Chapter 5

Chapter 5
Oxford University Press 2011. All rights reserved.
Changing Indian Scenario

Increasing number of outbound deals as compared to inbound investments
Tata Corus
High value M&A deals in commodities especially metals and telecom. Growth of M& A activity in the commodities sector due to factors such as economic growth, international commodity prices, exports, growth of infrastructure, cheap labor etc. Hindalco
- Novelis
Holcim Gujarat Ambuja
Hutch Vodafone
Rationale for major inbound deals such as Holcims investment in Gujarat Ambuja and Ambuja Cements mostly to expand capacity in India. In January and February 2007 alone, 102 M&A deals have taken place with a total value of almost USD 36.8 billion
Provisions governing M & A:

Provisions of Companies Act, 1956 SEBI (Buyback of Securities) Regulations, 1998 SEBI (Substantial Acquisition of Shares and Takeovers), 1997
Listing Agreement Norms

SEBI (Delisting of Shares) Corporate Governance Issues
Provision of Income Tax Act, 1961

FEMA Competition Act Oxford University Press 2011. All rights reserved.
Companies Act 1956:

Provisions related to mergers and amalgamations contained in Sections 391 to 396A in Chapter V, Part VI of the Companies Act Section 390:
Sections deals with Arrangement that includes reorganization of the
share capital of the company

Done either by consolidation of shares of different classes or by the
division of shares into shares of different classes or both.

Section provides that unsecured creditors who may have filed suits
shall be treated at par with other unsecured creditors.

Companies Act 1956:

Section 391(1):
Deals with Compromise Is an arrangement that is carried out at the behest of the Court on an
application made by the company or any creditor or member or the liquidator where a company is being wound-up
Is generally carried out between the company and its creditors or
between a company and its members.
Companies Act 1956:

Section 393 (1):
Section deals with disclosure of terms of arrangement and
compromise Notice calling the meeting of creditors or members should clearly state the terms of arrangement and compromise and its effects Also to state any material interest of any of the top official of the company Where notice is given through an advertisement the same should give details of the place from where the copies of the statement on the terms of the arrangement and compromise can be obtained Copies to be provided by the company free of cost.
Companies Act 1956:

Section 393 (2):
Section states that if the arrangement and compromise is going to
affect the rights of the debenture holders, a statement giving information and explanation relating to the trustees of the deed for securing debenture capital needs to be given.
If the above provisions are violated the company and every officer of
the company shall be punishable with a fine that may extend up to Rs.50000/ Also any Officer required to give information on self, but fails to do so
is punishable with a fine that may extend up to Rs.5000/-.

Companies Act 1956:
Section 391 (2) to (7):

Sections state that every scheme of arrangement and compromise
should be approved by of creditors or members present and voting either in person or by proxy.
Companies Act 1956:

Section 394:
Section states that the Court has powers to sanction compromise or arrangement scheme proposed in connection with a scheme for reconstruction of the company or amalgamation of two or more companies The approval of the Court is subject to the condition that the scheme is not prejudicial to the interests of the members or to public. Sanction of the Court may provide for:

Transfer of whole or part of the property or liabilities of the transferee (target) to the transferor (acquirer) Allotment or apportionment of the shares, debentures or other like interests amongst the transferor or transferee Continuation of suit by or against the target by or against the acquirer The dissolution, without winding up, of any transferor Dissent by any person to the scheme of compromise or arrangement and be filed with the Court within stipulated time and in stipulated manner Oxford University Press 2011. All rights reserved. Matters that are necessary to carry out the scheme in a complete and effective manner
Companies Act 1956:

Once the scheme is approved, the following changes shall take:
All the property and liabilities shall stand transferred to the transferee
company
All the property that had a charge but the order frees the said
property from such a charge it should be done
Once the order is passed, the company to file a certified copy of the order with the Registrar of Companies, failing which every Officer who is at default is punishable with a fine that may extend up to Rs.500/ Oxford University Press 2011. All rights reserved.
Companies Act 1956:

