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Chapter-III

Legal Provisions Relating to Amalgamation in India

Introduction

An entrepreneur may grow its business either by internal expansion or by external

expansion. In the case of internal expansion, a firm grows gradually over time in the

normal case of the business, through acquisition of new assts, replacement of the

technologically obsolete equipments and the establishment of new lines of products.

But in external expansion, a firm running business and grows overnight through

corporate combinations. These combinations are in the form of mergers,

acquisitions, amalgamations and takeovers and have now become important features

of corporate restructuring. In India, all formations, reorganizations or combinations

of business, either by internal expansion of by external expansion of business have

been viewed from the angle of anti–monopolies and lessening the concentration of

economic power in few hands.

Merger, takeovers are playing an important role in the external growth of a number

of leading companies allover the world. They have become popular because of the

enhanced competition, breaking of trade barriers, free flow of capital across

countries and globalization of businesses. In the wake of economic reforms, Indian

industries have also started restructuring their operations around their core business

activities through acquisition and takeovers because of their increasing exposure to

competition both domestically and internationally.

Merger and acquisition activities must adhere to the existing legal regime which

provides existing legal frame work under which merger and amalgamation activities

can be undertaken. These are strategic decisions taken for maximization of a

company’s growth by enhancing its production and marketing operations. They are

being used in a wide essay of fields such as information technology,

telecommunications, and business process outsourcing as well as in traditional

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businesses in order to gain strength, expand the customer base, cut competition or

enter in to a new market or product segment. Most of the legal systems have been

under review and are being reformulated in accordance with the emerging corporate

scenario in India following are the laws enacted in India dealing with the Merger

and Amalgamation of companies.

Different Indian Legal Provisions related to Amalgamation.

The Companies Act, 1956.

The Industrial (Development and Regulation) Act, 1951.

The Monopolies and Restrictive Trade practice Act 1969.

The Competition Act, 2002.

The Foreign Exchange Management Act 1999.

The Sick Industrial Companies (Special Provisions) Act, 1985.

The Income Tax Act, 1961.

The Securities Contracts (Regulation) Act, 1956.

The Securities and Exchange Board of India Act, 1992.

The Banking Companies Act, 1949.

The SEBI (Substantial Acquisition of Shares & Takeover)

Regulations, 1997.

A. Merger and Acquisitions under the Companies Act, 1956

The terms merger and amalgamation or acquisitions have not been defined in The

Companies Act, 1956 (hereinafter referred to as the Act) though this voluminous

piece of legislation contains 69 definitions in section 2. The concept paper issued by

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ministry of company affair, the fate of which is still unknown, contained 100 of such

definitions but still stopped short of defining merger or amalgamation. As per

concise oxford Dictionary, 10th

edition means to combine or unite to form one

organization or structure.

The provisions relating to merger and amalgamation are contained in sections 391 to

396 A in chapter V of part VI of the Act. Any proposal of amalgamation or merger

begins with the process of due diligence, as the proposal for merger without due

diligence, as the proposal for merger without due diligence is like entering a tunnel

with darkness growing with each step. The due diligence process makes the Journey

see the light at the end of tunnel. The light of wisdom to amalgamate or not.

The Act and the relevant rules pertaining to amalgamation are to be followed

scrupulously. The provisions of the Act also deal with compromise or arrangement

within or without amalgamation or merger. Presently, the High court enjoys power

of sanctioning amalgamation matters under section 394 of the Act though it is a

matter of time when this power will be exercised by National Company Law

Tribunal, Under Section 391 to 396 of Companies Act, merging companies have to

approach the appropriate High courts [amended to National Company Law Tribunal

by Companies (Second Amendment) Act, 20021 but it was not enforced yet] a forum

where chartered accountants shall be authorized to appear. Not loosing sight of this

opportunity coming way of the chartered accountants. The role of chartered

accountants in any amalgamation case cannot be undetermined as without their

uncanny insight within the financial maze, no due diligence, valuation, share

exchange ratio etc can be accomplished.

The policy initiative since 1991 has changed the corporate environment. This is also

an enjoying discussion on corporate governance suitable in India. The companies

Act, 1956, give general frame work for discussion. Earlier the power in respect of

1 The Companies Second Amendment Act 2002 has brought it a major change in the manner which

certain very important functions are administered. This is aimed at and it is certainly hoped so that

it will reduce delays and tedious procedures for carrying out many acts under the Companies Act,

1956. These groups of amendments relate to the setting up of the National Company Law Tribunal

(“Tribunal”) which will also see the simultaneous dissolution of the Company Law Board. (“CLB).

69

matters dealing with compromise, arrangement and reconstruction were with the

High Court (Usually known as the company court). But these powers are being

transferred to National company law Tribunal (NCLT) by Companies (second)

Amendment Act, 20022 now the compromise arrangement and amalgamation

require approval of NCLT.

Section 390 to 395 of Companies Act, 1956 deal with arrangements, amalgamations,

merger and the procedure to be followed for getting the arrangement, compromise or

the scheme of amalgamation approved. Though, section 391 deals with the issue of

compromise or arrangement which is different from the issue of compromise or

arrangement as deal with under section 394, as section 394 too refers to the

procedure under section 391 etc., all the section are to be seen together while

understanding the procedure of getting the scheme of amalgamation approved.

Again, it is true that while the procedure to be followed in case of amalgamation of

two companies is under the scheme of compromise or arrangement though there

exist substantial overlapping.

Provision under the Companies Act, 1956 lays down legal procedure

for mergers or acquisitions:

Permission for merger: Two or more companies can amalgamate only

when the amalgamation is permitted under the memorandum of

association also the acquiring company should have the permission in

its object clause to carry on the business of the acquired company. If

these is no such provision under Memorandum of Association, it is

necessary to seek the permission of shareholders, board of directors

and the company law Board

Information to the stock exchange: The acquiring and the acquired

companies should inform the stock exchanges (where they are listed)

about the merger.

2 Companies (Amendment) Act, 2002, The Companies Act, 1956 was amended twice in the year 2002

and this is IInd amendment of the year.

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Approval of board of direction: The board of direction of the

individual companies should approve the draft proposal for

amalgamation and authorize the managements of the companies to

further pursue the proposal.

Application in the High Court: An application for approving the draft

amalgamation proposal duly approved by BOD of the companies

should be made the High Court.

Shareholders and ‘creators’ meetings: The individual companies

should hotel separate meetings of their shareholders and creditors for

approving the scheme. At least, 75% of shareholders and creditor in

separate meeting, voting in person or by proxy, must accord their

approval to the scheme.

Sanction by the High Court: After the approval of the shareholder and

creditors, on the petitions of the companies, the High Court will pass

an order, sanctioning the amalgamation scheme after it is satisfied that

the scheme is fair and reasonable. The date of the Courts hearing will

be published in two newspapers, and also, the regional direction of the

Company Law Board will be intimated.

Filing to the Court order: After the Court order, its certified true

copies will be filed with the Registrar of companies,

Transfer of assets and liabilities: The assets and liabilities of the

acquired company will be transferred to the acquiring company in

accordance with the approved scheme, with effect from the specified

date.

Payment by cash or securities: As per the proposal, the acquiring

company will exchange shares and debentures and or cash for the

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shares and debentures of the acquired company. These securities will

be listed on the stock exchange.

The provisions for such procedure are as below:

Section 391:3

Section 391 of the Companies Act, 1956 provides that the company or any

creditor or member of a company can make an application to the NCLT (National

Company Law Tribunal). If a company is already under liquidation, an application

will be made by the liquidator. Section 391 (1) of the Act, lays down that on such

application, the NCLT may order for a meeting of creditors or members or a class of

them to be called and held as per directions of NCLT. The NCLT may waive

conditions for meeting of creditors. Section 391 (2) of Companies Act, 1956

provides that if the NCLT sanctions the scheme, it will be binding on all creditors or

members of that class and also on the company, its liquidation and contributors.

Section 391 (3) of the Companies Act, provides that copy of the NCLT will have to

be filed with the Registrar of the companies. Section 391 (3) of Companies Act,

1956 provides that copy of the National Company Law Tribunal will have to be filed

with the Registrar of the companies section 391 (4) along with the above says that

every order of NCLT will have to be filed with the Registrar will be annexed to

every copy of memorandum and articles of company issued after receiving certified

copy of NCLT order. Section 391 (5) of Companies Act, 1956 says that in case of

default in compliance with provisions of section 391 (4) company as well as every

officer who is in default is punishable with fine up to Rupees 100 for every copy in

respect of which default is made. Section 391 (6) of the Act provides that after an

application for arrangement has been made under the section the NCLT can stay

commencement of any suit or proceedings against the company till application for

sanction of scheme is finally disposed of section 391 (7) of Companies Act, 1956

provides that the appeal against the NCLT order can be made to the National

3 For details see Section 391 of Companies Act, 1956

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Company Law Appellate Tribunal where appeal against the original order of the

National Company Law Tribunal lies.

Section 3764 of the Companies Act, 1956 provides that any provisions in article or

in any resolution, prohibiting reconstruction or the amalgamation of the company

either absolutely or conditionally is void. The only condition that can be put in

Article/Resolution is that in case of reconstruction or amalgamation, the Managing

Director or Manager shall be appointed Managing Director or Manager of the

resulting company after amalgamation. Any other condition in Articles prohibiting

reconstruction as amalgamation is void.

Section 392: Power of the NCLT to enforce compromise and

Arrangement5

Where the NCLT sanctions a compromise or arrangement, it will have powers to

supervise the carrying out of the scheme. Section 392(1) of the Companies Act,

1956 provides that the National Company Law Tribunal can give suitable directions

or make modifications in the scheme of the compromise or arrangement for its

proper working. Section 392 (2) of the Companies Act, 1956 provides that if the

National Company Law Tribunal finds that the scheme cannot work, it can order

winding up.

Section 393: Notice and conduct of Meeting6

Notice of meeting sent to every creditor / member will contain a statement setting

forth the terms of compromise or arrangement explaining its effect material interest

of direction, managers of the company in the scheme of amalgamation and the effect

of scheme of amalgamation on their interest should be fully disclosed. Section 393

(1) of Companies Act, 1956 provides that if an advertisement of notice is published,

it should give details of the statement containing the scheme of amalgamation or

4 For details see, Section 376 of Companies Act, 1956. 5 For details see, Section 392 of Companies Act, 1956. 6 For details see, Section 393 of Companies Act, 1956.

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place at which copy of the statement can be obtained. Section 393(2) of Companies

Act, 1956 provides that if the scheme of amalgamation affects the rights of

debenture holders, statement should give details of the interest of trustees of any

deed for securing the issue of debentures and how these will be affected. Section 393

(3) of the Companies Act, 1956 provides that the copy of scheme of compromise or

arrangement should be furnished to creditors members free of cost. Section 393 (4)

of Companies Act, 1956 Says that in case of non – compromise, company as well as

every officer who is in default is punishable with fine up to Rs.5000/- liquidator will

also be treated as an officer for this purpose.

Section 393 (5) of Companies Act, 1956 Provides that any director, Managing

director or trustee of the debenture holders shall give notice to the company of

matters relating to himself which the company has to disclose in the statement and if

he fails to do so, he is punishable with fine up to Rs.5000/-. The resolution has to be

sanctioned by majority of members representing 75 percent of value.

If the compromise or arrangement involves reduction of Capital Procedure in respect

of reduction of capital shall be complied with Rule 85 of companies (Court) Rules

and substantial compliance with the section 100 and 101 (in respect of procedure for

reduction of capital enough).

Section 394: Provisions for facilitating reconstruction and Amalgamation of

companies.7

Where an application is made to the court (now the NCLT) for sanction of

compromise or arrangement between a company and such person as in section 3918

and it is shown to court,

(a) that the compromise or arrangement has been proposed for the

purpose of, or in connection with, a scheme for reconstruction of any

company or companies or the amalgamation of any two or more

companies;

7 For details see, Section 394 of Companies Act, 1956. 8 See, Section 391 of the Companies Act, 1956.

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(b) That under the scheme the whole or any part of undertaking property

or liabilities of any company concerned in the scheme (in this section

referred to as the (“Transferor Company”) is to be transferred to

another company (in this section referred to a “Transferee company”.

