Mergers & Acquisitions
Presentation outline
• What is M&A
• Key structuring Processes
• Key Legislations/Regulations
What is M&A?
What is M&A
In Business Parlance
• Merger is an operation in
which two or more companies
(including those situated in
different countries) – decide
to pool their assets to form a
single company – in the
process one or more
companies disappear
completely
• Acquisition does not
constitute a merger if the
acquired company does not
disappear
Further Classification
• Inward M&A – Where the
Transferee/Targets are located in
India
• Outward M&A – Where the
Transferee Co./Targets are
located outside India (Not
permitted under Company Law)
Key Structuring Processes
Key M&A Processes
Merger
DEMERGER
Spin Offs
OTHERS
ASSETS
(Eg: Slump sale)
Acquisitions
SHARES
CONTROL
Major Key Legislations / Regulations
•Companies Act
•Income Tax Act
•Stamp Acts
•Competition Act
LISTED COMPANIES
•SEBI Regulations
•Stock Exchange – Listing Agreement
TRANS-BORDER TRANSACTIONS
•Foreign Exchange Management Act
Companies Act
Reconstruction/ Amalgamation/Merger / Demerger Process
(Sec. 391 - 394)
Pre-merger activity
Approval of Boards of both companies
Scheme of Amalgamation
Court directions to convene meeting
Shareholders’ / Creditors approval
Court petition for merger approval
Clearance from RD, RoC & OL
High Court’s sanction
Stamping and filing with RoC
Significant Points( 391-394)
• Meetings of members/creditors held according to the directions of Court.
• Notice of meeting to be published in newspaper at least 21 clear days before the date of
meeting.
• Voting only by poll; proxies allowed to vote in the meeting.
• Majority in number (50%) representing three fourths in value(75%) to approve the
scheme.
• With reference to the members and creditors present and voting at the meeting.
• Substantial compliance allowed. (e.g.: individual affidavits given by creditors/members,
banks/financial institutions giving consent in writing).
Significant Points( 391-394)
•
The dissenting shareholders to the scheme should be paid for their shareholding in the
transferor company.
•
In this regard the court in Dena Bank’s case has interpreted that:
The dissenting shareholders shall be paid a lesser amount than the value per share as
per the scheme. An amount somewhere between 15 to 20 percent less than the value
per share as per the scheme would be a fair price that would be paid to the dissenting
shareholders. So once the scheme is approved by the majority, the dissenting
shareholders shall be given a cash option which is less than the price at which the
shares are valued for the purpose of allotment of shares by the transferee company .
•
Dissolution of the transferor company without winding up process. (subject to the
clearance from Official Liquidators.
Significant Points( 391-394)
• Court shall stay all the commencement or continuation of any suit or proceedings against the
company on any terms as the court may think fit.
• Regarding, the criminal proceedings against the company and its directors there is a
controversy. The Bombay and the Calcutta High Court have held that the criminal proceedings
against the company cannot be stayed. But the Gujarat High Court has held that the High Court
has powers to stay even the criminal proceedings against the company and its directors.
• Only Merging entity can be a foreign company
–Sec. 394(4)(b) read with Sec. 2(7) of Cos. Act. (Transferee company- Include only
companies covered under Cos Act (Sec 3). Transferor company can be body corporate also.)
• Reverse pattern not allowed under Cos Act
–JJ Irani recommendations.
• Sec. 394 Court Order has no extra-territorial effect
–Local foreign laws to be complied with.
Section 81(1)(a):
• Shareholders resolution for further issue of shares.
Acquisitions
Share Acquisition:
Section 108A
• Central Government permission required if the acquisition exceeds the threshold limit.(>25%)108A
Section 108B
• Central Government Intimation-Transfer of shares–Bodies corporate-(>10%)-108B
Applicability of the above sections(108 G)
•
Increase in the production, supply, provision of services rendered in India of the dominant
undertaking.
• Change in the ownership of the dominant undertaking.