Section 394 A
States that the Court should communicate the details of all the notices of compromise and arrangement to the Central Government and seek and consider the representations made by the Central Government before passing any order. Court should ensure all material facts pertaining to the company and its functioning have been duly disclosed in the application before making any order.
Companies Act 1956:

Section 394 A
Copies of the order to be :

Filed with the Registrar of Companies
Annexed with every copy of memorandum of association issued after
the copy has been filed with the Registrar.
Companies Act 1956:

Section 394 A Default in this regard punishable with fine of up to Rs.100/- for each copy where default occurs Once the Court admits the application, a stay is imposed on all suits or proceedings against the company Where a company that is a going concern , Court needs to classify creditors or members and ensure the company offers identical compromise to investors belonging to one class.. Scheme needs to be approved by the requisite majorities and it becomes binding on all the members of the company whether consented to by all or not. For ascertaining majority the members present at the meeting are counted and not the total number of members. The Court may reject the scheme if it feels that the scheme is patently fraudulent or is intended to Press cover the of the Directors Oxford University 2011. Allmisdeeds rights reserved.
Companies Act 1956:

Section 376: Section states that reconstruction or amalgamation shall be void when it is prohibited under any provision of:
The Memorandum or Articles of Association

Resolution passed in the General Body Meeting or by the Board of Directors An agreement between the company and any other person
Companies Act 1956:
Section 395:
Section deals with acquisition of shares of shareholders dissenting from the scheme or contract approved by the majority involving the transfer of shares
Powers of the Court with regards to sanctioning the scheme of amalgamation:

Court can use powers and make provisions in the order on the following matters:
Transfer of the whole or any part of the undertaking, property or
liabilities of any target to the acquirer Allotment or appropriation of any shares, debentures or other like interests in that company by the acquirer under the compromise or arrangement Any legal proceedings pending by or against each other Dissolution of the acquirers company without winding up Making provisions for any person who shows dissent to the compromise or arrangement provided such dissent has been filed within the stipulated time and in the manner prescribed Any other issues necessary to ensure that the reconstruction or amalgamation is carried out fully and effectively
Report of Registrar of Companies and the Official Liquidator needs to be considered prior to sanctioning the scheme of amalgamation or reconstruction Report should state the affairs of the company are being conducted in a manner that is prejudicial to the interest of members or the public, in general. Court can sanction the scheme with retrospective effect provided the effective date is not too far in the past for can have adverse implication for the new entity such as noncompliance of various laws
Where the entire undertaking of the transferor company is transferred to the transferee company without affecting the rights of the creditor or members and also without any reorganization of capital of the transferee company, the transferee company need not file a separate petition Approval of shareholders and creditors secured and unsecured need to be obtained in meetings convened under the directions of the Court Court to appoint a Chairperson and an alternate Chairperson for such meeting
Once the Court receives a request for the meeting it can issue directions on:
Date, time and place of meetings Appointment of chairperson for the meetings Contents of notice and the manner of service of Notice Determination of the class/classes of members and creditors whose meetings are to be held Determination of quorum Any other matter as the court may deem fit. Oxford University Press 2011. All rights reserved.
Where the transferee proves before the Court that the creditors and members have given their consent to the scheme of amalgamation with their interest not adversely affected, the Court can exercise its discretion and grant approval to the proposed scheme
Voting at Court convened meetings of members or creditors are to done through poll only.
Section 391(2) states the resolution approving the scheme of amalgamation should be passed by majority in number representing 3/4th in value of the creditors or members The strength includes members or creditors present in person or through proxies at the time of meeting Chairperson of the meeting is required to submit to the Court a report of proceedings of the meeting stating :
The number of persons present at the meeting The number of persons voting in person and through proxy The value of shares/indebted amount The votes cast in favour of the resolution and The votes cast against the resolution Oxford University Press 2011. All rights reserved.
SEBI (Buyback of Securities) Regulations, 1998

