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Foreword
The new Companies Act, 2013 has sought to streamline and make M&A more smooth and
transparent. It appears that the New Act can help to deal with the challenges and complexities that
the current procedures faces in relation to procedures that were contemplated under the old Act.
The New Act has incorporated various provisions to tackles the problems actually faced during the
process of mergers, by taking into consideration the practical aspects of the process. The newly
added provisions have made it easier for companies to implement Schemes of Arrangement
(Mergers & Acquisitions, de-merger, corporate debt restructuring etc) and at the same time impose
checks & balances to prevent abuse of these provisions.
It is an attempt to fine tune the process by making it more efficient and in-tune effective. The new
law allows an Indian company to merge with a foreign company, making cross-border mergers and
acquisitions easier. The new law also disallows reverse merger of a listed company with that of an
unlisted one. The New Act no doubt has some ambiguities attached to it, which would need to be
sorted out in order to reduce any complexity in the process. It would need to reduce reliance on
rules to be specified later and also ameliorate provisions that contrive other legislations.
Against this backdrop, ASSOCHAM is actively involved in showcasing related programmes to
bring updated knowledge and policy guidelines for the industry and all stakeholders. ASSOCHAM,
jointly with Ernst & Young LLP is bringing out this compilation for the benefit of participants and
practitioners.
I wish all the best and success for the conference and assure that such knowledge based events
shall continue to be held for the benefit of all segments of the industry and commerce.
D.S. Rawat
Secretary General
ASSOCHAM
Being the Chairman of M&A Council of the Associated Chambers of Commerce & Industry of India
(ASSOCHAM), I am delighted to organize the National Conference on New Mergers & Acquisitions
Era under the Companies Act, 2013.
There are pragmatic reforms for Merger and Acquisitions under Companies Act, 2013, which could
make merger, acquisitions and restructuring easier for companies. Introduction of novel concepts
fast track merger for Small Companies and Holding and its wholly owned subsidiary Companies,
Cross Border merger (removing the restriction on only transferee company being Indian company)
under this Act are expected to increase internal restructuring and Cross Border restructuring.
Further exit opportunity to the dissenting shareholders is expected to reduce litigation & frivolous
complaint and representation of Income Tax Department, Sectoral Regulators would safeguard their
interest, though at the cost of prolonged process.
This is the first significant change to merger and amalgamations regime in the last six decades,
with the previous Companies Act having been in place since 1956.The Ministry of Corporate Affairs
has also prepare roadmap for Companies Act, 2013 and in this direction in its recent circular given
chance to Income Tax Department and other Sectoral Regulators to make their representation on
Merger and Amalgamation in line with the provision of Companies Act, 2013.
I hope this National Conference gives rich insight and adequate knowledge to all the interested
stakeholders. We shall be happy to receive comments /suggestions of the readers for making our
future endeavors better.
With warm wishes
Corporate law has undergone a radical change with the introduction of the Companies Act, 2013
in India during this era of major economic overturns. Pursuant to receiving the final nod from the
President in August 2013, the enactment of the Companies Act, 2013 has been a significant
step in the path of adapting with laws suitable for our times. The provisions enacted in the new
legislation bring India at par with its global peers from a corporate law perspective on several fronts.
A bright spot in the history of Indias legislative initiatives, the new Act aims to improve
transparency and accountability in Indias corporate sector. It retains the fundamental provisions of
the earlier Act while incorporating stronger and progressive new provisions.
In the recent past, Indias economy has outperformed the West on its growth and attracted large
inflows of foreign funds. Economists predict that the West will soon begin heading northwards. In
this environment, Indian investors will get significant exposure to global economies. Furthermore,
with opening up of international opportunities, companies can look at scenarios where strategic
alliances take simpler routes, and global consolidation and fund-raising are required. Global
integration and cross-border mergers are now permitted, which is an excellent change from the
earlier environment in which only foreign companies were welcomed in India. The challenges faced
by many corporate organizations in listing their businesses abroad if their entire business value is
housed in India will now be reduced due to cross-border mergers, which will enable them to set up
overseas listing vehicles.
The introduction of Class Action Suits, the concept of arms length pricing in related party
transactions, the focus on Corporate Social Responsibility, recognition of inter-se shareholder
rights, opening of doors to outbound mergers, fast-track mergers, an increased focus on
governance and protection of minority shareholders are important initiatives for organizations to
move toward global best practices. This paper elaborates on the key provisions of the corporate law
affecting mergers and acquisitions.
The new Act prescribes rules for implementation of its provisions. However, the Rules are at the
draft stage at present. It is hoped their implementation will help Indian corporate laws achieve
parity with international ones and smoothen the transition from the Companies Act, 1956 to the
Companies Act, 2013. It will also help organizations gauge whether Indian corporate laws are
focusing northwards.
