When two companies merge: the swap, the vote and the gap

The email comes from the registrar rather than from the broker, which is the first reason it gets ignored. It is a notice of a meeting convened under an order of the tribunal, and attached to it are a scheme running to ninety pages, a valuation report, something called a fairness opinion, and a link to vote electronically. Somewhere in the middle of the scheme, in a single line, is the thing that decides what happens to your money: three shares of one company for every seven held in the other. The previous lesson was about an acquirer being forced to make you an offer. Here nobody makes you an offer, nobody buys your shares, and yet at the end of it the shares you own will have ceased to exist. This is how most of the largest changes of ownership in Indian markets actually happen, and it runs on an entirely different set of protections.

Think of it like this

The two schools that merge

Two neighbouring schools merge. Your daughter's school ceases to exist and she is enrolled in the other one, placed in a class by a conversion table somebody drew up between the two syllabuses. Her old report cards are treated as though they had always been the new school's, so nothing about her record starts again from zero. Nobody asked her. The parents were sent a notice, a meeting was held, and the decision needed a large majority of those who actually turned up to it.

In the market

That is a scheme of arrangement. Your shares in the transferor company are cancelled, shares of the transferee are issued in exchange at a ratio computed by valuers, and your original purchase date and cost are treated as having always belonged to the new shares. You were sent a notice. The majority required is set by statute rather than by anybody's sense of fairness, and — as at the school — it is a majority of those who vote, not of those who own.

Why nobody makes you an offer

An acquisition made under a scheme of arrangement sanctioned by the tribunal is exempt from the open-offer obligation. That single exemption explains the whole shape of this lesson: ownership of a business worth thousands of crores can move, and you can end up holding a different company's shares, without any price ever being offered to you. One qualification on how far the exemption reaches, because it is not equally wide in both directions. Where the company whose shares you hold is itself a party to the scheme — the one being absorbed, or the one absorbing it — the exemption is unconditional, and that is the ordinary merger this lesson describes. Where the scheme does not directly involve your company at all, and control reaches it because a holding company somewhere above it is being reorganised, the exemption is available only on conditions the regulations attach. So "it came through a scheme" is a complete answer in the common case and a question worth asking in the unusual one. In exchange for the price you never get, what the law gives you is a process, with five separate checks in it.

The check	What it actually requires	What it is worth to you
The regulator sees it first	For a listed company the draft scheme goes to the stock exchange, which routes it to SEBI. Only after SEBI's comments does the exchange issue its observation letter, and only with that can the company go to the tribunal	A great deal, and it is invisible. Objections raised at this stage are usually met by amending the scheme before anybody votes, so the scheme you are asked to approve has already been through one round of scrutiny
A valuation, by a registered valuer	The exchange ratio has to be derived from a valuation report rather than agreed across a table	Moderate. A valuation is a range of judgements and two honest valuers can land some distance apart. Its real value is that the reasoning is written down and filed, so it can be read and argued with
A fairness opinion, from an independent merchant banker	A second, separate professional has to state whether the ratio is fair to shareholders	Read it for what it does not say. A fairness opinion speaks to the ratio, not to whether the merger is a good idea, and its language is worth reading closely rather than skimming for the conclusion
The statutory majority	A majority in number representing three-fourths in value of the members who vote, at a meeting the tribunal orders	Substantial where the shareholding is dispersed, close to nil where a promoter block holds most of the company. Note the denominator: those who vote, not those who own
The public-shareholder test	For the categories of scheme SEBI specifies, it may be acted on only if the votes cast by public shareholders in favour exceed those cast against	This is the one that can genuinely decide an outcome, because the promoter block is excluded from the count. Whether a particular scheme attracts the test is stated in the notice you receive, which is the reason to read the notice rather than a summary of it

The ratio, and the fraction it leaves behind

The share exchange ratio — the swap ratio, in market usage — is the whole of the commercial bargain compressed into two numbers. It says how many shares of the surviving company you receive for each share you hold in the one that disappears. Everything else in the ninety pages is machinery for delivering it.

Worked example

Three for seven, on 430 shares

A scheme merging company T into company A

What you holdThe cost and the purchase date both matter later, so they are worth writing down before anything moves430 shares of T, bought in 2021 at ₹362 — ₹1,55,660

The exchange ratio in the schemeBefore the announcement T traded at ₹505 and A at ₹1,180. Three A shares for seven T shares values a T share at ₹505.71, so the ratio was struck close to where the market already had them3 shares of A for every 7 shares of T

Your entitlement, arithmeticallyWhich is not a number of shares anybody can issue, because a share is indivisible430 × 3 ÷ 7 = 184.29 shares of A

What is actually creditedWhole shares only. The leftover 0.29 of a share — two-sevenths, precisely — is a fractional entitlement and is not credited to anybody184 shares of A

What happens to the fractionEvery shareholder's fraction across the whole register is pooled, the resulting whole shares are sold in the market by a trustee appointed under the scheme, and the net proceeds are distributed in proportionA trustee aggregates and sells it

