Demerger Legal

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BUSINESS RESTRUCTURING EXERCISE WITH

SPECIFIC REFERENCE TO MERGERS AND

DE-MERGERS-LEGAL ASPECTS

A Presentation by

Dr. J.P. Joshipura

Director

SLIM



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CONTENTS

Introduction of New Industrial Policy, 1991

Opening up of Manufacturing & Service Sectors for

Foreign Direct Investment (FDI) Rationalisation of Regulatory Environment

Introduction of New Laws

Amendment of existing laws for facilitating BusinessRestructuring



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IMPORTANT MODES OF BUSINESS

RESTRUCTURING COMMONLY PURSUED BY

CORPORATIONS IN INDIA

Mergers/ Amalgamations

De-mergers

Other Modes

Takeover/ Acquisition of Shares or voting rights inlisted/ unlisted companies

Takeover/ Acquisition of Business Undertaking /

Business as a whole on a going concern basis /

Acquisition of Assets/ Hive off :



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(a) on a going concern basis by way of

³Slump Sale´; or

(b) by way of itemized sale of identified assetsout of the whole business.

Acquisition of Brands

Re-organization of capital by buy-back of shares andreduction of capital

Combinations

IMPORTANT MODES OF BUSINESS

RESTRUCTURING (CONTD)



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MERGERS/ AMALGAMATIONS

Definition of the term ³Merger´

The term ³Merger´ is not defined under the IndianLaw. Therefore, the ordinary meaning of the merger is followed in India, i.e. combination of two or morecompanies into a single company where one survivesand the other looses its corporate existence. The

survivor acquires the assets as well as liabilities of the merging company or companies.



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In order to claim capital gains tax exemption,amalgamation should satisfy the conditionsmentioned in Section 2(1B) of the Income Tax Act,1961.

Merger of one or more companies with another

company. All the properties and liabilities of the amalgamating

company shall become the property and liabilities of the amalgamated company.

The shareholders holding not less than three-fourth

in value of the shares in the amalgamating companybecomes the shareholders of the amalgamatedcompany by virtue of such amalgamation.



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Amalgamation should be effected under the

provisions of Section 391 read with Section 394 of

the Companies Act, 1956 by presenting a Scheme of Amalgamation seeking sanction of the High Court.

The Scheme of Amalgamation should be approved

by the requisite majority, I.e. majority in number representing three-fourths in value of the

shareholders and/or creditors or class of them

present and vote either in person or through proxies

at the meeting.



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Once the scheme of amalgamation is approved by

the shareholders and/or creditors, a petition is

required to be made to the High Court for obtaining

its confirmation.

Once the High Court approves the Scheme of

Amalgamation, the same is binding on all members

and creditors including governmental authorities by

operation of law.



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ADVANTANGES OF AMALGAMATION

Sanctity of the Court Order

Binding nature of the Scheme on all concerned

Automatic transfer of assets, liabilities, licenses,

permits, rights, duties, obligations and the like byvirtue of a vesting Court Order

Exemption from applicability of SEBI Takeover Codein case companies are publicly listed(Reg.3(1)(j)(ii))



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Advantages (contd.)

Expansion and consolidation of business Business having synergetic linkages

Elimination of competition

Improving liquidity and having direct access to cashresources

Improving earning per share

For expanding and espousing backward integrationto assimilate the sources of supply and forwardintegration towards the market out-lets

To achieve economies of scale To share common distribution of research facilities

by elimination of costs.



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TAX BENEFITS IN CASE OF AMALGAMATION

If the amalgamation is in accordance with Section

2(1B) of the Income Tax Act conditions, the samebecomes entitled to claim tax exemption under section 47 of the Income Tax Act, 1961.

Under section 76-A of the Income Tax Accumulatedlosses and unabsorbed depreciation of the

amalgamating / transferor company is treated as thelosses and allowance for depreciation of theamalgamated/ transferee company for the previousyear in which the amalgamation was effected.

The benefit of set-off and carried forward loss is

available subject to the conditions made in section72-A of the Income Tax Act, 1961.



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Transfer of business and undertaking of theamalgamating/ transferor company does not attractany sales tax since the transfer is on a going basisand the transfer of business by the amalgamating/

transferor company is not in its capacity as a ³dealer´nor is the same in the ordinary course of business bythe amalgamating/ transferor company.

