BUSINESS RESTRUCTURING EXERCISE WITH SPECIFIC REFERENCE TO MERGERS AND DE-MERGERS-LEGAL ASPECTS

A Presentation by Dr. J.P. Joshipura Director SLIM

CONTENTS

Introduction of New Industrial Policy, 1991 Opening up of Manufacturing & Service Sectors for Foreign Direct Investment (FDI) Rationalisation of Regulatory Environment Introduction of New Laws Amendment of existing laws for facilitating Business Restructuring

IMPORTANT MODES OF BUSINESS RESTRUCTURING COMMONLY PURSUED BY CORPORATIONS IN INDIA Mergers/ Amalgamations De-mergers Other Modes Takeover/ Acquisition of Shares or voting rights in listed/ unlisted companies Takeover/ Acquisition of Business Undertaking / Business as a whole on a going concern basis / Acquisition of Assets/ Hive off :

IMPORTANT MODES OF BUSINESS RESTRUCTURING (CONTD)

(a) on a going concern basis by way of Slump Sale; or (b) by way of itemized sale of identified assets out of the whole business.
Acquisition of Brands Re-organization of capital by buy-back of shares and reduction of capital Combinations

MERGERS/ AMALGAMATIONS

Definition of the term Merger

The term Merger is not defined under the Indian Law. Therefore, the ordinary meaning of the merger is followed in India, i.e. combination of two or more companies into a single company where one survives and the other looses its corporate existence. The survivor acquires the assets as well as liabilities of the merging company or companies.

In order to claim capital gains tax exemption, amalgamation should satisfy the conditions mentioned in Section 2(1B) of the Income Tax Act, 1961. Merger of one or more companies with another company. All the properties and liabilities of the amalgamating company shall become the property and liabilities of the amalgamated company. The shareholders holding not less than three-fourth in value of the shares in the amalgamating company becomes the shareholders of the amalgamated company by virtue of such amalgamation.

Amalgamation should be effected under the provisions of Section 391 read with Section 394 of the Companies Act, 1956 by presenting a Scheme of Amalgamation seeking sanction of the High Court. The Scheme of Amalgamation should be approved by the requisite majority, I.e. majority in number representing three-fourths in value of the shareholders and/or creditors or class of them present and vote either in person or through proxies at the meeting.

Once the scheme of amalgamation is approved by the shareholders and/or creditors, a petition is required to be made to the High Court for obtaining its confirmation. Once the High Court approves the Scheme of Amalgamation, the same is binding on all members and creditors including governmental authorities by operation of law.

ADVANTANGES OF AMALGAMATION

Sanctity of the Court Order Binding nature of the Scheme on all concerned Automatic transfer of assets, liabilities, licenses, permits, rights, duties, obligations and the like by virtue of a vesting Court Order Exemption from applicability of SEBI Takeover Code in case companies are publicly listed(Reg.3(1)(j)(ii))

Advantages (contd.) Expansion and consolidation of business Business having synergetic linkages Elimination of competition Improving liquidity and having direct access to cash resources Improving earning per share For expanding and espousing backward integration to assimilate the sources of supply and forward integration towards the market out-lets To achieve economies of scale To share common distribution of research facilities by elimination of costs.

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TAX BENEFITS IN CASE OF AMALGAMATION If the amalgamation is in accordance with Section 2(1B) of the Income Tax Act conditions, the same becomes entitled to claim tax exemption under section 47 of the Income Tax Act, 1961. Under section 76-A of the Income Tax Accumulated losses and unabsorbed depreciation of the amalgamating / transferor company is treated as the losses and allowance for depreciation of the amalgamated/ transferee company for the previous year in which the amalgamation was effected. The benefit of set-off and carried forward loss is available subject to the conditions made in section 72-A of the Income Tax Act, 1961.

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Transfer of business and undertaking of the amalgamating/ transferor company does not attract any sales tax since the transfer is on a going basis and the transfer of business by the amalgamating/ transferor company is not in its capacity as a dealer nor is the same in the ordinary course of business by the amalgamating/ transferor company. No stamp duty is charged in case of amalgamation if no immoveable property involved or in case of merger of Wholly owned Subsidiary.

