37TH MANAGEMENT SKILLS ORIENTATION PROGRAMME (MSOP)

24th September 2018 to 11th October 2018

ICSI- SOUTHERN INDIA REGIONAL COUNCIL

PROJECT REPORT

TEAM –C

October 11th, 2018

Prepared and submitted by

J NEHAL BOHRA 221178561/08/2011U SIDDHARTH 320559710/02/2010REVATHI R 320437420/06/2008

NIKITA K 320850381/08/2012NIKITA CHATRANI 350105188/08/2013

MANASWINI 340105454/08/2014SWAMINATHAN 350056275/02/2013

VENKATA KRISHNA 320673341/02/2011YASODHA 340081004/05/2014

AISHWARYA SATHISH 340056924/02/2014YOGESH 340155061/02/2015

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PREFACE

This report is prepared as per the requirement of the 37TH MANAGEMENT SKILLSORIENTATION PROGRAMME (MSOP) of SIRC - Chennai as prescribed by the Institute ofCompany Secretaries of India.

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MERGERS ANDAMALGAMATIONSPROJECT REPORT-37th MSOP Batch Team C

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ACKNOWLEDGEMENT

It gives us immense pleasure to express our gratitude to the Institute of CompanySecretaries of India for giving us this opportunity to present our project on mergers andamalgamations.

We are grateful to the Southern India Regional Council – Chennai for their constant supportand guidance. We extend our sincere gratitude to our fellow professionals and friends fortheir continuous support, encouragement and guidance.

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TABLE OF CONTENTS

S.No Topic PageNumber

1. Introduction 62. Power to Compromise or Arrangements. 7-153. Other key changes to the process of compromise or arrangement:4. Merger and Amalgamation of Companies. 16-185. Power of Central Government to Provide for Amalgamation of

Companies in Public Interest.19-20

6. Fast track mergers 21-247. Aspects to consider under the Income Tax Act, 1961 25-308. Aspects to consider under the Competition Act, 2002 31-339. Aspects in connection with Stamp duty 34-3510. Aspects under FEMA and Cross Border Mergers 36-3811. Aspects under SEBI – LODR 39-4012. Accounting Treatment : Overview 41-4613. Minority Buyout 47-4914. Role of a Company Secretary in M & A 50-5115. Conclusion 52

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INTRODUCTION

The Companies Act, 2013 appears to be opening new and simple avenues for mergers,acquisitions and restructuring operations in India. While the Act retains the old provisions, italso adds robust and progressive new ones. Changes made in it are likely to have a positiveimpact on the manner in which corporate structuring is undertaken in India due to numerousprocedural changes.

The 2013 Act seeks to simplify the overall process of acquisitions, mergers andrestructuring, facilitate domestic and cross-border mergers and acquisitions, and thereby,make Indian firms relatively more attractive to PE investors. While some of the changes tolook for at the conceptual level include merger/demerger processes, cross-border and fasttrack mergers between small companies and holdings, subsidiaries and provisions relatingto minority shareholders’ protection and exits, among others, a lot still needs to be done interms of provision of increased clarity on some critical areas and the overall interplay of the2013 Act with other laws.

However, pending notification of the sections and rules in relation to restructuring andabsence of transitional provisions has led to concern within industry and professionalsengaged in restructuring in the corporate world. The 2013 Act provides for the constitution ofthe National Company Law Tribunal (NCLT) as the single authority for all schemes relatingto restructuring. However, there is no clarity on the time that will be taken for the NCLT to beconstituted and become operational. Practical difficulties are expected in implementation ofprovisions relating to restructuring till the MCA provides clarity on these issues.

This project report looks at some key provisions relating to mergers, compromises andarrangements in the 2013 Act and provides a quick impact analysis of these.

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Power to make Compromise or Arrangements

MCA vide notification dated 14th Dec, 2016 has issued rules i.e. The Companies(Compromises, Arrangements and Amalgamations) Rules, 2016. These rules will beeffective from 15th December, 2016. Consequently, w.e.f. 15.12.2016 all the matters relatingto Compromises, Arrangements, and Amalgamations (hereafter read as “CAA”) will be dealtas per provisions of Companies Act, 2013 and The Companies (Compromises,Arrangements, and Amalgamations) Rules, 2016.

As per the latest rules below mentioned will be process of Compromise and arrangement.

1. Between whom the Compromise & Arrangement can propose: Section 230(1)

1. between a company and its creditors or any class of them; or2. between a company and its members or any class of them

2. Who can file the application for Compromise & Arrangement can propose: Section230(1)

An application for Compromise & Arrangement can be file with Tribunal (NCLT) byfollowings:

1. The Company or2. Creditor or3. Member of the Company, or4. In the case of a company which is being wound up, of the Liquidator.

Joint Application: Rule 3(2)

Where more than one company is involved in a scheme, such application may, at thediscretion of such companies, be filed as a joint-application.

Conditions for serving of application, in situation where application is not served bythe Company: Rule 3(3)

Where the application is not filed by the Company then, At least 14 days before the datefixed for the hearing of the notice by the tribunal-

A copy of notice of admission and of the affidavit shall be served on the Company, or, Where the company is being wound up, on its liquidator.

The applicant shall also disclose to the Tribunal in the application under sub-rule (1), thebasis on which each class of members or creditors has been identified for the purposes ofapproval of the scheme. [Rule 3(4)]

3. Format of Application

Application to the tribunal for Compromise & Arrangement will be submitted in formno. NCLT-1 along with following documents: Rule 3(1)

a) A notice of admission in Form No. NCLT-2

b) An affidavit in form no. NCLT-6

c) A copy of Scheme of C&A

d) A disclosure in form of affidavit including following points Section 230(2)

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– All material facts relating to the company, such as

i. the latest financial position of the company,

ii. the latest auditor’s report on the accounts of the company and

iii. the pendency of any investigation or proceedings against the company

– Reduction of share capital of the company, if any, included in the compromise orarrangement

e) Any scheme of Corporate Debt Restructuring consented to by not less than seventy fiveper cent of the secured creditors in value, including

i. A Creditor’s Responsibility statement in the form No. CAA-1.

ii. safeguards for the protection of other secured and unsecured creditors;

iii. report by the auditor that the fund requirements of the company after the corporate debtrestructuring as approved shall conform to the liquidity test based upon the estimatesprovided to them by the Board;

iv. where the company proposes to adopt the corporate debt restructuring guidelinesspecified by the Reserve Bank of India, a statement to that effect; and

v. a valuation report in respect of the shares and the property and all assets, tangible andintangible, movable and immovable, of the company by a registered valuer.

f) The applicant shall also disclose to the Tribunal in the application, the basis on which eachclass of members or creditors has been identified for the purposes of approval of thescheme.

4. Calling of Meeting by Tribunal:

Upon hearing of the application Tribunal shall, unless it thinks fit for any reason to dismissthe application, give such directions / order as it may think necessary in respect meeting ofthe creditors or class of creditors, or of the members or class of members, as the case maybe, to be called, held and conducted in such manner as prescribed in rule 5 of CAA Rules,2016 as follow:

i. Fixing the time and place of the meeting or meetings;

ii. Appointing a Chairperson and scrutinizer for the meeting or meetings to be held,as the case may be and fixing the terms of his appointment includingremuneration;

iii. Fixing the quorum and the procedure to be followed at the meeting or meetings,including voting in person or by proxy or by postal ballot or by voting throughelectronic means;

iv. Determining the values of the creditors or the members, or the creditors ormembers of any class, as the case may be, whose meetings have to be held;

v. Notice to be given of the meeting or meetings and the advertisement of suchnotice;

vi. Notice to be given to sectoral regulators or authorities as required under sub-section (5) of section 230;

vii. The time within which the chairperson of the meeting is required to report theresult of the meeting to the Tribunal; and

viii. Such other matters as the Tribunal may deem necessary.

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5. Notice of Meeting: The Notice of the meeting pursuant to the order of tribunal to be givein Form No. CAA-2.

Person entitled to receive the notice The notice shall be sent individually to each of theCreditors or Members and the debenture-holders at the address registered with thecompany.

Person authorized to send the notice:

Chairman of the Company, or If tribunal so direct- by the Company or its liquidator or by any other person

Modes of Sending of notice:

By Registered post, or by Speed post, or by courier, or By e-mail, or by hand delivery, or by any other mode as directed by the tribunal

Documents to be send along with notice: The notice of meeting send with (i) Copy ofScheme of C&A and (ii) Following below mentioned details of C&A if not included in the saidscheme:

a. Details of the order of the Tribunal directing the calling, convening and conducting of themeeting:-

Date of the Order; Date, time and venue of the meeting.

b. Details of the company including:

Corporate Identification Number (CIN) or Global Location Number (GLN) of the company; Permanent Account Number (PAN); Name of the company; Date of incorporation; Type of the company (whether public or private or one person company); Registered office address and e-mail address; Summary of main object as per the memorandum of association; and main business carried

on by the company; Details of change of name, registered office and objects of the company during the last five

years; Name of the stock exchange (s) where securities of the company are listed, if applicable; Details of the capital structure of the company including authorised, issued, subscribed and

paid up share capital; and Names of the promoters and directors along with their addresses.

c. Relationship in case of Combined Application: if the scheme of compromise orarrangement relates to more than one company, then the fact and details of any relationshipsubsisting between such companies who are parties to such scheme of compromise orarrangement, including holding, subsidiary or of associate companies.

d. Disclosure about effect of C&A on material interests of directors, Key ManagerialPersonnel (KMP) and debenture trustee

e. Details of Board Meeting:

The name of the directors who did not vote or participate on such resolution The name of the directors who voted against the resolution and The name of the directors who voted in favour of the resolution, The date of the board meeting at which the scheme was approved by the board of directors

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f. Explanatory Statement disclosing details of the scheme of compromise or arrangementincluding:

parties involved in such compromise or arrangement; in case of amalgamation or merger, appointed date, effective date, share exchange ratio (if

applicable) and other considerations, if any; summary of valuation report (if applicable) including basis of valuation and fairness opinion

of the registered valuer, if any, and the declaration that the valuation report is available forinspection at the registered office of the company;

details of capital or debt restructuring, if any; rationale for the compromise or arrangement; benefits of the compromise or arrangement as perceived by the Board of directors to the

company, members, creditors and others (as applicable); Amount due to unsecured creditors.

g. Disclosure about the effect of the compromise or arrangement on: Section 230(3)

Key Managerial Personnel; Directors; Promoters; Non-Promoter Members; Depositors; Creditors; Debenture holders; Deposit trustee and debenture trustee; Employees of the company:

h. Below Mentioned Details: Following below mentioned details

Investigation or proceedings, if any, pending against the company under the Act. details of approvals, sanctions or no-objection(s), if any, from regulatory or any other

governmental authorities required, received or pending for the proposed scheme ofcompromise or arrangement

a statement to the effect that the persons to whom the notice is sent may vote in the meetingeither in person or by proxies, or where applicable, by voting through electronic means

A copy of the valuation report, if any.

i. Details of availability of documents: Details of the availability of the following documents forobtaining extract from or for making or obtaining copies of or for inspection by the membersand creditors, namely

Latest audited financial statements of the company including consolidated financialstatements;

Copy of the order of Tribunal in pursuance of which the meeting is to be convened or hasbeen dispensed with;

copy of scheme of compromise or arrangement; Contracts or agreements material to the compromise or arrangement; The certificate issued by Auditor of the company to the effect that the accounting treatment,

if any, proposed in the scheme of compromise or arrangement is in conformity with theAccounting Standards prescribed under Section 133 of the Companies Act, 2013; and

Such other information or documents as the Board or Management believes necessary andrelevant for making decision for or against the scheme;

6. Advertisement of Notice of Meeting: The Notice of the meeting shall be advertisedin form No. CAA-2 at lease in one English Newspaper and in at least one vernacular

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language newspaper. it shall indicate the time within which copies of the compromise orarrangement shall be made available to the concerned persons free of charge from theregistered office of the company

Such Newspaper shall be published on the website of the company at least 30 days beforethe date fixed for meeting, as directed by tribunal. Section 230(3)

In case of Listed Company, such notice and other documents shall also be published on thewebsite of SEBI and stock exchange, where securities of the Company are listed.