No stamp duty is charged in case of amalgamation if no immoveable property involved or in case of merger of Wholly owned Subsidiary.



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Tax benefits (contd)

Retrenchment compensation is not required to bepaid to the workmen of the amalgamating/transferor company if transfer under theamalgamation does not result in interruption or discontinuation of services of the employees of theamalgamating/ transferor company; provided theservice conditions of the amalgamated/ transfereecompany are not in any way less favourable to suchemployees than those applicable to themimmediately before amalgamation.

Consolidation of balance sheet and profit and lossaccount.



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Tax benefits (contd.)

Asset liabilities and reserves of the amalgamating/transferor company are recorded by theamalgamated/ transferee company at its existingcarrying amounts under the pooling of interestmethod prescribed by Accounting Standard-14.

Identity of the reserves is preserved as they appear in the books of the amalgamating/ transferor company.

Accounting Treatment provided in the Scheme ispreserved and respected by Auditors.



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Under the Foreign Exchange (Management) Act,2003 no permission is required by the amalgamated /transferee company for issue and allotment of sharesto non-resident shareholders of the amalgamating/

transferor company subject to certain conditions asprescribed in FEMA(Transfer and issue of securityby persons resident outside India) Regulations, 2000.

If the company is listed on any stock exchange theconditions prescribed under the Listing Agreementare required to be complied with.



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DE-MERGERS A de-merger is akin to a merger/ amalgamation save

and except in the case of amalgamation, theamalgamating/ transferor company looses its identityas the same is dissolved without winding up under

the court order whereas, in De-merger, both thetransferor and the transferee company retain their separate identity.

The process is virtually the same as in the case of amalgamation.



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De-merger is resorted to for achieving tax neutrality

upon transfer of certain assets as in the case of

merger.

De-merger is a tax driven business restructuringexercise.

The primary objective is to seek carry forward of

accumulated loss and unabsorbed depreciation from

the de-merging / transferor to the resulting/

transferee company.

Saving on capital gains tax



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De-merged company separates/ hives off andtransfers one of its non-core undertaking to another company either newly formed or existing under aScheme of arrangement sanctioned by the HighCourt.

If the de-merger satisfies the conditions contained

under section 2(19AA) of the Income Tax Act, thesame qualifies for tax neutrality.



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One of the essential conditions in the case of de-merger is that the assets and liabilities aretransferred at book value and the mirror image of theshareholding is reflected in both, the transferor and

transferee company since as a consideration of suchtransfer, the transferee company issues shares to theshareholders of the transferor company on aproportionate basis.



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In order to qualify for a tax neutrality, the de-mergedundertaking is transferred on a going concern basisand the de-merger is in accordance with theconditions, if any, notified under section 72A of the

Income Tax Act. Unlike in the case of amalgamation where a valuation

exercise is carried out for the purpose of issuingshares in consideration of transfer of an undertaking,in case of de-merger, strictly speaking, valuation is

not required. However, the same is done for determination of adequacy of capitalization since themirror image of shareholding is reflected in both thecompanies.



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TAX BENEFITS IN CASE OF DEMERGERS (Contd.)

A scheme of de-merger is required to be approved by

the High Court as in the case of amalgamation.

Benefits of the Sales Tax Act and reduced rate of

stamp duty is also available as in the case of amalgamation.



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Competition Act,2000

The Act mandates constitution of merger benches allover India exclusively to deal with combinations andthe regulations of combinations.

Though the Act has come into force, the appointeddate for regulating combinations falling under Section6 has yet not been notified by theGovernment.Section 6 requires notice of merger/combination to be given to the CompetitionCommission.



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PROCEDURE

Ascertain that the business, activities and operationscarried on by the Transferor Company or which itintends to undertake prior to the amalgamationshould be covered by the Objects Clause i.e. the

Main and/or Other Objects of the Memorandum of Association of the Transferee Company.

If not, then this can be achieved by providing thesame in the Scheme of Amalgamation itself and,there is no need to pass a separate Special

Resolution in a separate General Meeting changingthe Object Clause.