• Dominant undertaking defined under MRTP Act. (supplies goods/services more than one fourth
of the total goods/services produced in India. )
• Section 372A(Share Acquisition):
• Transferee company need to pass resolution in general meeting. Inter-corporate Loans and
Investments beyond 60% of paid up capital and free reserves or 100% of free reserves require
Shareholders’ approval.
Acquisitions
Share Acquisition
Section 395: (specifically applies to unlisted company)
• Compulsory acquisition mode for transferee company to acquire shares of the dissentient
minority shareholders holding less than 10%.
• Scheme to be filed with the Registrar.
• Scheme approved by nine tenth(9/10th) in value within four months after the date of making offer
for acquisition.
• Notice to be given to dissentient within two months from the expiry of four months. Dissentient
shareholders to apply to the court within one month.
• If shares are already held by transferee company is more than 1/10 th in value = then 9/10th in
value giving their consent must be at least 3/4 th in number.
• Consideration held in trust by the transferor company on behalf of its shareholders.
Section 108:
• Share Transfer deed duly executed and stamped required for physical share transfer.
Acquisitions
Business Acquisition
Section 293(1)(a):
• General meeting resolution required to sell or dispose of whole or any part of the undertaking.
Postal Ballot:
• Shareholders approval for sale of business through postal ballot in case of public cos/subs of
public companies.
Control Acquisition:
Postal Ballot:
• Special resolution to be passed by members through postal ballot.
FEMA/FDI
Merger/Demerger
Inward
No FIPB Approval required for shares issued under merger/demerger if:
• Non-resident shareholding retained within the prescribed sectoral cap/approval of
Government. (If exceeded prior approval of RBI/Government required.)
• Transferor/Transferee Companies not to engage in activities prohibited under FDI policy
• Transferee company files requisite report with RBI.
Outward
• Not permitted under Co. Law
Share Acquisition-Inward
•
Governed by FEMA read together with FDI Guidelines
- Minimum Pricing norm (atleast CCI Guideline pricing)
- FIPB/RBI Approval/Post facto RBI filings
• NR to NR transfer – exempt except for previous venture/tie up
Share Acquisition - Outward
Cash
• Automatic Route subject to following
conditions
– Total financial commitment within 200% of
Networth as per last Audited balance
sheet. (AP DIR circular issued to increase
the limit to 400%)
– Investment out of ADR/GDR/ EEFC
proceeds may be excluded.
– Investment in excess of prescribed cap
triggers RBI Approval.
ADR/GDR Swap
• Automatic Route subject to following
conditions
– Has already issued ADR/GDR and are
currently listed in stock exchange.
– Not to exceed 10 times the export
earnings of Indian party.
– ADR/GDR backed by underlying equity
shares.
– Investment in excess requires RBI
Approval
• Investment not satisfying the above conditions need RBI approval.
• Foreign investment can be made by exchange of shares with RBI approval.
• Valuation from Registered Investment/Merchant Banker in India/overseas compulsory in case
of Share-Swap transactions and Cash transactions exceeding USD 5 mn. Other cases
certification from CA/CPA.
Asset Acquisition
Inward
• Foreign Cos needs to have registered presence (Branch/Subsidiary) in India for making
asset acquisition
Outward
• Governed by the laws of the overseas jurisdiction
SEBI Takeover Code/ Listing Agreement with
Stock Exchange
Merger-Listing Agreement & SEBI
Listing Agreement:
•
•
•
•
Scheme before the Court must not violate, override or circumscribe the securities
laws or stock exchange requirements
Prior approval of Stock exchange necessary for the Scheme (Clause 24(f) of the
listing agreement).
Three copies of all notices, circulars, etc., issued or advertised in the press either
by the Company, or by any company which the Company proposes to merge or
amalgamate to be forwarded to exchange.
Constitutes ‘Price Sensitive Information’ in terms of Insider Trading Regulations.
Merger-Listing Agreement & SEBI
Merger of Unlisted with Listed Co.