7. Notice to Statutory Authorities: Section 230(5) and Rule 8

A notice in Form No CAA-3 along with Copy of Scheme of C&A, the explanatory statementand Disclosures mentioned in point No.5 above, shall also be sent to followings:

The Central Government, The Registrar of Companies and The income-tax authorities, in allcases

The Reserve Bank of India, the Securities and Exchange Board of India, the CompetitionCommission of India, and the stock exchanges, as may be applicable.

Other Sectoral Regulators or authorities, as required by Tribunal.Notice shall be sent to the office of the authority after sending of notice to members orcreditors of the Company by Registered post, or by Speed post, or by courier, or by handdelivery.

Representation by authority:

The authority desire to make any representation then shall sent to the tribunal within a periodof 30 days from the date of receipt of such notice.

Copy of such representation shall simultaneously be sent to the concerned companies In case of no representation within the 30 days then presumed that authority doesn’t have

any representation.

8. Voting:

The persons to whom the notice is sent may vote in the meeting either themselves orthrough [8]proxies or by postal ballot to the adoption of the compromise orarrangement within one month from the date of receipt of such notice. Section 230(4) Rule 9

Right of Objections: Section 230(4)

Any objection to the compromise or arrangement shall be made only by

Persons holding not less than 10% (Ten Percent). of the shareholding or Having outstanding debt amounting to not less than five per cent. of the total outstanding

debt as per the latest audited financial statementOther Conditions for C&A:

I. Copy of Compromise or arrangement to be furnished by the company:

The Company on the requisition of the creditors or members entitled to attend meeting shallfurnish a copy of scheme of C&A and copy of statement required to furnish in section230(2)(c) with in one day of requisition.

II. Affidavit of Service:

Liability to Service: The Chairperson appointed for the meeting of the company or otherperson directed to issue the advertisement and the notices of the meeting.

[9]Above mentioned shall file an affidavit before the Tribunal at least seven days before thedate fixed for the meeting or the date of the first of the meetings, as the case may be, stating

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that the directions regarding the issue of notices and the advertisement have been dulycomplied with.

SECOND STEP- Result of Meeting

III. Copy of Compromise or arrangement to be furnished by the company:

Method of Voting: The voting at the meeting or meetings held in pursuance of thedirections of the Tribunal on all resolutions shall take place by poll or by voting throughelectronic means.

The report of the result of the meeting shall be in Form No. CAA.4 and shall state accurately

The number of creditors or class of creditors or The number of members or class of members, as the case may be,o who were present ando who voted at the meeting either in person or by proxy, ando Where applicable, who voted through electronic means, their individual values and the way

they voted.IV. Report of the result of the meeting by Chairperson: – [10]The Chairperson of themeeting shall, within the time fixed by the Tribunal, or where no time has been fixed, within 3(Three) days after the conclusion of the meeting, submit a report to the Tribunal on the resultof the meeting in Form No. CAA.4.

V. Binding of approval: Section 230(6)

Where, at a meeting majority of persons representing three-fourths in value of the creditors,or class of creditors or members or class of members, as the case may be, voting in personor by proxy or by postal ballot, agree to any compromise or arrangement AND if suchcompromise or arrangement is sanctioned by the Tribunal by an order.

The same shall be binding on the company, all the creditors, or class of creditors ormembers or class of members, as the case may be, or, in case of a company being woundup, on the liquidator and the contributories of the company.

THIRD STEP- Order of Tribunal

After completion of the Voting and report of result of the meeting by the chairman to thetribunal next step will be confirmation of C&A form the Tribunal (NCLT).

VI. Petition for confirming compromise or arrangement Rule 15

The Company shall, within 7 (seven) days of the filing of the report by the Chairperson,present a petition to the Tribunal in Form No. CAA.5 for sanction of the scheme ofcompromise or arrangement. The petitioner will pray for the appropriate orders anddirections from the Tribunal.

Right of Creditor to file the petition: Where the company fails to present the petition forconfirmation of the compromise or arrangement as aforesaid, it shall be open to any creditoror member as the case may be, with the leave of the Tribunal, to present the petition and thecompany shall be liable for the cost thereof.

VII. Notice of Hearing by Tribunal Rule 16; The Tribunal shall fix a date for the hearing of thepetition.

Legal Responsibility of the Tribunal: The notice of the hearing of the petition shall also beserved by the Tribunal ;

To the Objectors or To Their Representatives under sub-section (4) of section 230 of the Act and To the Central Government and

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Other Authorities who have made representation under rule 8 and have desired to be heardin their representation.

Publication of the Notice:

The notice of the hearing shall be advertised in the same newspaper in which the notice ofthe meeting was advertised or in such other newspaper as the Tribunal may direct, at leastten days before the date fixed for the hearing.

VIII. Order by Tribunal Rule 17;

Where the Tribunal sanctions the compromise or arrangement, the order shall be in FormNo. CAA. 6. The order shall include such directions in regard to any matter or suchmodifications in the compromise or arrangement as the Tribunal may think fit to make for theproper working of the compromise or arrangement.

Filing of Order of Tribunal: Section 230(8) Rule 17(2)

The order of the Tribunal shall be filed with the Registrar by the company within a period ofthirty days of the receipt of the copy of order, or such other time as may be fixed by theTribunal.

Power of Tribunal

If the Tribunal is satisfied that the compromise or arrangement sanctioned under section 230cannot be implemented satisfactorily with or without modifications, and the company isunable to pay its debts as per the scheme, it may make an order for winding up the companyand such an order shall be deemed to be an order made under section 273

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Other key changes to the process of compromise or arrangement

The 2013 Act provides that a notice for a meeting for the scheme should be sent to theCentral Government (i.e., the Regional Director, Registrar of Companies (ROC), the OfficialLiquidator (OL), Income Tax authorities, the RBI, SEBI, the Competition Commission of India(CCI) and other sectoral regulators for their comments/ suggestions/ objections within 30days. In case no representation is made within 30 days, it will be presumed that they haveapproved the scheme. Although the relevant section has not been notified, the MCA is takingsteps to increase the role of other authorities in implementation of such schemes. In a recentcircular, the MCA has clarified that the RD will invite specific comments from the Income Taxdepartment within 15 days of receipt of the notice before filing his response to the Court.Furthermore, the RD will also consider the feedback required from any sectoral regulator if itappears necessary to him. Additionally, the Bombay High Court (in its recent order) gavespecific instructions and detailed timelines to be followed during the RD process afteradmission of a petition, restricting the timeline from the date of service of petition on the RDto the date of filing of an affidavit by the RD in the High Court. However, whether the otherjurisdictional High Courts adopt a similar approach is a wait and watch game.

The 2013 Act envisages a paradigm shift in the process of compromise/arrangement. Itenvisages that all the powers and functions of the Company Law Board, Company CourtBIFR under the Sick Industrial Companies Act will henceforth be exercised by the NCLT.Establishment of a single forum, which is dedicated to corporate matters, is a welcomemove, and removes the problem of multiple regulators. However, setting up of such quasi-judicial tribunals has been a constant point of litigation, either on its legal competence ornon-compliance with the provisions of the NCLT with the principles laid down in the pastApex Court ruling. A recent petition filed in the Apex Court (against the formation of theNCLT) has delayed the process of recruiting judicial and technical members of the NCLT,which could mean further deferral in setting up of the NCLT, which found its way into the2013 Act after almost a decade of a legal battle.

Furthermore, with a view to reduce the timelines involved in a restructuring exercise, the2013 Act has introduced a minimum threshold for raising objections to the scheme ofarrangement, i.e., only persons holding a 10% shareholding or with a minimum outstandingdebt of 5% can object to the scheme. These limits may be considered high, especially in thecase of listed companies, where the minority would need to commit substantial effort inpooling stakes if they are to raise valid objections, unless a large institutional shareholdertakes up the cause. However, it provides a safeguard against frivolous litigations byshareholders with negligible stakes (which happens in many schemes), thereby avoidingunnecessary delays.

The 2013 Act also empowers the NCLT to dispense with meetings of creditors if at least90% of the creditors in value agree and confirm this by affidavit, thereby reducing thediscrepancy in practice followed by different High Courts while granting their approval on thebasis of consent letters obtained. However, there is the absence of an explicit provision fordispensation from shareholders’ meetings.

The 2013 Act also requires the valuation report for the share swap ratio to be sent along withthe notice for the meeting to all stakeholders, as is currently applicable to listed companies,

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thereby opening doors for larger scrutiny on the share swap ratio by shareholders, even inthe case of unlisted companies.

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Merger and Amalgamation of Companies.

Section 232 – Merger and amalgamation of companies Sub-section (1): Tribunal’s power tocall meeting of creditors or members, with respect to merger or amalgamation of companies.

Section 232(1) states that when an application is made to the Tribunal under section 230 forthe sanctioning of a compromise or an arrangement proposed between a company and anysuch persons as are mentioned in that section, and it is shown to the Tribunal— (a) that thecompromise or arrangement has been proposed for the purposes of, or in connection with, ascheme for there construction of the company or companies involving merger or theamalgamation of any two or more companies; and (b) that under the scheme, the whole orany part of the undertaking, property or liabilities of any company (hereinafter referred to asthe transferor company) is required to be transferred to another company (hereinafterreferred to as the transferee company), or is proposed to be divided among and transferredto two or more companies, the Tribunal may on such application, order a meeting of thecreditors or class of creditors or the members or class of members, as the case may be, tobe called, held and conducted in such manner as the Tribunal may direct and the provisionsof sub-sections (3) to (6) of section 230 shall apply mutatis mutandis.

Sub-section (2) Circulation of documents for members/creditors meeting.

Section 232(2) states that when an order has been made by the Tribunal under sub-section(1), merging companies or the companies in respect of which a division is proposed, shallalso be required to circulate the following for the meeting so ordered by the Tribunal,namely:

(a) the draft of the proposed terms of the scheme drawn up and adopted by the directors ofthe merging company;

(b) confirmation that a copy of the draft scheme has been filed with the Registrar;

(c) a report adopted by the directors of the merging companies explaining effect ofcompromise on each class of shareholders, key managerial personnel, promotors and non-promoter shareholders laying out in particular the share exchange ratio, specifying anyspecial valuation difficulties;

(d) the report of the expert with regard to valuation, if any;

(e) a supplementary accounting statement if the last annual accounts of any of the mergingcompany relate to a financial year ending more than six months before the first meeting ofthe company summoned for the purposes of approving the scheme.