Further the Tribunal may, either by the order sanctioning the compromise

arrangement or by a subsequent order, make provisions for all or any of the

following matters.9

(i) The transfer to the transferee company of the whole or any part of the

undertaking, property or of the liabilities of the transferor company.

(ii) The allotment or appropriation by the transferee company of any

shares, debentures, policies, policies or other like interest in that

company which, under the compromise or arrangement, are to be

allotted to or appropriated by that company to or for any person;

(iii) The continuation by or against the transferee company of any legal

proceedings, pending by or against any transferor company;

(iv) The dissolution, without winding up, of any transferor company;

(v) The provisions to be made for any person, who within such time and

in such manner as the tribunal directs, dissent from the compromise

or arrangements ; and

(vi) Such incidental, consequential and supplement matters as are

necessary to secure that the reconstruction or amalgamation shall be

fully or effectively carried out.

Provided10

no compromise or arrangement proposed for the purpose of or in

connection with a scheme for the amalgamation of the company, which is being

wound up, with any other company or companies, shall be sanctioned by the court

9 See, Section 394 of Companies Act, 1956. 10 Inserted by the Act of 31 of 1965, Section 49, w.e.f. 15.10.1965.

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(now NCLT) unless the NCLT has received a report from the Company Law Board

or Registrar that the affairs of the company have not been conducted in a manner

prejudicial to the interest of its members or the public interest.

1) Provided further that no order for the dissolution of any Transfer

Company under clause (iv) shall be made by the court unless the

official liquidator has, on scrutiny of the books and paper of the

company, made a report to the court that the company affairs have

not been conducted in a manner prejudicial to the interests of its

members or the public interest.

2) An order under this section provides for the transfer of any property

or liabilities, then, by virtue of the order, that property shall be and

vest in, and those liabilities shall be transferred to and become the

liabilities of, transferee company; and in case of any property, if the

order so directs, freed from any charge which is, by virtue of a

compromise or arrangement, cease to have effect.

3) Within 3011

days after the making of an order under this section,

every company in relation to which the order is made shall cause a

certified copy thereof to be filed with the Registrar for registration. If

default is made in complying with the sub-section, the company and

every officer of the company who is in default, shall be punishable

with fine which may extend to ( Rs.500) 12

Section 394 A:

Notice to be given to central Government13

. The court (now the NCLT) shall give

notice of every application made to it under section 391 or 394 to the central

Government, and shall take into consideration the representation, if any, made to it

by that Government before passing any order under any of these sections, the

11 Substituted by the Act 31 of 1965, Section 62 on Schedule for ‘fourteen’ w.e.f. 15.10.1965. 12 Substituted for Rs.50. by The Companies (Amendment) Act, 2000 w.e.f. 13.12.2000. 13 Powers delegated to the Regional Director vide notification No.GSR (288(E)), dated 31.05.1991.

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National Company Law Tribunal’s sanction to scheme if it is satisfied that company

or any other person who has made application as disclosed all material facts relating

to the company. The NCLT should also be satisfied that the meeting was fairly

represented by members / creditors.

Section 395: “Reconstruction by sale of shares.14

Reconstruction and

amalgamation without following NCLT procedure is possible under section 395 by

takeover or by sale of shares. Selling shareholders get either the compensation or

shares of the acquiring company. This procedure is rarely followed, as sanction of

shareholders of at least 90% of value of shares is required, and not only of those

attending the meeting. This is difficult to obtain. Moreover, the section 395

procedure can be followed only when creditors are not involved in the

reconstruction and their interest are not affected.

These provisions could be useful to a small and closely held company, or where the

holding company already holds/controls more than 90% of shares and wants to

convert the subsidiary company into a wholly owned subsidiary. In case of listed

company SEBI Takeover code will have to be complied with and in case of listed

company section 395 is not possible.

Section 396:15

Powers of central Government to provide for

Amalgamation of companies in National Interest.

1) Where the central Government is satisfied that it is essential in the

(Public interest)16

that two or more companies should amalgamate,

then notwithstanding anything contained in sections 394 and 395 but

subject to provisions of this section, the central Government may, by

order notified in the official gazette provide for amalgamation of those

companies in to a single company with such constitution; with such

14 For details see, Section 395 of the Companies Act, 1956. 15 For details see, Section 396 of the Companies Act, 1956. 16 Substituted by Act 65 of 1960, Section 152 for national interest ;

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property, power, rights, interests, authorities and privileges ; as may be

specified in the order.

2) [The order 17

aforesaid may provide for the continuation by or against

the transferee company of any legal proceedings pending by or against

any transferor company and may also] contain such consequential,

incidental and the supplemental provisions as may, in the opinion of

the central Government, be necessary to give effect to the

amalgamation.

(3) Every member or creditor (including a debenture holder) of each of

the companies before the amalgamation shall have, as nearly as may

be, the same interest in or rights against the company resulting from

the amalgamation as he had in the company of which he was

originally a member or creditor & his rights or interest in or against

the company resulting from the amalgamation are less than his interest

in or rights against the original company, he shall be entitled to the

compensation which shall be assessed by such authority (as may be

prescribed)18

and every such assessment not shall be published in

official gazette. The compensation so assessed shall be paid to the

member or creditor concerned by the company resulting from the

amalgamation.

(3A)19

Any person aggrieved by any assessment of compensation made by

the prescribed authority under sub section (3) may, within 30 days

from the date of publication of such assessment in the official gazette

prefer an appeal to the Company Law Board and thereupon the

assessment of compensation shall be made by Company Law Board.

17 Substituted by Companies (Amendment) Act, 1985 (35 of 1985) for the words “the order

aforesaid”. 18 Joint Director (A/c.), Department of Company Affairs is the prescribed authority vide Rule 12A,

Companies (Central Government ) Rule, 1956. 19 Inserted by Companies (Amendment) Act, 1985 (35 of 1985)

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(4) Copies of every order made under section 395 shall, as soon as may is

after it has been made, be laid before both houses of parliament

(section 396).

Section 396 A20

: Preservation of Books and papers of Amalgamated

company.

The books and papers of a company which has been amalgamated with or whose

shares have been acquired by, another company under this chapter shall not be

disposed of without the prior permission, of the central Government and before

granting such permission, that Government may appoint a person to examine the

books and papers or any of them for the purpose of ascertaining of an offence in

connection with the promotion or formation, or the management of the affairs, of the

first – mentioned company or its amalgamation or the acquisition of its shares.

B. Industries (Development and Regulation) Act, 1951.

Takeover and acquisition by Central Government. The Central Government has

assumed vide power under the Industries (Development and Regulation) Act, 1951

to order to takeover and undertaking either having gone into investigation under the

provisions of the Act or not.21

Sections 18FC – 18FH vests powers in central

Government – (i) to take over management or control of industrial undertakings of

the company in liquidation with the permission of the High Court; (ii) to take action

in public interest to prevent fall in the production of undertaking turnover by the

Central Government; (iii) To give order for selling out of the takeover industrial

undertaking if found not working profitably.

Although Central Government has done with the registration of the industrial

undertaking as required under the Act under the liberalization policy being followed

up by it, yet the powers of Central Government in respect of the taking over of

20 Inserted by Act 31 of 1965, Section 52, w.e.f. 15.10.1965. 21 For details, chapter III A of the Act, with sections 18A – 18FA. Chapter III AA comprising section

18FA, chapter II AB comprising section 18FB and chapter III A C Comprising sections 18FC to 18

FH vests power in central Government.

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management of industrial undertaking in general public interest are intact. Time and

again, the Central Government has taken action against the corporate enterprises

under the Industries (Development and Regulation) Act, 1951 under the following

provisions:

Section 391: The Companies Act, 1956 and 18FA of Industries

(Development and Regulation) Act, 1951.

As held in a company case,22

that where permission under section 18FA of

Industries (Development and Regulation) Act, 1951 is granted the court cannot

entertain and examine the scheme brought under section 391 of the Companies Act.

The court is bound to grant permission to central Government on its application

made under sub-section (i) of section 18FA of Industries (Development and

Regulation) Act, 1951, if the following two conditions are to be satisfied viz.

(i) It must be established that the central Government has formed an opinion

about the possibility of running or restraining the industrial undertaking;

(ii) Such undertaking should be run or restarted for maintaining or increasing

the production, supply or distribution of articles or class of articles

needed by the general public and relatable to the scheduled industry.23

The court is bound to pass order for the takeover of the Industrial unit as

the expression “shall” in section 18FA of IDRA is mandatory. Hence in a

case where permission under section 18FA is granted, the court cannot

entertain and examine the scheme brought under section 391 of the

Companies Act, 1956.24

22 Union of India vs. Vijay Manufacturing (P) Ltd., (1977) 47, Comp Case 348 (Bom) 23Union of India vs. Manakchowk and Ahmedabad Mfg. Co.Ltd. (1985) 58 Comp Case 729 (Gujarat) 24Gujarat State Textile Corporation Ltd., Manubhlal Chimanlal Shah Indulal & Co. Ahmedabad and

others vs. New Jehangar Vakil Mills Ltd. (1985) 58 Comp Case 768 (Guj)

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C. MONOPOLIES AND RESTRICTIVE TRADE PRACTICES

ACT, 1969

The Monopolies and Restrictive Trade Practices Act has created greatest hindrance

in the way of corporate merger in India. Sections 23 and 24 of the Act till the MRTP

(Amendment) Act, 1991 has remained operative requiring the corporate

undertakings being subject to the MRTP Act. The Act to seek Government’s

approval before contemplating mergers. These sections have since been abolished,

and no permission for the merger of corporate units is required under MRTP Act,

1969.25

Section 30A to 30G of the Act to transfer of shares, involving dominant undertaking

has also been abolished vide the Monopolies and Restructure Trade Practices

(Amendment) Act, 1991. The new clauses 40A & 40B were incorporated in May,

1990 Although Both the Companies Act (Sec. 395) and in MRTP Act (Sec. 24) had

provisions for corporate takeovers. According to this clause any person who

acquires 50% or more of shares in a company must notify the stock exchange and

when the holdings cross 10% of a public offer to purchase shares must be made.

However this agreement was restricted to only listed company and was effective

only when either of the parties in an acquisition was a listed company.

D. THE COMPETITION ACT, 2002

On August 28, 2009 the Ministry of Corporate Affairs issued a notification pursuant

to which Monopolies and Restrictive Trade Practices Act 1969 was repealed and

replaced by the competition Act 2002 with effect from September 1, 2009. The

Competition Act attempts to make a shift from curbing monopolies to curbing

practices that have adverse effects on competition both within and outside India.

25Competition Act, 2002 has been passed repealing Monopolies and Restrictive trade practices Act,

1969.

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The Monopolies and Restrictive Trade Practices Act was passed in 1969 so as to

avoid the concentration of the economic power to common detriment and control of

the monopolies and prohibition of monopolistic and restrictive trade practices.26

Then the Government decided to liberalise the economic policy, provisions in

respect of concentration of economic power were deleted by omitted part A of

Chapter III of Monopolies and Restrictive Trade Practices Act w.e.f 27.9.1991.

The Act regulates the various forms of business combinations through competition

commission of India. Under the Act, no person or enterprise shall enter into a

combination, in the form of an acquisition, merger or amalgamation, which causes

or is likely to cause an appreciable adverse effect on competition in the relevant

market and such a combination shall be void. Entries intending to enter in to a

combination may give notice to the commission, and it must be voluntary. The

competition Act does not seek to eliminate combinations it only aims to eliminate its

harmful effects. Provisions effecting on mergers of competition Act.

Position on combinations.

Section 3 of the act governs anti – competitive agreements and prohibits: 27

“Agreements involving production, supply, distribution, storage, acquisition or

control of goods or provision of services, which cause or are likely to cause an

appreciable adverse effect on competition in India.”

