A business can grow over time as the utility of its products and services is recognized in the Market. But in this era of Globalization where the environment is dynamic, competitive and rapidly evolving, Mergers and acquisitions has gained importance as a method of bringing immense inorganic growth to a business.
It provides various benefits to the entities which include increased resources, access to market, technology, reducing the competition, diversification of business, Regulatory, Tax and fiscal considerations. There is always a synergy value that gets created with the joining of two entities which is more when compared with their individual stands.
Mergers can be defined as union of two entities into one; acquisitions are situations where one player takes over the other to combine the bought entity with itself. It may be in form of a purchase, where one business buys another or a management buyout, where the management buys the business from its owners. Further, de-mergers, i.e., division of a single entity into two or more entities also require being recognized and treated on par with mergers and acquisitions regime. Mergers and acquisitions may be undertaken to access the market through an established brand, to get a market share, to eliminate competition, to reduce tax liabilities or to acquire competence or to set off accumulated losses of one entity against the profits of other entity.
Chapter XV (Section 230 to 240) of Companies Act, 2013 and Companies contains provisions on ‘Compromises, Arrangements and Amalgamations’, that covers compromise or arrangements, mergers and amalgamations, Corporate Debt Restructuring, demergers, fast track mergers for small companies/holding subsidiary companies, cross border mergers, takeovers, amalgamation of companies in public interest etc. The procedural aspects involved such as format of application to be made to National Company Law Tribunal (the Tribunal), form of notice and the procedural aspects involved with respect to the substantive law are covered under the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.
CHECKLIST FOR MERGERS AND AMALGMATION
The following procedure shall be followed when the whole or any part of the undertaking, property or liabilities of any company (hereinafter referred to as the transferor company) is required to be transferred to another company (hereinafter referred to as the transferee company), or is proposed to be divided among and transferred to two or more companies.
1. The Memorandum of Association of the companies in merger must provide their power to merge and amalgamate in its objects clause. If not, amendment has to be done to the MoA.
2. Board meeting shall be convened to pass resolution for the following:
· Approve the draft scheme of merger or amalgamation
· Authorize to file application to the tribunal
3. Application to be made to National Company Law Tribunal by either of the party to merger or amalgamation U/S 230 in Form no. NCLT 1. The application shall be accompanied by a notice of admission in Form No. NCLT-2 and an affidavit in Form no. NCLT 6disclosing the following:
· Latest financial position of the company, the latest auditor’s report on the accounts of the company
· Reduction of share capital of the company, if any, included in the compromise or arrangement
· Any scheme of corporate debt restructuring consented to by not less than seventy-five per cent. of the secured creditors in value, along with
(i) A creditor’s responsibility statement in Form no. CAA 1;
(ii) safeguards for the protection of other secured and unsecured creditors;
(iii) report by the auditor that the fund requirements of the company after the corporate debt restructuring as approved shall conform to the liquidity test based upon the estimates provided to them by the Board;
(iv) where the company proposes to adopt the corporate debt restructuring guidelines specified by the Reserve Bank of India, a statement to that effect; and
(v) A valuation report in respect of the shares and the property and all assets, tangible and intangible, movable and immovable, of the company by a registered valuer as per Rule 25 of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 along with fees as prescribed in The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.
4. Meeting to be held in pursuance of order of Tribunal by sending notice to Creditors or a class of creditors, Members or a class of members & Debenture holders accompanied by a statement disclosing the details of the compromise or arrangement, a copy of the valuation report, if any, and explaining their effect on creditors, key managerial personnel, promoters and non-promoter members, and the debenture-holders and the effect of the compromise or arrangement on any material interests of the directors of the company or the debenture trustees, and such other matters as may be prescribed in Form no. CAA. 2.
5. The following documents shall also be sent along with notice of meeting.
a. the draft of the proposed terms of the scheme drawn up and adopted by the directors of the merging company;
b. confirmation that a copy of the draft scheme has been filed with the Registrar;
c. a report adopted by the directors of the merging companies explaining effect of compromise on each class of shareholders, key managerial personnel, promotors and non-promoter shareholders laying out in particular the share exchange ratio, specifying any special valuation difficulties;
d. the report of the expert with regard to valuation, if any;
e. a supplementary accounting statement if the last annual accounts of any of the merging company relate to a financial year ending more than six months before the first meeting of the company summoned for the purposes of approving the scheme. [Sec 232(2)]
6. The same notice and documents will be placed in the website of the company. The same details shall be sent to Securities and Exchange Board and stock exchange in case of listed company.