Sub-section (3): Sanctioning of scheme by tribunal Section 232(3) states that the Tribunal,after satisfying itself that the procedure specified in sub-sections (1) and (2) has beencomplied with, may, by order, sanction the compromise or arrangement or by a subsequentorder, make provision for the following matters, namely:—

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(a) the transfer to the transferee company of the whole or any part of the undertaking,property or liabilities of the transferor company from a date to be determined by the partiesunless the Tribunal, for reasons to be recorded by it in writing, decides otherwise;

(b) the allotment or appropriation by the transferee company of any shares, debentures,policies or other like instruments in the company which, under the compromise orarrangement, are to be allotted or appropriated by that company to or for any person: Notransferee company can hold shares in its own name or under any trust A transfereecompany shall not, as a result of the compromise or arrangement, hold any shares in its ownname or in the name of any trust whether on its behalf or on behalf of any of its subsidiary orassociate companies and any such shares shall be cancelled or extinguished;

(c) the continuation by or against the transferee company of any legal proceedings pendingby or against any transferor company on the date of transfer;

(d) dissolution, without winding-up, of any transferor company;

(e) the provision to be made for any persons who, within such time and in such manner asthe Tribunal directs, dissent from the compromise or arrangement;

(f) where share capital is held by any non-resident shareholder under the foreign directinvestment norms or guidelines specified by the Central Government or in accordance withany law for the time being in force, the allotment of shares of the transferee company to suchshareholder shall be in the manner specified in the order;

(g) the transfer of the employees of the transferor company to the transferee company;

(h) when the transferor company is a listed company and the transferee company is anunlisted company,— (A) the transferee company shall remain an unlisted company until itbecomes a listed company; (B) if shareholders of the transferor company decide to opt out ofthe transferee company, provision shall be made for payment of the value of shares held bythem and other benefits in accordance with a pre-determined price formula or after avaluation is made, and the arrangements under this provision may be made by the Tribunal:The amount of payment or valuation under this clause for any share shall not be less thanwhat has been specified by the Securities and Exchange Board under any regulationsframed by it;

(i) where the transferor company is dissolved, the fee, if any, paid by the transferor companyon its authorised capital shall be set-off against any fees payable by the transferee companyon its authorised capital subsequent to the amalgamation; and

(j) such incidental, consequential and supplemental matters as are deemed necessary tosecure that the merger or amalgamation is fully and effectively carried out: No compromiseor arrangement shall be sanctioned by the Tribunal unless a certificate by the company’sauditor has been filed with the Tribunal to the effect that the accounting treatment, if any,proposed in the scheme of compromise or arrangement is in conformity with the accountingstandards prescribed under section 133.

Sub-section (4) Transfer of property or liabilities

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Sub-section (4) stares that an order under this section provides for the transfer of anyproperty or liabilities, then, by virtue of the order, that property shall be transferred to thetransferee company and the liabilities shall be transferred to and become the liabilities of thetransferee company and any property may, if the order so directs, be freed from any chargewhich shall by virtue of the compromise or arrangement, cease to have effect.

Sub-section (5): Certified copy of the order to be filed with the registrar Section 232(5) statesthat every company in relation to which the order is made shall cause a certified copy of theorder to be filed with the Registrar for registration within thirty days of the receipt of certifiedcopy of the order

Sub Section (6): Effective date of the scheme. Section 232(6) states that the scheme underthis section shall clearly indicate an appointed date from which it shall be effective and thescheme shall be deemed to be effective from such date and not at a date subsequent to theappointed date.

Sub-section (7): Annual statement certified by CA/CS/CWA to be filed with registrar everyyear until the completion of the scheme.

Section 232 (7) states that every company in relation to which the order is made shall, untilthe completion of the scheme, file a statement in such form and within such time as may beprescribed with the Registrar every year duly certified by a chartered accountant or a costaccountant or a company secretary in practice indicating whether the scheme is beingcomplied with in accordance with the orders of the Tribunal or not.

Sub-section (8): Punishment

Section 232(8) states that if a transferor company or a transferee company contravenes theprovisions of this section, the transferor company or the transferee company, as the casemay be, shall be punishable with fine which shall not be less than one lakh rupees but whichmay extend to twenty-five lakh rupees and every officer of such transferor or transfereecompany who is in default, shall be punishable with imprisonment for a term which mayextend to one year or with fine which shall not be less than one lakh rupees but which mayextend to three lakh rupees, or with both.

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Power of Central Government to provide for amalgamation of companies in publicinterest

Sub-section (1): Power of Central Government to provide for amalgamation ofCompanies

Section 237(1) states that when the Central Government is satisfied that it is essential in thepublic interest that two or more companies should amalgamate, the Central Governmentmay, by order notified in the Official Gazette, provide for the amalgamation of thosecompanies into a single company with such constitution, with such property, powers, rights,interests, authorities and privileges, and with such liabilities, duties and obligations, as maybe specified in the order.

Continuation of legal proceedings.

Section 237 (2) states that the order under sub-section (1) may also provide for thecontinuation by or against the transferee company of any legal proceedings pending by oragainst any transferor company and such consequential, incidental and supplementalprovisions as may, in the opinion of the Central Government, be necessary to give effect tothe amalgamation.

Interest or rights of members, creditors, debenture holders not to be affected.

As per Section 237(3), every member or creditor, including a debenture holder, of each ofthe transferor companies before the amalgamation shall have, as nearly as may be, thesame interest in or rights against the transferee company as he had in the company of whichhe was originally a member or creditor, and in case the interest or rights of such member orcreditor in or against the transferee company are less than his interest in or rights againstthe original company, he shall be entitled to compensation to that extent, which shall beassessed by such authority as may be prescribed and every such assessment shall bepublished in the Official Gazette, and the compensation so assessed by such authority asmay be prescribed and every such assessment shall be published in the Official Gazette,and the compensation so assessed shall be paid to the member or creditor concerned by thetransferee company.

Sub-section 4: Appeal to tribunal

As per Section 237 (4) Any person aggrieved by any assessment of compensation made bythe prescribed authority under sub-section (3) may, within a period of thirty days from thedate of publication of such assessment in the Official Gazette, prefer an appeal to theTribunal and thereupon the assessment of the compensation shall be made by the Tribunal.

Sub-section 5: Conditions for order

As per Section 237 (5) No order shall be made under this section unless—

(a) a copy of the proposed order has been sent in draft to each of the companies concerned;

(b) the time for preferring an appeal under sub-section (4) has expired, or where any suchappeal has been preferred, the appeal has been finally disposed off; and

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(c) the Central Government has considered, and made such modifications, if any, in the draftorder as it may deem fit in the light of suggestions and objections which may be received byit from any such company within such period as the Central Government may fix in thatbehalf, not being less than two months from the date on which the copy aforesaid is receivedby that company, or from any class of shareholders therein, or from any creditors or anyclass of creditors thereof. Sub-section 6: As per Section 237 (6) the copies of every ordermade under this section shall, as soon as may be after it has been made, be laid beforeeach House of Parliament.

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Fast Track Merger

SECTION 233 OF COMPANIES ACT, 2013

{Rule 25 of Companies (Compromises, Arrangements and Amalgamations) Rules,2016}

Fast Track Merger (FTM) is a new concept introduced under the Companies Act, 2013. It isunique concept because High Court approval is not required in this Merger, only RegionalDirectors (Powers of Central Government delegated to Regional Director vide NotificationNo. S.O. 4090(E) dated 19th December, 2016), Registrar of Companies and OfficialLiquidator are the authorities whose approval is required.

In Fast Track Merger, a scheme of merger or amalgamation may be entered into between:

i. two or more small companies, orii. a holding company and its wholly-owned subsidiary company, oriii. Such other class or classes of companies as may be prescribed. (No such other

Companies are prescribed yet)

Small Company:

Section 2(85) of the Companies Act, 2013 “Small company” means a company, other than apublic company,-

(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount asmay be prescribed which shall not be more than five crore rupees; and

(ii) turnover of which as per its last profit and loss account does not exceed two crore rupeesor such higher amount as may be prescribed which shall not be more than twenty

STEPS FOR THE FAST TRACK MERGER (FTM):

1. Check the Articles of Association of the respective companies involved in the merger,whether there is clause to merge the business of the Companies with the othercompanies, if not then, first of all, alter the AOA of the Companies.

2. Call the Board Meeting and Prepare the Draft Scheme of Amalgamation or Merger.

3. Conduct Board Meeting and do the followings:

a) Get the Draft scheme approvedb) b. Authorized any director or Company Secretary or any other person to do

such acts in this regard.c) c. Prepare the Statement of Assets and Liabilities of the Companies which

reveals the current position of the Companies and receive the Auditor’sReport on the Statement.

4. Send a notice in Form CAA-9 of the proposed scheme inviting objections orsuggestions, if any, within 30 days of issuing the notice from the Registrar andOfficial Liquidators where registered office of the respective companies are situatedor persons affected by the scheme with the attachments are given below:

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a) Scheme of Merger or Amalgamationb) Pre and post Merger Shareholding of the Transferee Companyc) Last 3 years Audited financial statements with Auditors report thereon filed

to ROCd) MOA and AOAe) Board Resolutionf) Valuations report for Share Exchange ratio from the registered Valuer, in

case of Wholly Owned Subsidiary Company, no need of Valuation report.

Note: To ROC and OL, the Notice in CAA-9 shall be submitted via hand delivery. Andto Person affected by the scheme (i.e. Income Tax Department, RBI, SEBI,Respective Stock Exchange, CCI, if necessary, or other sectoral regulators orauthorities which are likely to be affected), the notice shall be served via post orspeed post or via courier.

5. The objection or suggestions shall be given by ROC, OL or Person affected by theScheme within 30 days of serving notice to the RD and authorized representative ofTransferor Company.

6. each of the companies involved in the merger files a declaration of solvency in theForm CAA-10 with the ROC of the place where the registered office of the companyis situated along with the fee as provided in the Companies (Registration offices andfees) Rules, 2014 before convening the meeting of members and Creditors forapproval of the Scheme. The attachments are:

a) Board Resolutionb) Statement of Assets and liabilitiesc) Auditors report on the statement of Assets and Liabilities Note: Currently, this

form is not available as e-form, so it may be filed in GNL-2 or may be filed at thetime of submission of File as an annexure of the Scheme of merger oramalgamation.

7. After getting objections or suggestions call a Board meeting and amend the DraftScheme and consider the Day, Date, Time and Place for General Meeting andCreditors Meeting. If no such objections or suggestion received, then get the schemeapproved without alteration and do the further proceeding for the Meeting ofMembers and Creditors.

8. Send the notice of the meeting to the members and creditors shall be accompaniedby- a. a statement, as far as applicable, referred to in sub-section (3) of section 230of the Act read with sub-rule (3) of rule 6 hereof; b. the declaration of solvency filed inForm CAA-10 c. a copy of the scheme.

9. Conduct General Meeting and get the scheme approved by the respective membersor class of members at a general meeting holding at least 90 per cent of the totalnumber of shares. (Note: The meeting should be conducted after 30 days of thesending Notice in CAA-9, so that the objections or suggestions shall be considered).

10. Conduct Creditors Meeting by giving a notice of 21 days along with the aboveattachments (point no. 6) and get the scheme approved by majority representing ninetenths in value of the creditors or class of creditors of respective companies orotherwise approved in writing.

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11. The Transferee company shall, within seven days after the conclusion of the meetingof members or class of members or creditors or class of creditors, file a copy of thescheme as agreed to by the members and creditors, along with a report of the resultof each of the meetings in Form No. CAA.11 with the following:

a) Regional Directors along with the fees as provided under the Companies(Registration Offices and Fees) Rules, 2014. (file shall be submitted via handdelivery along with payment challan)

b) Copy of the scheme shall also be filed, along with Form No. CAA. 11 with theRegistrar of Companies in Form No. GNL-1 along with fees provided underthe Companies (Registration Offices and Fees) Rules, 2014; and

c) the Official Liquidator through hand delivery or by registered post or speedpost.

12. The objections or suggestions shall be given by ROC and OL to the RD within 30days of the filing the Form CAA-11.

13. Where no objection or suggestion is received to the scheme from the Registrar ofCompanies and Official Liquidator or where the objection or suggestion of Registrarand Official Liquidator is deemed to be not sustainable and the Regional Directors isof the opinion that the scheme is in the public interest or in the interest of creditors,the Regional Directors shall issue a confirmation order of such scheme of merger oramalgamation in Form No. CAA.12.Note: If no such communication is made, it shall be presumed that he has noobjection to the scheme.

14. Where objections or suggestions are received from the ROC and OL and theRegional Directors is of the opinion, whether on the basis of such objections orsuggestions or otherwise, that such a scheme is not in public interest or in theinterest of the creditors, it may file an application before the Tribunal in form CAA-13within a period of 60 days of the receipt of the scheme stating its objections oropinion and requesting that the Tribunal may consider the scheme under section 232of the Companies Act, 2013.