So any agreement entered into in contravention of above provisions shall be void

under section 3(2) which makes any agreement void which is in contravention to

section 3(1).

Section 3(3) provides that presumed Anti–Competitive Agreement (where in order

to prove that the practice is not anti–competitive is on defendent is any agreement

which :

(a) Directly or indirectly determines purchase or sale prices ;

26 Subsequently, Provisions in respect of Unfair Trade Practices were inserted w.e.f. 01.08.1984. 27for details, see Section 3 of The Competition Act, 2002

82

(b) Limits or controls production supply, markets, technical development,

investment or provision of services ;

(c) Shares the market or source of production or provision of services by

way of allocation of geographical area of market, or type of goods or

services, or number of customers in the market or any other similar

way ;

(d) Directly or indirectly results in bid rigging or collusive bidding.

Section 3(4) provides that agreement where the appellant has to prove that the

practice is anti – competitive is:

(a) Tie-in –arrangement.

(b) Exclusive supply agreement

(c) Exclusive distribution agreement

(d) Refusal to deal

(e) Re-sale price maintenance.

It should be noted that the provisions as Tie-in-sales or full time forcing, resale price

maintenance under competition Act, 2002 are similar to the provisions under MRTP

Act. Thus we can say that provisions in respect of Anti- competitive Agreements are

similar to Restrictive Trade Practice.

Section 428

of Act prohibits the abuse of a dominant position by an enterprise. Under

the Monopolies Act, a threshold of 25% constituted a position of strength.

Section 4(2) (a) provides that, “dominant position” means a position of strength,

enjoyed by an enterprise, in the relevant market, in India, which enables it to

28 For details see Section 4 of The Competition Act, 2002.

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Operate independently of competitive forces prevalent in the relevant

market; or

Affect its competitors or consumers or the relevant market in its favour.

Under Section 4(2)(1), if an enterprise follows (i) unfair or discretionary conditions

in sale of goods or services, limiting or (ii) restricting production or development

(iii) Denial of market access etc., then these shall be an abuse of dominant position

under section 4(2)(1) of Competition Act, 2002.

Section 529

of Competition Act, defines combination by providing threshold limits

on assets and turnovers, under this section, combination defined as – combination by

reference to assets and turnover.

(a) Exclusively in India and

(b) In India and outside India.

And it provides that acquisition of one or more enterprises by one or more persons

or the merger or amalgamation of enterprises shall be treated as “combination”, of

such enterprises and persons as enterprises in following cases:

(1) Transactions among Indian companies with combined assets of $250

million in turnover of the merged entity,

(2) Cross border transactions involving both Indian and foreign

Companies with combined assets of $500 million or $1.5 billion in

turnover.

(3) Transactions that have territorial nexus with India, where the acquirer

has $ 125 million in assets or $ 375 million in turnover in India.

For acquiring groups, the threshold figures are much higher.

(1) $ 1 billion in assets and $ 3 billion in turnover in India respectively.

29 For details see Sections 5 of The Competition Act, 2002.

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(2) Assets in excess of $ billion ; or

(3) Turnover of more than $ 6 billion outside India.

The threshold criterion could create a deadlock because once an entity or group

grows a size of prescribed limits, all combinations – however small would be

covered by the regulations. It is to be noted that the competition Act, 2002, does not

make a distinction between horizontal, vertical and conglomerate mergers and

provides the same threshold test for all of them.

Section 630

of competition Act states that ‘no person or enterprise will enter in to a

combination which causes or is likely to cause an adverse effect on competition

within the relevant market in India and such a combination will be void.

Section 6 (2)31

provides that any person or enterprises, who or which proposes to

enter in to a combination, may, at his own option, give notice to the commission, in

the form as may be specified, and the fee which may be determined, by regulations,

disclosing the details of the proposed combination, within 7 days of

(a) Approval of proposal relating to merger or amalgamation, referred to

in clause section 5(c) by the board of directors of the enterprises

concerned with such merger or amalgamation, as the case may be ; or

(b) Execution of any agreement or other document for acquisition referred

to in section 5(a) or acquiring of control referred to in section 5(b).

The commission shall, after receipt of notice under section 6 (2) deals

with such notice in accordance with the provisions contained in

sections 29, 30, 31.

According to Section 6(3)32

where any person or enterprise has given a notice under

section 6(2) the commission shall inquire-

(a) Whether the disclosure made in notice is correct. 30 For details see Section 6 of The Competition Act, 2002. 31 For details see Section 6 (2) of The Competition Act, 2002 32 For details see Section 6 (3) of The Competition Act, 2002.

85

(b) Whether the combination has or is likely to have an appreciable

adverse effect or competition under (section 30)

Section 6(4)33

provides that provisions of section 6 doesn’t apply to share

subscription or financing facility or any acquisition, by a public financial institution,

foreign institutional investor, bank or venture capital fund, perusal to any conversant

of a loan agreement or investment agreement

Section 6(5) The public financial Institution, foreign Institutional investor, bank or

venture capital fund, referred to in subsection 4, shall within 7 days from date of

acquisition, file, in the form as may be specified by regulations, with the

commission with all details of acquisition.

Section 20: Enquiry into combination by commission:

The commission can enquire in to combination either (a) on its own or (b) on receipt

of reference by statutory authority.34

Section 20(1) of competition Act, 2002 provides that referred to in section 5(a) or in

case of merger or acquisition.

The commission can enquire into whether such a combination has caused or is likely

to cause an appreciable adverse effect on competition in India. The commission shall

not initiate any inquiry under this sub-section after the expiry of one year from the

date on which such combination has taken effect.

And According to section 2(2) the communion shall on receipt of a notice under

section 6(2) or upon receipt of a reference under of section 21(2), inquire whether

the combination referred to in that notice or reference has caused or is likely to cause

an appreciable adverse effect on competition in India. In such cases the enquiry is

mandatory and the time limit of one year, as specified in section 20(1) does not

apply.

33 For details see Section 6 (4) of The Competition Act, 2002. 34 For details see, Section 20 of The Competition Act 2002.

86

Section 21: Reference by statutory authority.35

When in course of proceeding before any statutory authority an issue is raised by

any party that any decision which such statutory authority has taken or purposes to

take, is or would be, contrary to any of the provisions of this act, then such authority

may make reference to the commission and union shall after hearing the parties, to

the proceedings, give its opinion to such statutory authority which shall thereafter

pass such order on the issues referred to in that sub-section as it deems fit. The

commission on shall give its opinion under this section within 60 days of receipt of

such reference.

Section 26: Procedure for Inquiry36

On receipt of a complaint or a reference from the central Government or a state

Government or statutory authority or its knowledge or information under section 19,

if commission is of the opinion that there exist? A prima facie case, it shall direct the

Director General to cause an investigation to be made in to the matter under section

26(1).

Section 26(3) says about in case there exist no prima facie case it shall dismiss the

complaint and may pass such orders as it deems fit, including imposition of costs if

necessary.

And according to section 26(2) Director General shall, on receipt of direction submit

a report on his findings within such period as may be specified by the commission

and commission shall forward a copy of such reports to the parties concerned, to

central Government or state Government or the statutory authority under section

26(4). Section 26(5) provides that if the report of the Director General relates on a

complaint and such report recommends that there is no contravention of any of the

provisions of this Act, the complainant shall be given an opportunity to rebut the

findings of the Director General. If, after hearing the complainant, the commission

35 For details see. Section 21 of The Competition Act, 2002. 36 For details see Section 26 of The Competition Act, 2002.

87

agrees with the recommendation of the Director General, it shall dismiss the

complaint, under section 26(6) and if after hearing the complainant, the commission

is of the opinion that further inquiry is called for, it shall direct the complainant to

proceed with the complaint under section 26(7). Section 26(8) provides that if the

report of the Director General referred to in section 26(1) recommends that there

exist no contravention of the provisions of this Act, the commission shall invite

comments of central Government or the state Government or the statutory authority,

as the case may be, on such report and on receipt of such comments, the commission

shall return the reference if there is no prima facie case or proceed with the reference

as a complaint if there is a prima facie case.

Section 26(9) provides that if the report of Director General referred to in section

26(2) recommends that there is contravention of any of the provisions of this Act,

and the commission is of the opinion that further inquiry is called for, it shall inquire

into such contravention in accordance with the provisions of this Act.

If commission finds after inquiry that an agreement referred to in section 3 (with

respect to anti-competitive agreement) or action of the enterprises in dominant

position under section 4 (abuse of dominant position), is in contravention of section

3 or section 4, as the case may be it may pass the following orders.

Order to discontinue agreement / abuse (sec. 27A)

Imposition of penalty [section 27(b)]

Award compensation [section 27 (c) with section 34]

Direction to modify the agreement [section 27(d)]

Recommends Division [section 27(e)]

Other orders and payments of costs [section 27(f)]

Any other order [section 27(f)]

88

Section 28: Division of Enterprise Enjoying Dominant position.37

The central Government, on the recommendation under section 27(f) from the

controller of capital issues may direct division of an enterprise enjoying dominant

position to ensure that such enterprise doesn’t abuse its dominant position under

section 28(1).

Section 29: Procedure for investigation of combination.38

Section 29(1) says that where the commission is of the opinion that a

combination is likely to cause, or has caused an appreciable adverse

effect on competition within the relevant market in India, it shall issue

a notice to show cause to the parties to combination calling upon them

to response within thirty days of the receipt of the notice, as to why

investigation in respect of such combination should not be conducted.

Inquiry into disclosure under section 6(2), section 30 provides that

where any person or enterprise has given a notice under section 6(2),

the commission shall inquire (9) whether the disclosure made in the

notice is correct ;

(b) Whether the combination is likely to have, an appreciable adverse

effect on competition.

Under section 29(2) if there is an adverse effect on competition of

combination it shall within 7 working days from the date of receipt of

the response of the parties to the combination, direct the parties to the

said combination to publish details within 10 working days of such

direction in such manner, as it thinks appropriate, for bringing the

combination to the knowledge or information of the public.39

37 For details see, Section 28 of The Competition Act, 2002. 38 For details see, Section 29 of The Competition Act, 2002. 39 ibid

89

[29(3)] provides the commission may invite any person or member of

the public, affected or likely to be affected by the said combination, to

file his written objections, if any, before the communion within 15

working days from the date on which the details of combination were

published.

[29(4) and 29(5)]. The commission may within 17 working days from

the expiry of the period specified in section 29(3), call for such

additional or other information as it may deem fit from the parties to

the said combination [29(4)] the additional details called for by the

communion shall be furnished by the parties referred to in section

29(4) within fifteen days from the expiry of the period specified in

section 29(4) and 29(5).

[29(6)]. After receipt of all information and within a period of 45

working days from the expiry of the period specified in section 29(5),

the commission shall proceed to deal with the case in accordance with

the provision contained in section 31.

Section 31: Order of commission after enquiry.40

The matter will be heard by Bench of CCI having the Jurisdiction over the

matter. After enquiry, the commission can pass any of the following orders:

Approve the combination or direct that it will not take effect [Section

31(1) and 31(2)]

Propose modifications to combination and carry them out within

period specified by the commission [section 31(3), 31(4)],

Alternative proposals if proposals of CCI not acceptable [section

31(6)].

40 For details see Section 31 of The Competition Act, 2002.

90

Further order by commission [section 31(a) & 31(10)]

Effect of CCI declares combination void [section 31(12)]

Deemed approved of communion doesn’t issue order in 90 days

[section 31(12)]

E. FOREIGN EXCHANGE MANAGEMENT ACT, 1999.

During the Second World War, several rules were issued under the Defence of India

Act, 1939 to keep the foreign exchange for importing food and war equipments.

Though these were the temporary measures, but the foreign exchange situation did

not improve. This resulted in enacting foreign Exchange (Regulations) Act, 1947.

(FERA). This was intended for ten years but it became a permanent feature in 1957.

