India: Merger And Acquisition - Transformed Rules Of The Game

Last Updated: 14 March 2014
Article by Yogesh Malhan and Gopal Bageria

Most Read Contributor in India, July 2017

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

(i) paid-up share capital of which does not exceed 50 lakh rupees or such higher amount as may be prescribed which shall not be more than 5 crore rupees; or

(ii) Turnover of which as per its last P&L account does not exceed 2 crore rupees or such higher amount as may be prescribed which shall not be more than 20 crore rupees3"

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.