7. Advertisement shall be published in newspaper regarding the notice of meeting in Form No. CAA.2 in at least one English newspaper and in at least one vernacular newspaper having wide circulation in the state in which the registered office of the company is situated, not less than thirty days before the date fixed for the meeting.
8. The voting maybe done either individually or through proxies in the meeting or by postal ballot to the adoption of the compromise or arrangement within one month from the date of receipt of such notice. Sec 230(4).
Objection can be done only by persons holding not less than ten per cent. of the shareholding or having outstanding debt amounting to not less than five per cent. of the total outstanding debt as per the latest audited financial statement.
9. The notice of meeting in Form No. CAA. 3 and such other documents shall be sent to the following authorities if necessary: Central Government, the income-tax authorities, the Reserve Bank of India, the Securities and Exchange Board, the Registrar, the respective stock exchanges, the Official Liquidator, the Competition Commission of India. It shall also be sent to such other authorities who are likely to be affected by the merger or acquisition. [Sec 230(5)]
The representations from the authorities has to be made within 30 days from date of receipt of notice, if not it shall be presumed they have no representations.
10. Affidavit has to be filed before the Tribunal not less than seven days before the meeting, stating that the directions regarding the issue of notices and the advertisement have been duly complied with. [Rule 12 of Companies CAA Rules, 2016]
11. If in the meeting, the scheme is approved by persons representing 75% of value of creditors or such members, either in person or proxy or by postal ballot, and the Tribunal has also sanctioned the scheme, then it is binding on the company and all the members thereof., viz. creditors, members and the liquidators and contributors, in case of company being wound up. [Sec 230(6)]
12. Report of the result of the meeting shall be submitted to Tribunal in Form No: CAA 4, within three days after conclusion of meeting or such time prescribed by the Tribunal. [Rule 14 of Companies CAA Rules, 2016]
13. The Tribunal, after satisfying that the above conditions are fulfilled, may by order sanction the compromise or arrangement and may order that:
a. the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of the transferor company from a date to be determined by the parties unless the Tribunal, for reasons to be recorded by it in writing, decides otherwise;
b. the allotment or appropriation by the transferee company of any shares, debentures, policies or other like instruments in the company which, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person:
Provided that a transferee company shall not, as a result of the compromise or arrangement, hold any shares in its own name or in the name of any trust whether on its behalf or on behalf of any of its subsidiary or associate companies and any such shares shall be cancelled or extinguished;
c. the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company on the date of transfer;
d. dissolution, without winding-up, of any transferor company;
e. the provision to be made for any persons who, within such time and in such manner as the Tribunal directs, dissent from the compromise or arrangement;
f. where share capital is held by any non-resident shareholder under the foreign direct investment norms or guidelines specified by the Central Government or in accordance with any law for the time being in force, the allotment of shares of the transferee company to such shareholder shall be in the manner specified in the order;
g. the transfer of the employees of the transferor company to the transferee company;
h. where the transferor company is a listed company and the transferee company is an unlisted company,—
A. the transferee company shall remain an unlisted company until it becomes a listed company;
B. if shareholders of the transferor company decide to opt out of the transferee company, provision shall be made for payment of the value of shares held by them and other benefits in accordance with a pre-determined price formula or after a valuation is made, and the arrangements under this provision may be made by the Tribunal:
Provided that the amount of payment or valuation under this clause for any share shall not be less than what has been specified by the Securities and Exchange Board under any regulations framed by it;
i. where the transferor company is dissolved, the fee, if any, paid by the transferor company on its authorized capital shall be set-off against any fees payable by the transferee company on its authorized capital subsequent to the amalgamation; and
j. such incidental, consequential and supplemental matters as are deemed necessary to secure that the merger or amalgamation is fully and effectively carried out:
Provided that no compromise or arrangement shall be sanctioned by the Tribunal unless a certificate by the company’s auditor has been filed with the Tribunal to the effect that the accounting treatment, if any, proposed in the scheme of compromise or arrangement is in conformity with the accounting standards prescribed under section 133. [Sec 232(3)]
14. If the Tribunal orders for transfer of property or liabilities, then the property shall be transferred to the transferee company and the liabilities shall be transferred to and become the liabilities of the transferee company and any property may, if the order so directs, be freed from any charge which shall by virtue of the compromise or arrangement, cease to have effect.