15. On receipt of an application from the Regional Directors or from any person, if theTribunal, for reasons to be recorded in writing, is of the opinion that the schemeshould be considered as per the procedure laid down in section 232, the Tribunalmay direct accordingly or it may confirm the scheme by passing such order as itdeems fit. Note: If the Regional Directors do not have any objection to the scheme orit does not file any application under this section before the Tribunal, it shall bedeemed that it has no objection to the scheme.

16. The confirmation order of the scheme issued by the Regional Directors or Tribunalshall be filed, within 30 days of the receipt of the order of confirmation, in Form INC-28 along with the fees as provided under Companies (Registration Offices and Fees)Rules, 2014 with the Registrar of Companies having jurisdiction over the transfereeand transferor companies respectively.

17. It is clarified that with respect to schemes of Merger or Amalgamation falling withinthe purview of section 233 of the Act, the concerned companies may, at theirdiscretion, opt to undertake such schemes under sections 230 to 232 of theCompanies Act, 2013, including where the condition prescribed in clause (d) of sub-section (1) of section 233 of the Act has not been met.

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POST MERGER EFFECT:

1. The registration of the scheme shall be deemed to have the effect of dissolution of thetransferor company without process of winding-up.

2. The registration of the scheme shall have the following effects:

a) transfer of property or liabilities of the transferor company to the transferee companyso that the property becomes the property of the transferee company and theliabilities become the liabilities of the transferee company;

b) the charges, if any, on the property of the transferor company shall be applicableand enforceable as if the charges were on the property of the transferee company;

c) legal proceedings by or against the transferor company pending before any court oflaw shall be continued by or against the transferee company; and

d) where the scheme provides for purchase of shares held by the dissentingshareholders or settlement of debt due to dissenting creditors, such amount, to theextent it is unpaid, shall become the liability of the transferee company.

3. A transferee company shall not on merger or amalgamation, hold any shares in its ownname or in the name of any trust either on its behalf or on behalf of any of its subsidiary orassociate company and all such shares shall be cancelled or extinguished on the mergeror amalgamation.

4. The transferee company shall file an application with the Registrar along with the schemeregistered, indicating the revised authorised capital and pay the prescribed fees due onrevised capital: Provided that the fee, if any, paid by the transferor company on itsauthorised capital prior to its merger or amalgamation with the transferee company shallbe set-off against the fees payable by the transferee company on its authorised capitalenhanced by the merger or amalgamation.

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Taxation Aspect of Mergers and Amalgamation

Under Income Tax Act, 1961

Section 2(1B) of Income Tax Act defines ‘amalgamation’ as merger of one or morecompanies with another company or merger of two or more companies to from one companyin such a manner that:-

1. All the property of the amalgamating company or companies immediately before theamalgamation becomes the property of the amalgamated company by virtue of theamalgamation.

2. All the liabilities of the amalgamating company or companies immediately before theamalgamation becomes the liabilities of the amalgamated company by virtue of theamalgamation

3. Shareholders holding at least three-fourths (75%) or more in value of the shares inthe amalgamating company or companies (other than shares already held thereinimmediately before the amalgamated company or its nominee) becomes theshareholders of the amalgamated company by virtue of the amalgamation.

(Example: Say, X Ltd merges with Y Ltd in a scheme of amalgamation and immediatelybefore the amalgamation, Y Ltd held 20% of shares in X Ltd, the above mentioned conditionwill be satisfied if shareholders holding not less than 75% in the value of remaining 80% ofshares in X Ltd i.e. 60% thereof, become shareholders in Y Ltd by virtue of amalgamation)

The motive of giving this definition is that the benefits/concession under Income Tax Act,1961 shall be available to both amalgamating company and amalgamated company onlywhen all the conditions, mentioned in the said section, are satisfied.

‘Amalgamating company’ means company which is merging and ‘amalgamated company’means the company with which it merges or the company which is formed after merger.However, acquisition of property of one company by another is not ‘amalgamation’.

Tax Relief’s and Benefits in case of Amalgamation

If an amalgamation takes place within the meaning of section 2(1B) of the Income TaxAct, 1961, the following tax reliefs and benefits shall available:-

1. Tax Relief to the Amalgamating Company:

• Exemption from Capital Gains Tax [Sec. 47(vi)]: Under section 47(vi) of theIncome-tax Act, capital gain arising from the transfer of assets by the amalgamatingcompanies to the Indian Amalgamated Company is exempt from tax as such transferwill not be regarded as a transfer for the purpose of Capital Gain.

• Exemption from Capital Gains Tax in case of International Restructuring [Sec.47(via)]: Under Section 47(via), in case of amalgamation of foreign companies,transfer of shares held in Indian company by amalgamating foreign company toamalgamated foreign company is exempt from tax, if the following two conditions aresatisfied:

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i. At least twenty-five per cent of the shareholders of the amalgamatingforeign company continue to remain shareholders of the amalgamatedforeign company, and

ii. Such transfer does not attract tax on capital gains in the country, in whichthe amalgamating company is incorporated

2. Tax Relief to the shareholders of an Amalgamating Company:

Exemption from Capital Gains Tax [Sec 47(vii)]:Under section 47(vii) of the Income-tax Act, capital gains arising from the transfer ofshares by a shareholder of the amalgamating companies are exempt from tax assuch transactions will not be regarded as a transfer for capital gain purpose, if:

• The transfer is made in consideration of the allotment to him of shares in theamalgamated company and Amalgamated company is an Indian company.

3. Tax Relief to the Amalgamated/ Resulting Company:

Carry Forward and Set Off of Accumulated loss and unabsorbed depreciationof the amalgamating company [Sec. 72A]: Section 72A of the Income Tax Act,1961 deals with the mergers of the sick companies with healthy companies and totake advantage of the carry forward of accumulated losses and unabsorbeddepreciation of the amalgamating company. But the benefits under this sectionwith respect to unabsorbed depreciation and carry forward losses are availableonly if the followings conditions are fulfilled:-

i. There should be an amalgamation of – (a) a company owning an industrialundertaking (Note 1) or ship or a hotel with another company, or (b) a bankingcompany referred in section 5(c) of the Banking Regulation Act, 1949 with aspecified bank (Note 2), or (c) one or more public sector company or companiesengaged in the business of operation of aircraft with one or more public sectorcompany or companies engaged in similar business.

[Note 1: The term ‘Industrial Undertaking’ shall mean any undertaking engaged in : (i)the manufacture or processing of goods, or (ii) the manufacture of computer software,or (iii) the business of generation or distribution of electricity or any other form ofpower, or (iv) mining, or (v) the construction of ships, aircrafts or rail systems, or (vi)the business of providing telecommunication services, whether basic or cellular,including radio paging, domestic satellite service, network of trunking, broadbandnetwork and internet services.

Note 2: Specified bank means the State Bank of India constituted under the StateBank of India Act, 1955 or a subsidiary bank as defined in the State Bank of India(Subsidiary Bank) Act, 1959 or a corresponding new bank constituted under section 3of the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970 orunder section 3 of the Banking Companies (Acquisition and Transfer of Undertaking)Act, 1980.]

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ii. The amalgamated company should be an Indian Company.

iii. The amalgamating company should be engaged in the business, in which theaccumulated loss occurred or depreciation remains unabsorbed, for 3 years ormore.

iv. The amalgamating company should held continuously as on the date ofamalgamation at least three-fourth of the book value of the fixed assets held by ittwo years prior to the date of amalgamation.

v. The amalgamated company holds continuously for a minimum period of fiveyears from the date of amalgamation at least three-fourths in the book value offixed assets of the amalgamating company acquired in a scheme ofamalgamation.

vi. The amalgamated company continues the business of the amalgamatingcompany for a minimum period of five years from the date of amalgamation.

vii. The amalgamated company fulfils such other conditions as may be prescribed toensure the revival of the business of the amalgamating company or to ensurethat the amalgamation is for genuine business purpose.

Expenditure on scientific research [Sec. 35(5)]:When an amalgamating company transfers any asset represented by capitalexpenditure on the scientific research to the amalgamated Indian company in ascheme of amalgamation provisions of section 35 shall be applicable-

i. Unabsorbed expenditure on scientific research of the amalgamating companywill be allowed to be carried forward and set off in the hands of theamalgamated company,

ii. If such asset ceases to be used in the previous year for scientific researchrelated to the business of amalgamated company and is sold by theamalgamated company the sale price to the extend of cost of asset shall betreated as business income and the excess of sale price over the cost shallbe subject to the provisions of capital gain.

Amortization of expenditure in case of Amalgamation [Sec. 35DD]:Under Sec 35DD for expenditure incurred in connection with the amalgamation theassessee shall be allowed a deduction of an amount equal to one-fifth of suchexpenditure for each of the five successive previous years beginning with theprevious year in which the amalgamation takes place.

Treatment of preliminary expenses [Sec. 35D(5)]:When and amalgamating company merges with an amalgamated company under ascheme of amalgamation, the amount of preliminary expenses of the amalgamatingcompany to the extend not yet written off shall be allowed as deduction to the

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amalgamated company in the same manner as would have been allowed to theamalgamating company.

Expenditure for obtaining a licence to operate telecommunication services[Sec. 35ABB(6)]:Where in a scheme of amalgamation, the amalgamating company sells or otherwisetransfer its licence to the amalgamated company (Being an Indian Company), theprovisions of Section 35ABB which were applicable to the amalgamating companyshall become applicable in the same manner to the amalgamated company,consequently:

i. The expenditure on acquisition on license, not yet written off, shall be allowedto the amalgamated company in the same number of balance installments.

ii. Where such licence is sold by the amalgamated company, the treatment ofthe deficiency/surplus will be same as would have been in the case ofamalgamating company.

Treatment of capital expenditure on family planning [U/S 36(1)(ix)]:If Asset representing capital expenditure on family planning is transferred by theamalgamating company to the amalgamated company under a scheme ofamalgamation, such expenditure shall be allowed as deduction to the amalgamatedcompany in the same manner as would have been allowed to the amalgamatingcompany.

Treatment of bad debts [Sec. 36(1)(vii)]:When due to amalgamation debts of the amalgamating company has been takenover by amalgamated company, and subsequently, such debts turn out to be bad, itshall be allowed as deduction to the amalgamated company.

Availability of MAT credit post Merger: All the assets and liabilities of the Transferor companies become properties of

the Transferee Company pursuant to merger . As MAT credit forms part of theassets of the transferor Company and thus the same should get transferred tothe Transferee Company.

The Act does not specifically provide that the MAT credit should betransferred on Amalgamation and the literal reading of the MAT provisionssuggest that MAT credit to be availed off by the persons who paid MAT.

Cross border merger:

The provisions of the Companies Act, 2013 (Act) governing inbound and outbound mergers,amalgamations or arrangements between Indian companies and foreign companies (CrossBorder Mergers) were notified by the Ministry of Corporate Affairs on April 13th, 2017.Subsequently, on April 26th, 2017, the Reserve Bank of India (RBI) issued draft regulationsto govern Cross Border Mergers (Draft RBI Regulation), on March 20th, 2018 RBI issuednotification of cross border merger.

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Inbound Merger:

Cross border merger in which the Resultant Company is an Indian company.

Outbound Merger:

Cross border merger in which the Resultant Company is a foreign company. The foreigncompany should be incorporated in a jurisdiction specified in Annexure B to Co. Rules.

General anti-avoidance rule clarification:

The general anti-avoidance rule (GAAR) empowers the tax authorities to declare an‘arrangement’ entered into by a taxpayer to be an ‘impermissible avoidance agreement’(IAA), resulting in denial of the tax benefit under domestic tax laws or a tax treaty. TheGAAR provisions took effect as of 1 April 2017 (FY 2018). The India Tax Administration hasfurther issued guidance clarifying the applicability of GAAR provisions under specifiedscenarios. One of the key clarifications relates to interplay between the limitation on benefit(LOB) article in tax treaties and the GAAR provisions. The guidance clarifies that if the caseis sufficiently addressed by the LOB article in the respective tax treaty, GAAR should not beinvoked.

