Looking Beyond the Words

Looking Beyond the Words

Analyzing Impact Of The Companies Act, 2013 on Mergers & Acquisitions

February, 2013

Cross-Border M&A

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| 3Impact Of CA, 2013 on Mergers & Acquisitions

Merger Of Indian Company With Foreign Company

F Co.

I Co.

Overseas

India

F Co.

Business of Indian Co

Overseas

India

Indian Shareholders

Merger of I Co. with F Co.

What the New Act Says… What the Old Act Says…

Merger of Indian company with a foreign company specifically allowed under the provisions of the New Companies Act subject to conditions:

Allowed only in specified overseas jurisdictions. (No notification from the MCA on specified overseas jurisdiction)

Merger subject to approval from RBI

GDR, cash or a combination of both could be used for discharge of consideration

It was specifically provided that in relation to a transaction of merger / amalgamation, the transferee company should be a company registered under the Companies Act

Thus, merger of an Indian company with foreign company was specifically prohibited

Foreign Shareholders

Foreign and Indian

shareholders

Business of Indian Co to continue as

branch of foreign Co

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Merger Of Indian Company With Foreign Company (Cont…)

Taxability of assets transferred by Indian company to Foreign Co – Exemption under Section 47 (vi) of the Income Tax Act, available only if the merged company is Indian company – Availing of exemption difficult

Taxability of shares transferred by Indian shareholder in lieu of GDR / cash of Foreign Co- Exemption under Section 47 (vii) of the Income Tax Act, available only if the merged company is Indian company – Availing of exemption difficult

Post merger, the Indian business would be considered as branch / permanent establishment of the Foreign Company

Tax rate applicable to profits of foreign Company would be 43.26% as against 33.99% for domestic companies

Income of the branch to be determined in accordance with the principles of Article 7 of the relevant DTAA i.e. profits attributable to the Branch

Relatively easy to repatriate profits from the branch to the parent

Tax

Considerations

Implications of foreign mergers

Substantive compliance requirements for Indian companies under Companies Act, would not be applicable

Post merger the Branch, would be considered as a foreign company and provisions of Section 592 to 602 of Companies Act would be applicable

Compliance with RBI regulations, as applicable to Branch applicable

Regulatory

considerations

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Cross-border M&A – Issues For Consideration

Overseas acquisitions by Indian companies generally through Special Purpose Vehicles(“SPV’s”) incorporated outside

India

Section 185 of New Act prohibits any loan/guarantee to subsidiaries ( whose board could be de-facto said to be

controlled or accustomed to act on behalf of holding company)

Circular dated 13 February 2014, allows provision of guarantees/ securities by holding to subsidiaries, only till section 186

(relating to loans and investment by company) of the New Act is notified

The case study below presumes the position after notification of section 186

Background

I Co.

Subsidiary

India

Overseas

TargetOverseas Bank

Situation under Old Act

Funding(100

MUSD)

Purchase of shares of target for 100 MUSD

Position under New ActI Co.

India

Overseas

Subsidiary

Target

100% shares of Subsidiary (20 MUSD)

100% shares of Subsidiary (100 MUSD)

• Entire acquisition to be funded by I Co through self funds. • Leveraged buyouts likely to be affected

Guarantee

Purchase of shares of target for 100 MUSD

Equity fund – 20Loan funds - 80

Equity fund – 100

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Domestic Acquisition By Foreign Company

Division A

New Co.

In various cases, inbound M&A deals have been

structured through ‘Subsidiarization’

The subsidiary structure also enabled ease of

entry of foreign investor in a new entity, with

desired business

Structure feasible under the Old Act as section

372A / 295 of the old Act, allowed loans between

holding-subsidiary

Section 185 of the New Act, prohibits loan / book

debts to a subsidiary by a holding Company (no

exemptions). Also Section 186, as proposed, does

not contain exemption for loans provided to a

100% subsidiary

This means entire consideration of Slump sale,

should be discharged in cash on Day 1 – Thereby

making structuring of such M&A deal structures

difficult

Background and Implications

Step ISlump sale of Division B to 100% subsidiary of Co. X for a definite consideration

Consideration to reflect as payable in books of New Co.

Division B

Divesting Co. X

Foreign Investor

India

Overseas

Step IIInvestment at an agreed valuation in New Co.

Step IIIInvestment proceeds to be used by New Co. to discharge its liability to Co.X for slump sale consideration

Acquisition structure under old Act

M&A provisions for Small Companies/ Holding-subsidiary

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What's In The Bucket For Small Companies/Holding-Subsidiary ?

The New Act, recognizing the need for flexibility, has provided fast track route for merger of small

companies / holding or subsidiary companies

Merger between small companies; or

Merger between holding company and its 100% subsidiary; or

Merger between other class or classes of companies as may be prescribed

Fast track

mergers

Small Company (under the New Act)

Company other than a public company

Paid up capital does not exceed 50 lakh rupees or the amount prescribed (not more than INR 5

crore)

Turnover as per last profit and loss – Less than INR 2 crore or the amount prescribed (not more than

INR 20 crore)

Cannot be a holding / subsidiary company

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Fast Track Merger Scheme – Small Companies/ Holding-Subsidiaries

Notice of the Scheme to Registrar, OL of both the Transferee/Transferor Companies

Conduct general meetings of both the Transferee/Transferor Companies – Approval by shareholders having 90% of the total share capital

Transferee/Transferor Companies to file declaration of solvency with their respective Registrars