15. The company shall file a certified copy of the order with the Register for registration within thirty days of the receipt of certified copy of the order.
16. The scheme shall indicate the date from which it will be effective and it shall be deemed to be effective on that date and not at the next day of appointed date.
17. The company shall file a statement in Form No: CAA.8certified by a chartered accountant or a cost accountant or a company secretary in practice indicating whether the scheme is being complied with in accordance with the orders of the Tribunal or not, to the Registrar every year till the completion of the scheme.
18. If the transferor or transferee company contravenes the provisions of this section, the transferor company or the transferee company, as the case may be, shall be punishable with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees and every officer of such transferor or transferee company who is in default, shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than one lakh rupees but which may extend to three lakh rupees, or with both.
MERGER OR AMALGAMATION OF SMALL COMPANIES
The following procedure shall be followed for the merger or amalgamation among small companies and certain other companies as per Section 233 of Companies Act, 2013 and Rule 25 of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.
1. A scheme of merger or amalgamation may be entered into between two or more small companies or between a holding company and its wholly-owned subsidiary company or such other class or classes of companies. A notice for the same shall be sent in Form No. CAA.9 to Registrar and such other authorities, whom the scheme shall affect, inviting objections to be submitted within 30 days of receipt of notice.
2. The meeting shall be convened after giving a notice of 21 days along with the scheme to the creditors and other members.
3. The scheme has to be approved in a general meeting after considering the objections raised if any, by members holding at least 90% of total number of shares.
4. The companies involved in the merger shall file a declaration of solvency in Form No: Form No.CAA.10 with the Registrar of the place where the registered office of the company is situated.
5. The transferee company shall within 7 days of the meeting, file a copy of the approved scheme to the Central Government in Form No: CAA. 11.
The Copy of scheme shall be submitted along with Form No: CAA 11 to –
· The Registrar of Companies in Form No. GNL-1 along with fees provided under the Companies (Registration Offices and Fees) Rules, 2014.
· The Official Liquidator through hand delivery or by registered post or speed post.
6. On the receipt of the scheme, if the Registrar or the Official Liquidator has no objections or suggestions to the scheme, the Central Government shall register the same and issue a confirmation thereof to the companies. [Sec 233(3)]
7. The Central Government may on receiving objections file to the Tribunal, requesting to consider the scheme under Sec 232. On the receipt of such an application, Tribunal may if deems fit, order the scheme to follow procedure under Section 232. [Sec. 233(7)]
8. The confirmation order of scheme either under Sec 233(3) or 233(7) has to be filed to the Registrar in Form No: INC -28 within 30 days of receipt of such order.
9. The registration of the scheme under sub-section (3) or sub-section (7) shall be deemed to have the effect of dissolution of the transferor company without process of winding-up.
10. The registration of the scheme shall have the following effects, namely:—
- transfer of property or liabilities of the transferor company to the transferee company so that the property becomes the property of the transferee company and the liabilities become the liabilities of the transferee company;
- the charges, if any, on the property of the transferor company shall be applicable and enforceable as if the charges were on the property of the transferee company;
- legal proceedings by or against the transferor company pending before any court of law shall be continued by or against the transferee company; and
- where the scheme provides for purchase of shares held by the dissenting shareholders or settlement of debt due to dissenting creditors, such amount, to the extent it is unpaid, shall become the liability of the transferee company.
11. A transferee company shall not on merger or amalgamation, hold any shares in its own name or in the name of any trust either on its behalf or on behalf of any of its subsidiary or associate company and all such shares shall be cancelled or extinguished on the merger or amalgamation.
12. The transferee company shall file an application with the Registrar along with the scheme registered, indicating the revised authorized capital and pay the prescribed fees due on revised capital:
Provided that the fee, if any, paid by the transferor company on its authorized capital prior to its merger or amalgamation with the transferee company shall be set-off against the fees payable by the transferee company on its authorized capital enhanced by the merger or amalgamation.