Taxability on Indirect share transfers:

Where a foreign company transfers shares of a foreign company to another company andthe value of the shares is derived substantially from assets situated in India, then capitalgains derived on the transfer are subject to income tax in India. Further, payment for suchshares is subject to Indian withholding tax (WHT). Shares of a foreign company are deemedto derive their value substantially from assets in India if the value of such Indian assets is atleast INR100 million and represents at least 50 percent of the value of all the assets ownedby such foreign company.

The India Tax Administration has now notified rules for computing the FMV and consequentgains attributed to assets located in India. The value of assets, both tangible and intangible,is deemed to be their FMV on the ‘specified date’ without reduction of liabilities (if any) forthe asset.

The rules also require the Indian entity and the transferor entities to report the information inprescribed forms.

GST implications related to merger/amalgamation:

As per the GST provisions (sec 87), if two or more companies merge or amalgamate, thenthey are individually have liability for GST, provided:

Under GST, merger or amalgamation has happened due to the order of a court ortribunal;

Order is to take effect from a date earlier to the date of the order i.e. in retrospectiveeffect;

Both companies have supplied goods and / or services to each other during theperiod in between the order date to order effect date;

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It is to be noted that the merging companies will be treated as separate companies underGST till the date of the order and not the order effect date. Their registrations will standcancelled on the date of the order.

(In case of amalgamation the transferee liable to get registration under GST from the date onwhich ROC issues incorporation certificate.)

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Aspects to consider under the Competition Act, 2002

The Competition Act, 2002(“Competition Act”) replaced the Monopolies and RestrictiveTrade Practices Act, 1969, and takes a new look at competition altogether. The CompetitionAct primarily covers (i) anti-competitive agreements (Section 3), (ii) abuse of dominance(Section 4), and (iii) combinations (Section 5, 6, 20, 29, 30 and 31).

The Competition Commission of India (Procedure in regard to the transaction of businessrelating to combinations) Regulations, 2011 (“Combination Regulations”) govern themanner in which the Competition Commission of India (CCI) will regulate combinationswhich have caused or are likely to cause an appreciable adverse effect on competition(“AAEC”) in India.

Inter-connected transactions

The mandatory and suspensory nature of the Indian merger control regime also has animplication on inter-connected transactions. Regulation 9(4) of the CCI (Procedure in regardto the transaction of business relating to combinations) Regulations, 2011 (CombinationRegulations) provides that “Where the ultimate intended effect of a business transaction isachieved by way of a series of steps or smaller individual transactions which are inter-connected, one or more of which may amount to a combination, a single notice, covering allthese transactions, shall be filed by the parties to the combination.” Therefore, even steps tothe transaction that are not notifiable must be notified within 30 calendar days of theexecution of relevant documents (discussed in detail below) and cannot be consummateduntil the notice is approved by the CCI.

In Thomas Cook India Limited/Thomas Cook Insurance Services (India) Limited/SterlingHoliday Resorts (India) Limited2, the CCI noted that Thomas Cook Insurance Services(India) Limited (TCISL) had acquired a stake of 9.93% of SHRIL through open marketpurchases between 10-12 February 2014. The CCI imposed a penalty of INR 10 million(approx. USD 148,500; GBP 119,631; EUR 138,159; JPY 17 million)3 on Thomas Cook IndiaLimited (TCIL) and TCISL under Section 43A of the Competition Act, for failing to notify andconsummating certain inter-connected parts of the transaction prior to obtaining the CCI’sapproval. The CCI noted that since the combination and the market purchases wereauthorized in the same board meeting and all transactions related to SHRIL’s business andshares, the market

COMPETITION ACT, 2002:

Section 5 – Acquisition, Mergers, Acquiring control and Amalgamation – together called‘combinations’

Kinds of Merger under Competition Act, 2002:

1. Horizontal merger2. Vertical merger3. Conglomerate Merger

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Any acquisition, merger or amalgamation that meets the jurisdictional thresholds, asprovided in Section 5 of the Competition Act, 2002 (“Act”), is a “combination” for the purposeof the Act.

The thresholds prescribed under the Act has been enhanced by the Central Governmentvide its Notification No. S.O. 675(E) dated March 4, 2016)

The Competition Act, 2002 (as amended), is mainly concerned with promoting competitionand providing protection to the Indian market by prohibiting any practices causingappreciable adverse effect.

The act is mainly concerned with prohibiting three kinds of agreement that includes1. Anti-competitive agreements,2. Abuse of dominant position and3. The regulation of combinations (mergers and acquisitions).

Anti - Competitive Agreements

The Competition Act essentially contemplates two kinds of anti-competitive agreements –horizontal agreements i.e. agreements between entities engaged in similar trade of goods orprovisions of services, and vertical agreements i.e. agreements between entities in differentstages / levels of the chain of production, in respect of production, supply, distribution,storage, sale or price of goods or services. Anti-competitive agreements that cause or arelikely to cause an AAEC within India are void under the provisions of the Competition Act. Ahorizontal agreement that (i) determines purchase / sale prices, or (ii) limits or controlsproduction supply, markets, technical development, investment or provision of services, or(iii) shares the market or source of production or provision of services, by allocation ofgeographical areas/type of goods or services or number of customers in the market, or (iv)results in bid rigging / collusive bidding, are presumed to have an AAEC.

Abuse of dominant position

An entity is considered to be in a dominant position if it is able to operate independently ofcompetitive forces in India, or is able to affect its competitors or consumers or the relevantmarket in India in its favour. The Competition Act prohibits an entity from abusing itsdominant position. Abuse of dominance would include imposing unfair or discriminatoryconditions or prices in purchase/sale of goods or services and predatory pricing, limiting orrestricting production / provision of goods/services, technical or scientific development,indulging in practices resulting in denial of market access etc.

Regulation of Combinations

The Combination Regulations are the key regulations through which the CCI regulatescombinations such as mergers and acquisitions. Under Section 32 of the Competition Act,the CCI has been conferred with extra-territorial jurisdiction. This means that any acquisitionwhere assets / turnover are in India (and exceed specified limits) would be subject to thescrutiny of the CCI, even if the acquirer and target are located outside India.

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A combination is not void by itself but if CCI is of opinion that the outcome of suchtransaction may results in appreciable adverse effect on competition, then the CCI mayissue a show cause notice to the parties under Section 29(1) of the Act to ask such parties tothe combination as to why no investigation should be carried against them

Factors of relevant market –Relevant product and relevant geographic are defined underthe Competition Act, 2002. Combinations causing or likely to cause appreciable adverseeffect on competition in relevant market in India are void as per section 6.

Small Company Exemption

On March 4, 2016 vide a notification, the CCI has increased the de-minimis thresholds forsmall companies. Now an exemption has been granted to companies which have assets ofless than INR 350 crores or turnover of less than INR 1,000 crores in India (“SMEExemption”). However, this exemption is only valid for a period of five years and isavailable until March 04, 2021.

Mandatory reporting

Section 6 makes void any combination which causes or is likely to cause an AAEC withinIndia. Accordingly, Section 6 of the Act requires every acquirer to notify the CCI of acombination within 30 days of the decision of the combination or the execution of anyagreement or other document for acquisition and seek its approval prior to effectuating thesame.

The CCI must form a prima facie opinion on whether a combination has caused or is likely tocause an AAEC within the relevant market in India, within 30 days of filing. The combinationwill become effective only after the expiry of 210 days from the date on which notice is givento the CCI, or after the CCI has passed an order approving the combination.

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Aspects in connection with Stamp duty

Stamp Duty on Merger & Amalgamation

Stamp duty is a duty payable on certain specified instruments / documents. Broadlyspeaking, when there is a conveyance or transfer of any movable or immovable property, theinstrument or document effecting the transfer is liable to payment of stamp duty.

Stamp duty provisions are governed by The Indian Stamp Act, 1899 (“Stamp Act”) which is aCentral enactment and the States are vested with powers either to adopt the said Stamp Act(with amendments, if any) or enact their own legislations governing payment of stamp dutyon instruments.

Section 3 of the Stamp Act is the charging section which provides for levy of stamp duty onexecution of an instrument.

Conveyance includes a conveyance on sale (whether movable or immovable property).

Three important factors for computing stamp duty are:

a) There has to be an instrument;b) Proper execution; andc) Rate of stamp duty applicable in the State where instrument is executed.

An order of National Company Law Tribunal (“NCLT”) under section 232 of the CompaniesAct, 2013, through which assets and liabilities are transferred is treated as an instrument ofconveyance and stamp duty is leviable.

A. Stamp duty on court order for mergers/demergers

Since the order of the Court merging two or more companies, or approving a demerger, hasthe effect of transferring property to the surviving /resulting company, the order of the Courtmay be required to be stamped. The stamp laws of most states require the stamping of suchorders. The amount of the stamp duty payable would depend on the state specific stamplaw.

B. Stamp duty on share transfers

The stamp duty payable on a share transfer form executed in connection with a transfer ofshares is 0.25% of the value of, or the consideration paid for, the shares. However, if theshares are in dematerialised form, the abovementioned stamp duty is not applicable.

C. Stamp duty on shareholder agreements/joint venture agreements

Stamp duty will be payable as per the state specific stamp law.

D. Stamp duty on share purchase agreements

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Stamp duty may be payable on an agreement that records the purchase ofshares/debentures of a company. This stamp duty is payable in addition to the stamp dutyon the share transfer form.

E. Transaction costs for asset purchase vs. share purchase

Transaction related costs, are generally higher in the case of an asset purchase ascompared to a share purchase. This is primarily because in a share purchase, there wouldusually be no incidence of sales tax/value added tax/service tax, which may be levied ondifferent aspects of an asset purchase.

Further, the rate stamp duty is also usually higher in an asset purchase, and as discussedabove is dependent on the nature of the assets transferred.

The stamp duty on a transfer of shares is 0.25% of the consideration payable for the shares,which rate is usually far less than the stamp duty rates applicable for transfer ofmovable/immovable assets.

Stamp Duty for SEZ:

The provisions of Stamp Act were amended in 2005 (through section 57 of SEZ Act) byinsertion of proviso (3) to section 3 of the stamp act. The above referred proviso exemptsstamp duty on any instrument executed, by, or, on behalf of, or, in favour of, the Developer,or unit, or in connection with the carrying out of purpose of the SEZ.

2. Explanation to section 3 of stamp act clarifies the expression “Developer” SpecialEconomic Zone” and “Unit” shall have the meanings assigned to it under the provisions ofSEZ Act.

3. In view of the above, there would, be no stamp duty implications on transfer of SEZInfrastructure Division .

Stamp Duty if instrument has implication in two states:

If the registered offices of the amalgamating companies are situated in different states andscheme is required to be approved by two different NCLTs, then the order passed by eachjurisdictional NCLTs would be the instrument chargeable to stamp duty in the respectivestates.

Hence, in respect of the companies situated in Mumbai and Chennai, in a scheme,compromise or arrangement sanctioned under section 230-232 of the Companies Act, 2013,no rebate (in respect of stamp duty paid on the said scheme in another state) will beavailable to the company in the other State.

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Merger and Amalgamation of Company with Foreign Company andFEMA Aspects

On 13th April 2017, the Ministry of Corporate Affairs (MCA) notified Section 234 of theCompanies Act, 2013 and inserted a new Rule 25A (merger or amalgamation of a ForeignCompany with Indian company and vice-versa) in the Companies (Compromises,Arrangements and Amalgamations) Rules, 2016 (Compromises Rules), paving way formerger and amalgamation of a Foreign Company with an Indian company and vice-versa.Since Rule 25A required prior approval of the Reserve Bank of India (RBI) for cross-bordermerger, without corresponding procedural aspects in place, cross-border merger could nottake-off. Now, with the RBI notifying the Foreign Exchange Management (Cross BorderMerger) Regulations, 2018 (FEMA Regulations/Regulations) for mergers amalgamation andarrangement between Indian and foreign companies on 20th March 2018, this gap has beenbridged.