•New shares alloted to unlisted co. shareholders to be listed on SE
•To be made pari passu with existing shares
• Merger of Listed with Unlisted Co.
•Unlisted co. should get listed on SE.
•Shares allotted by unlisted transferee company to shareholders of listed transferor
company under a HC sanctioned scheme – can be listed without an IPO subject to
conditions (DIP).
Merger-Listing Agreement & SEBI
• Compliance with Delisting Guidelines if public shareholding below prescribed limit.
• MPHL norms recently amended by SEBI
- Recommends MPHL at 25% of issued capital for continuous listing
- Certain companies however allowed MPHL at 10% if:
 Its initial listing was allowed at that level; or
 It has aggregated listing of 2 crore share with average market capitalisation of at least
Rs. 1000 crore in the ‘previous financial year’
• MPHL norms to be adhered to even in case of a Court-approved merger/demerger
Acquisition-SEBI Takeover Code
 Acquisition of shares pursuant to a scheme of arrangement or reconstruction – exempt from
SEBI Takeover Code.
• Applicable to significant acquisitions of listed cos – acquisitions may be either by way of:
- Acquisition of shares (entitling to voting rights)
- Acquisition of Control (board composition)
• Requires acquirer – upon triggering of a Takeover Event – to make:
• Disclosure in respect of the acquisition made
• An open offer to public in accordance with the Regulations
• Open Offer to be restricted to Minimum Public Holding Level (‘MPHL’).
Acquisition-Trigger Events
Stakes held (New +
Existing) in the
Compliance / Requirement under Takeover Code
Target Co.
>0 to <15%
Disclosure to Co./Stock Exchange if holdings exceed 5%,
10% and 14%
15% to <55%
• Initial Acquisition
Open Offer as soon as the stake of the acquirer is atleast
15%
• Any Subsequent Acquisition (Creeping)
At least 2% acquisition
– Disclosure to Co./SE
Above 5% acquisition p.a. – Open offer
Disclosure to Co./SE if holdings exceed 54% through
Creeping Acquisitions
55% to MPHL
Open offer for any additional acquisition – Disclosure to
Co./SE @ 74%
Open Offer
• Minimum size - 20% shares of Target
- Open Offers may be for stakes larger than 20% at the Acquirer’s sole discretion
- Open offer can be made for a lower % for complying MPHL
• Threshold pricing of the Open offer – prescribed
• Forms of Offer Price
- Cash
- Issue, exchange and / transfer of shares of Acquirer company, if listed
- Issue, exchange and / transfer of secured instrument of Acquirer company with minimum
“A” grade rating from a credit rating agency registered with SEBI.
- Combination of the above
Stamp Duty
Stamp Duty- for court order passed under section 394
•
–
–
–
•
–
–
–
–
•
High Court Order approving the Scheme
whether an “instrument” effecting the transfer( Li Taka Pharmaceuticals vs. State of Maharashtra 8
SCL 102 and Hindustan Lever v State of Maharashtra confirmed by Supreme Court)
Transfer of property including liabilities from transferor to transferee and hence conveyance. (for
transfer of title court order is used)
Therefore, only state legislation/practice followed by respective court relevant.
Specific entry in the Stamp Duty Schedule for the High Court Order sanctioning merger
Eg. Maharashtra, Karnataka, Gujarat, Rajasthan, Madhya Pradesh, West Bengal, Andhra Pradesh
Mostly determined on the value of shares allotted and other considerations paid -for merger
Value of gross assets transferred- for other arrangements/schemes/demerger approved by the court.
Some states specify maximum percentage/amount limit of stamp duty. (Eg: Karnataka – 7% of the
market value of immovable or 0.7% of the market value of shares allotted plus consideration amount
whichever is higher.
Remission – merger is with 90% subsidiary/ 90% of capital is with transferee company (not available
in states having specific legislations)
Stamp Duty
Share Acquisition:
• 0.25% on the consideration.