Section 77: Prohibited a limited company from buying back its own shares
Basic reason for such a prohibition was a feeling that allowing companies to buy-back their shares could give rise to companies trafficking in their own shares leading to undesirable practices in the stock market, like insider trading or other such unhealthy influences on stock prices Buy back was however possible through compliance with the provisions of and adherence to the procedure for reduction of share capital as specified under Sections 100 to 104 of the Companies Act, 1956 that involved confirmation by the Court
Amendments to Section 77:
Working Group on Companies Act, 1956 constituted by the Central Government Recommended insertion of Section 77A and 77B into the Companies Act facilitating Buy-back of shares Section 77A of the Act expanded the scope of the company and bestowed the power to a company to purchase its own securities subject to the provisions of Section 77A (2) and section 77B of the Act SEBI thereafter issued the SEBI (Buy-back of Securities) Regulation 1998 applicable to listed companies
Sources for buy-back:
Why do companies go for a Buy back?

To increase promoters holding To increase earnings per share To improve ROC, RONW and enhance shareholders value To provide an additional exit route to the shareholders in conditions
where the shares are under-valued or are thinly traded To enhance consolidation of stake in the company To utilize the surplus cash to the shareholders through buy back To achieve the objective of having an optimum capital structure To rationalize the capital structure by writing off capital not represented by assets To support the share value in the capital market by reducing the floating capital To thwart hostile takeover attempt To pay surplus cash not required by business
Why do companies go for a Buy back?
Free reserves
Share Premium account
Proceeds of any shares or other specified securities
Pre-requisites of a valid Buy-back:
Buy-back of shares authorized under the Articles of Association. If the articles are silent on this aspect the articles need to be amended as per the procedure laid down in section 31
Pass a special resolution in general meeting of the company authorizing the buy-back.
Proposal be approved by the Board of Directors by means of a Board resolution passed at its meeting. The overall limit for any buy-back of securities that may be resorted to by a company should not exceed 25% of the companys paid-up capital and free reserves.
Buy-back debt-equity ratio should be within the permissible 2:1 range. Central Government is empowered to relax the debt-equity ratio in respect of a class of companies, but not in respect of any particular company.
The shares intended to be bought back must be fully paid-up

Buyback of listed securities be done strictly in accordance with the SEBI (Buy-back of Securities) Regulations, 1998
Buyback of unlisted securities to be done in accordance with the provisions of the Private Limited Company and Unlisted Public Company (Buy-back of Securities) Rules, 1999
Section 77A (4) of the Companies Act, 1956 states buy-back is required to be completed within 12 months from:
The date of passing the special resolution or The date of passing the Board resolution or The date of declaration of the result of the postal ballot where the resolution is passed through postal ballot
Notice of the meeting containing the special resolution relating to buy-back of shares be accompanied by an explanatory statement clearly addressing the following
The necessity for buy-back The class of security intended to be purchased by the buy-back The amount to be invested under buy-back The time limit for completion of buy-back Oxford University Press 2011. All rights reserved.
Declaration of solvency needs to be filed with the Registrar and Done to guarantee the companys solvency for at least a year after the completion of buy-back Unlisted entities need not file this declaration with SEBI Post buy-back company is required to physically extinguish and destroy the securities within 7 days from the last day on which the buy-back process is completed. In case of shares in dematerialized form the same should be deleted from the records of the company
Company to maintain a register containing the particulars of the brought back securities stating consideration paid for them, the date of cancellation, the date of physically extinguishing and physically destroying securities, etc. Company cannot make a further issue of securities within a period of 6 months from the date of completion of the buy-back process although bonus shares can be issued and discharging existing obligations like conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares permitted Post buy-back process return to be filed with SEBI and the Registrar of companies in the prescribed format within a period of 30 days
Modes of Buy back :

