Looking Beyond the Words
Analyzing Impact Of The Companies Act, 2013 on
Mergers & Acquisitions
February, 2013
Cross-Border M&A
1
Merger Of Indian Company With Foreign Company
F Co.
Foreign
Shareholders
F Co.
Foreign and
Indian
shareholders
Merger of I Co. with F Co.
Overseas
Overseas
India
India
Business of
Indian Co
Business of Indian
Co to continue as
branch of foreign 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:
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
Allowed only in specified overseas jurisdictions. (No
notification from the MCA on specified overseas
jurisdiction)
Thus, merger of an Indian company with foreign company
was specifically prohibited
All rights reserved
I Co.
Indian
Shareholders
Merger subject to approval from RBI
GDR, cash or a combination of both could be used for
discharge of consideration
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Merger Of Indian Company With Foreign Company (Cont…)
Implications of foreign mergers
Tax
Considerations
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
considerations
Post merger the Branch, would be considered as a foreign company and provisions of Section 592 to
602 of Companies Act would be applicable
All rights reserved
Regulatory
Substantive compliance requirements for Indian companies under Companies Act, would not be
applicable
Compliance with RBI regulations, as applicable to Branch applicable
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Cross-border M&A – Issues For Consideration
Background
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
Guarantee
I Co.
I Co.
100% shares of
Subsidiary (20
MUSD)
Position under New Act
100% shares of
Subsidiary (100
MUSD)
India
India
Overseas
Subsidiary
Funding
(100
MUSD)
Overseas
Bank
Equity fund – 20
Loan funds - 80
Overseas
Subsidiary
Purchase of
shares of target
for 100 MUSD
Target
Equity fund – 100
•
•
Target
Purchase of
shares of target
for 100 MUSD
Entire acquisition to be funded by I Co through self funds.
Leveraged buyouts likely to be affected
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All rights reserved
Situation under Old Act
Domestic Acquisition By Foreign Company
Acquisition structure under old Act
Background and Implications
In various cases, inbound M&A deals have been
structured through ‘Subsidiarization’
Foreign Investor
The subsidiary structure also enabled ease of entry
of foreign investor in a new entity, with desired
business
Overseas
Structure feasible under the Old Act as section
India
372A / 295 of the old Act, allowed loans between
holding-subsidiary
Divesting Co. X
Step I
Slump 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
New Co.
Step II
Investment at an agreed
valuation in New Co.
Step III
Investment proceeds to be
used by New Co. to
discharge its liability to
Co.X for slump sale
consideration
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
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All rights reserved
Division A
M&A provisions for Small
Companies/ Holding-subsidiary
2
What's In The Bucket For Small Companies/Holding-Subsidiary ?
Fast track
The New Act, recognizing the need for flexibility, has provided fast track route for merger of small
companies / holding or subsidiary companies
mergers
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
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)
All rights reserved
Cannot be a holding / subsidiary company
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Fast Track Merger Scheme – Small Companies/ Holding-Subsidiaries
1
2
Notice of the Scheme
Notice of the Scheme to Registrar, OL of both the
Transferee/Transferor Companies
4
Conduct general meetings of both the
Transferee/Transferor Companies – Approval by
shareholders having 90% of the total share capital
Creditors approval
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)
5
Convening GM
Filing of Scheme with
the
CG
Transferee
Company to
file copy of scheme with
the Central Government,
Registrar and OL
3
Declaration of solvency
Transferee/Transferor Companies to file declaration
of solvency with their respective Registrars
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’
Issues
All rights reserved
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
(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 ?
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Fast Track Merger Scheme – Small Companies/ Holding-Subsidiaries
Specifically provided that provision of Section 233 shall apply
Whether the Fast track merger scheme applicable for
mutatis mutandis to other types of Schemes referred in Section
Demerger of small/holding-subsidiaries ?
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
Can small companies/ holding-subsidiaries apply for normal route under acompany/holding-subsidiary
scheme of arrangement ? 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
All rights reserved
process?
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Other Important Aspects
3
Merger Of Listed Company With Unlisted Company
Shareholders
of Co. A
Shareholders of
Co. A & Co. B
Shareholders
of Co. B
Overseas
Overseas
India
India
Co. A (Listed)
Co. B
(Unlisted)
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
Merged C o.
(A+B)
(Unlisted)
Co. A to merge with Co. B
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.
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
Impact Of CA, 2013 on Mergers & Acquisitions
All rights reserved
An exit opportunity is also being provided to the shareholders
of the merged listed company at a fair price
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Other Important Aspects
Implications of buy-back, issue of differential voting rights etc
Under old Act, 365 day time gap was required between board approved buybacks (i.e. buy-backs upto 10%)
Buy-Back
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.
Permits issue of shares with differential voting and dividend rights subject to restrictions / rules – Section 43
Voting Rights
(“DVR”)
Layered
structures
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
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
Treasury Stock
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
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All rights reserved
Differential
Other Important Aspects (cont..)
Implications on Scheme Accounting, Objections, Notice etc
Earlier Act provided for flexibility in the manner of recording the transaction of merger / demergers –
thereby facilitating financial restructuring (set off of losses etc)
Scheme
Accounting
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.
Objections to
Scheme
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.
Scheme
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.
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All rights reserved
Notice of
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.
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