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Tax benefits (contd)

Retrenchment compensation is not required to be paid to the workmen of the amalgamating/ transferor company if transfer under the amalgamation does not result in interruption or discontinuation of services of the employees of the amalgamating/ transferor company; provided the service conditions of the amalgamated/ transferee company are not in any way less favourable to such employees than those applicable to them immediately before amalgamation. Consolidation of balance sheet and profit and loss account.

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Tax benefits (contd.)

Asset liabilities and reserves of the amalgamating/ transferor company are recorded by the amalgamated/ transferee company at its existing carrying amounts under the pooling of interest method prescribed by Accounting Standard-14. Identity of the reserves is preserved as they appear in the books of the amalgamating/ transferor company. Accounting Treatment provided in the Scheme is preserved and respected by Auditors.

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Under the Foreign Exchange (Management) Act, 2003 no permission is required by the amalgamated / transferee company for issue and allotment of shares to non-resident shareholders of the amalgamating/ transferor company subject to certain conditions as prescribed in FEMA(Transfer and issue of security by persons resident outside India) Regulations, 2000 . If the company is listed on any stock exchange the conditions prescribed under the Listing Agreement are required to be complied with.

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DE-MERGERS
A de-merger is akin to a merger/ amalgamation save and except in the case of amalgamation, the amalgamating/ transferor company looses its identity as the same is dissolved without winding up under the court order whereas, in De-merger, both the transferor and the transferee company retain their separate identity. The process is virtually the same as in the case of amalgamation.

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De-merger is resorted to for achieving tax neutrality upon transfer of certain assets as in the case of merger. De-merger is a tax driven business restructuring exercise. The primary objective is to seek carry forward of accumulated loss and unabsorbed depreciation from the de-merging / transferor to the resulting/ transferee company. Saving on capital gains tax

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De-merged company separates/ hives off and transfers one of its non-core undertaking to another company either newly formed or existing under a Scheme of arrangement sanctioned by the High Court. If the de-merger satisfies the conditions contained under section 2(19AA) of the Income Tax Act, the same qualifies for tax neutrality.

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One of the essential conditions in the case of demerger is that the assets and liabilities are transferred at book value and the mirror image of the shareholding is reflected in both, the transferor and transferee company since as a consideration of such transfer, the transferee company issues shares to the shareholders of the transferor company on a proportionate basis.

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In order to qualify for a tax neutrality, the de-merged undertaking is transferred on a going concern basis and the de-merger is in accordance with the conditions, if any, notified under section 72A of the Income Tax Act. Unlike in the case of amalgamation where a valuation exercise is carried out for the purpose of issuing shares in consideration of transfer of an undertaking, in case of de-merger, strictly speaking, valuation is not required. However, the same is done for determination of adequacy of capitalization since the mirror image of shareholding is reflected in both the companies.
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TAX BENEFITS IN CASE OF DEMERGERS (Contd.) A scheme of de-merger is required to be approved by the High Court as in the case of amalgamation. Benefits of the Sales Tax Act and reduced rate of stamp duty is also available as in the case of amalgamation.

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Competition Act,2000
The Act mandates constitution of merger benches all over India exclusively to deal with combinations and the regulations of combinations. Though the Act has come into force, the appointed date for regulating combinations falling under Section 6 has yet not been notified by the Government.Section 6 requires notice of merger/combination to be given to the Competition Commission.

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PROCEDURE
Ascertain that the business, activities and operations carried on by the Transferor Company or which it intends to undertake prior to the amalgamation should be covered by the Objects Clause i.e. the Main and/or Other Objects of the Memorandum of Association of the Transferee Company. If not, then this can be achieved by providing the same in the Scheme of Amalgamation itself and, there is no need to pass a separate Special Resolution in a separate General Meeting changing the Object Clause.