The FEMA Regulations cover both inbound and outbound investments.

The term “Inbound Merger” means a Cross Border Merger where the Resultant Company isan Indian company whereas “Outbound Merger” means a Cross Border Merger where theResultant Company is a Foreign Company.

The “Resultant Company” means an Indian company or a Foreign Company which takesover the assets and liabilities of the companies involved in the cross-border merger. FEMARegulations define “Cross Border Merger” as any merger, amalgamation or arrangementbetween an Indian company and a Foreign Company in accordance with the CompromisesRules.

The term “Foreign Company” has been defined as any company or body corporateincorporated outside India in a jurisdiction whether having a place of business in India or not.

Investments in Cross Border merger

Greenfield vs. Brownfield Investments Greenfield Investment: Making fresh investment Brownfield Investment: Making investment in an already established firm.

Reason / benefits in cross border merger and amalgamation:

Capital Build up Employment Technology transfer Expansion of market

Issues and challenges in cross border merger:

Political Challenge Cultural Accounting issue Legal challenges

Case of Cross border merger & Acquisition:

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Acquisition of corus group Plc (uk based) by tata steel Ltd

Overview of the notified provisions

o Prior approval of the RBI: A foreign company may merge into a company registeredunder the 2013 Act or vice-versa after obtaining prior approval of the Reserve Bank ofIndia (RBI).

o Payment of consideration: The terms and conditions of the scheme of merger mayprovide, among other things, for the payment of consideration to the shareholders ofthe merging company in cash, or in depository receipts, or partly in cash and partly indepository receipts, as the case may be, as per the scheme to be drawn up for thepurpose.

Rule 25A of the Compromises Rules: Merger or amalgamation of a foreign company witha company and vice-versao Prior approval of RBI and compliance with other sections of the 2013 Act: A company

may merge with a foreign company after obtaining prior approval of the RBI and aftercomplying with the provisions of the following sections of the 2013 Act and relatedRules: Section 230: Power to compromise or make arrangements with creditors and

members Section 231: Power of National Company Law Tribunal (NCLT) to enforce

compromise or arrangement Section 232: Merger and amalgamation of companies.

Following are some of the key highlights of the recent regulations governing cross bordermergers:

Jurisdiction Test

The eligible jurisdictions are: (a) those whose securities market regulator is a signatory to theMultilateral Memorandum of Understanding of the International Organisation of SecuritiesCommission or to the Bilateral Memorandum of Understanding with the Securities andExchange Board of India; or (b) jurisdictions whose central bank is a member of the Bank ofInternational Settlements; and jurisdictions not identified in the public statement of theFinancial Action Task Force (FATF) for deficiencies relating to anti-money laundering orcombating terrorism financing or jurisdictions without an action plan developed with theFATF to address the deficiencies. Key countries like the USA, UK, Russia, Germany,France, Japan, China, Singapore, Mauritius, etc. will fall within the definition of eligiblejurisdictions.

For inbound mergers

All issuance of shares / security or transfer of security to a non-resident, borrowings of theforeign company (becoming borrowings of the Indian company pursuant to the inboundmerger) and assets acquired, held or transferred by the resultant Indian company, must bein compliance with the relevant Indian foreign exchange regulations (i.e., compliance withsectoral caps and conditions, government approval route, compliance with applicableexternal commercial borrowing norms, trade credit norms, etc).

For outbound mergers

An Indian resident may acquire or hold securities of the foreign company in accordance withthe applicable Indian foreign exchange regulations. As regards any borrowings of the foreigncompany, the resultant foreign company shall be liable to repay any outstanding borrowings

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or impending borrowings as per the court sanctioned scheme. Further, the resultant foreigncompany may acquire, hold and transfer any asset or security in India, provided it ispermitted to do so under the provisions of relevant Indian foreign exchange regulations.Cross border mergers that are in compliance with the above conditions, as well as otherconditions of the RBI, would not be required to file applications to seek approval with theRBI on account of the deemed approval status.

Challenges and Concerns

While the move by the Government and the RBI are much needed and welcome steps, thereare some areas of concern that still need to be ironed out. For instance, the Indian IncomeTax Act exempts a transaction of amalgamation, where the amalgamated (i.e. transferee)company is an Indian company. Thus presently, where an Indian company merges into aforeign company, it would be a taxable transaction. Given the intricacies involved, India’s taxlaws need to be realigned to exempt shareholders from any taxes that may arise in anoutbound merger. One can be hopeful that the income tax provisions may be modified in linewith the new regulations above.

As it stands today, the requirement to bring all cross border merger transactions in line withrequirements under Indian foreign exchange laws may also be practically difficult toimplement. For example, in the case of inbound mergers, it may not be possible for theresultant Indian company to comply with all of the provisions of the external commercialborrowing regulations, especially loans which are already existing on the books of theforeign company. Also, in respect of outbound mergers, the RBI notification on cross bordermergers mandates compliance with all provisions of the Indian overseas direct investmentand liberalised remittance scheme regulations. The foregoing regulations, inter alia, set outthresholds for overseas investments and remittances, and such thresholds may impedeoutbound mergers.

It may also be noted that the prevalent rules in the jurisdiction of the resultant foreigncompany could play a role in determining the efficacy of the Indian cross border mergerscheme. For example, it is understood that Japanese corporate law currently does not allowa Japanese company to undergo a statutory merger with a non-Japanese company. Hence,the satisfaction of the Indian jurisdiction test satisfies only half the puzzle!

Outbound mergers would also need to comply with the provisions in the Indian CompaniesAct governing compromises, arrangements and amalgamations, and these provisions mayneed to be revisited to tie in with the newly notified provisions on outbound mergers,especially on applicability to foreign companies. For instance, there is no clarity inaddressing the eventuality of any conflict between the Indian merger framework and the lawsof the resultant foreign company in case of outbound mergers. Further, as per the currentmerger framework under Indian company law, inter alia, various intermediaries includingauditors are required to participate, a meeting of the stakeholders is required to beconducted and an application is required to be submitted in a prescribed form and mannerprior to the final sanction of the merger by the tribunal having the authority to do so. In theabsence of specific provisions to govern cross border mergers, the current mergerframework may not be efficient, especially in the case of an outbound merger.

It is important for the Government of India to come out with further clarifications andamendments keeping in mind the practical implications of a cross border merger. While theregulations issued by the RBI are currently only in draft form, we hope that necessaryclarifications will come to light when the cross border regulations are (hopefully) notified bythe RBI.

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Key Aspects under the SEBI (Listing Obligations and Disclosure Requirements) 2015

Introduction

Securities and Exchange Board of India (SEBI) on September 2, 2015 issued the SEBI(Listing Obligations and Disclosure Requirements) Regulations, 2015 with the aim toconsolidate and streamline the provisions of existing listing agreements for differentsegments of capital markets such as equity shares (including convertibles), non convertibledebt securities, etc. and disclosure norms in relation thereto , thereby ensuring betterenforceability.

Regulation 37 : Observation Letter

Listed entity desirous of undertaking a scheme of arrangement or involved in a scheme ofarrangement, shall file the draft scheme of arrangement, proposed to be filed before anyCourt or Tribunal under Sections 230- 234 and Section 66 of Companies Act, 2013, with thestock exchange(s) for obtaining Observation Letter or No-objection letter, before filing suchscheme with the Tribunal,

The listed entity shall place the Observation letter or No-objection letter of the stockexchange(s) before the Court or Tribunal at the time of seeking approval of the scheme ofarrangement:

Provided that the validity of the Observation Letter‘ or No-objection letter of stock exchangesshall be six months from the date of issuance, within which the draft scheme of arrangementshall be submitted to the Tribunal.

Regulation 11 of SEBI (LODR) Regulations, 2015 :

The listed entity shall ensure that the Scheme ofarrangement/amalgamation/merger/reconstruction etc to be presented to Tribunal does notin any way violate, override or limit the provisions of securities laws or requirements of stockexchange.

Exception:

This regulation shall not be applicable to the units issued by mutual funds which are listed ona recognized stock exchange.

Greater public shareholder participation and involvement

The shareholding of the pre-scheme public shareholders of the listed company and that ofqualified institutional buyers of the unlisted company must not fall below 25% in the mergedcompany that is to be listed.

Stricter disclosure standardsThe unlisted company must mandatorily disclose all material information in the form of anabridged prospectus prior to its merger with a listed company.

Issuance of shares to a larger audience

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To ensure that all classes of shareholders get an equitable treatment in schemes of suchnature, the listed company must mandatorily follow the pricing formula prescribed under theLODR.

Merger of a wholly owned subsidiary (WOS) with its parentSEBI also considered the need for easing certain procedures for schemes of arrangementinvolving merger of a WOS with its parent company. Such schemes do not need to be filedwith, or require the pre-approval of SEBI. Such schemes will need to be filed directly with thestock exchanges for the limited purpose of disclosures.

Other Important Proposals

1. An unlisted company can be merged with a listed company only if it is listed on astock exchange having nationwide trading terminals.

2. Companies will need to submit a compliance report confirming compliance with theSEBI Circular, and the accounting standards will need to be duly certified by thecompany secretary, chief financial officer, and the managing director.

Analysis

It can be understood that SEBI was alarmed by the number of instances where largeunlisted companies were listing themselves on stock exchanges by merging with a smalllisted company, effectively sidestepping their listing obligations and disclosures. To allayconcerns, the SEBI Board has passed these proposals to ensure greater public participationand scrutiny of such schemes, thereby protecting the interest of public shareholders.

SEBI has also been careful to not overregulate all types of mergers. Taking cognizance ofthe relaxation under Section 233 of the 2013 Act for a fast track merger of a WOS with itsparent company, the SEBI has agreed to modify the approval requirement to a meredisclosure norm. This dispensation would reduce any ambiguous interpretation of Sections230 and 233 of the 2013 Act.

In a way, the aforesaid proposals read with Section 230(5) of the 2013 Act and the SEBICircular would lend support to SEBI’s efforts in regulating schemes.

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Accounting Aspects

Accounting Standard (AS)-14 recognizes two types of amalgamation:

(a) Amalgamation in the nature of merger.

(b) Amalgamation in the nature of purchase.

An amalgamation should be considered to be an amalgamation in the nature of mergerwhen all the following conditions are satisfied:

(i) All the assets and liabilities of the transferor company become, afteramalgamation, the assets and liabilities of the transferee company.

(ii) Shareholders holding not less than 90% of the face value of the equity shares ofthe transferor company (other than the equity shares already held therein,immediately before the amalgamation, by the transferee company or itssubsidiaries or their nominees) become equity shareholders of the transfereecompany by virtue of the amalgamation.

(iii) The consideration for the amalgamation receivable by those equity shareholdersof the transferor company who agree to become equity shareholders of thetransferee company is discharged by the transferee company wholly by the issueof equity shares in the transferee company, except that cash may be paid inrespect of any fractional shares.

(iv) The business of the transferor company is intended to be carried on, after theamalgamation, by the transferee company.

(v) No adjustment is intended to be made to the book values of the assets andliabilities of the transferor company when they are incorporated in the financialstatements of the transferee company except to ensure uniformity of accountingpolicies.

An amalgamation should be considered to be an amalgamation in the nature ofpurchase, when any one or more of the conditions specified above is not satisfied. Theseamalgamations are in effect a mode by which one company acquires another companyand hence, the equity shareholders of the combining entities do not continue to have aproportionate share in the equity of the combined entity or the business of the acquiredcompany is not intended to be continued after amalgamation.

There are two main methods of accounting for amalgamations: (a) the pooling ofinterests method; and (b) the purchase method.