More restrictions were introduced with foreign Exchange (Regulation) Act, 1973

which came in to effect on Ist June, 1974. Government initiated process of

liberalization of Indian economy in 1991. Foreign investment in various sectors was

permitted which resulted in flow of foreign exchange in India. At last Foreign

Exchange (Regulation) Act has been repealed and Foreign Exchange Management

Act (FEMA), 1999 has been passed. This Act has been made effective from Ist June

2000. Although Foreign Exchange Management Act, 1999 has repealed Foreign

Exchange Regulation Act but all the offences committed under FERA would

continue to be governed by the provisions of the repealed Act as if the Act has not

been repealed.

Section 49(5) of Foreign Exchange Management Act, 199941

provides that anything

done or any action taken or purported to have been done or taken including any rule,

notification, inspection, order or notice made or issued or any appointment,

confirmation or declaration or exemption granted or any document or instrument

executed or any direction given under Foreign Exchange Regulation Act, 1973 (the

repealed Act) which is not inconsistent with the provisions of this Act, be deemed to

41 According to section 49 of The Foreign Exchange Management, Act, 1999.

91

have been done or taken under the corresponding provisions of Foreign Exchange

Management Act.

Provisions of Foreign Exchange Management Act are applicable, where the scheme

of amalgamation or merger or takeover envisage issue of shares / cash option to

Non-Resident Indians, the affected companies are required to obtain prior

permission of Reserve Bank of India under the Foreign Exchange Management Act

or regulations made therein.

Section 3 of the Act42

, prohibits dealing in Foreign Exchange or Foreign security to

any unauthorized person or makes any payment to or for credit of any person

resident outside India in any manner, or receives any payment from or on behalf of

any person resident outside India. The restrictions cover financial transactions

entered in India, which may be as considerations or associated with the acquisition

or creation or transfer of any assets outside India by any person. Reserve bank of

India is empowered to give general or special permission to any person dealing in

foreign exchange.

The foreign exchange laws relating to issuance and allotment of shares to foreign

entities are contained in the Foreign Exchange Management (Transfer or issue of

security by a person residing out of India) Regulation, 2000 issued by RBI vide GSR

No. 406 (E) dated 3rd

May, 2000. These regulations provide general guidelines on

issuance of shares or securities by an Indian entity to a person residing outside India

or recording in its books any transfer or security from or to such person. RBI has

issued detailed guidelines on Foreign Direct investment in India vide “Foreign

Direct investment scheme contained in schedule I of said regulation.

Regulation 7 (issue and acquisition of shares after merger or De-merger or

amalgamation of Indian companies).43

42 According to Section 3 of The Foreign Exchange Management Act, 1999. 43 See Regulation 7 of The Foreign Exchange Management (Transferor issue of security by person

outside India) Regulations 2000.

92

Where a scheme of merger or amalgamation of two or more Indian companies or a

reconstruction by way of de-merger or otherwise of an Indian company, has been

approved by a court in India, the transferee company, or as the case may be, the new

company may issue shares to the shareholders of the transferor company resident

outside India, subject to the following conditions, namely:

(a) The percentage of shareholding of persons resident outside India in the

transferee or new company doesn’t exceed the percentage specified in

the approved granted by the Central Government or the Reserve Bank,

or specified in these regulations :

Provided that where the percentage is likely to exceed that will be

specified in approved or in regulations.

(b) The transferor company or transferee or new company shall not

engage in agriculture, plantation or real estate business or trading in

TDRs and

(c) The transferee or the new company files a report within 30 days with

the Reserve Bank giving full details of the shares held by persons

resident outside India in the transferor and transferee or the new

company, before and after the merger / amalgamation / reconstruction,

and also furnishes a confirmation that all the terms and conditions

stipulated in the scheme approved by the court have been compiled

with.

F. THE SICK INDUSTRIAL COMPANIES (SPECIAL

PROVISIONS) REPEAL ACT, 2003 (SICA REPEAL).

The Sick Industrial Companies (Special provisions) Repeal Act 2003, which repeals

the SICA has been enacted but not yet come in to force, similarly while the

companies (Second amendment) Act, 2002 has introduced chapter VI (A) in

Companies Act, 1956, which makes substantial amendments to regime governing

93

sick companies, these provisions are also yet to come into effect. As a result SICA

continues to be valid and binding.

The provisions Sick Industrial Companies (Special Provisions) Act, have merged in

Companies (Second Amendment) Act, 2002. Now the powers of Board of Industrial

and financial Reconstruction will be exercised by National Company Law Tribunal.

Appeal against order of National Company Law Tribunal will be before National

Company Law Appellate Tribunal instead of Appellate Authority for Industrial and

Financial Reconstruction.

Act to Repeal SICA has been passed by the Parliament in December, 2003 but till

now its ineffective so, SICA is in force.

The major provisions of Sick Industrial companies (Special provisions) Act relating

to amalgamation for rehabilitation and revival of sick industries are as follows:

Section 18: Preparation and sanction of schemes44

Section 18(b) and 18(c) empowers Board of Industrial and financial Reconstruction

(to prescribe for revival of sick units) to order the takeover of management of sick

industrial company by another company of or by amalgamation of sick unit with any

other healthy industrial company. The operating agency which is specified in this

order has to prepare a scheme suggesting takeover or merger of the sick company

with any other healthy company under section 18(1) of the Act. Section 18(2)

provides that it is within scheme, that the terms and conditions and the manner of

transfer of undertakings, the business, properties, assets and liabilities and mode of

payment has to be specified for the sanction of Board of Industrial and Financial

Reconstruction. Section 18(3) provides that a copy of draft scheme for

amalgamation so finalized by the Board shall be sent to sick industrial company, the

operating agency and the transferee industrial company and any other company

concerned in the amalgamation for suggestions and objection within specified

period. The Board has the requisite powers to modify the draft scheme on receipt of

44 For details see Section 18 of The Sick Industrial Companies (Special Provisions) Act, 1985.

94

suggestions from the above concerns or from the creditors, or employees of the

concerned industrial enterprises.

The scheme when finalized by the board has to be approved by the shareholders of

the transferee company with or without modifications by a special resolution.

Section 18(4) provides that on compliance of requirements of section 18(3)(a)and

18(3)(b), the Board may sanction the scheme which shall come in to force on such

date as the Board may specify in this behalf. And after sanction the scheme becomes

legal document to be admitted and relied upon by the courts in evidence in all legal

proceeding, in appeal or otherwise.

Section 18 of Sick Industrial Companies (Special Provisions) Act, 1985 has

also been amended by Sick Industrial Companies (Special Provisions)

(Amendment) Act, 1993 in order to have better perspective of the conditions

of merger or amalgamation. The amended provisions are as follows :

Section 18: Preparation and sanction of schemes.45

(i) Where an order is made under section 17(3) related to any sick industrial

company, the operating agency specified in the order shall prepare, as expeditiously

as possible and ordinarily within a period of 90 days from the date of such order, a

scheme with respect to such company providing for any one or more of the

following measures, namely:

(a) The financial reconstruction of the sick Industrial company;

(b) Proper management of the sick industrial company by change in, or

takeover of management of the sick industrial company ;

(c) The amalgamation of sick or other industrial company.

(d) The sale or lease of any industrial undertakings of sick industrial

company.

45For details see, Section 18 of Sick Industrial Companies (Special Provisions) Amendment) Act,

1993.

95

(e) Any other preventive or remedial measures as appropriate and such

any incidental measures as necessary for purpose specified in clause

(a) to (f).

(ii) The scheme may provide for any one or more of the following.

(a) The constitution, name and registered office, the capital, assets,

powers, rights, interests, authorities, privileges, duties and obligations

for the sick industrial company or as the case may be, of the transferee

company ;

(b) The business, properties, assets and liabilities of sick industry transfer

to Transferee Company on terms & conditions as may be specified in

the scheme.

(c) Any change in Board of Directors, or appointment of a new Board of

Director, of the sick Industrial company and the authority by whom,

the manner in which and the other terms and conditions on which such

change shall be made.

(d) The alterations of memorandum or articles of association of the sick

industrial company or, as the case may be, of the transferee company

for the purpose of altering the capital structure there of or for such

other purpose as may be necessary to give effect to the reconstruction

or amalgamation.

(e) If any legal proceeding pending against the sick industrial proceeding

inform to Transferee Company of any such action before the date of

the order made under sec. 17(3).

(f) The reduction of interest or rights which shareholder have in sick

industrial company.

(g) The allotment to shareholder of sick industrial company of shares in

sick industrial company or as the case may be in transferee company,

96

and of shareholder claims payment in cash and not allotment of shares,

or where it is not possible to allot shares to any shareholder the

payment of cash to those shareholders, in full satisfaction of their

claims.

(h) Any other terms and conditions for the reconstruction or

amalgamation of the sick industrial company ;

(i) Sale of the industrial undertaking of sick industrial company

encumbrances and all liabilities of the company or other such

encumbrances and liabilities as may be specified, to any person,

including a cooperative society formed by the employees of such

undertaking and fixing of reserve price for such sale.

(j) Lease of the industrial undertaking of sick industrial company to any

person, including cooperative society formed by the employees of

such undertaking ;

(k) Method of sale of assets of Industrial undertaking of sick industrial

company such as by public auction or by inviting tenders or in any

other manner as may be specified and for the manner of publicity

thereof.

(l) Transfer of shares at their face value or at intrinsic value which may

be at descant value or such other value as specified to any industrial

company or any person including the executives and employees of

sick industrial company.

(m) All such incidental, consequential and supplemental matters as may

be necessary to secure the reconstruction or amalgamation and other

measures mentioned in the scheme are fully and effectively carried

out.

97

3(a) The scheme prepared by the operating agency shall be examined by the

Board and a copy of the scheme with modification, if any, made by

the Board shall be sent, in draft, to the sick industrial company and the

operating agency and in case of amalgamation, also to any other

company concerned, and the Board shall publish or cause to be

published the draft scheme in brief in such daily newspaper as the

Board may consider necessary, for suggestions and objections, if any,

within such period as the Board may specify.

(b) As above discussed according to such suggestions and objections,

Board may make such modifications.

(4) The scheme shall thereafter be sanctioned, as soon as may be by the

Board (referred as ‘sanctioned scheme’) and shall come in to force on

such date as Board may specify in this behalf, Provided that different

dates may be specified for different provisions of the scheme.

(5) The Board on recommendations of operating agency or otherwise,

review any sanctioned scheme and make, such modifications which

may deem fit or consider necessary,

(6) When a fresh scheme is prepared under section 18(5), the provisions

of sections, 18(3) and 18(4) shall apply in relation thereto as they

apply to in relation to a scheme prepared under section 18(1)

(6A) Where a sanctioned scheme provides for the transfer of any property

or liability of the sick industrial company in favour of any other

company or person or where such scheme provides for transfer of any

property or liability of any other company or person in favour of sick

industrial company then by virtue of and to extent provided in, the

scheme, on and from the date of coming in to operation of the

sanctioned scheme or any provision thereof, the property shall be

transferee to, and vest in, and the liability shall become the liability of

98

such other company or person or, as the case may be, the sick

industrial company.

(7) The sanction accorded by the Board under sub-section (a) shall be

conclusive evidence that all require – mats of this scheme relating to

the construction or amalgamation

(8) On and from the date of coming into operation of the sanctioned

scheme or any provision thereof the scheme or such provision shall be

binding on the sick industrial company and the transferee company or

the case may be.

(9) If any difficulty arises in giving effect to the provisions of the

sanctioned scheme, the Board may, on the recommendation of the

operating agency or otherwise, by order do anything, not inconsistent

with such provisions, which appears to it to be necessary or expedient

for the purpose of removing difficulty.

(10) The Board may, if it deems necessary or expedient so to do, by order

in writing, direct any operating agency specified in the order to

implement a sanctioned scheme with such terms and conditions and in

relation to such sick industrial company as may be specified in the

order.

(11) Where the whole of the undertaking of the sick industrial company is

sold under a sanctioned scheme, the Board may distribute the sale

proceedings to the parties entitled thereto in accordance with the

provisions of sections 529A and other provisions of Companies Act

1956.

(12) The Board may monitor periodically the implementation of the

sanctioned scheme.