I wish to acknowledge the contribution made by my EY tax colleagues and their untiring efforts in
preparing an extensive in-depth comprehensive study on this subject.
We hope this booklet will provide relevant insights and adequate knowledge to all stakeholders in
the M&A arena and we wish the conference great success.
Amrish Shah
Partner and Transaction Tax Leader
EY
Table of contents
18 12 6
Chapter 1
2
Chapter 2
6
Introduction
The Companies Act, 2013 (2013 Act) has seen the light of
day and replaced the 1956 Act with some sweeping changes
including those in relation to mergers and acquisitions (M&A).
The new Act has been lauded by corporate organizations
and lawyers for its business-friendly corporate regulations,
enhanced disclosure norms and providing protection to
investors and minorities, among other factors, thereby
making M&A smooth and efficient. Its recognition of interse shareholder rights takes the law one step forward to an
investor-friendly regime. While the 2013 Act is appreciated
by many, it poses some practical difficulties for companies in
structuring their transactions.
This article focuses on some of the sections (notified or not
notified), which may have an impact on how M&A transactions
are undertaken and structured in India.
Existing
New
Promoter Hold Co
Promoter Hold Co
Group Hold Co
Group Hold Co
Investment No 1
Investment No 1
Investment No 2
Investment No 2
Target Co
Target Co
As the law stands today, the 2013 Act provides that private
companies will also have to comply with the rules to be
framed by the Government in this regard in order to be able
to issue shares with differential rights. There are concerns
on the validity and enforceability of the differential rights of
the shares of private companies issued under the 1956 Act,
especially since such issuances of shares were not subject to
any conditions.
B Co.
Unit B
16%
4%
10
B Co.
Unit A
Unit B
81%
19%
Conclusion
While the 2013 Act is a step in the
right direction for India Inc. and
investors, it may be worthwhile
for the regulators to pay heed to
concerns being voiced by lawyers
and corporate organizations
and incorporate the required
amendments while notifying
rules and issuing clarifications.
Furthermore, the 2013 Act
seeks to align other laws such
as Income Tax and Exchange
Control provisions to facilitate its
efficient implementation. Only
time will tell whether the 2013
Act will be successful in making
M&A easier and more efficient or
be a legislation, which is open to
interpretation, leading to further
disputes and litigation.
11
Chapter 3
12
Introduction
Merger
100%
Approval process
Under this process, the schemes approved by the boards of
directors of companies will need to be sent to the Registrar
of Companies (RoC) and the Official Liquidator (OL) for their
suggestions or objections within 30 days. The scheme will then
be considered in the meetings of shareholders or creditors,
along with their suggestions or objections, and will have to be
approved by the following classes of persons:
WOS
1 A small company is a private company that meets either of the following requirements:
Its paid-up capital does not exceed INR5 million (or higher amount, as may be prescribed, and should not be more than INR 50 million).
Its turnover (according to its last profit and loss account) does not exceed INR20 million (or a higher amount, as may be prescribed, which will not be more than
INR200 million).
Mergers and acquisitions in the new era of Companies Act, 2013
13
B. Cross-border mergers
With businesses no longer limited by borders, cross-border M&A
transactions present significant opportunities for economic
gain and increased shareholder or investor value. Various
factors influence the spurt in recent cross-border mergers and
acquisitions, including the ever-increasing need of companies to
tap new markets and set up global operations in these, achieve
cost reduction and synergies and secure natural resources.
Cross-border M&A is also supported by technological
advancements, low cost financing arrangements and robust
market conditions, which have made deal-makers confident and
think more creatively about their global growth strategies.
The flow of transactions could be inbound (non-residents
investing in India) or outbound (Indian businesses making
investments abroad).
Overseas
Current laws only permit
jurisdiction
inbound mergers (foreign
Outbound
Inbound
companies merging with
Merger
Merger
Indian ones) and not the
other way round. The 2013
Indian
Act proposes to allow both
Company
inbound and outbound
cross-border mergers between Indian companies and foreign
ones. It provides for the merger of an Indian company into
a foreign one, whether its place of business is in India or in
certified jurisdictions (to be notified by the Central Government
from time to time), subject to the NCLTs and RBIs approval.
The consideration of a merger, which will also be subject to
the approval of the RBI, could either be in cash or depository
receipts, or partly in cash and partly in depository receipts2. The
provisions mentioned above could have a far-reaching impact
that will facilitate cross-border transactions and increase their
C. Demergers defined
The draft rules released by the MCA clarify that the term
demerger is to be included within the compromise or
arrangement defined in the 2013 Act. As opposed to the 1956
Act, the Rules provide a clear definition of the term. It defines
a demerger in relation to companies and includes transfers,
2 For this purpose, depository receipts are defined as any instrument in the form of a depository created by a domestic company in India and authorised by one
incorporated outside India, which is making an issue of such depository receipts.