The Pooling of Interest Method

Since merger is a combination of two or more separate business, there is no reason torestate carrying amounts of assets and liabilities. Accordingly, only minimal changes aremade in aggregating the individual financial statements of the amalgamating companies.In preparing the transferee company’s financial statements, the assets, liabilities andreserves (whether capital or revenue or arising on revaluation) of the transferor companyshould be recorded at their existing carrying amounts and in the same form as at thedate of the amalgamation. The balance of the Profit and Loss Account of the transferor

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company should be aggregated with the corresponding balance of the transfereecompany or transferred to the General Reserve, if any. If, at the time of theamalgamation, the transferor and the transferee company have conflicting accountingpolicies, a uniform set of accounting policies should be adopted following theamalgamation. The effects on the financial statements of any changes in accountingpolicies should be reported in accordance with Accounting Standard (AS-5), Net Profit orLoss for the Period ‘Prior Period Items and Changes in Accounting Policies’. Thedifference between the amount recorded as share capital issued (plus any additionalconsideration in the form of cash or other assets) and the amount of share capital of thetransferor company should be adjusted in reserves. It has been clarified that thedifference between the issued share capital of the transferee company and share capitalof the transferor company should be treated as capital reserve. The reason given is thatthis difference is akin to share premium. Furthermore, reserve created on amalgamationis not available for the purpose of distribution to shareholders as dividend and/or bonusshares. It means that if consideration exceeds the share capital of the transferorcompany (or companies), the unadjusted amount is a capital loss and adjustment mustbe made, first of all in the capital reserves and in case capital reserves are insufficient, inthe revenue reserves. However, if capital reserves and revenue reserves, are insufficientthe unadjusted difference may be adjusted against revenue reserves by making additionthereto by appropriation from profit and loss account. There should not be direct debit tothe profit and loss account. If there is insufficient balance in the profit and loss accountalso, the difference should be reflected on the assets side of the balance sheet in aseparate heading.

The Purchase Method

In preparing the transferee company’s financial statements, the assets and liabilities ofthe transferor company should be incorporated at their existing carrying amounts or,alternatively, the consideration should be allocated to individual identifiable assets andliabilities on the basis of their fair values at the date of amalgamation. The reserves(whether capital or revenue or arising on revaluation) of the transferor company, otherthan the statutory reserves, should not be included in the financial statements of thetransferee company except as in case of statutory reserve. Any excess of the amount ofthe consideration over the value of the net assets of the transferor company acquired bythe transferee company should be recognised in the transferee company’s financialstatements as goodwill arising on amalgamation. If the amount of the consideration islower than the value of the net assets acquired, the difference should be treated asCapital Reserve. The goodwill arising on amalgamation should be amortised to incomeon a systematic basis over its useful life. The amortisation period should not exceed fiveyears unless a somewhat longer period can be justified. The reserves of the transferorcompany, other than statutory reserve should not be included in the financial statementsof the transferee company. The statutory reserves refer to those reserves which arerequired to be maintained for legal compliance. The statute under which a statutoryreserve is created may require the identity of such reserve to be maintained for a specificperiod. Where the requirements of the relevant statute for recording the statutoryreserves in the books of the transferee company are complied with, such statutoryreserves of the transferor company should be recorded in the financial statements of thetransferee company by crediting the relevant statutory reserve account. The

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corresponding debit should be given to a suitable account head (e.g., ’AmalgamationAdjustment Account’) which should be disclosed as a part of “miscellaneousexpenditure” or other similar category in the balance sheet. When the identify thestatutory reserves is no longer required to be maintained, both the reserves and theaforesaid account should be reversed.

Consideration

The consideration for amalgamation means the aggregate of the shares and othersecurities issued and the payment made in the form of cash or other assets by thetransferee company to the shareholders of the transferor company. In determining thevalue of the consideration, assessment is made of the fair value of its various elements.The consideration for the amalgamation should include any non-cash element at fairvalue. The fair value may be determined by a number of methods. For example, in caseof issue of securities, the value fixed by the statutory authorities may be taken to be thefair value. In case of other assets, the fair value may be determined by reference to themarket value of the assets given up, and where the market value of the assets given upcannot be reliably assessed, such assets may be valued at their respective net bookvalues. While the scheme of amalgamation provides for an adjustment to theconsideration contingent on one or more future events, the amount of the additionalpayment should be included in the consideration if payment is probable and areasonable estimate of the amount can be made. In all other cases, the adjustmentshould be recognised as soon as the amount is determinable.

Treatment of Reserves on Amalgamation

If the amalgamation is an ‘amalgamation in the nature of merger’

If the amalgamation is an ‘amalgamation in the nature of merger’, the identity of thereserves is preserved and they appear in the financial statements of the transfereecompany in the same form in which they appeared in the financial statements of thetransferor company. Thus, for example, the General Reserve of the transferor companybecomes the General Reserve of the transferee company, the Capital Reserve of thetransferor company becomes the Capital Reserve of the transferee company and theRevaluation Reserve of the transferor company becomes the Revaluation Reserve of thetransferee company. As a result of preserving the identity, reserves which are availablefor distribution as dividend before the amalgamation would also be available fordistribution as dividend after the amalgamation. The difference between the amountrecorded as share capital issued (plus any additional consideration in the form of cash orother assets) and the amount of share capital of the transferor company is adjusted inreserves in the financial statements of the transferee company.

If the amalgamation is an ‘amalgamation in the nature of purchase’

If the amalgamation is an ‘amalgamation in the nature of purchase’, the identity of thereserves, other than the statutory reserves is not preserved, dealt within the certaincircumstances mentioned below. Certain reserves may have been created by thetransferor company pursuant to the requirements of, or to avail of the benefits under, theIncome-tax Act, 1961; for example, Development Allowance Reserve, or InvestmentAllowance Reserve. The Act requires that the identity of the reserves should be

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preserved for a specified period. Likewise, certain other reserves may have been createdin the financial statements of the transferor company in terms of the requirements ofother statutes. Though, normally, in an amalgamation in the nature of purchase, theidentity of reserves is not preserved, an exception is made in respect of reserves of theaforesaid nature (referred to hereinafter as ‘statutory reserves’) and such reserves retaintheir identity in the financial statements of the transferee company in the same form inwhich they appeared in the financial statements of the transferor company, so long astheir identity is required to be maintained to comply with the relevant statute. Thisexception is made only in those amalgamations where the requirements of the relevantstatute for recording the statutory reserves in the books of the transferee company arecomplied with. In such cases the statutory reserves are recorded in the financialstatements of the transferee company by a corresponding debit to a suitable accounthead (e.g., ‘Amalgamation Adjustment Account’) which is disclosed as a part of‘miscellaneous expenditure’ or other similar category in the balance sheet. When theidentity of the statutory reserves is no longer required to be maintained, both thereserves and the aforesaid account are reversed. The amount of the consideration isdeducted from the value of the net assets of the transferor company acquired by thetransferee company. If the result of the computation is negative, the difference is debitedto goodwill arising on amalgamation and dealt with in the manner stated below ‘under‘treatment of goodwill on amalgamation, . If the result of the computation is positive, thedifference is credited to Capital Reserve.

Goodwill on Amalgamation

Goodwill arising on amalgamation represents a payment made in anticipation of futureincome and it is appropriate to treat it as an asset to be amortised to income on asystematic basis over its useful life. Due to nature of goodwill, it is difficult to estimate itsuseful life, but estimation is done on a prudent basis. Accordingly, it should beappropriate to amortise goodwill over a period not exceeding five years unless asomewhat longer period can be justified. The following factors are to be taken intoaccount in estimating the useful life of goodwill: (i) the forceable life of the business orindustry; (ii) the effects of product obsolescence, changes in demand and othereconomic factors; (iii) the service life expectancies of key individuals or groups ofemployees; (iv) expected actions by competitors or potential competitors; and (v) legal,regulatory or contractual provisions affecting the useful life.

Balance of Profit and Loss Account

In the case of an ‘amalgamation in the nature of merger’, the balance of the Profit andLoss Account appearing in the financial statements of the transferor company isaggregated with the corresponding balance appearing in the financial statements of thetransferee company. Alternatively, it is transferred to the General Reserve, if any. In thecase of an ‘amalgamation in the nature of purchase’, the balance of the Profit and LossAccount appearing in the financial statements of the transferor company, whether debitor credit, loses its identity.

Disclosure Requirements

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(a) For amalgamations of every type of the following disclosures should be madein the first financial statements following the amalgamations:

(i) names and general nature of business of the amalgamating companies;

(ii) effective date of amalgamation for accounting purposes;

(iii) the method accounting used to reflect the amalgamation; and

(iv) particulars of the scheme sanctioned under a statute.

(b) In case of amalgamations accounted for under the pooling of interests method,the following additional disclosures are required to be made in the first financialstatements following the amalgamation :

(i) description and number of shares issued, together with the percentage of eachcompany’s equity shares exchanged to effect the amalgamation;

(ii) the amount of any difference between the consideration and the value of netidentifiable assets acquired, and the treatment thereof.

(c) In case of amalgamations accounted for under the purchase method thefollowing additional disclosures are required to be made in the first financialstatements following the amalgamations:

(i) consideration for the amalgamation and a description of the consideration paid orcontingently payable, and

(ii) the amount of any difference between the consideration and the value of netidentifiable assets required, and the treatment thereof including the period ofamortization of any goodwill arising on amalgamation.

Amalgamation after the Balance Sheet Date

While an amalgamation is effected after the balance sheet date but before the issuanceof the financial statements of either party to the amalgamation, disclosure should bemade as per the provisions of AS-4, ‘Contingencies and Events Occurring after theBalance Sheet Date’, but the amalgamation should not be incorporated in that financialstatements. In certain circumstances, the amalgamation may also provide additionalinformation affecting the financial statements themselves, for instance, by allowing thegoing concern assumption to be maintained.

Companies (Indian Accounting Standards) Rules, 2015

The Ministry of Corporate Affairs (MCA) has notified on February 16, 2015 theCompanies (Indian Accounting Standards) Rules, 2015. Ind AS 103 defines businesscombination which has a wider scope whereas the existing AS 14 deals only withamalgamation. Under the existing AS 14 there are two methods of accounting foramalgamation. The pooling of interest method and the purchase method. Ind AS 103prescribes only the acquisition method for each business combination IND-AS 103provides definition of a business. It defines business as “An integrated set of activitiesand assets that is capable of being conducted and managed for the purpose of providing

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a return in the form of dividends, lower costs or other economic benefits directly toinvestors or other owners, members or participants” Further a Business Combinations isa transaction or other event in which an acquirer obtains control of one or morebusinesses. Transactions sometimes referred to as ‘true mergers’ or ‘mergers of equals’are also business combinations as that term is used in this Indian Accounting Standard.Under Ind AS 103, Business Combinations, all business combinations are accounted forusing the purchase method that considers the acquisition date fair values of all assets,liabilities and contingent liabilities of the acquiree. The limited exception to this principlerelates to acquisitions between entities under common control.

Ind AS-103, Business Combinations and AS-14, Accounting for Amalgamations

(i) Ind AS 103 defines business combination which has a wider scope whereas theexisting AS 14 deals only with amalgamation.

(ii) Under the existing AS 14 there are two methods of accounting for amalgamation.The pooling of interest method and the purchase method. Ind AS 103 prescribesonly the acquisition method for each business combination.

(iii) Under the existing AS 14, the acquired assets and liabilities are recognised attheir existing book values or at fair values under the purchase method. Ind AS103 requires the acquired identifiable assets liabilities and non-controlling interestto be recognised at fair value under acquisition method.

(iv) Ind AS 103 requires that for each business combination, the acquirer shallmeasure any non controlling interest in the acquire either at fair value or at thenon-controlling interest’s proportionate share of the acquiree’s identifiable netassets. On other hand, the existing AS 14 states that the minority interest is theamount of equity attributable to minorities at the date on which investment in asubsidiary is made and it is shown outside shareholders’ equity.