99

Although till June 2004, the Sick Industrial Companies Repealing Act and

Companies (Second Amendment) Act haven’t made effective but following are the

provisions of SICA which are incorporated in Companies (Second Amendment) Act,

2002 and are relevant under new provisions also.

The provisions of SICA have been transferred to Companies Act in

much diluted form. These are no sections parallel to section 22 of

SICA (protection against suits and recovery proceedings) and section

32 of SICA (giving overriding provisions to the Act) in the Companies

Act which has limited the power of Tribunal in passing orders.

Under SICA, the power with respect to the rehabilitation of sick

company was with Board of Industrial and Financial Reconstruction

(BIFR)46

while winding up was with High Court. But under the new

Act both the power are with the Tribunal, Which has saved time and

avoided prolonged proceedings.

According to the new provisions a sick company is required to make a

reference to Tribunal, along with its scheme for revival under section

424 B(2) and panel’s auditor’s certificate giving reasons for sickness.

Tribunal will decide whether the company can revive on its own or

preparation of scheme is required. If rehabilitation scheme is required,

it will ask for preparation of such scheme.

A ‘Sick Industrial company’ is required to make reference to National

Company Law Tribunal. There are some additions in the definition of

‘Sick industrial company. ‘Sick Industrial Company’ means an

industrial company which has :

46 The Govt. of India had set up a Board of Industrial Financial Reconstruction under purview of Sick

Industrial Companies (Special Provision) Act, 1985. It had been established as a quasi-judicial body

of Department of Economic Affairs, Ministry of Finance for revival and rehabilitation of potentially

sick undertakings and for closure/liquidation of non-viable and sick industrial companies.

100

(i) The accumulated losses in any financial year equal to 50% or more of

its average net worth during 4 years immediately preceding such

financial year; or

(ii) Failed to repay its debts within any 3 consecutive quarters on demand

in writing for its repayment by a creditor / creditors of such company47

The second part of definition has been newly added. The term used is ‘creditor’.

Hence if any creditor (secured / unsecured) isn’t paid for 9 months despite demand

made by them, the company will be ‘sick industrial company’.

(Section 424A (1) (earlier under section 15(1) of SICA) provides for

making reference to Tribunal by the directors of the sick company.

Under section 424A (1) now the directors have to make reference as

well as prepare and submit a scheme of revival and rehabilitation to

the Tribunal.48

The Tribunal may on receipt of a reference under section 424A(1),

pass an order as to whether a company in respect of which a reference

has been made has become a sick industrial company and such order

shall be final [section 424 A(5)]. The Tribunal can accept or reject the

reference at that stage itself, on prima-facie basis and such order can

be passed without making an enquiry.

Section 18(1)49

of Sick Industrial Companies Act is similar to section

424 C (3) related to preparation to ‘Scheme of Revival’, except that

scheme shall be prepared by RBI, in this behalf be prepared by RBI, in

this behalf which has been newly added in new section.

47 Section 2 (46 AA.. the first part of definition was really definition of ‘ potentially sick company as

per section 23(1) of SICA, except that the words were used ‘peak net worth in last 4 years... second

part has been newly added. 48 For details see, Section 424 of The Companies (Second Amendment) Act, 2002. 49 For details see, Section 18(1) of Sick Industrial Companies Act, 1985

101

Under section 424 D (ii) a new provision has been added providing

that the creditors can also prepare a scheme for consideration by the

Tribunal.

Section 424 D (2) is similar to section 18(2) of SICA. Under section

424 D (2) (a) and 424 D (2) (b) it has been provided that if the

operating agency proposes amalgamation, it should be indicate

proposed terms of amalgamation. The company, in which the other

company is being, amalgamated in the ‘transferee company’. Both the

sick company and the other company will have separate Board of

Directors, separate capital, registered office etc., but after

amalgamation, these will be only one i.e. ‘Transferee Company.’ Thus

the scheme may provide for terms and conditions of transfer of

business, properties, assets and liabilities of sick industrial company,

constitution of Transferee Company, etc. Tribunal can pass order of

amalgamation and other suitable orders according to procedure under

section 394.

Under section 424 D (2) (h) the scheme may provide all other terms

and conditions for reconstruction or the amalgamation of the sick

company.

Under section 424(2)(k) the scheme may provide for the method of

sale of assets by public auction and under section 424 (2) (1) the

scheme may provide for the transfer or issue of shares of sick

company at face or discount value or any other value to any industrial

company or employees or executives of sick industrial company.

Section 18(3)(a) of Sick Industrial Companies Act is similar to

[section 424D (3) (9)] dealing with the procedure after the formulation

of scheme except that publication of advertisement was mandatory

under SICA, while it is optional under the new provisions.

102

A new provision has been added under [424D (3) (b)] providing that

copy of scheme shall be kept at registered office or at such place as

may be specified in the advertisement.

Section 19(3)(b) of SICA is similar to [section 424D(3)(c)] providing

that the scheme will be modified by the tribunal on the basis of

suggestions and objections received from sick company, operating

agency, transferee company, other company, interested in the

amalgamation, shareholder, creditors or employees, provisions,50

to

section 424D(3)(1) provides that in case of proposal involves

amalgamation with other company, proposal must be approved by the

shareholders of ‘other’ company in general meeting by a special

resolution prior to its consideration by the Board for approval.

Section 424 D(4) is similar to section 18(4) of SICA and 424(D)(7) is

similar to 18(6A) of SICA as well as section 424 D(8) is similar to

section 18(7) of SICA.

Section 424 D (10) is parallel to section 18(8) of SICA and section

424(14) is similar to section 18(9) of SICA and section 424. D(15) is

similar to section 18(10) as well as section 424D(16) to 424D(17) are

parallel to section 18(11) of SICA and 18(12) respectively.

SICA provisions were overriding provisions. Once scheme is sanctioned by BIFR, it

was conclusive and was valid irrespective of any provisions in contrary in any other

law. However, there exist no such overriding provisions in Companies Act. Hence,

even after approval of scheme, provisions, contained in Companies Act, Transfer of

Property Act, Indian stamp Act, Registration Act, etc., have to be complied with to

give effect to the scheme approved by the Tribunal.

50 for details see, section 424 of The Companies (second amendment) Act, 2002.

103

G. SECURITIES AND EXCHANGE BOARD OF INDIA ACT,

1992.

No doubt after liberalization of Indian economy and industrial policy in 1991 capital

market started growing at a very fast pace as such need was felt by controller of

capital issues (CCI) to have a single authority to regulate and administer the

securities law. With these objectives, Securities and Exchange Board of India

(SEBI), which was earlier established as an administrative body in April 1988, was

given statutory status under section 3 of SEBI Act, 1992,51

on 30th

January 1992 by

the central Government so as to protect interest of investor in securities. Controller

of capital issues was abolished with a view to have as a single agency to look after

control over capital market.

The Act has been amended from time to time. Latest amendment was made vide

Amendment Act, 2002 w.e.f. 29.10.2002.

In order to protect the interest of investors in securities section 11(b) of the

Securities and Exchange Board of India (Amendment) Act, 2002,52

empower the

Board as one of its functions of “regulating substantial acquisition of shares and

takeover of companies”. Securities and Exchange Board of India had formulated the

substantial Acquisition of shares and takeovers Regulations, 1994.53

Which

remained in force till February 20, 1997 when on recommendation of Justice P.N.

Bhagwati, Committee Report Regulation, 1994 was revised and Substantial

Acquisition of Shares and Takeovers Regulations, 1997 was enforced.54

The regulations are based on the recommendations of Justice P.N.Bhagwati

committee Report on substantial Acquisition of shares and Takeovers which has

defined the approach in drafting the regulations based on equality of treatment and

opportunity to all shareholders. The regulations are not exhaustive and final.

Economic environment is rapidly changing requiring suitable adjustment in

51 For details, see Section 3 of Securities and Exchange Board of India Act, 1992. 52 For details, see Section 11 (b) of Securities and Exchange Board of India (Amendment) Act, 2002. 53 Vide Notification No. SO 800, dated November 4, 1994. 54 Vide Notification No SI 124 (E), Dated February 20, 1997 (Annexure-1).

104

regulations so as to keep pace with the changing social and economic matrix and

emerging global scenario. The Regulations are explained in the light of observations

and recommendations of Bhagwati committee.

Guiding Principles given by Bhagwati committee: Bhagwati committee have

cited the ethical and moral obligations of the persons involved in process of takeover

and laid the guiding principles for the enforcement and observance of code.

Equality of treatment and opportunity to all shareholders.

Protection of interest of shareholders.

Fair and truthful disclosure of all material information by acquirer in

all public announcements and offer documents.

No information to be furnished by the acquirer and other parties to an

offer exclusively to any one group of shareholder.

Availability of sufficient time to shareholders for making informed

decisions.

An offer to be announced only after most careful and responsible

consideration.

The acquirer and all other intermediaries professionally involved in

office, to exercise highest standards of care and accuracy in preparing

offer documents.

Recognition by all persons connected with the process of substantial

acquisition of shares that there are bound to be limitations on their

freedom of action and on the manner in which the pursuit of their

interest can be carried out during the offer period.

All parties to an offer to refrain from creating a false market in

securities of Target Company.

105

No action to be taken by Target Company to frustrate an offer without

approval of shareholder. The committee has stated that in the event of

any ambiguity or doubt as to interpretation of the regulations the

concerned authority shall be guided by any one or more of the

aforesaid general principles having bearing on the matter.

Section 15 H55

of SEBI Act prescribes penalty for non disclosure of

acquisition of shares and takeovers.

If any person who is required under this Act or any rules or regulations made there

under, fails to:

(i) Provide that if a person fails to disclose the aggregate of his

shareholding in a body corporate before he acquires any share in the

body corporate or has been required under the Act, rules or regulations

to make such disclosure he will have the penalty Rs.5,00,000 per

default.

(ii) If a person who is required under the Act, rules or regulations to make

a public announcement to acquire shares at a minimum price he will

be fined Rs.5,00,000 per default.

Section 11(A)56

: Matters to be disclosed by the companies.

Section 11A provides that without being prejudice to the provisions of the

Companies Act, 1956 (1 of 1956) the Securities and Exchange Board may, for the

protection of its investors, specify the regulation which is as follows:

(a) That any matter either relating to issue of capital, transfer or securities,

or other matter incidental thereto shall be disclosed by the companies.

55 For details see, section 15H or Securities and Exchange Board of India (Amendment) Act, 2002. 56 Section 11A of The Securities Exchange Board of India Act, 1992 has been inserted by Securities

Law (Amendment) Act, 1995 dated 25.01.1995.

106

(b) That any manner in which such matter shall be disclosed by the

companies.

Section 11(B): Powers to issue Directions

This section provides that if after making or inquiring or causing to make on inquiry,

the securities Board is satisfied that it is necessary in the interest of investors, or

orderly development of security market it may issue such directions to any company

in respect of matters specified in section 11A as may be appropriate in the interest of

investor in securities and securities market.

Section 15(1): Power to Adjudicate

This section provides that for the purpose of adjudicating under section 15(H) the

Board is entitled to appoint under section 15(1) any of its officer not below the rank

of Division chief as adjudicating officer for holding an enquiry in prescribed manner

after giving any person concerned reasonable opportunity of being heard for the

purpose of imposing penalty.

The takeover code is not meant to ensure proper management of the business of the

company or to provide remedies in the event of mismanagement. It has a limited

role. Its main objective is to ensure equality of treatment and opportunity to all

shareholders, and afford protection to them, in the event of substantial acquisition of

shares and takeovers the test is to whether the other shareholders have been treated

unfairly in context of takeovers (Regulation 5)57

SEBI (Substantial Acquisition of shares and Takeovers) Regulations, 1997 –

The SEBI Act, 1992 under section 30 of SEBI Act 1992, the Security Board

is empowered to make the following regulations further named as SEBI

(Substantial Acquisition of shares and Takeovers) Regulation, 1997.