Section 77A (5) read with Regulation 4 of SEBI (Buy-back of Securities) Regulation, 1998: Existing security-holders on a proportionate basis or
The open market through:

book building process in accordance with Regulation 17;
stock exchanges in accordance with Regulation 15; or
In odd lots where the shares of a listed company are smaller than the marketable lot Securities issued to employees of the company under stock option or sweat equity.
Prohibited modes of Buy back:

Section 77 B of the Companies Act: Through a subsidiary company including its own subsidiary company
Through any investment companies or group of investment companies. If the company has defaulted in respect of:
Repayment of deposit or interest payable thereon or Redemption of debentures or preference shares or Payment of dividend to any share holder or Repayment of any term loan or Interest payable thereon to any financial institution or bank.
Through negotiated deals, spot transactions, private Oxford University Press 2011. All rights reserved. arrangements and insider dealings.
Other provisions relating to Buy back:

Section 77 B of the Companies Act: Through a subsidiary company including its own subsidiary company
Through any investment companies or group of investment companies. If the company has defaulted in respect of:
Repayment of deposit or interest payable thereon or Redemption of debentures or preference shares or Payment of dividend to any share holder or Repayment of any term loan or Interest payable thereon to any financial institution or bank.
Through negotiated deals, spot transactions, private Oxford University Press 2011. All rights reserved. arrangements and insider dealings.
Other provisions :
The offer price should have a floor price. Floor price is determined on the basis of the average traded price of 26 weeks preceding the date of public announcement. The floor price so determined is without any ceiling of maximum price.
If the related securities are infrequently traded, the offer price shall be determined as per regulation 20(5) of the SEBI (Substantial Acquisition and Takeover) Regulations. Entire process needs to be carried out transparently
Other provisions :
If securities are being delisted, the acquirer is required to allow a further period of 6 months for any of the remaining shareholders, who have not utilized the earlier opportunity of surrendering the securities, to tender securities at the same price. Stock exchanges required to monitor the possibility of price manipulation and keep a special watch on the securities that are in the process of getting delisted. Registrar and Transfer Agent to co-operate with the Clearing Corporation to determine the quality of the genuineness of physical securities upfront.
Other provisions :
Where the quantity eligible for acquiring securities at the final price, offered does bring the public shareholding below the required level of public holding for continuous listing, the company will continue to remain listed.
Delisting of securities does not extinguish the paid up share capital

In case of partly paid-up securities, the price determined by the book building process be applicable to the extent the call Amount of consideration for the tendered and accepted securities to be settled in cash
Advantages of Buyback of Shares
Low market price

Boost to the share price
Utilizing excess cash

Infuse ESOP
Safeguard from Hostile takeover bid
Disadvantages of Buyback of Shares
Flaw in Income tax Act Flaw in legal provisions Enhancing promoters holdings Delisting of companies No restriction on number of buybacks Insider trading
SEBI (Substantial Acquisition of Shares and Takeovers), 1997
When an acquirer acquires substantial quantity of shares or voting rights of the Target Company
Acting in concert is a takeover strategy whereby individuals and companies acquire substantial number of shares in the target company in a disguised manner and thus avert legal complications. Each member acquires enough number of shares, so that individually each one remains below the threshold limit but collectively they exceed the threshold limit.
Substantial Quantity of Shares or Voting Rights
Threshold of disclosure to be made by acquirer(s)

5% or more but less than 15% shares or voting rights Threshold of disclosure to be made by acquirer(s)
Trigger point for making an open offer by an acquirer

15% shares or voting rights
Creeping acquisition limit

Consolidation of holding
Procedure for Substantial Acquisition of Shares
Public Announcement
Letter of offer Determining the Offer Price Duration of the Offer Discharging the dues of the shareholders
Listing Agreement Norms

Means admission of securities to the trading privileges/ dealings on recognized stock exchanges through a formal agreement. Listing Agreements needed when:
A Public Issue that may be an Initial Public Offering (IPO) or Further