(v) Under Ind AS 103, the goodwill is not amortised but tested for impairment onannual basis in accordance with Ind AS 36.The existing AS 14 requires that thegoodwill arising on amalgamation in the nature of purchase is amortised over aperiod not exceeding five years.

(vi) Ind AS 103 deals with reverse acquisitions whereas the existing AS 14 does notdeal with the same.

(vii) Under Ind AS 103, the consideration the acquirer transfers in exchange for theacquiree includes any asset or liability resulting from a contingent considerationarrangement. The existing AS 14 does not provide specific guidance on thisaspect.

(viii) Ind AS 103 requires bargain purchase gain arising on business combination to berecognised in other comprehensive income and accumulated in equity as capitalreserve, unless there is no clear evidence for the underlying reason forclassification of the business combination as a bargain purchase, in which case,it shall be recognised directly in equity as capital reserve. Under existing AS 14the excess amount is treated as capital reserve

(ix) Appendix C of Ind AS 103, deals with accounting for common controltransactions, which prescribes a method of accounting different from Ind AS 103.Existing AS 14 does not prescribe accounting for such transactions different fromother amalgamations.

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Minority Squeeze Out: A strong new provision under section 236 of the CompaniesAct, 2013

Although the concept of squeezing out the minority shareholders has always been practicallypresent in the corporate sector around the globe, there was absence of a backing statuteunder the Companies Act, 1956 (‘Erstwhile Act’). However, such concept has been explicitlyintroduced under the provisions of the Companies Act, 2013 (‘Act’) which has been enforcedvide Ministry of Corporate Affairs notification dated 7th December, 20161 .

The skeptic situation of the dominance of majority rule and at the same time protecting therights and interest of the minority has always been the area of controversy and discord. It isimperative for the statute to ensure that the powers of the majority are within reasonablebounds, hence not resulting in oppression of the minority. But the practical implication ofprotecting minority interests while taking strategic business decisions often create obstacleswhich lead to prolonged legal battle.

Prevalent practices for squeezing out of the minority shareholding from entity companyaround the globe has generally been:

1. Takeovers;

2. Arrangements;

3. Mergers;

4. Conversion of securities to Equity; and

5. Capital Reduction.

“Squeeze out” in context of acquisition and takeover means a situation where the minorityshareholders are squeezed or dragged out of their shareholding in the transferor companyby the majority shareholders by purchasing their stake inspite of disagreement by the former.‘Minority shareholding’ has not been specifically defined under the Act, however, section 236of the Act uses the word Minority shareholding in respect of registered holders of the issuedequity shares of the company not exceeding ten percent.

Squeezing out minority equity shareholders- The Indian perspective

Section 236 of the Act provides for the purchase of minority shareholding by the majorityshareholders in accordance with the provisions of the section read with the Companies(Compromises, Arrangements and Amalgamations) Rules, 20162 (‘CAA Rules, 2016’).

Open ended provision for becoming majority shareholder

The acquirer entity or any person acting in concert with such acquirer can become a majorityshareholder to the extent of at least 90% of the issued equity share capital by way of: (i) anamalgamation, (ii) share exchange, (iii) conversion of securities or (iv) any other reason, maynotify the company of their intention to buy the remaining equity shares. The aforesaidprovision has been kept open ended for the majority shareholders to increase their stake to90% in the transfer company. Besides the options of amalgamation, share exchange, etc the

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acquirer can undertake any other possible mode to increase its stake to a minimum of 90%for going ahead with the exercise of acquiring minority shareholding.

Determination of Exit Price

Section 236(2) of the Act provides for a pre-determined exit price to be offered to theminority shareholders to be calculated by a registered valuer in accordance with Rule 27 ofthe CAA Rules, 2016 which provides for evaluation criteria for listed companies as well asunlisted companies. To proceed with the purchase of minority shareholding, the majorityshareholders are required to deposit an amount equal to the value of shares to be acquiredby them of the minority shareholders in a separate bank account which shall be operated bythe transferor company for atleast one year for payment to the minority shareholders,however, such amount shall be disbursed to the entitled shareholders within sixty days;Such disbursement shall continue to be made to the entitled shareholders for a period of oneyear, where the entitled minority shareholders have failed to receive or claim paymentarising out of such disbursement

Suo moto offer by the minority shareholders

The minority shareholders can suo moto provide offer to the majority shareholders topurchase their equity shareholding under Section 236 (3) of the Act at a price arrived inaccordance with the aforesaid CAA Rules, 2016.

Issue of duplicate share certificates in lieu of undelivered minority shares

In case the minority shareholders whose shares are intended to be bought fail to tender theirshares within the specified time period decided by the transferor company, such shares shallbe taken as cancelled and the transferor company shall be authorized to issue shares in lieuof the cancelled shares and complete the transfer by following the applicable transferprovision and dispatching the amount paid by the acquirer in advance.

Cases where the minority shareholders are not traceable

When the majority shareholder fails to acquire full purchase of the shares of the minorityequity shareholders, due to reasons of non-traceability or death of the shareholders, theprovisions of this section will still apply to make an offer for sale of minority equityshareholding for a period of three years from the date of majority acquisition or majorityshareholding

Typical negotiation deal

Section 236 (8) of the Act provides for a typical negotiation deal between the acquirer andthe minority shareholders. This provision allows the majority shareholders to share theadditional compensation paid by them for reaching from a stake of 75% to a stake of 90% inthe transferor company with the minority shareholders. This seems to be a protectiveprovision for the minority shareholders.

Continuance of applicability even after delisting

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When a shareholder or the majority equity shareholder fails to acquire full purchase of theshares of the minority equity shareholders, then, the provisions of this section shall continueto apply to the residual minority equity shareholders, even though, —

(a) the shares of the company of the residual minority equity shareholder had been delisted;and

(b) the period of one year or the period specified in the regulations made by the Securitiesand Exchange Board under the Securities and Exchange Board of India Act, 1992, hadelapsed.

As there was no corresponding provision in the erstwhile Companies Act, 1956, section 236of the Companies Act, 2013 brings the Indian corporate environment in alignment with theglobal corporate world by introducing the concept of “squeezing out of minorityshareholding”. It can be seen as a progressive move for growth and avoidance ofcontroversial barriers. However, there can be several lapses observed in the provisions ofsection 236 of the Act relating to purchase of minority shareholding as to no clarity onwhether minority shareholders are bound to accept the offer as it poses a serious threat onthe rights of minority shareholders. If the same is interpreted as a compulsory acquisition,there is no scope for opposition by the dissenting shareholders. In addition to this there is noprovision for holding a separate meeting of the minority shareholders to vote against suchsqueeze out. The provisions of section 236 clearly incorporate the concept of “Squeeze out”prevailing in various countries but with certain gaps in the statute for the above-mentionedissues, the practical implication of this section shall act as a fulcrum in deciding the benefitsand hindrances it would create in the coming corporate future.

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ROLE OF A COMPANY SECRETARY IN MERGERS AND AMALGAMATION

CS plays a vital role between the company and its Board of Directors, shareholders,government and regulatory authorities and all other stakeholders.

Due Diligence: The most important process of all. Each company scrutinizes the othercompany before merger & amalgamation (or takeover). This scrutiny runs on variousgrounds, from financial to legal and the outcome of this diligence can affect the ultimate priceand valuation of the merger. The CS is usually routed in for conducting the legal duediligence, which may include checking historical data to find shortcomings in compliance,missteps in governance, mismanagement, while additionally identifying risks (external andinternal) that may arise due to these factors.

Valuation: In tandem with the earlier point, the CS can be roped to quantify such risks asthey negatively affect the deal price.

Literature: The CS is usually the one (besides expertise from law firms) who draft the offerdocument.

Deal Structuring: This process might include different actions that have to be executedtimely. For instance, incorporation of a new company for the amalgamated entity, dissolvingthe old company, executing the share transfer, etc.

Post M&A activities: Many CS’s miss the point that the success of a merger is not in itsexecution but in the strategy followed after the merger. The human resource management ofboth companies, the internal policies and controls that have to be revamped, businessnetwork that is to be recast, and on a whole the actual merger of the business activity andother processes. The CS is aptly trained to handle and structure such activities andstrategies.

Further to the above, the Merger process can be divided into 3 stages:

Pre-merger Merger process Post-merger

Pre-Merger:

Due Diligence process

Each company scrutinizes the other company before merger and amalgamation. Theoutcome of this diligence can affect the ultimate price and valuation of the merger.

The CS is usually routed in for conducting the legal due diligence, which may includechecking historical data to find shortcomings in compliance

Missteps in governance, mismanagement Identifying risks (external and internal) that may arise Examining and reporting whether the adequate systems and processes are in place Ensuring all the statutory and regulatory laws are complied with. Ensuring all forms, returns and applications are filed with ROC Finding out any litigation pending in court, Contracts and agreements entered into by

the company with third party. Preparation of DD report. ( observations and remarks of the DD)

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During Merger:

Check MOA whether it authorises merger, if not amend object clause. Convene preliminary Board Meeting. Obtain the valuation report and swap ratio from a registered valuer. Preparation of Scheme of merger or amalgamation. Convene Board Meeting to approve the scheme, valuation report and swap ratio. Apply to tribunal for convening General Meeting in form No. NCLT -1 with affidavit in

form No. NCLT -6. Notice of meeting to creditors/members in form No. CAA.2 atleast 1 month before the

day of meeting Report the results of the meeting to tribunal in form No. CAA.4. on confirmation of the scheme by the majority of members/creditors representing

3/4th of the value of the total number of creditors/members present and vote at themeeting and by those voted by electronic means, the company shall pray before theTribunal for sanction of the scheme of compromise or arrangements in Form CAA.5within 7 days of the filing of report by the Chairperson.

Call Board meeting for adopting merger order and Call an Extra Ordinary GeneralMeeting and inform details about merger like allotment of shares, change in objectclause.

Post-Merger:

File INC-28 within 30 days from date of receiving the order. File E-form (PAS-3) for allotment of share with Roc Within 30days from date of

Allotment. Printing of Amalgamation Order and Scheme and attaching to every copy of MOA In case Share issued to Foreign National, File FC-GPR with RBI In case of company shares being listed, Intimation to Stock Exchanges. General Intimation in newspapers. Statement of compliance – In relation to the order u/s 232(3) shall until the full

scheme is implemented file a statement with ROC every year duly certified by aCA/CMA/CS in practice indicating whether the scheme is being complied inaccordance with the orders of Tribunal of not within 210 days from the end of eachfinancial year.

If the objects or name of the company is changed, MOA to be altered and necessaryROC filings to be complied with.

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CONCLUSION

As Dale Carnegie said “Flaming enthusiasm, backed by horse sense and persistence, is thequality that most frequently makes for success”.

There is little to stop Indian companies that desire to be global names for playing the mergerand amalgamation game globally. With a plethora of financing options, this aspiration hasbecome a reality for many corporate houses, who can now boast of having the best in theindustry under their wings. Indian companies have often surpassed their foreign counterpartsin corporate restructuring both within and beyond the national frontiers. Mergers andacquisitions are powerful indicators of a robust and growing economy. The legal frameworkfor such corporate restructuring must be easy and facilitative and not restrictive and mired inbureaucratic and regulatory hurdles. The biggest obstacle in the way of completing a mergeror an amalgamation remains the often long drawn out court procedure required for thesanction of a scheme of arrangement. 91. November 24, 1888 – November 1, 1955. Therecommendations of the JJ Irani Report are of particular significance in this regard. TheReport has recommended that legal recognition to ‘contractual merger’ (i.e., mergers withoutthe intervention of the court) can go a long way in eliminating the obstructions to mergers inIndia. The report also recommended that the right to object to a scheme of merger/acquisition should only be available to persons holding a substantial stake in the company.

As George Bernard Shaw is reputed to have said “we are made wise not by the recollectionof our past, but by the responsibility for our future”, and the future of India is bright indeed.