57 Punjab State Industrial Corporation Ltd. Vs. S.E.B.I (2001) 32 SCL 631 (Mum)

107

Regulation 1258

: Acquisition of control over a company.

Regulation 12 provides that irrespective of whether or not there exists any

acquisition of shares or voting rights in a company, no acquirer shall acquire control

over the target company, unless such person makes public announcement to acquire

shares and acquires such shares in accordance with the Regulations:

Provided that nothing contained herein shall apply to any change in control which

takes place in pursuance to a resolution passed by the shareholder in general

meeting.

Regulation 1359

: Regulation is supplementary to Regulation 12 and provides that

before making public announcement the acquirer shall appoint a merchant banker in

category I holding a certificate or registration granted by the Board, who is not

associate of or group of the acquirer or Target Company.

Regulation 1760

: It provides that the public announcement of offer or letter of

offer issued in relation to acquisition of shares shall not contain any ‘misleading

information’.

Regulation 761

: Acquisition of 5% and more shares or voting rights of company

regulation 7 describes that:

(i) The acquirer, who acquires shares or voting rights which (taken

together with share or voting rights, if any held by him) would entitle

him to more than 5% shares or voting rights in a company;

58 For details see Regulations 12 of SEBI (Substantial Acquisitions of Shares and Takeovers)

Regulation, 1997. 59 For details see Regulations 13of SEBI (Substantial Acquisitions of Shares and Takeovers)

Regulation, 1997. 60 For details see Regulations 17 of SEBI (Substantial Acquisitions of Shares and Takeovers)

Regulation, 1997. 61

For details see Regulations 7 of SEBI (Substantial Acquisitions of Shares and Takeovers)

Regulation, 1997.

108

(ii) The disclosures mentioned in sub-regulation (1) shall be made within

four working days of (a) the receipt of intimation of allotment of

shares (b) the acquisition of shares or voting rights, as the case may

be.

(iii) Every company, whose shares are acquired in a manner referred to in

sub-regulation (i), shall disclose to all the stock exchanges on which

the shares of the said company are listed the aggregate number of

shares held by all such persons referred above within 7 days of receipt

of information under sub-regulation (i).

Regulation 1062

: Acquisition of 15% of more of the shares or voting

rights if company.

Above regulation says that no acquirer shall acquire shares or voting rights which

taken together with shares or voting rights, if any held by him or by persons acting

in concern with him entitle him to exercise (fifteen %) 63

or more of the voting rights

in a company, unless such acquirer makes public announcement to acquire shares of

such company in accordance with the Regulation.

Regulation 1164

: Consolidation of Holdings.

(i) No acquirer who, together with person acting in concern, with him,

has acquired, in accordance with legal provisions (15% or more but

less than 75%)65

of shares or voting rights in a company, shall acquire,

either by himself or through or with persons acting in concert with him

62

For details see Regulations 10 of SEBI (Substantial Acquisitions of Shares and Takeovers)

Regulation, 1997. 63 Substituted for 10% by the SEBI (substantial Acquisition of Shares and Takeovers) Amendment

Regulation, 1998 w.e.f. 28.10.1998. 64

For details see Regulations 11 of SEBI (Substantial Acquisitions of Shares and Takeovers)

Regulation, 1997. 65 Substituted for 2% by the SEBI (Substantial Acquisition of Shares and Takeovers) Amendment

Regulation, 1998 w.e.f. 28.10.1998.

109

additional or voting rights entailing him to exercise more than (5%)66

of voting rights, in any period of 12 months, unless such acquirer

makes a public announcement to acquire shares in accordance with the

regulations.

(ii) No acquirer shall acquire shares or voting rights which (taken together

with shares or voting rights, if any, held by him or by person acting in

concert with him), entitle such acquirer to exercise more than 51% of

voting rights in a company, unless such acquirer makes a public

announcement to acquire shares in accordance with the regulations.

Explanation to Regulations 10 and 11 include

(1) Direct acquisition in a listed company to which regulation apply;

(2) Indirect acquisition by virtue of acquisition of holding companies,

whether listed or unlisted whether in India or abroad.

Regulation 3067

: Bailout Takeover

It deals with takeover of financially weak company;

(1) It deals with substantial acquisition of shares in a financially weak

company (not being sick industrial company), in pursuance to a

scheme of rehabilitation by public financial institution or a scheduled

bank;

(2) The scheme may provide for acquisition of shares in financially weak

company, in any of the following manner;

(a) Outright purchase of shares; or

66 Substituted for words “not less than 10% but more than 51% by SEBI Amendment Regulations

1998 w.e.f. 28.10.1998. 67 For details see Regulations 30 of SEBI (Substantial Acquisitions of Shares and Takeovers)

Regulation, 1997.

110

(b) Exchange of shares.

(c) Combination of both;

Provided that the scheme as far as possible ensures that after the proposal acquisition

the erstwhile promoters do not own any shares in case such acquisition is made by

new promoters pursuant to such scheme.

Explanation to Regulation 30 says that “financially weak company” means a

company, which has at the end of the previous financial year accumulated losses,

which has resulted in erosion of more than 50% but less than 100% of its net worth

as at the beginning of the previous financial year, that is to say, of the sum total of

the paid up capital and free reserves.68

Regulation 31: Manner of Acquisition of shares

(1) Before 69

giving effect to any scheme of rehabilitation the lead

institution shall invite offers for acquisition of shares from at least

three parties.

(2) The lead institutions shall select one of the parties having regard to the

managerial competence, adequacy of financial resources and technical

capability of the person acquiring shares to rehabilitate the financially

weak company.

(3) The lead institution shall provide necessary information to any person

intending to make an offer to acquire shares about the financially

weak company particularly in relation to its present management,

shareholding pattern, financial holding and performance and assets

and liabilities of such company for period covering 5 years from the

date of offer as also the minimum financial and other commitment

expected from the person acquiring shares for such rehabilitation.

68Ibid. 69For details see Regulation 31 of SEBI (Substantial Acquisition of Shares and Takeovers)

Regulation, 1997.

111

Regulation 3370: Persons Acquiring shares to make an offer person acquiring

shares who has been identified under Regulation 32(2), shall on receipt of

communication make a formal offer to acquire shares from the promoters or person

– in charge of the affairs of management of the financially weak company, financial

institutions and also other shareholder of the company at a price determined by

mutual negotiation between the person acquiring the shares and lead institution.

Explanation: Nothing in this regulation shall prohibit the lead institution offering

the shareholdings held by it in the financial weak company as part of scheme of

rehabilitation.

Regulation 3471

: Persons acquiring shares to make Public Announcement.

(1) The person acquiring shares from promoters or the persons-in-charge

of the management of the affairs of the financial weak company or the

financial Institution shall make a public announcement of his intention

of acquisition of shares from the other shareholder of company.

(2) Such public announcement shall contain relevant information about

the offer including the information about identity and background of

person acquiring shares, numbers and percentage of shares proposed

to be acquired, offer price, specified date, the dale of date of opening

of offer and period for which the offer shall be kept open and such

other particulars as may be required by the board.

Regulation 3772

: Acquisition of shares by a state level public financial

Institution.

Regulation 37 provides that where proposal for acquisition of shares in respect of

financially weak company is made by state level public financial institution, the

provisions of these regulations in so far as the relate to scheme of rehabilitation

70 See Regulation 33 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 1997. 71 See Regulation 34 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 1997. 72 See Regulation 37 of SEBI (Substantial Acquisition of Shares and Takeovers) Regulation, 1997.

112

prepared by public financial institution, shall apply except that in such a case the

Industrial Development Bank of India, a cooperative establishment established

under IDBI Act, 1964 shall be the agency for ensuring the compliance of these

regulations for acquisition of shares in the financially weak company.

H. THE SECURITIES CONTRACTS (REGULATION) ACT,

1956.

The securities contract (Regulation) Act is mainly deals with provisions for

regulating the exchanges and to ensure that transactions in stock exchanges are

carried out in transparent and regulated manner. The act gives powers to central

Government, however, almost all these powers have been delegated to SEBI73

.

Section 22(A) was omitted by Depository Act, 1996 with effect from 20.09.1995 but

its ingredients were adopted in the form of section 111A of the Companies Act,

1956 and again this section 22(A) with sections 22(B) to 22(F) were inserted by the

Securities Law (Amendment) Act, 1999.

Section 22(A) deals with right of appeal to securities appellate Tribunal against

refusal of stock exchange to list securities of public companies74

section 22(B) deals

with the procedures of Securities Appellate Tribunal which are equivalent to that to

code of civil procedure, 1908 (5 of 1908) and section 22f deals with appeal can go to

High Court.

I. DEPOSITORY LAW TO FACILITATE HOSTILE OR

FRIENDLY TAKEOVERS (THE DEPOSITORIES ACT,

1996).

Central government introduced the depository system to smoothen the registration of

transfer of shares by the companies and eliminate refusal to such transfer, hereby

facilitating takeovers both hostile and friendly. The Depositories Act, 1996 has been

73 Vide Notification no 1/57/SE/93 dated 13.09.1994. 74 For details see, section 22A of Securities Contract (Regulation) Act, 1956.

113

enforced on September 20, 1995, and it will remove hindrance in transfer and

transmission of shares and create healthy conditions in corporate world followed by

SEBI (Depositories and participant) Regulations, 1996, providing for the rights and

obligations of the depository and other constituents.

J. MERGER AND STAMP DUTY PROVISIONS.

Corporate combination (such as merger and acquisitions provides revenue to state

exchanger in certain states stamp duty acts. Indian stamp Act provides for stamping

of instruments. While Maharashtra has amended definition of instruments to in order

of mergers. Indian stamp act applicable to Delhi has not been so amended Gujarat

state also levy stamp duty on business combination.75

In a recent case76

definition of instruments has been defined and their transfer has

been declared transfer of assets and liabilities takes effect by an order of the court.

Once shareholders of Transferee Company receive consideration, it would deemed

as if owner has received the consideration.

In recent Judgment77

of Delhi High Court held that “the transferor company is a

hundred percent subsidiaries of the transferee company. In view of the requirement

of item 55 of the notification, dated 25th

Dec, 1937 requires a certificate to be

produced by the parties to the instrument that the conditions prescribed in the instant

case are fulfilled. Compliance with the notification cannot be waived. It is also held

that the Notification dated 25 Dec, 1937 is applicable and binding. As a result, the

stamp duty chargeable on approved scheme of amalgamation would stand remitted

in terms thereof.

However, stamp duty being a state subject, the above would only be applicable in

those states where the state government follows the notification of the centre. At

present stamp duty payable as under.

75 www.feeleminds.com/forum/stam duty-on-merger-P38472 76 Hindustan Lever vs. State of Maharashtra (2003). 48 SCL 630 77 Delhi Towers Ltd vs. GNCT of Delhi (C.A. No. 466 of 2008 in Company Petition No.50 of 2003

(Delhi)

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(a) Maharashtra – 0.7% of value of shares allotted or 7% of value of

immovable properties in Maharashtra subject to ceiling of 10% of

value of shares allotted.

(b) Gujarat – Maximum 2% of value of shares allotted and other

consideration (as per slab).

(c) Karnataka-0.1% of value of properties in Karnataka. At present no

stamp duty is payable in other states.

K. MERGER AND INCOME TAX PROVISIONS.

Income Tax is vital among all tax laws, which affect the amalgamation of

companies, from the angel of tax saving and treatment of company’s books of

accounts. Indian Income Tax Act has provisions for. Tax concern by for mergers /

demergers between two Indian companies. These mergers / demergers need to

satisfy the conditions pertaining to section 2 (19AA) and section 2(1B) of the Indian

Income Tax Act as per applicable situation. In case of an Indian merger when

transfer of shares occur for a company they are entitled to a specific exemption from

capital gains tax under Indian Income – Tax act. These companies can either be

Indian origin or foreign ones. But there is different set of rules in foreign company

mergers. It can be noted that for foreign company mergers the share allotment in the

merged company in place of shares surrendered by the amalgamating foreign

company would be termed as a transfer, which would be taxable under Indian tax

law. And under section 5(1), the global income accruing to an Indian company

would also be included under the head of ‘Scope of income’ for Indian company78

.