• No stamp duty in demat mode
Asset Acquisition:
• As per the state legislation and the duty applicable.
Slump Sale:
• On the value of assets transferred.
Competition Act
Competition Act
Competition Act, 2002 (Partially notified)
•
Merger or Acquisition = “Combination” if stipulated thresholds respecting aggregate
asset or turnover is exceeded
•
Prior approval of combination is not mandatory. Notice to be given.
•
Test – “Cause or likely to cause an appreciable adverse effect on competition within
the relevant market in India”
Income tax
Merger/Demerger-Meaning and Tests
• Section 2(1B) (‘Amalgamation’) lays down tests for a tax compliant merger
• Section 2(19AA) lays down tests for a tax compliant demerger
• No tax exemption under Income-tax Act, 1961 in case of amalgamation of an Indian
company into a foreign company wherein the amalgamated company is a foreign
company.
• Such a merger would result in a foreign company having assets or business in India and
therefore may cause a Permanent Establishment of foreign company in India.
Merger/Amalgamation-Not a Transfer
Section 47 conditions for exemption
• Any transfer, in a scheme of amalgamation, of a capital asset, by the amalgamating company to the
amalgamated company, if the amalgamated company is an Indian company [Section 47(vi)]
• Any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares
held by him in the amalgamating company, if:
1. the transfer is made in consideration of allotment to him of any share or shares in the
amalgamated company; and (exemption not available if anything other than shares is
obtained Gujarat HC in Gautam Sarabhai v. CIT, 173 ITR 216.)
2. the amalgamated company is an Indian company [Section 47(vii)]
•
Any transfer, in a scheme of amalgamation, of a capital asset being a share or shares held in an Indian
company, by the amalgamating foreign company to the amalgamated foreign company.
at least 25% of the shareholders of the amalgamating foreign company continue to remain
shareholders of the amalgamated foreign company. (for demerger 3/4th in value of the shareholders
remain in resulting company)
•
such transfer does not attract capital gains tax in the country in which the amalgamating foreign
company is incorporated.
•
•
Same conditions with demerged and resulting company for demerger.
Merger/Amalgamation –Carry forward and Set off of
Losses
• Benefit of carry forward and set-off of loss / depreciation to Indian company subject to certain
conditions [Section 72A(2)]
Eligibility-72A.
• Company owning an industrial undertaking or ship or hotel with another company.
• Banking company with a specified bank.
• 2 PSUs engaged in in the business of operation of aircraft
• Additional conditions for carry forward and set-off of losses (not depreciation) in case
of a closely held company [Section 79]
• on the last day of the previous year, the shares of the company carrying not less
than fifty-one per cent of the voting power were beneficially held by persons who
beneficially held shares of the company carrying not less than fifty-one per cent of the
voting power on the last day of the year or years in which the loss was incurred.
Demerger –Carry forward and Set off of Losses
• Directly relatable to the undertakings transferred to the resulting company:
• allowed in the hands of the resulting company
• Not directly relatable to the undertakings transferred to the resulting company:
• apportioned between the demerged and the resulting company in the same proportion
in which the assets of the undertakings have been retained by the demerged company
and transferred to the resulting company.
Merger/Amalgamation/Demerger – Specific
Provisions
• Capital expenditure in the nature of scientific research.
• Expenditure on acquisition of copyright/patent/ know how.
• Expenditure for obtaining license to operate telecommunication services
• Amortization of Preliminary expenses.
Slump Sale

Slump Sale = Transfer of undertaking without itemizing individual assets and
liabilities- s.2(42C) Income Tax Act

Treated as capital gains

If undertaking is older than 3 years, long term capital gains rates apply even if
individual assets are new.

Carry forward of losses and unabsorbed depreciation unavailable.
Miscellaneous Issues
Human Resource
•
Workmen entitled to retrenchment benefits unless retained in employment on
same terms.
•
Adjustments of pay scale needs to be resolved.