14
D. Treasury shares
Indian promoters of companies, including listed ones, have in
the past used the route of issuing treasury stocks to consolidate
their holdings in companies to raise funds and as an avenue
to control voting rights. Promoters have followed the practice
of transferring the shares of their subsidiary companies to
trusts and issuing shares of holding companies pursuant to
the mergers of wholly owned or partially owned subsidiaries
with holding companies, instead of canceling such shares.
Past precedents include Escorts, Mahindra & Mahindra and
Jaiprakash Associates.
However, the 2013 Act restricts a transferee company from
holding shares in its own name or in the name of a trust. Any
inter-company investments between companies involved in
mergers need to be mandatorily canceled in this event.
The provisions given above should result in greater
transparency and reduce the scope of unconventional or
15
F. Minority buyout
The 2013 Act has introduced an exit mechanism for minority
shareholders with the intent of reducing litigation with minority
shareholders. The Act grants access to the acquirer or person
acting in concert or a person or a group of persons becoming
registered shareholders of 90% or more of the issued equity
share capital of the target company (listed or unlisted) by virtue
of amalgamation, share exchange, conversion, securities or
for any other reason. Such an acquirer, person or a group of
persons will notify minority shareholders about their intention
of buying the remaining equity shares. In addition, minority
shareholders may also offer their shares suo- motto to
majority shareholders.
16
The 2013 Act provides that a notice for a meeting for the
Mergers and acquisitions in the new era of Companies Act, 2013
Conclusion
To conclude, the overall impact of the
2013 Act on mergers, compromises and
arrangements is to introduce certain
simplistic and forward-looking concepts, and
also codify in law certain concepts (such as
dispensation, statutory auditor certificates
and demerger accounting), which were
followed in practice, put not contained in
law. As of now, the full impact of the law is
not very clear, since many matters will be
governed by rules, which will be formalized
once feedback from stakeholders is received
by the MCA and incorporated in the final
rules to be issued.
On the whole, the 2013 Act is a step
toward bringing greater transparency and
accountability in the age-old procedures
of M&A, thereby visibly making the Indian
Corporate Law relatively friendlier and more
acceptable in the global arena.
17
Chapter 4
18
Buy-back of shares3
Buy-back refers to purchase of its own shares by a company
from its existing shareholders. This is generally undertaken by
a company when it has a significant amount of cash, there are
no viable projects on the table and it is interested in disbursing
cash to its shareholders in the form of dividends. The way out
for management is buying back its own shares. Buy-back may
also be undertaken for other reasons such as maintaining the
Capital reduction5
Capital reduction, a commonly used tool for increasing
shareholder value and realigning capital structure, has also
been subject to certain stringent provisions under the New
Cos Act.
3 Section 77A in Old Cos Act and Section 68 in New Cos Act
4 Conditions detailed in section 77B of Old Cos Act and section 70 of New Cos Act; section partly notified by the Ministry
5 Section 101-105 of Old Cos Act and Section 66 of New Cos Act
Mergers and acquisitions in the new era of Companies Act, 2013
19
6 The New Cos Act, in order to provide swifter ruling in cases related to companies, proposes setting up of the National Company Law Tribunal (NCLT), which will
assume jurisdiction of the High Court on corporate law-related matters.
7
Section 106-107 of Old Cos Act and Section 48 of New Cos Act
Section 85-86 of Old Cos Act and Section 43 of New Cos Act
No provisions for issue of bonus shares in Old Cos Act, governed by section 63 of New Cos Act
20
Private placement10
The New Cos Act formally introduces the concept of private
placement, which, under the Old Cos Act, was conducted
with the support of various provisions. Under the New Cos
Act, private placement has been defined to mean any offer
of securities or an invitation to subscribe to the securities
of a select group of persons by a company through issue of
21
Loans to directors/subsidiaries11
Like the existing Old Cos Act, the New Cos Act also prohibits a
company from giving loans or guarantees to, providing security
in connection with a loan to any other body corporate or
acquiring the securities of any other body corporate exceeding
the higher of the following:
12 Section 372A of Old Cos Act and Section 186 of New Cos Act
22
Conclusion
While some conditions for regulation of capital
structuring, including offers of securities
made by private companies, are warranted
in view of some recent cases, the current set
of regulations seem too cumbersome and
restrictive, especially for private companies.
On the other hand, this ensures discipline and
corporate governance, which appear to be the
need of the hour.
13 Revival and rehabilitation of Sick Industrial companies was earlier governed under the Sick Industrial Companies Act, 1985 and is now covered under Chapter XIX of
New Cos Act.
Mergers and acquisitions in the new era of Companies Act, 2013
23
Date
Notes:
24
Date
Mergers and acquisitions in the new era of Companies Act, 2013
25
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