Stricter framework for sale, lease or disposal of undertaking by a listed entity

– Nitu Poddar |

Reg 37A of Listing Regulations requires additional voting and disclosure requirements

Keeping in view of the significance of the amendments, we are conducting a workshop on the same. Details can be accessed at
The article was also published by IndiaCorpLaw and can be viewed here

Disposal of an undertaking (whole or substantially the whole) can be done either as part of a scheme of arrangement or otherwise by way of slump sale / business transfer agreement (‘BTA’). Disposal, other than by way of scheme of arrangement, have so far been regulated as per section 180(1)(a) of the Companies Act, 2013 (‘Act’) which requires approval of the shareholders by way of special resolution. SEBI has prescribed approval requirement in this regard by way of introduction of regulation 37A vide SEBI (Listing Obligations and Disclosure Requirements) (Second Amendment) Regulations, 2023 (‘Amendment Regulations’) effective from June 14, 2023 that requires listed entities to follow a stricter regime for disposal of undertaking inter alia mandating approval from majority of the public shareholders who are not interested in the transaction, disclosure of the object, commercial rationale and use of proceeds arising from such transaction. While there is an exemption provided in case of transactions with a wholly owned subsidiary (WOS), the approval regime will apply in case of disposal of undertaking by such WOS or any reduction in shareholding in the WOS subsequent to transfer of the undertaking.

The said amendment is based on the Consultation Paper rolled by SEBI on February 21, 2023. Apart from incorporating the provisions proposed in this regard in the Consultation Paper, the amendment has introduced new provisions as well. Provision with respect to seeking approval from the shareholders of the listed entity in case a WOS is used as a conduit for transfer in undertaking is a new requirement brought in through the amendment.

Effective date

Regulation 37A came into force with immediate effect, i.e from June 14, 2023.  The Amendment Regulations clarify that the new provision will not apply in cases where the notice for seeking shareholders approval has already been dispatched.

Meaning of ‘undertaking’

The meaning of the term ‘undertaking’ in regulation 37A is the same as defined in section 180(1)(a) of the Act. The section refers to a numerical parameter of what should be considered as an undertaking. However, before testing the numerical parameter, one needs to assess whether the asset to be disposed of is at all an undertaking. For this, such asset should be capable of being identified as an unit i.e has assets and liabilities of its own discrete of the listed entity.  Once this qualitative criteria is met, undertaking shall be covered under section 180(1)(a) and regulation 37A if:

i.  investment of the company in such undertaking is more than 20% of its net worth; or

ii. the undertaking generates atleast 20% of the total income of the company

Further, the expression “substantially the whole of the undertaking” means atleast 20%  of the value of the undertaking

For detailed understanding on the meaning of the term, refer to this article.

Approval from majority of eligible public shareholders

In addition to the special resolution required under section 180(1)(a) and regulation 37A for disposal of undertaking, in case such undertaking is that of a listed company, regulation 37A additionally requires approval from majority of public shareholders who are not in any way interested in the transaction. Votes of only such public shareholders shall be counted for the second criteria above, who is not a party, directly or indirectly, to such sale, lease or otherwise disposal of the whole or substantially the whole of the undertaking of the listed entity (‘eligible public shareholder’). Thus, the voting strength of the promoters of the company is disregarded for the purpose of achieving the majority of minority vote.

This approval from the majority of the public shareholders is in addition to the approval through special resolution, where the promoters are entitled to vote.  It is interesting to note that this approval criteria, while seems similar, is actually different from the one required for appointment of independent directors of a listed company under regulation 25(2A) of Listing  Regulations or under regulation 37 in case of a Scheme of Arrangement (‘SoA’).

Approval under reg 37AApproval under reg 25(2A)Approval under reg 37[1]
Special resolution; andSpecial resolution; orMajority of members representing 3/4th in value [as per section 230]
Approval from majority of the eligible public shareholdersOrdinary resolution and approval from majority of the public shareholdersApproval from majority of the public shareholders

As discussed in the Consultation Paper, the idea of putting this additional criteria for approval is to prevent prejudice to the public shareholders in case of disposal of undertaking outside the scheme of arrangement.

Disposal as a part of the SoA undergo stringent scrutiny and approval regime including observation letter from stock exchange, approval from NCLT. The requisite approval from shareholders also requires approval from the majority of shareholders representing 3/4th in value of the shareholders.

Transaction additionally classifying as a Material RPT

Practically, there could be a situation where an undertaking is disposed to a related party. Question would arise with respect to the manner of seeking prior approval from the shareholders in case of a material related party transaction (‘Material RPT’) in terms of Listing Regulations or the Act. In this regard, it should be noted that:

  • Approval from shareholders for an RPT is required only in case where such RPT is material either as per Act, 2013 or Listing Regulations;
  • If material, the approval requirement under RPT framework will be applicable which is a lot different from the approval framework for disposal of undertaking under section 180(1)(a) or reg. 37A.
Points of differenceApproval under reg 37AApproval under reg 23 
Resolution type(i) Special resolution; and (ii) Approval from majority of the eligible public shareholdersOrdinary resolution
Who cannot voteFor the purpose of the second criteria of approval, public shareholders who have a direct or indirect interest in the transaction, cannot vote.All related parties of the company cannot vote irrespective of whether such entity is a related party to the particular transaction or not. 
  • Accordingly, two separate resolutions ought to be taken to the shareholders for approval (i) for sale, lease or disposal of undertaking; and (ii) for approval of a Material RPT. 