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PROCEDURE
If the Transferor Company is 100% subsidiary of the Transferee Company, it will not be necessary to determine the exchange ratio. the shares held by the Transferee Company in the Transferor Company shall stand cancelled and extinguished. If valuation is required, it would be necessary to carry out a valuation exercise of the shares of each of the companies.

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PROCEDURE
Draw up a Scheme of Amalgamation .Provide following important matters amongst others: all assets and liabilities of the Transferor Company shall, with effect from a predetermined date, be transferred to and vest in the Transferee Company. for takeover of the employees of the Transferor Company by Transferee Company; merger of reserves of the Transferor Company with that of the Transferee Company and also carry forward of unabsorbed depreciation and losses to be assumed by Transferee Company for setting off; Transfer of contracts, arrangement and other agreements to Transferee Company; and Transfer of licenses, permit etc. to the Transferee Company.

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PROCEDURE
Follow Miheer H. Mafatlal v Mafatlal Industries Ltd [(1996) & Company Law Journal 124], wherein the Supreme Court has generally laid out the scope and ambit of the jurisdiction of the Company Court when called upon to sanction a scheme of compromise and/or arrangement . Follow Hindustan Lever employees Union v Hindustan Lever Limited and othersAIR 1995 S.C. 470

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PROCEDURE
Place the Scheme before the Board and seek approval of the respective Board of Directors of the Transferor Company and the Transferee Company. Inform the Stock Exchange under clause 24(f) read with 24 (g) of the BSE Listing Agreement before filing the application to the court. 30 day cooling off period. Upon NOC of BSE received file application in the High Court exercising jurisdiction over the Registered Office of the Companies.

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STEPS IN THE HIGH COURT

An application under the provisions of the Companies (Court) Rules, 1959 Seek Order for waiver/dispensation from calling the General Meeting of their respective shareholders for the purpose of approving the Scheme of Amalgamation Once the Board of Directors, the Stock Exchanges, the Shareholders, the Creditors have approved the scheme, present a petition under section 394 of the CA. At the time of admission of the Petition, the Court will, in the normal course, give directions for matters such as the following:a) date of hearing of the Petition; b) advertisement of the Petition in the newspapers. c) notice to the Central Government inviting their comments on the Scheme of Amalgamation. d) direction to the Official Liquidator to scrutinise the books and papers of the Transferor Company and to make a report to the Court on the affairs of the Transferor Companies. e) individual notices to be given to the creditors (if any), of the Companies involved.

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STEPS IN THE HIGH COURT

Following publication of the Notice of Petition in the newspapers, it would be competent for any creditor of the Companies to appear at the final hearing of the Petition before the High Court and to raise any objections he may have. After hearing all the parties concerned, the Court will make the final order of amalgamation. The effect of the Court's Order -all the assets and liabilities of the Transferor Companies will, without any further formality, vest in the Transferee Company and the Transferor Companies would stand dissolved, without having to be wound-up.

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STEPS IN THE HIGH COURT

E-File Certified copies of the Court's Order with the Registrar of Companies in Form 21 within thirty days the date of the Order issued by the High Court. Submit the Court Order sanctioning the Scheme for adjudication with the stamp Office as it is treated as deemed conveyance under Article 25(da) of the Bombay Stamp Act.

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POST MERGER COMPLIANCE

Annex a copy of the Courts Order to every copy of the Memorandum and Articles of Association of the TransfereeCompany. intimate the particulars to Government authorities, banks, creditors, customers, excise and sales tax authorities and obtain fresh licenses and certificates. Close the Register of Members of the Transferor-Company to ascertain the names of persons who are entitled to shares. Apply to stock Exchange for in-principal approval for listing of new shares under 19(2) of the SCRA. Prepare a list of persons entitled to shares in the Transferee Company. Place the list before the Board and pass necessary resolution relating to allotment. Dispose of fraction, if any, as per the Scheme.

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POST MERGER COMPLIANCE

After the allotment, issue the share certificates. Take steps to get transferred all licenses held by the Transferor Company to name of the Transferee Company. Send suitable intimation to the employees of the Transferor Company.

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THANK YOU

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