Public Offering (FPO) Preferential Issues Issue of Indian Depository Receipts (IDRs) Amalgamation that implies mergers and acquisitions and reconstruction of companies Going ahead with Qualified Institutions Placements (QIPs)
Objectives of Listing
To provide liquidity to securities To mobilize savings for economic development To protect interest of investors by ensuring full disclosures by listed entities To provide a mechanism for effective management of trading in securities To provide cost-effective access to capital
Norms of Listing
BSE Norms:
Listing Requirements for Companies through initial public offering
(IPO) and further public offering (FPO) Listing requirements for Companies already listed on Other Stock Exchanges Requirements for Companies delisted by BSE seeking re-listing Permission to use the name of BSE in the Company's Prospectus Submission of Letter of Application Allotment of Securities Requirement of 1% Security Payment of Listing Fees Compliance with the Listing Agreement
NSE Norms of Listing
Listing in case of IPOs:

Capital requirements Adherence to legal provisions Submission of Annual Reports
No disciplinary action
Redressal Mechanism of Investor grievance Distribution of shareholding Details of Litigation
Track Record of Director(s) of the Company
NSE Norms of Listing
Listing of Securities of Existing Companies

Paid up Capital Adherence to legal provisions Documents pertaining to track record
Other Provisions
No Disciplinary action Redressal mechanism Shareholding Pattern
Details of Litigation
Track Record of Director(s) of the Company Change in Control of a Company
Benefits of Listing
Improves ability to raise additional capital Provides Liquidity Independent valuation Improves companys profile Disclosures Automated trading Regular flow information of Oxford University Press 2011. All rights reserved.
SEBI (Delisting of Securities) Guidelines, 2003
Delisting of shares
Compulsory Delisting
Delisting Exchange
Exchange
Voluntary Delisting
Applicability of Voluntary Delisting

Promoters seek voluntary delisting of the company Public shareholding falls below the minimum limit specified in the listing conditions or listing agreement as a result of any acquisition of shares of the company or scheme or arrangement Promoters of the companies voluntarily seek to delist the securities from all or some of the stock exchanges Person in control of management seeks to consolidate his holdings in a company whereby the public shareholding in the company falls below the limit specified in the listing conditions or in the listing agreement Companies are compulsorily delisted by the stock exchanges
Voluntary Delisting of Securities of a Listed Company
The securities of the company have been listed on any stock exchange for a minimum period of 3 years
The investors have been given an exit opportunity before the shares are de-listed from the stock exchange. The exit price in such cases needs to be determined in accordance with the book building process described in clauses 7-10 and 13 and 14 of the guidelines. Again an exit opportunity is not required to be given in cases where securities continue to be listed in a stock exchange having nationwide trading terminals.
Procedure for Voluntary Delisting

Pass a special resolution at the general The votes cast in favour of the delisting proposal must be at least twice the votes cast against the proposal Make an application in the specified format along with a copy of the special resolution to the Stock Exchange Public announcement Comply with the other additional conditions Acquirer must buyback adequate number of shares Acquirer needs to provide the public shareholders an exit opportunity at a price determined by the book building process
Delisting is applied for:

Buyback of equity shares initiated by the company or Any preferential allotment made by the company or A period of three years has elapsed since the listing of that class of equity shares on any recognized stock exchange or Any convertible instruments issued by the company in the same class of equity shares that are sought to be delisted are outstanding. It is not clear whether a company will be required to take approval from all the stock exchanges having nationwide terminals in case it is listed on more than one such stock exchange.
Corporate Governance Issues

Is about the whole set of legal, cultural, and institutional arrangements that determine what public corporations can do, who controls them, how that control is exercised, and how the risks and return from the activities they undertake are allocated Principles:
Honesty, trust and integrity Openness Performance Orientation
Responsibility and accountability