Cash for the fractionThe trustee's sale realised ₹1,190 a share, and two-sevenths of that is ₹340. You cannot insist on a share instead, and you cannot insist on a priceAbout ₹340

The cost that follows the sharesAn amalgamation meeting the conditions in the income-tax law is not a transfer by you, so no gain arises on the swap and the cost carries across₹1,55,660, now on 184 shares — about ₹846 each

The clock that follows them tooThe holding period of the original shares is included, so the new shares are long-term from the day they are credited rather than starting againStill running from 2021

Four hundred and thirty shares of one company became one hundred and eighty-four of another plus ₹340 in cash, and the tax position of the swap itself is nil — no gain, no loss, cost and clock intact. Two smaller items are worth handling deliberately rather than by assumption. The cash paid for the fractional entitlement is a separate, small receipt and is not obviously covered by the same relief as the swap, so it is a question to settle rather than to ignore. And the relief itself is conditional: it applies to an amalgamation that satisfies the definition in the income-tax law and where the consideration is shares of an Indian company. A restructuring that pays you partly in cash, or in something other than shares, is a different transaction and the assumption that a merger is automatically tax-neutral does not survive it.

The gap: the weeks in which you own something you cannot sell

This is the part of a merger that no document highlights and that every holder discovers by trying to place an order. Between the old shares ceasing to trade and the new shares becoming tradable there is a period of weeks in which you own a real asset with no market at all.

What happens in what order

1
The tribunal sanctions the scheme, and it becomes effective
The order is filed with the Registrar of Companies and the scheme takes effect. Note that the appointed date written into the scheme — the date from which the transfer is treated as having happened for accounting purposes — can sit a year or more earlier, which is a separate source of confusion and not the date anything happens to your holding.
2
A record date is fixed
The scheme provides for a record date to identify who is entitled to the new shares. Whoever is on the register on that date receives them, which is why buying or selling the old share around it needs care.
3
The old share stops trading
The exchange notifies a last trading day for the transferor's shares, after which the old ISIN is extinguished. This is the last moment at which the holding can be sold as itself. If you were going to act on it — because you do not want the new company, or you want to realise a loss in a particular year — the window closes here, not later.
4
The new shares are credited
The transferee issues shares under the scheme and they arrive in your demat account under its ISIN. You now hold a real asset in a listed company, and you still cannot sell it.
5
Listing and trading approval
The new shares have to be admitted to trading, which requires the exchanges to grant listing approval and then trading permission. Only after that can an order be placed. The elapsed period is measured in weeks and is not something the holder can accelerate.

Check yourself

A tribunal-sanctioned scheme merges T into A, giving 3 shares of A for every 7 shares of T. You hold 430 shares of T. What do you end up with?

Simple bhasha mein

Do school mil gaye, class conversion table se tay hua

430 share T ke, 2021 mein ₹362 pe = ₹1,55,660. Scheme kehti hai 7 T ke badle 3 A. 430 × 3 ÷ 7 = 184.29 — matlab 184 share A ke, aur bachi 0.29 (theek do-bataa-saat) kisi ko nahi milti: sabki fractions jodkar ek trustee market mein bech deta hai aur cash baant deta hai. ₹1,190 pe bika, toh 2/7 × 1,190 = ₹340. Do achhi baatein: qualifying amalgamation transfer nahi maana jaata, isliye swap pe tax zero, poora ₹1,55,660 cost 184 share pe chala jaata hai (kareeb ₹846 per share), aur ghadi 2021 se hi chalti rehti hai — phir se din ek se nahi. Par asli baat yeh hai: is poore mamle mein aapko koi open offer nahi aata, kyunki tribunal wali scheme ko chhoot hai. Aapke paas daam nahi, process hai — SEBI ke comments aur observation letter, valuer ki report, fairness opinion, aur vote. Aur jo log yeh soch kar baith jaate hain "tribunal mein ladenge": aitraaz sirf woh kar sakta hai jiske paas 10% shareholding ho (ya 5% karza). 800 share wale ke paas vote hai, aur woh kuch hi din mein band ho jaata hai. Ek cheez koi nahi batata — purana share jis din trade band karta hai, wahi aakhri tareekh hai bechne ki; uske baad naye share aane aur unki listing-trading approval ke beech hafton tak aap aisi cheez ke maalik hote ho jo bech hi nahi sakte.

What to remember

An acquisition under a tribunal-sanctioned scheme is exempt from the open-offer obligation — no price is offered to you at all.
Your protection is a process: SEBI's comments and the observation letter, a registered valuer's report, an independent fairness opinion, the statutory majority, and the public-shareholder test where it applies.
Only holders of a tenth of the shareholding, or creditors owed a twentieth of the debt, may object before the tribunal — but every holder can vote.
Fractional entitlements are pooled, sold by a trustee and paid out in cash; nothing is rounded up.
A qualifying amalgamation is not a transfer by you, so cost and holding period carry across — and the last trading day of the old share is the real deadline.

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