In 2007, Vodafone Group bought the Indian Telecom assets of Hong Kong’s

Hutchison Telecommunications International Ltd. It paid us$11 billion for a 67%

stake in Hutchison Essar. The latter was the operating company in India for what is

now the third larger operator with 111 million users. Vodafone was the buyer,

Hutchison the seller, made huge capital gains. Yet since then, Vodafone has been

78 www.economywatch.com/merger acquisition/laws.html.

115

betting it out in the courts against the Indian income tax (IT) department, which has

saddled it with a US $ 2.1 billion tax plain. Hutchison, which pocketed the capital

gains, is nowhere in picture.

In such transactions, the buyer is supposed to deduct tax at source (or withholding

tax) and pay to the government. This is a transaction involving foreign companies

and the seller can easily disappear once the money is in the bank. The structure in

this case was extremely complex with nearly 50 companies involved. Essentially,

the court upheld the IT departments contention that if the assets are in India, the

taxation should also be in India.

The Bombay High court has attempted a difficult distinction. On one hand are the

actual shares (in Vodafone case, Just one share of layman island was transferred).

This is not taxable. Balanced against this are the assets owned by company in India.

This is Taxable.79

Present status-on Sept 27, 2010, Supreme court gave the tax department 4 weeks to

work out the liability it is claiming from UK based Vodafone group for buying

Hutchison telecom business. The next hearing will be on 25th

October. The tax

department had revised a demand of Rs.12,000/- crore from Vodafone. The Bombay

High Court, earlier this month, dismissed Vodafone’s petition, but said Indian tax

authorities would not issue a final order for the next eight weeks.80

Income tax provisions related to acquisitions are as follows:

Section 281

(1B)82

of income Tax Act, 1961 defined ‘amalgamation’ as merger of

two or more companies to form one company in such a manner that all property and

liabilities of amalgamating company or companies become property of amalgamated

company. ‘Amalgamating company means a company which is merging and

‘Amalgamated company’ means a company with which it merger or company which

79 http://knowledge.wharton.upenn.edu/india/article 9529. 80 Article No capital gains in hutch deal, no tax payable: Vodafone, Times of India, 28th Sept. 2010. 81 Inserted by finance (No.2) Act 1967 w.e.f. 1.04.1967. 82 Renumbered for “(1A)” by the Direct Tax Laws (Amendment) Act, 1987 w.e.f.01.04.1967.

116

is formed after merger. However, ‘acquisition of property of one company by

another is not ‘amalgamation.’

Section 47(IV) of the Income Tax Act, 1961 provides that amalgamation is not

considered as transfer and hence there is no liability of capital gains tax.

Section 2(22) (a) of the Income Tax Act, 1961 provides that the transfer of assets by

one company to another in a scheme of amalgamation is not regarded as distribution

of profits. Amalgamation involves merger and not liquidation and hence section

2(22/C) of Income Tax Act, 1961 is also excluded. After amalgamation, profits of

amalgamating and amalgamated company are calculated together.

Proviso to section 32 of Income Tax Act, 1961 provides that total depreciation

allowable to amalgamating company and the amalgamated company cannot exceed

the normal depreciation allowable under the Act if the amalgamation had not taken

place.

In respect of unabsorbed losses (accumulated losses) of amalgamating company,

these are permitted to be carried forward in hands of amalgamated company only if

conditions of section 72A of Income Tax Act, 1961 are prescribed.

Sections 35AB (3), 35ABB(7) and 35E(7A) of Income Tax Act, 1961 deals with

expenditure on license to operate telecommunication services or expenditure on

prospecting is tax deductible in the hand of amalgamated company. Under section

35(DD)(1) of the Income Tax Act, 1961 the expenditure incurred on amalgamation

is deductible in five years in equal instalments@20% per year.

Section 72 of Income Tax Act, 1961 provides that loss of business can be set off

against profits of subsequent year or years. Such carry forward loss is permitted upto

8 assessment year.

117

Section 72(A) of Income Tax Act, 196183

provides that loss of the amalgamating

company can be carried forward in the amalgamated company subject to following

conditions.

Amalgamated company should hold atleast 75% of the assets of

amalgamating company acquired as a result of amalgamation, at least

for 5 year.

The amalgamated company should continue business of amalgamating

company at least for 5 years.

It should make efforts to ensure revival of the business of

amalgamating company, as per conditions prescribed in Rule 9(c) of

information Technology Act, 2000. After five years, the business of

amalgamating company need not be carried by amalgamated

company.

Rule 9(c) of information Technology Act, 2000 the amalgamated company shall

achieve level of production of atleast 50% of the installed capacity of the

undertaking which was amalgamated (i.e. of amalgamating company). Within 4

years from date of amalgamation and continue to maintain the minimum leave till

end of 5 years from date of amalgamation.

ACCOUNTING ASPECTS OF MERGER AND ACQUSITION --

ACCOUNTING STANDARD

India, merger, amalgamation and takeover accounting is done in the traditional basis

and in the case of vendor whose books of accounts are to be closed as the business

goes into liquidation. The transferee or the acquirer assumes the status as purchaser

in whose books of accounts the acquisition is recorded as purchase transaction. All

the companies are expected to follow the Accounting Standard (AS) 14 to record the

merger transactions in their books. This standard is mandatory in nature. The

83 For details see, Section 72 (A) of Income Tax Act, 1961.

118

guidance note on Accounting Treatment of Reserves in Amalgamation issued by the

Institute in 1983 stands withdrawn from the aforesaid date.

Methods of accounting for amalgamations

There exist two main methods of accounting for amalgamations:

POLLING OF INTEREST METHOD

Under the pooling of the Interest method, the assets, liabilities and

reserves of the transferor company are recorded by the transferee

company at their existing carrying amounts (after making adjustment

required in paragraph 11). If at the time of the amalgamation, the

transferor and transferee companies have conflicting accounting

policies, a uniform set of accounting policies is adopted following

amalgamation. The effects on the financial statements of any changes

in accounting policies are reported in accordance with Accounting

Standard (AS) 5. Prior Period and Extraordinary items and changes in

accounting period.

PURCHASE METHOD

Under the purchase method the transferee company accounts for

amalgamation either by incorporating assets and liabilities at the

existing carrying amounts or by allocating the consideration o

individual identifiable assets and liabilities of Transferor Company on

the basis of their face values at the date of amalgamation. The

identifiable assets and liabilities may include assets and liabilities not

recorded in the financial statements of transferor company.

Where assets and liabilities are restarted on the basis of their face

value, the determination of fair values may be influenced by the

intention of Transferee Company. For example the transferee

company may intend to effect changes in activities of the transferor

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company which necessitate the creation of specific provisions of

expected costs, i.e. planned employee termination and ......relocation

costs. The consideration for amalgamation consists of securities, cash

or other assets.

TAX IMPLICATIONS OF MERGER AND TAKEOVER

Section 2(B) of Income Tax Act, 1961 defines Amalgamation as:84

“Merger of one or more companies with another company or merger of two or more

companies to form one company in such a manner that-

(i) all property of amalgamating company or companies immediately

before amalgamation becomes the property of amalgamated company

by virtue of the amalgamation;

(ii) all liabilities of the amalgamating company or companies immediately

before the amalgamation become the liabilities of amalgamated

company by virtue of amalgamation;

(iii) shareholders holding not less than three-fourth85

in value of the shares

in amalgamating company or companies become shareholders of the

amalgamated company by virtue of amalgamation,

Otherwise than as a result of acquisition of property of one company by another

pursuant to purchase of such property by the other company or as a result of

distribution of such property to the other company after winding up of first

mentioned company.

“Amendments to provisions relating to amalgamation of the companies”-The

Finance (No.2) Act, 1967 has made several provisions in the Income Tax Act and

Gift Tax Act with a view to facilitate the merger of uneconomic company units with

other financially sound company units in the interest of the increased efficiency and 84 A.K. Majumdar and Dr.G.K.Kapoor, Company Law, 2004 at Pg.543; For details see section 2(1B)

of the Income Tax Act.1961. 85 Substituted for “9/10” by Finance Act, 1999 w.e.f. 1st April 2000.

120

productivity and also to remove certain tax liabilities which are attracted in case of

the “amalgamating company” as well as the shareholders of the amalgamating

company who receives shares in the “amalgamated company” in lieu of their

shareholdings in the amalgamating company. All these amendments take effect from

01.04.1967 i.e. for and from the assessment year 1967-68.

Where, the amalgamating company sells or otherwise, transfer to amalgamated

company any capital assets used by it for scientific research related to business, or

any capital assets of the nature of patent rights or copyright or any capital asset used

for promoting family planning amongst its employees, the amalgamated company

will be entitled to amortise the capital cost of such assets against its profits, under

the relevant provisions of Income Tax Act under sections 35, 35A and 36(1) (ix)

respectively, in the same manner and to the same extent as the amalgamating

company would have been, if it had not sold or transferred the assets to

amalgamated company. In such case, the amalgamating company won’t be entitled

to any terminal benefits under Sections 35, 35A and 36(1) (ix) in relation to such

capital assets. [Section 35(5) Section 35A (6) and third provision to section 36(1)

(ix)]86

(i) Exemption from capital gains.

No capital gains or loss will be computed in the assessment of the amalgamating

company in respect of any capital assets transferred by it to the amalgamated

company, where the later company is an Indian Company.

On transfer of business undertaking as going concern in any manner attracts the

provisions of section 45 of Income Tax Act. But section 47 provides exemptions for

certain transfers, not to be treated as transfer of capital gains purpose clause (vi) and

(vii) of section 4787

provides relief to transfer of assets resulting for amalgamation

and demerger of the companies.

86 Section 35(5), Section 35A (6), third proviso to section 36(1)(ix) of Income Tax Act, 1961. 87 Section 47 clause (vi), (vib), (vic) and (vii) of Income Tax Act, 1961.

121

(ii) Exemption in case of Amalgamation.

Section 47 was amended w.e.f. 1.4.1967 providing exemption from applicability of

section 45 to taxation of capital gains on transfer of assets in case of amalgamation.

After 1967 amendment, The supreme court need in CIT vs. Madurain Mills

Company Ltd.88

that no transfer is involved in getting shares from transferee

company on amalgamation.

In CIT vs. Master Raghuveer Trust,89

the Karnataka court held that no transfer is

involved when a shareholder gets some shares or cash from the amalgamated

company in lieu of his shares in the amalgamating company.

2. A Transfer of capital assets under amalgamation is not

transfer

In Shaw Wallace and Co. vs. CIT,90

it was pointed out that under the scheme of

amalgamation, the amalgamating company, transfers their capital assets to

amalgamated company, the scheme of amalgamation further provides that the

amalgamating companies would be subsequently dissolved. It was held that

transaction would not be classed as a transfer, or of any capital gains or loss

resulting there from, even though their may be the extinguishment of rights.

Similarly, any allotment of the shares as a result of amalgamation would not be

treated as involving a transfer in the hands of the shareholders.

3. Consideration only in shares and not in Bond/debentures.

In CIT vs. Gautam Sarabhai trust,91

. It was pointed out that even where all necessary

formalities with regard to amalgamation with a view to secure exemption under this

clause were sought to be compiled with but it was found as a fact that the transaction

was the subterfuge or device for the avoidance of tax liability, the court could refuse

88 (1973) 89ITR45 SC. 89 (1985) 151 ITR 368 (KAR) 90 (1979) 119 ITR 399 (Col) 91 (1980) 173 ITR 216 Guj.

122

to grant sanction to the scheme of amalgamation itself. The amalgamated company

is not liable to make payments on tax liability of amalgamating company accruing

after amalgamation.

L. BANKING COMPANIES ACT, 1949.

Amalgamation of Banking companies is controlled by the special provisions of

Banking companies is controlled by the special provisions of Banking Companies

Act, 1949. In India no company may carry on Banking company business except

under a license issued by the Reserve Bank of India and all such Banking companies

are subject to provisions of the Banking Companies Act, 1949.