Mutual respect and Commitment to the organization.
Issues Covered:
Systems relating to internal controls Procedure to be followed while appointing internal auditors The independence of the companys external auditors and the quality of their audits Management of risk associated with the business Financial Statements to be prepared by the entity Procedure for reviewing the compensation of the CEO and other senior executives Resources to be made available to directors for carrying out their duties effectively The manner and procedure for nominating individuals for positions on the board Dividend policy to be adopted by the company
Non-mandatory requirements
Independence of Directors Non-Executive Directors Compensation & Disclosures Other provisions relating to Board Audit Committee Subsidiary Companies Disclosures CEO/CFO Certification Compliance Report Non-mandatory requirements
Merger is a process where one company unites with another company and ensures that the following conditions are met:
All properties are transferred to the amalgamated company.
All liabilities are transferred to the amalgamated company.

Shareholders holding at least 3/4th in the value of shares of the
amalgamating company become shareholders of the amalgamated company.

Amortization of expenditure in case of amalgamation or demerger Capital gains Special provision for computing the cost of acquisition of certain assets Transfer under Section 47 (vi a) Carry forward and set off of accumulated loss and unabsorbed depreciation Cost with reference to certain modes of acquisition Deduction of certain expenditure incurred Stamp duty aspects of M&A
Foreign Exchange Management Act, 1999

Law states
The percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the prescribed sectoral cap and The transferor company or the transferee or the new company is not engaged in activities that prohibited under the FDI policy.
Competition Act, 2002
Section 3: The section governs anti-competitive agreements and prohibits agreements that are capable of generating adverse effect on competition like:
Production Supply Distribution Storage Acquisition or control of goods or Provision of services
Section 4 Section 6
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Chapter 5 - Legal Issues

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Oxford University Press 2011. All rights reserved.

Changing Indian Scenario

Holcim Gujarat Ambuja

Provisions governing M & A:

Listing Agreement Norms

Provision of Income Tax Act, 1961

Companies Act 1956:

share capital of the company

division of shares into shares of different classes or both.

shall be treated at par with other unsecured creditors.

Companies Act 1956:

between a company and its members.

Oxford University Press 2011. All rights reserved.

Companies Act 1956:

Companies Act 1956:

is punishable with a fine that may extend up to Rs.5000/-.

Companies Act 1956:

Section 391 (2) to (7):

Oxford University Press 2011. All rights reserved.

Companies Act 1956:

Companies Act 1956:

property from such a charge it should be done

Companies Act 1956:

Oxford University Press 2011. All rights reserved.

Companies Act 1956:

Copies of the order to be :

the copy has been filed with the Registrar.

Oxford University Press 2011. All rights reserved.

Companies Act 1956:

Companies Act 1956:

The Memorandum or Articles of Association

Oxford University Press 2011. All rights reserved.

Companies Act 1956:

Oxford University Press 2011. All rights reserved.

Powers of the Court with regards to sanctioning the scheme of amalgamation:

Powers of the Court with regards to sanctioning the scheme of amalgamation:

Powers of the Court with regards to sanctioning the scheme of amalgamation:

Powers of the Court with regards to sanctioning the scheme of amalgamation:

Powers of the Court with regards to sanctioning the scheme of amalgamation:

Oxford University Press 2011. All rights reserved.

Powers of the Court with regards to sanctioning the scheme of amalgamation:

SEBI (Buyback of Securities) Regulations, 1998

Amendments to Section 77:

Sources for buy-back:

Why do companies go for a Buy back?

Why do companies go for a Buy back?

Share Premium account

Proceeds of any shares or other specified securities

Oxford University Press 2011. All rights reserved.

Pre-requisites of a valid Buy-back:

Pre-requisites of a valid Buy-back:

The shares intended to be bought back must be fully paid-up

Pre-requisites of a valid Buy-back:

Pre-requisites of a valid Buy-back:

Pre-requisites of a valid Buy-back:

Modes of Buy back :

The open market through:

Prohibited modes of Buy back:

Other provisions relating to Buy back:

Delisting of securities does not extinguish the paid up share capital

Advantages of Buyback of Shares