India: Merger And Acquisition - Transformed Rules Of The Game

Merger and Acquisition (M&A) has always been a sought for transaction in India, as more and more M&A deal is being carried out each and every day in the Indian market. As per Grant Thorton, there have been a total of 480 deals amounting to $27.4 billion during 2013 involving Indian companies. However, Indian companies were involved in 598 M&A deals worth $35.4 billion in 2012 and 644 transactions worth $44.6 billion a year ago in 2011². But, it is predicted that the improvement of the economy in the year 2014 and the coming in force of the provisions of Companies Act 2013, will pave the way for a number of M&A transactions in the country in all the sectors. Apart from this, M&A rules for the telecom industry have also been given a nod during the month of February 2014 which shall induce various telecom companies to broaden their market share.

As we know the Companies Act 2013 ("2013 Act") has come into force, the sections related to M&A is yet to be notified and the Ministry of Corporate Affairs (MCA) is striving hard to notify the aforesaid sections and the rules thereon. Section 230-240 of the 2013 Act contains the provision related to M&A as compared to Section 390- 396A of the Companies Act 1956 ("1956 Act"), which is still in presence. As the MCA notifies the sections of the new Act, the 2013 Act will replace the 1956 Act. The coming in force of the 2013 Act will help in reducing shareholders' litigation and make corporate restructuring process smooth and efficient. The new act also promises to bring easy and efficient ways of doing business in India with better governance and improved level of transparency. Accountability and making corporate's socially responsible is also one of the main factors to scrap out approximately 60 years old Act. The 2013 Act has surely wide amplitude as various other forms of M&A have also been allowed.

Cross Border Merger:

The 1956 Act prohibited the merger/ demerger of Indian company with the foreign company, however, the vice versa was possible. But as per the 2013 Act, both types of mergers have been allowed with only those foreign entities which have been notified by the government. RBI approval is also required to be taken for concluding these types of deals. RBI will also notify the regulation which has to be complied to enter into this transaction. The payment in the scheme can be done through cash or through depository receipts or both.

Short Form Merger/ Fast Track Merger:

This type of mergers includes merger between- (a) two or more small companies (b) parent and wholly owned subsidiary company.

"Small Company means a company, other than a public Company

Therefore, in this form of mergers/ demergers no prior approvals of NCLT is required and even the approval of various other regulatory bodies is not needed. However, the Central Government, ROC, OL approval is necessary along with the approval of shareholders holding 9/10th portion of total shares and majority creditors representing 9/10th in value. Moreover, the auditor's certificate for compliance with applicable accounting standards is also not required to be provided. But the benefit of this fast track merger/ demerger is not available to small public companies where there is merger/demerger between two or more small companies, (Benefit only applicable to private small companies). However, in case of merger/ demerger between a parent company and its wholly owned subsidiary, these provisions are applicable for both public and private companies.

The rules as was prescribed in 1956 Act have also been modified in the 2013 Act.

• The power of sanctioning the scheme has been transferred from the High Court to NCLT (National Company Law Tribunal). This can slash the huge number of pending cases from the High court to a specialized body.
• The M&A scheme have to be sanctioned by various statutory authorities- the Central Government, RBI, official liquidator, ROC, SEBI, Competition Commission of India etc... These authorities have been given a strict timeline to work under. With the involvement of all these parties, the M&A process are sure to be more cumbersome.
• Normally on amalgamation, based on judicial decisions, the authorized capital of the transferor company is added to the authorized capital of the transferee company. Now it is expressly provided that fees, if any, paid by the transferor company on its authorized capital shall be allowed to be set-off against fees, if any, payable by the transferee company on its authorized capital subsequent to the amalgamation.
• The Board of Director also is required to pass the M&A in the meeting of the board and not by circulation.
• The approval of the members and/or creditors can also be taken through postal ballot. It will ensure more number of members to take part in M&A process.
• The shareholders are also required to be given the report on valuation of shares along with the scheme which will ensure the shareholders to take informed decision. Such valuation report has to be prepared by the registered valuer. Although, this report was also given to the shareholders in the 1956 Act, but it was not mandatory.
• The objections for the M&A can be raised by only those shareholders who hold not less than 10 per cent of shares in the company. Creditors can object to the scheme if and only if they hold not less than 5 per cent of the outstanding debt which will reduce the frivolous litigations filed by various stakeholders.
• The shareholders/ group of persons holding 90 per cent or more shares have also been granted the authority to compulsorily notify their intention to acquire minority shares and can subsequently acquire those shares. This is known as minority squeeze out. This leads to majority shareholders easily acquiring the shares of minority shareholders and reducing the lengthy process of litigation.
• Buy back as per the 2013 Act needs to be complied with, if the M&A results in purchase of shares by the company. In the erstwhile act, a mechanism of single window clearance was present, wherein the scheme which was presented to the High court acted as a scheme which could comply with almost all the regulations of the act (if necessary) and separate procedure for every other sections was not necessary to be complied with.
• The concept of treasury shares has also been removed as earlier the investment in intercompany in the form of shares had to be kept as a treasury stock. But the 2013 Act requires such shares to be cancelled and holding shares in name of trust will not be allowed.

Reverse Merger:

The merger of a company with a financially weak company, in order to get various tax exemptions is known as reverse merger. It is also a kind of merger of listed company with an unlisted company (private or public) by which the unlisted company gets listed in the stock exchange wherein the listed company has already been listed earlier. In this kind of merger, as per 1956 Act, the unlisted company automatically gets a back door entry to become a listed company without an IPO. It means the unlisted company can enjoy all the benefits of becoming a listed company without diluting its shares in the public. However, as per Section 232 (h), if the transferee company is an unlisted company, it shall not automatically become a listed company by merging with a listed company. It has to follow the process of listing as per SEBI (ICDR) Regulation 2009 in order to become listed. During merger the unlisted company also has to grant an exit opportunity to the existing shareholders of the listed company. Therefore, the process of backdoor listing will end as soon as these provisions of 2013 Act are notified.

Conclusion:

India is a big market having world class companies and the recent amendment in the laws favoring the corporate's and shareholder's at the same time relating to M&A surely will entice foreign companies to merge amongst themselves and grab the benefits of Synergy.

Footnotes

1. CS Intern

2. As per 9th annual edition 2013 of Grant Thorton report on Deal tracker.

3. As per Section 2 (85) of Companies Act 2013

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.