Transferee/Transferor Companies to gain approval of their respective creditors representing 90% of the total value of creditors. (21 days notice for obtaining approval in writing)

Transferee Company to file copy of scheme with the Central Government, Registrar and OL

If no objection, CG to register the Scheme

Objection by Registrar, OL, to be filed with CG within 30 days else deemed ‘no objection’

CG to decide to approve scheme or file objections with Tribunal (time limit to CG for raising objections is within 60 days of receipt of the Scheme), else deemed ‘no objection’

Tribunal, upon receipt of objections from the CG, shall pass order approving the scheme, otherwise normal procedure laid down under section 230 to be complied with

Issues (i) Whether Demerger covered under the provisions of section 233(ii) Can small companies/ holding-subsidiaries apply for normal course under a scheme of arrangement ?

Notice of the Scheme Convening GM

Creditors approvalDeclaration of solvency

Filing of Scheme with the CG

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Fast Track Merger Scheme – Small Companies/ Holding-Subsidiaries

Whether the Fast track merger scheme applicable for

Demerger of small/holding-subsidiaries ?

Can small companies/ holding-subsidiaries apply for normal route under a scheme of arrangement ?

Specifically provided that provision of Section 233 shall apply

mutatis mutandis to other types of Schemes referred in Section

230 or 232 (i.e. demerger, spin offs etc)

Thus, Demerger of small companies can be undertaken using the

Fast track process

Specific provision under section 233 allows a small

company/holding-subsidiary to apply for normal route for

merger / demerger

Issue for consideration : Whether merger of a small company with a foreign company permissible under the fast track merger

process?

Other Important Aspects

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Merger Of Listed Company With Unlisted Company

Shareholders of Co. A

Co. A (Listed)

Overseas

India

Shareholders of Co. A & Co. B

Merged C o. (A+B)

(Unlisted)

Overseas

India

Co. B (Unlisted)

Shareholders of Co. B

Co. A to merge with Co. B

Shareholder of the transferor company have an option to exit at a fair price if the merged entity remains unlisted, by payment of cash consideration

What the New Act Says… What the Old Act Says…

The New Act specifically provides that on merger of a listed company into an unlisted company, the transferee company shall remain unlisted unless it goes through the process of a listing through a public offering.

An exit opportunity is also being provided to the shareholders of the merged listed company at a fair price

No specific provisions under the old Act. The listing of the merged entity was practically possible subject to compliance with the SEBI laws

Historically, in certain cases companies have remain unlisted post merger/ demerger transactions involving listed entities

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Other Important Aspects

Under old Act, 365 day time gap was required between board approved buybacks (i.e. buy-backs upto 10%)

Under new Act, buyback possible after 3 years from which specified defaults (repayment of deposits / interest etc,) ceased to subsist

Minimum 1 year gap required between two buybacks (whether shareholder approved or board approved), even if buyback is within 25% limit.

Buy-Back

Implications of buy-back, issue of differential voting rights etc

Permits issue of shares with differential voting and dividend rights subject to restrictions / rules – Section 43

No exemption / relaxation to private limited companies, which was available earlier

Onerous conditions laid in Rules for issue of DVR shares, which inter-alia includes authorization in AOA and special resolution, track record of at least 10% dividend payout during past 3 financial years, no default in repayment of Investor or creditors dues and that the company has not been convicted of offence under RBI Act, SEBI Act, SCRA or other Special Acts

Differential

Voting Rights

(“DVR”)

Under new Act, investment not permitted through more than two layers of ‘Investment Companies’ – Section 186. This Restriction shall not apply to:

Company acquiring another company incorporated overseas having more than two layers, as per laws of that country

Subsidiary having investment subsidiaries for meeting any statutory requirements

Layered

structures

Prohibition on companies from holding shares through trusts, either on its behalf or on behalf of any subsidiaries/ associate companies on corporate restructuring / compromise / arrangement - Section 232

Treasury Stock

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Other Important Aspects (cont..)

Earlier Act provided for flexibility in the manner of recording the transaction of merger / demergers – thereby facilitating financial restructuring (set off of losses etc)

Specific provision in new law stipulates that the accounting must conform and comply with the accounting standards. (presently compliance with accounting standards is only mandatory for listed companies)

The new provision in the Companies Act, 2013 would even require an unlisted company to comply with the accounting standard norms

The auditor’s certificate stating that the scheme has been drawn in compliance with Accounting standards is now mandatory for all companies.

Scheme Accounting

Implications on Scheme Accounting, Objections, Notice etc

Under old Act, objections to scheme could be raised by any shareholder / creditor, without any threshold limit

Under New Act, objections can be raised only by persons holding not less than 10% of the shareholding or having outstanding debt amounting to not less than 5% of the total outstanding debt.

This has been done to prevent shareholders with very nominal shares to delay the procedures.

Objections to Scheme

Under old Act, the notice of scheme would be served to the Central Government, the Registrar of Companies and the Official Liquidator as per the directions of the High Court.

Under New Act, the notice of the scheme of the arrangement must be notified to all the regulatory authorities concerned like SEBI, Income Tax Department, RBI, Competition Commission of India (CCI), stock exchanges(as applicable) in addition to the provision of the Companies Act, 2013, NCLT, shareholders, creditors, etc.

Impact : Increased scrutiny of schemes by regulatory authorities.

Notice of

Scheme

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Documents

Looking Beyond the Words