MERGER OR AMALGAMATION OF COMPANY WITH FOREIGN COMPANY
A company may merge with a foreign company in the following manner as specified in Section 234 of companies Act, 2013 and Rule 25A of Companies (Compromises, Arrangements and Amalgamations) Rules, 2016.
1. The foreign company incorporated outside India should first obtain the approval of Reserve Bank of India, secondly should comply with provisions of Sections 230 and 232 of Companies Act, 2013.
2. (a) A foreign company incorporated in any of the jurisdictions specified in Annexure B of Companies CAA Rules, 2016 should first obtain the approval of Reserve Bank of India, secondly should comply with provisions of Sections 230 and 232 of Companies Act, 2013.
3. (b) The transferee company shall ensure that valuation is conducted by valuers who are members of a recognized professional body in the jurisdiction of the transferee company and further that such valuation is in accordance with internationally accepted principles on accounting and valuation. A declaration to this effect shall be attached with the application made to Reserve Bank of India for obtaining its approval under clause (a) of point 2.
4. The terms and conditions of the scheme of merger may provide, among other things, for the payment of consideration to the shareholders of the merging company in cash, or in Depository Receipts, or partly in cash and partly in Depository Receipts, as the case may be, as per the scheme to be drawn up for the purpose.
THE SECURITIES AND EXCHANGE BOARD OF INDIA REGULATIONS
The Securities and Exchange Board of India (SEBI) is the nodal authority regulating entities that are listed on stock exchanges in India. The Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 (henceforth termed as the ‘Takeover Code’) restricts and regulates the acquisition of shares / control in listed companies.
If an acquisition is contemplated by way of issue of new shares, or the acquisition of existing shares, of a listed company, to or by an acquirer, the provisions of the Takeover Code may be applicable. Under the Takeover Code, an acquirer, along with persons acting in concert:
1. cannot acquire shares or voting rights which (taken together with shares or voting rights, if any, held by him and by persons acting in concert), entitle such acquirer to exercise 15% or more of the shares or voting rights in the target,
2. Who has acquired 15% or more but less than 55% of the shares or voting rights in the target, cannot acquire, either by himself or through persons acting in concert, additional shares or voting rights entitling him to exercise more than 5% of the voting rights in the target, in any financial year ending on 31st March,
3. Who holds 55% or more but less than 75% of the shares or voting rights in the target, cannot acquire either by himself or through persons acting in concert, any additional shares or voting rights therein,
4. Who holds 75% of the shares or voting rights in the target, cannot acquire either by himself or through persons acting in concert, any additional shares or voting rights therein, unless the acquirer makes a public announcement to acquire the shares or voting rights of the target in accordance with the provisions of the Takeover Code.
The term ‘acquisition’ would include both, direct acquisition as well as indirect acquisition of an Indian listed company by virtue of acquisition of companies, whether listed or unlisted, whether in India or abroad. Further, the aforesaid limit of 5% acquisition is calculated aggregating all purchases, without netting of sales.
However, vide a recent amendment, any person holding 55% or more (butless than 75%) shares is permitted to further increase his shareholding by not more than 5% in the target without making a public announcement if the acquisition is through open market purchase in normal segment on the stock exchange but not through bulk deal /block deal/ negotiated deal/ preferential allotment or the increase in the shareholding or voting rights of the acquirer is pursuant to a buyback of shares by the target.
Where an acquirer who (together with persons acting in concert with him) holds 55% or more (but less than 75%) of the shares or voting rights in a target company, is desirous of consolidating his holding while ensuring that the public shareholding in the target company does not fall below the minimum level permitted by the Listing Agreement, he may do so only by making a public announcement in accordance with these regulations.
Regulation 12 of the Takeover Code further provides that irrespective of whether or not there has been any acquisition of shares or voting rights in a company, no acquirer shall acquire control over the target company, unless such person makes a public announcement to acquire shares and acquires such shares in accordance with the Takeover Code. However the requirement under
Regulation 12 does not apply to a change in control which takes place pursuant to a special resolution passed by the shareholders in a general meeting. Therefore, if 3/4ths of shareholders present and voting at a meeting approve the change of control, then the requirement to make a public offer under Regulation 12 would not be triggered.
