises, Arrangements and Amalgamations) Amendment Rules, 2024 (‘2024 Rules’) which  introduced a fast track process for reverse-flip mergers where a foreign holding company merges into its wholly-owned Indian subsidiary by amending Rule 25A(5) of the 2016 Rules. The cross-border reverse merger process is now handled by a jurisdictional Regional Director on behalf of MCA instead of the NCLT, and requiring only prior Reserve Bank of India (‘RBI’) clearance, bypassing the cumbersome process under the 2013 Act, reflecting the commitment of the government to ease of doing business in India by enabling swift, cost-effective cross-border consolidation. 

Other Significant Schemes of Arrangements

1. HDFC Ltd. and HDFC Bank amalgamation dated 17th March, 2023: The merger of HDFC Ltd and HDFC Bank, effective 01 July, 2023, marked a significant milestone in India’s financial sector. Approved by the Mumbai Bench of the NCLT on 17th March, 2023, the merger followed a composite scheme of amalgamation, consolidating HDFC Investments Ltd. and HDFC Holdings Ltd. into HDFC Ltd., which was then merged into HDFC Bank. With necessary clearances from the Reserve Bank of India, SEBI and Competition Commission of India (‘CCI’), the transaction streamlined the corporate structure, combining housing finance and banking services under one entity.

   
   

2. Reliance Industries and Jio Financial Services demerger dated 28th June, 2023: NCLT Mumbai sanctioned the vertical demerger of Reliance’s financial services arm into Reliance Strategic Investments Ltd (later renamed Jio Financial Services). The order explicitly referenced Section 2(19AA) of the Income-tax Act, ensuring the transaction was tax-neutral. The demerged entity went public on 21st August 2023.

   
   

3. Air India and Vistara composite scheme dated 06th June, 2024: NCLT Chandigarh Approved the scheme encompassing multiple amalgamations and share-capital rationalization to consolidate Tata Group’s airline portfolio into Air India. Sanction was conditional on obtaining Directorate General of Civil Aviation, CCI, and Foreign Direct Investment clearance.

   
   

4. Zee Entertainment and Sony India amalgamation dated 10th August, 2023: NCLT Mumbai Bench on 10th August, 2023 approved a cross-border merger with Sony India alongside non-compete protections and rejected lender objections (which constituted < 5% of liabilities). However, both parties mutually withdrew the scheme before implementation via NCLT order dated 5th September, 2024. 

Conclusion

The demerger of ITC’s hotels business into ITC Hotels represents a significant milestone in India's corporate restructuring landscape. It demonstrates the strategic potential of schemes of arrangement in unlocking shareholder value, sharpening operational focus, and pursuing industry-specific growth opportunities. Investors gain distinct exposure to ITC’s diversified portfolio, including FMCG, tobacco, agribusiness, and paperboards, and to ITC Hotels' dedicated pursuit of growth in the rapidly expanding hospitality sector. The independent management and separate listing of ITC Hotels enhance transparency, allowing for precise valuation and targeted strategies. Ultimately, ITC’s restructuring illustrates how conglomerates can leverage schemes of arrangement to effectively manage complexity, foster focused growth, and strengthen stakeholder confidence.

Authors: Abhinav Goyal, Anmol Singh and Nishika Godha 

Readers can direct their queries or comments to the authors.