 Global Trust employees were retained on same terms in OBC. Pay
packages of former GTB staff could be altered only after 3 years.
OBC management had to contend with GTB’s complex salary
structure.
Sales Tax

Where effective date is retrospective, any transfers between amalgamating company
and amalgamated company retrospectively cease to be liable to sales tax- Mad HC
Castrol Oil v. State of TN, 114 STC 468

Some Sales Tax enactments contain specific provisions to tax such transactions eg.
S.33C, Bombay Sales Tax Act.

No such provision in Central Sales Tax Act.
Thank you
Annexures
Pre Merger Activity
• Power to merge (Object clause of the Memorandum should contain the provision)
• Object Clause of the transferee company to include objects of transferor company.
• Authorised Share Capital of Transferee Company to be increased to accommodate
allotment of shares.
Exemptions from Open Offer
- Allotment pursuant to a public issue/ rights issue (stakes post rights should be below 55%)/made
to underwriters.
- Inter-se transfer of shares amongst:
 Group Companies as defined in the MRTP Act, 1969. (exercise control directly or indirectly on
the other company)
 Indian promoters and foreign collaborators who are shareholders
 Promoters
 Relatives
-
By a registered stock broker/market maker/by succession or inheritance.
- Pursuant to a Scheme
 Under Section 18 of Sick Industrial Companies (Special Provisions) Act, 1985
 Of arrangement or reconstruction (including mergers/demerger) under any law regulation –
Indian or foreign
- Acquisition of unlisted Co. shares if no control is acquired over a listed company by virtue of this
acquisition.
- ADRs/GDRs unless not converted
- Application can be made to the Exemption Panel – to seek exemption in non-specified cases
Open Offer Pricing
• Threshold pricing of the Open offer - Higher of the following:
- Negotiated Price under an agreement, if any, triggering the code
- Highest Price paid by the Acquirer during the 26-week period prior to the
date of public announcement for acquiring shares of Target Company in any
mode
- The Average of the weekly high and low of the closing prices of the shares
of the target company on the most frequently traded stock exchange during
26 weeks preceding the date of the public announcement
- The Average of the daily high and low prices of the shares of the target
company on the most frequently traded stock exchange during 2 weeks
preceding the date of the public announcement
Section 2(1B)
• All properties of Amalgamating Co. should become property of the
amalgamated co
• All the Liabilities of Amalgamating Co. should become property of the
amalgamated co
• Shareholders holding not less than 3/4th in value of shares in amalgamating co.
(other than shares already held by the amalgamated co or its subsidiaries)
become shareholders of the amalgamated company
Section 2(19AA)
• All Properties and Liabilities of the Demerged Co. Undertaking to become
property of the Resulting Co.
• Transfer should be at book values immediately before the demerger
• Resulting Co. to issue its shares to the shareholders of the Demerged company
on a proportionate basis
• Shareholders holding atleast 3/4th of the value of the Demerged Co. shares
should become shareholders of the resulting co.
• Transfer should be on a going-concern basis
• Fulfilment of such further condition as may be prescribed under Section 72A(5)
Conditions to be satisfied by Amalgamating/Amalgamated company
By amalgamating company:
•
Engaged in the business in which the loss occurred or depreciation remains unabsorbed
for 3 or more years.
•
Held continuously as on the date of amalgamation atleast 3/4th of the book value of
fixed assets held by it two years prior to the date of amalgamation.
By amalgamated company:
• Held continuously for a minimum period of 5 years from the date of amalgamation at
least 3/4th of the book value of fixed assets of the amalgamating company acquired in a
scheme of amalgamation.
•
Continues the business of the amalgamating company for a minimum period of 5 years
from the date of amalgamation.
Industrial undertaking- Section 72A
•
Manufacture or processing of goods
•
Manufacture or processing of computer software
•
Generation or distribution of electricity
•
Providing telecommunication services
•
Mining
•
Construction of ships, aircrafts or rail systems