It is also possible for the acquirer to provide that the offer to acquire shares is subject to minimum level of acceptance, which may be less than 20%. However to do this, the acquirer would need to deposit at least 50% of the consideration payable in an escrow account.
Pricing of the Offer: The merchant banker, appointed by the acquirer, will determine the price for the offer, on the basis of the parameters laid down in the Takeover Code. Regulation 20 (4) provides that the minimum offer price for shares of a target company (whose shares are frequently traded) will be the highest of:
(a) The negotiated price under the agreement,
(b) Average price paid by the acquirer for acquisitions including by way of allotment in a public or rights issue, if any, during the twelve month period prior to the date of public announcement,
(c) The price paid by the acquirer under a preferential allotment made to him, at any time during the twelve month period up to the date of closure of the offer and
(d) The average of the weekly high and low of the closing prices of the shares of the target company during the 26 weeks preceding the date of public announcement.
In the case of a target company whose shares are infrequently traded, in addition to the factors stated in (a) and (b) above (for frequently traded shares), other parameters such as return on net worth, book value of the shares of the target company, earning per share, price earning multiple vis-a-vis the industry average, are also considered for determining the price.
The SEBI may also require valuation of such infrequently traded shares by an independent valuer.
Mode of Payment of Offer Price: The offer price may be paid in cash, by issue, exchange or transfer of shares (other than preference shares) of the acquirer, if the acquirer is a listed entity, by issue, exchange or transfer of secured instruments of the acquirer with a minimum ‘A’ grade rating from a credit rating agency registered with the SEBI, or a combination of all of the above.
If the acquirer intends to dispose of / encumber the assets in the target company, except in the ordinary course of business, then he must make such a disclosure in the public announcement or in the letter of offer to the shareholders, failing which, the acquirer cannot dispose of or encumber the assets of the target company for a period of 2 years from the date of closure of the public offer.
Restrictions on the Target Company: After the public announcement is made by the acquirer, the target company is also subject to certain restrictions.
The target company cannot then
(a) sell, transfer, encumber or otherwise dispose off or enter into an agreement for sale, transfer, encumbrance or for disposal of assets, except in the ordinary course of business of the target company and its subsidiaries,
(b) Issue or allot any securities carrying voting rights during the offer period, except for any subsisting obligations, and
(c) Enter into any material contracts.
Further, the board of directors of the target company cannot:
(a) appoint as additional director or fill in any casual vacancy on the board of directors, any person(s) representing or having interest in the acquirer, until the acquire fulfill his obligations under the Takeover Code, and
(b) permit any existing director of the target company who represents or has an interest in the acquirer, to participate in any matter relating to the offer.
Competitive Bidding/ Revision of Offer / Bid: The Takeover Code also permits a person other than the acquirer (the first bidder) to make a competitive bid, by a public announcement, for the shares of the target company.
This bid must be made within 21 days from the date of the public announcement of the first bidder. The competitive bid must be for at least the number of shares held by the first bidder, plus the number of shares that the first bidder has bid for. If the first bidder wishes to revise his bid, then he must make another public announcement within 14 days from the date of the public announcement by the second bidder. The first bidder (and any other bidder) is in fact, entitled to revise his bid upwards (subject only to certain time limitations), irrespective of whether or not a competitive bid is made.
Disclosures on Certain Acquisitions: Regulation 7 requires an acquirer to make disclosures of the aggregate of his shareholding if the acquirer acquires more than 5%, 10%, 14%, 54% or 74% of the shares/voting rights of a company. Such disclosures must be made at each stage of acquisition and are to be made to the company and to the stock exchanges on which the shares of the company are listed.
Regulation 7 further provides that an acquirer, who has acquired shares/voting rights under Regulation 11 (Consolidation of holdings), must disclose purchase or sale of 2% or more of the share capital of the company, to the company and to the stock exchanges on which the shares of the company are listed. The disclosures mentioned above are to be made within 2 days of (i) the receipt of intimation of allotment of shares or (ii) the acquisition of shares or voting rights, as the case may be. The company whose shares are acquired must also disclose to the stock exchanges, the total number of shares held by the acquirers mentioned above.
Continual Disclosures: Regulation 8 requires a person holding more than 15% of the shares / voting rights of a company to make annual disclosures to the company (within 21 days from the financial year ending March 31) in respect of his holdings as on March 31.