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PROCEDURE

If the Transferor Company is 100% subsidiary of the

Transferee Company, it will not be necessary to

determine the exchange ratio.

the shares held by the Transferee Company in theTransferor Company shall stand cancelled and

extinguished.

If valuation is required, it would be necessary to carry

out a valuation exercise of the shares of each of the companies.



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PROCEDURE

Draw up a Scheme of Amalgamation .Provide followingimportant matters amongst others:

all assets and liabilities of the Transferor Company shall, witheffect from a predetermined date, be transferred to and vestin the Transferee Company.

for takeover of the employees of the Transferor Company byTransferee Company;

merger of reserves of the Transferor Company with that of theTransferee Company and also carry forward of unabsorbeddepreciation and losses to be assumed by Transferee Companyfor setting off;

Transfer of contracts, arrangement and other agreements toTransferee Company; and

Transfer of licenses, permit etc. to the Transferee Company.



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PROCEDURE

Follow Miheer H. Mafatlal v Mafatlal Industries Ltd[(1996) & Company Law Journal 124], wherein theSupreme Court has generally laid out the scopeand ambit of the jurisdiction of the Company Court

when called upon to sanction a scheme of compromise and/or arrangement .

Follow Hindustan Lever employees Union vHindustan Lever Limited and othersAIR 1995 S.C.470



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PROCEDURE

Place the Scheme before the Board and seek

approval of the respective Board of Directors of the

Transferor Company and the Transferee Company.

Inform the Stock Exchange under clause 24(f) readwith 24 (g) of the BSE Listing Agreement before filing

the application to the court. 30 day cooling off period.

Upon NOC of BSE received file application in the

High Court exercising jurisdiction over the Registered

Office of the Companies.



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STEPS IN THE HIGH COURT

An application under the provisions of the Companies (Court) Rules, 1959

Seek Order for waiver/dispensation from calling the General Meeting of their respective shareholders for the purpose of approving the Scheme of

Amalgamation

Once the Board of Directors, the Stock Exchanges, the Shareholders, theCreditors have approved the scheme, present a petition under section 394 of the

CA. At the time of admission of the Petition, the Court will, in the normal course,

give directions for matters such as the following:-

a) date of hearing of the Petition;

b) advertisement of the Petition in the newspapers.

c) notice to the Central Government inviting their comments on the Scheme of Amalgamation.

d) direction to the Official Liquidator to scrutinise the books and papers of

the Transferor Company and to make a report to the Court on the affairs of theTransferor Companies.

e) individual notices to be given to the creditors (if any), of the Companiesinvolved.



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Following publication of the Notice of Petition inthe newspapers, it would be competent for anycreditor of the Companies to appear at the finalhearing of the Petition before the High Court and to

raise any objections he may have. After hearing all the parties concerned, the Court

will make the final order of amalgamation.

The effect of the Court's Order -all the assets andliabilities of the Transferor Companies will, withoutany further formality, vest in the TransfereeCompany and the Transferor Companies wouldstand dissolved, without having to be wound-up.



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E-File Certified copies of the Court's Order

with the Registrar of Companies in Form 21

within thirty days the date of the Order

issued by the High Court.

Submit the Court Order sanctioning the

Scheme for adjudication with the stamp Office

as it is treated as deemed conveyance under

Article 25(da) of the Bombay Stamp Act.



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POST MERGER COMPLIANCE

Annex a copy of the Court¶s Order to every copy of theMemorandum and Articles of Association of the Transferee-Company.

intimate the particulars to Government authorities, banks,creditors, customers, excise and sales tax authorities and obtain

fresh licenses and certificates. Close the Register of Members of the Transferor-Company to

ascertain the names of persons who are entitled to shares.

Apply to stock Exchange for in-principal approval for listing of new shares under 19(2) of the SCRA.

Prepare a list of persons entitled to shares in the Transferee

Company. Place the list before the Board and pass necessaryresolution relating to allotment. Dispose of fraction, if any, as per the Scheme.



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POST MERGER COMPLIANCE

After the allotment, issue the share certificates.

Take steps to get transferred all licenses held by theTransferor Company to name of the TransfereeCompany.

Send suitable intimation to the employees of theTransferor Company.



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THANK YOU

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Demerger Legal