Information to be disclosed to the shareholders

Section 180(4) of the Act requires the special resolution to include conditions regarding the use, disposal or investment of the sale proceeds arising from the disposal of undertakings. Reg 37A additionally requires the following disclosure in the explanatory statement:

  • object of such disposal;
  • commercial rationale of such disposal;
  • use of proceeds arising therefrom.

In case of a Material RPT, the disclosures will be required to be made in terms of SEBI Circular dated November 22, 2021.

Transfer of an undertaking to a WOS

Considering a WOS to be an extension of the holding company, the provision of 37A has exempted the approval regime for transfer of undertaking to the WOS. However, if such WOS further transfers the undertaking to any other entity, or the listed company intends to dilute its shareholding in the WOS, approval regime under reg 37A will be applicable. It may be noted that this bit is a new insertion and was not part of the Consultation Paper. Let’s examine a few scenarios here:

ScenariosApplicability of reg 37A on the Listed Entity (‘LE’)
LE transfers an undertaking to WOSNot applicable
LE transfers an undertaking to a 90% subsidiaryApplicable
LE transfers an undertaking to WOS which further transfers the same undertaking to another entityApplicable
LE transfers an undertaking to WOS. The WOS transfers some other undertaking to another entityNot applicable
LE has not transferred any undertaking to WOS. WOS intends to transfer its undertaking to another entity.Not applicable  
The WOS is itself a result of hive off (outside scheme) of an undertaking from the LE. It now intends to transfer its undertaking to another entityApplicable. Considering the WOS itself in toto is a result of transfer of an undertaking by the LE, any further transfer by it ought to be covered by reg 37A.
LE has transferred an undertaking to the WOS pursuant to SoA. Now the WOS intends to transfer that undertaking to another entityNot applicable
LE has transferred its undertaking to WOS. Now LE intends to dilute its shareholding in the WOS:   by transferring its shareholding in the WOS;by allowing the WOS to issue convertible securities to any other entity     Applicable
LE intends to dilute its shareholding in any other WOSNot applicable. However, applicability of clause (5) and (6) of regulation 24 of Listing Regulations is to be checked individually for each case.
LE has transferred the undertaking to its WOS prior to the amendment, the WOS is further transferring such undertaking post this amendmentApplicable.   Keeping in mind the intent of the provision, if the WOS, to which an undertaking was transferred prior to the notification of the Amendment Regulations, intends to transfer such undertaking to any entity, the provisions of reg 37A should be made applicable and requisite approval from the shareholders of the LE is required to be obtained.

It should be noted that the above requirement is exclusive of the requirement under clause (5) and (6) of regulation 24 and that under clause (4) of regulation 23 in case of Material RPT undertaken by the unlisted subsidiaries of the listed entity..

The difference in the applicability of shareholders’ approval requirement is summarised hereunder:

Point of differenceRegulation 37ARegulation 24(5)Regulation 24(6)
ApplicabilityUsing a WOS to transfer an undertaking outside scheme, to a third partyDisposal of shareholding / control in a material subsidiary such that it ceases to be a subsidiarySelling, disposing and leasing of assets, outside scheme, amounting to more than 20% of the assets of the material subsidiary on an aggregate basis during a financial year
Materiality of the subsidiary relevant?NoYesYes
Approval required by LE(i) Special resolution; and (ii) Approval from majority of eligible public shareholdersSpecial resolutionSpecial resolution

Non-applicability of regulation 37A

It is very usual for companies to take parallel approval under section 180(1)(a) of the Act along with approval for borrowing limits under section 180(1)(c). Requirement of regulation 37A is exempted for disposal of undertakings arising out of any covenant under any agreement with financial institutions and debenture trustees e.g. in case of security enforcement.

Immediate actionable for Listed Entities (‘LE’)

Extension of the provision to WOS requires some background work to be done by the LE which has WOS(s). The LE needs to travel back to check if there has been any transfer of undertaking to the WOS or if the WOS is actually an outcome of spin off from the LE.

Having done so, the LE and its WOS needs to be adequately sensitised with the amendments so that the LE can be alerted in case (i) the undertaking from the LE is proposed to be transferred to another entity; or (ii) the LE intends to dilute its shareholding in the WOS (even by 1%) where an undertaking has been transferred.


1 reply
  1. sandeep deshmukh
    sandeep deshmukh says:

    If A limited, a listed co transfers undertaking to B limited its wos, there is no approval needed under 37A. If A limited transfers 1% holding in B limited to C limited, approval of shareholders will be required.
    Query –
    If subsequently A limited transfers say 15% again to C limited or any other person, will shareholder approval be required considering that B Limited was not a wos that time , however approval taken first from shareholders was only for only 1% dilution.


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