The Competition Act takes a new look at competition altogether and contains specific provisions on anti-competition agreements, abuse of dominance, mergers, amalgamations and takeovers and competition advocacy. The Competition Commission of India (CCI) has been established to control anti-competitive agreements, abuse of dominant position by an enterprise and for regulating certain combinations. The substantive provisions of the Competition Act relating to anti-competitive agreements (Section 3) and abuse of dominance (Section 4) have been notified while the provisions relating to combinations (Section 5 and 6) have not yet been notified.
The Competition Act essentially contemplates two kinds of anti-competitive agreements:
❖ Horizontal agreements or agreements between entities engaged in similar trade of goods or provisions of services, and
❖ Vertical agreements or agreements between entities in different stages / levels of the chain of production, in respect of production, supply, distribution, storage, sale or price of goods or services
Anti-competitive agreements that cause or are likely to cause an appreciable adverse effect on competition within India are void under the provisions of the Competition Act.
A horizontal agreement that
(i) determines purchase / sale prices, or
(ii) limits or controls production supply, markets, technical development, investment or provision of services, or
(iii)shares the market or source of production or provision of services, by allocation of geographical areas / type of goods or services or number of customers in the market, or
(iv) results in bid rigging / collusive bidding, are presumed to have an appreciable adverse effect on competition. On the other hand, vertical agreements, such as tie-in arrangements, exclusive supply or distribution agreements, etc. are anti-competitive only if they cause or are likely to cause an appreciable adverse effect on competition in India.
It may be noted that in the case of a vertical agreement, there is no presumption that such agreement would have an appreciable adverse effect on competition in India, and the CCI would have to prove such effect However, in the case of a horizontal agreement, the burden of proof would lie with the entities who are party to the agreement, to prove that there is no appreciable adverse effect on competition in India.
Abuse of Dominant Position:
An entity is considered to be in a dominant position if it is able to operate independently of competitive forces in India, or is able to affect its competitors or consumers or the relevant market in India in its favour. The Competition Act prohibits an entity from abusing its dominant position. Abuse of dominance would include imposing unfair or discriminatory conditions or prices in purchase/sale of goods or services and predatory pricing, limiting or restricting production / provision of goods/services, technical or scientific development, indulging in practices resulting in denial of market access etc.
Regulation of Combinations:
Certain combinations defined under the Competition Act are considered to affect competition in India and are regulated by the CCI, such as:
An acquisition where the transferor and transferee jointly have, or a merger or amalgamation where the resulting entity has,
(i) assets valued at more than Rs.10 billion or turnover of more than Rs.30 billion, in India; or
(ii) assets valued at more than USD 500 million in India and abroad, of which assets worth at least Rs.5 billion are in India, or, turnover more than USD 1500 million of which turnover in India should be at least Rs.15 billion.
An acquisition where the group to which the acquired entity would belong, jointly has, or a merger or amalgamation where the group to which the resulting entity belongs, has
(i) assets valued at more than Rs.40 billion or turnover of more than Rs.120 billion, in India; or
(ii) assets valued at more than USD 2 billion in the aggregate in India and abroad, of which assets worth at least Rs.5 billion should be in India, or turnover of more than USD 6 billion, including at least Rs.15 billion in India.
A share subscription, financing facility or any acquisition by a public financial institution, FII, bank or venture capital fund pursuant to any loan or investment agreement, would not qualify as a combination that will be regulated by the CCI, and such transactions are therefore exempt under the Competition Act. However, the public financial institution, FII, bank or venture capital fund is required to notify the CCI of the details of the acquisition within 7 day of completion of the acquisition.
JUDICIAL PRECEDENTS, CONSIDERED LANDMARK:-
Sun Pharmaceuticals Case: Whether Section 234 of the Companies Act refers to “cross-border demerger”?
- Sun Pharmaceutical Industries Limited (SIPL / Demerged Company) filed a petition u/s. 230 and 232 r.w.s. 234 of the Act with the NCLT seeking its sanction to a scheme of arrangement in the nature of demerger and transfer of two specified investment undertakings (including equity instruments, debt instruments and loans and advances) of SIPL, on a going concern basis, to its two overseas resulting companies, viz. Sun Pharma (Netherlands) B.V., Netherlands and Sun Pharmaceutical Holdings USA Inc., USA (collectively referred to as the ‘Resulting companies’).