PROVISIONS RELATING TO VALUATION OF SHARES AND

EXCHANGE RATIO DURING MERGER AND AMALGAMATION OF

COMPANIES

Valuation is a device to assess the worth of the enterprise which is subject to merger

or takeover so that consideration amount could be quantified and price of one

enterprise for the other could be fixed which in turn is to be paid in the form of

exchange of shares, in merger and amalgamation, shares of companies are expert

valuers comprising financial experts, accounting specialists technical and legal

experts. In case of amalgamation in third company, the shareholders of both the

companies get shares in third company in proportion to share valuation.. In case of

merger, the shareholders of the company being merged get shares of the company in

which it is merging, in proportion to the valuation of shares of both the companies.

Valuation of shares is the matter of judgement and is often subjective as no strait

jacket mathematical formula can be established. Valuation can be done on various

methods like yield method, asset value method and market value method, but

ultimately the valuer has to consider various intangible aspects.

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(i) GUIDELINES FOR VALUATION OF SHARES

The Central Government had come out with guidelines for valuation of shares in

1991. All India Financial Institution and banks are following them. These guidelines

lay down techniques for calculations of “Fair value (FV), “Net asset Value (NAV)”

and “Profit Earning Capacity value (PECV)” and the “Market value (MV)” in case

of quoted shares.92

(ii) NET ASSET VALUE (NAV)

The Net Asset Value as at the latest audited balance sheet, will be calculated starting

from the total assets of the company or of the branch and deducting there from all

debts, dues, borrowing and liabilities including current and likely contingent

liabilities and preference, capital, if any. In case of companies, the Net Asset value

as calculated from the assets side of the balance sheet will be cross checked with

equity share capital plus free reserves an surplus, less the likely contingent

liabilities.

(iii) PROFIT EARNING CAPACITY VALUE (PECV)

It will be calculated by capitalizing the average of the after tax profits at the

following rates:

(i) 15% in case of manufacturing companies.

(ii) 20% in case of trading companies.

(iii) 17.5% in case of intermediate companies (companies whose turnover

from trading activity is more than 40% but less than 60% of their total

turnover). Where a company has high profitability rate as revealed by

the percentage of after tax profits to the equity capital of company or

where a company has diversified its activities and is a multi-unit

company the capitalization rate of 15% could be liberalized upto

maximum of 12% for arriving at fair and equitable valuation.

92Ministry of Finance, Department of Economics Affairs, F.No.11(21) CCI(11)/90 dated: 13.07.1990.

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(iv) MARKET VALUE (MV)

Concept of market value arises in those cases where the shares being values are

listed on a stock exchange. In such cases, the market value will be taken cognizance

of in the following manner:

Average market price will be determined taking into account the stock

market quotations in preceding three years (after appropriate

adjustment of bonus issues ad dividend payments) as under:

The high and low of preceding two years; and

The high and low of each month in preceding 12 months.

The average market price will be kept in background as a relevant

factor while setting the fair value (FV) unless there are reasons to

believe that the market price is vitiated by speculative transactions or

manipulative practices.

The reasonableness of fair value will be checked against the average

market price on the following lines:

If the average of the net asset value and the profit earning capacity

value 15% capitalization rate is less than the average market price by

about 20% only, then the average will be regarded as fair value.

If average of net asset value and profit earning capacity value is less

than the average market price by substantial margin, then the profit

earning capacity value may be revoked by liberalizing suitably the

capitalization rate of 15% in the following manner.

If average market price is more than 20% to 50% of the fair value,

capitalization rate will be 12%. If the average market price is more

than 50% to 75% of fair value, capitalization rate will be 8%.

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The fair value will be determined on the basis of average of the net asset value and

profit earning capacity value.

In CWT v. Mahadeo Jalan,93

the Supreme Court of India has laid down the

following guidelines.

Regard should be had to price of shares prevailing in stock market.

Profit Earning capacity (yield method) or dividend method should be

considered. If the result of two methods differs a golden means should

be found.

In computing yield, abnormal expenses will be added back to calculate

‘yield’ (e.g. the company incurring expenses disproportionate to

commercial venture, probably to reduce income tax liability.

If company is ripe for wining up, break-up value method to determine

what would be realized in winding up process should be considered.

Valuation can be done on basis of the assets value, if reasonable

estimation of future profits and dividends is not possible due to wide

fluctuations in profits and uncertain conditions.

Though these guidelines are not binding, the principle indicates above should

be kept in mind while valuing the shares.

Waiting period in Merger.

International experience shows that 80-85% of mergers and acquisitions do not raise

competitive concerns and are generally approved between 30-60 days. The rest tend

to take longer time and, therefore, laws permit sufficient time for looking into

complex cases. The International Competition Network, an association of global

93 (1972) ITR 621 (SC)

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competition authorities, had recommended that the straight forward cases should be

dealt with within six weeks and complex cases within six months.

The Indian competition law prescribes a maximum of 210 days for determination of

combination, which includes mergers, amalgamations, acquisitions etc. This

however should not be read as the minimum period of compulsory wait for parties

who will notify the competition commission. In fact, the law clearly states that the

compulsory wait period is either 210 days from the filing of the notice or the order

of the commission, whichever is earlier. In the event the commission approves a

proposed combination on the 30th

day, it can take effect on the 31st day. The internal

time limits within the overall gap of 210 days are proposed to be built in the

regulations that the commission will be drafting, so that the over whelming

proportion of mergers would receive approval within a much shorter period.

The time lines prescribed under the act and the Regulations do not take cognizance

of the compliances to be observed under other statutory provisions like the SEBI

(Substantial acquisition of shares and Takeovers) Regulations, 1997 (‘SEBI

Takeover Regulations’). SEBIO Takeover Regulations require the acquirer to

complete all procedures relating to the public offer including payment of

consideration to the shareholders who have accepted the offer, within 90 days from

the date of public announcement. Similarly, mergers and amalgamations get

completed generally in 3-4 months’ time. Failure to make payments to the

shareholders in the public offer within the time stipulated in the SEBI Takeover

regulations entails payment of interest by the acquirer at a rate as may be specified

by SEBI. [Regulation 22(12) of the SEBI Takeover Regulations] It would therefore

be essential that the maximum turnaround time for CCI should be reduced from 210

days to 90 days.

Intellectual Property Due Diligence in Mergers and Acquisitions

The increased profile, frequency, and value of intellectual property related

transactions have elevated the need for all legal and financial professionals and

intellectual property (IP) owner to have thorough understanding of the assessment

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and the valuation of these assets, and their role in commercial transition. A detailed

assessment of intellectual property asset is becoming an increasingly integrated part

of commercial transaction. Due diligence is the process of investigating a party’s

ownership, right to use , and right to stop others from using the IP rights involved

in sale or merger --- the nature of transaction and the rights being acquired will

determine the extent and focus of the due diligence review . Due diligence in IP for

valuation would help in building strategy, where in:

(a) If intellectual property asset is underplayed the plans for maximization

would be discussed.

(b) If the trademark has been maximized to the point that it has lost its cachet in

the market place, reclaiming may be considered.

(c) If mark is undergoing generalization and is becoming generic, reclaiming the

mark from slipping to generic status would need to be considered.

(d) Certain events can devalue an intellectual property asset, in the same way a

fire can suddenly destroy a piece of real property. These sudden events in

respect of IP could be adverse publicity or personal injury arising from a

product. An essential part of the due diligence and valuation process

accounts for the impact of product and company – related events on assets –

management can use risk information revealed in the due diligence.

(e) Due diligence could highlight contingent risk which do not always arise

from intellectual property law itself but may be significantly affected by

product liability and contract law and other non intellectual property realms .

Therefore intellectual property due diligence and valuation can be correlated

with the overall legal due diligence to provide an accurate conclusion the

asset present and future value’

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Adequacy of Indian legal provisions in cross border mergers

and acquisition

The Companies Act, 1956 on the statute book is the largest legislation in India but

still probably inadequate in terms of dealing with cross border mergers and

acquisitions. Corporate Restructuring has been provided for in six sections from

Section 390 onwards. Therefore an important question arises as to what kind of law

India requires in order to deal with such a situation. Cross border mergers have

become an ever increasing phenomenon in the global commercial marketplace. Thus

what happens when an Indian company wants to invest abroad or a foreign company

wants to invest in India? The legal regime in India provides no answer to such an

important question and is therefore in constant search for answer to such a question.

Globalization has enabled third world countries to become global giants, and they

have been competing with western MNCs like never before. A strong legal regime

dealing with cross border mergers is required if there has to be a more equitable

spread of world economic power.

The phenomenon of global commercial activity has been enhanced and is dependent

on the legal or regulatory mechanism in any country. There are commercial

activities of various kinds and one amongst them is the buying and selling of

business corporations all over the world. For India, corporate restructuring is not a

new phenomenon and it has been further boosted by takeovers of foreign firms by

large Indian multinationals abroad. This augurs well for our country but an

important question that arises here is whether India has sufficient laws to deal with

cross border mergers and acquisitions. Surely there are provisions in the Indian

Companies Act, 1956 dealing with domestic mergers and acquisitions, but is there

any legislation or part of it which is concerned with cross border mergers and

amalgamations exclusively. The answer is no. The solution to this problem is sought

to be proposed in the paper whereby under the broad theme, the paper would analyze

the need for a cross border mergers and acquisitions law for India instead of a few

scattered provisions here and there.

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Global commercial activity demands effective regulation which in turn depends on

the domestic legal mechanism influencing the international nature of transactions.

Indian law on the topic is scarce as well as scattered in the form of various

provisions here and there and does not offer much promise in the long run when the

Indian sector in terms of transnational corporate restructuring would start to grow.

The Points are proposed as a measure to formulate an efficient regulatory

mechanism dealing with cross border Merger and Acquisition. There are various

options available before a country which does not have a law specifically dealing

with cross border mergers and acquisitions in a fast paced economy. Where can a

country progress if there are no legal or regulatory measures governing this

emerging phenomenon of economic activity. Stricter regulatory regimes should not

impede and must always further the process of economic development. Therefore in

line with the thinking on the subject, the following points are proposed as a measure

to formulate an efficient regulatory mechanism dealing with cross border mergers

and acquisitions:

There can be categorization of companies in the manner suitable for

facilitating a cross border merger or acquisition. This could be done on the

basis of turnover of the company, the asset base of the company, profit

making activities of the company, etc.

The existing tax benefits available to domestic companies going in for

mergers should be broadened so as to include cross border mergers.

The acquisition of the shares of the target companies should be subject to a

relaxed regime and an option of issuing a varied nature of securities should

be made available in order to raise capital in the market.

There should be a separate body created for the purpose of supervising cross

border mergers and amalgamations in light of the effect on the prevailing

competition in the market. Simultaneously, the Competition Commission

should be made operational so as to scrutinize effectively any effect the cross

border merger may have on the market conditions in that particular industry.

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The boards of the acquirer as well as target companies should be made bound

by law to act in the best interests of the shareholders of the company. This

could be achieved by extending the ambit of the domestic laws governing the

conduct of directors.

No relevant information should be withheld from the shareholders. This must

be ensured by the officials of the company specifically involved in the

merger. There should be no oppression of shareholders who belong to

minority in terms of their value of shareholding.

The offers being made by foreign companies for Indian companies should

not be allowed to be frustrated on frivolous grounds.

Conclusion:

Takeover is an effective weapon to minimize the effect of inefficient management

and to increase growth protection of shareholder to be ensured. If weapon of

takeover used wisely and appropriately the success will be definite. Cross border

mergers should not be viewed as a problem and rather they should be treated as part

and parcel of a growing economy. Growth rate is possible only when we the Indian

economy opens its doors more freely to the foreign authorities which in turn would

require a strong regulatory mechanism. The mechanism for corporate restructuring

needs to be strengthened every now and then, be it domestic or foreign mergers and

acquisitions. Therefore India needs to have a strong legal framework dealing with

cross border mergers in order to facilitate foreign investment in the country, thereby

helping in the overall economic development of the nation.