- The Resulting companies are direct / indirect wholly owned subsidiaries (WOS) of SIPL and thus no shares were to be issued or no consideration was payable by the resulting companies pursuant to the demerger. The Resulting companies were holding strategic investments in overseas operating companies and were authorized to undertake financial activities. The Scheme was proposed with an objective to consolidate the holding structure of the overseas direct and indirect WOS of SIPL.
- The Scheme of arrangement envisages cross border arrangement. Thus, SIPL complied with the provisions of Section 234 of the Act and Foreign Exchange Management (Cross Border Arrangement) Regulations, 20182 (RBI Regulations) and submitted a compliance certificate to that effect. As per Rule 9 of the RBI Regulations, the above-mentioned compliance tantamount to deemed approval from the RBI. Further, RBI sent a letter to SIPL in which neither any opinion nor any objections were raised by the RBI to the Scheme.
- SIPL also undertook other required compliance as required under the provisions of the Act and as directed by the NCLT.
- While perusing the Scheme, Regional Director (RD) made an observation that Section 234 of the Act refers only to cross border mergers and amalgamations and that the same does not refer to ‘Demergers’. In reply to the observation, SIPL submitted that provisions of Section 234 are applicable to the Scheme of Arrangement (either in the nature of a merger / demerger) and the Company has thus complied with the applicable rules framed under the RBI Regulations. SIPL referred to judgment delivered by the NCLT in the case of CP (CAA) 90 of 2018.
Ruling of the National Company Law Tribunal:
- NCLT observed that provisions of the Section 230 and 232 of the Act (which relate only to the Indian companies), contain the word ‘compromise’ and / or ‘arrangement’ which is inclusive of the term ‘demerger’. However, Section 234 (which relates to the cross border mergers of Indian companies with foreign companies and vice versa) mention only about the words ‘merger’ and / or ‘amalgamation’ and do not seem to contain the words ‘compromise’ and / or ‘arrangement’ and / or ‘demerger’. Thus, it can be said that provisions of Section 234 of the Act do not provide for (or rather restrict) the demerger from Indian company (ies) into foreign company (ies).
- NCLT further observed that rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 provides detailed procedure and requirements for cross border mergers. However, it is silent on ‘demerger’ and mentions only ‘mergers’ and ‘amalgamations’.
- It was further stated that the draft RBI regulations defined ‘cross border merger’ to mean any merger, demerger, amalgamation or arrangement between Indian company(ies) and foreign company(ies), in accordance with Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 notified under the Act. However, when the final RBI regulations were notified, the term ‘demerger’ was specifically deleted / excluded from the definition of ‘cross border merger’. Thus, it is crystal clear that the term ‘demerger’ was intentionally removed from draft regulations and it was not to be allowed in the cases of cross border mergers of the Companies with foreign companies.
- Considering the above observations, the NCLT held that Section 234 of the Act does not permit ‘cross border demergers’ as mentioned by the RD. NCLT further said that the function of the court is to administer the law and not to legislate it. If any provisions of law are clear beyond all ambiguity, it is to be implemented regardless of the fact that it causes hardship to a particular party.
- NCLT further mentioned that although the doors have now been opened for Indian companies for outbound mergers, the law is still silent on cross border demergers. While it was possible for a foreign company to transfer its undertaking / business to an Indian company under the erstwhile Act, as Section 394 applied to demergers as well as merger, Section 234 of the Act only refers to ‘mergers and amalgamation’ without any express mention of ‘demergers’.
Sriram Chit Fund case:
Facts of the case:
- The Transferor Companies and the Transferee Company (collectively referred to as ‘Petitioner Companies’) were part of the same group with common shareholders. Transferor Companies were proposed to be amalgamated with the Transferee Company.
- Of the Transferor Companies, Shriram Chits (Maharashtra) Limited (‘Transferor Company 2’) is within the jurisdiction of NCLT, Mumbai Bench and Shriram Chits (Karnataka) Private Limited (‘Transferee Company’) is within the jurisdiction of NCLT, Bengaluru Bench.
- The other Transferee Companies i.e., Shriram Chits Private Limited is within the jurisdiction of NCLT, Hyderabad Bench and Shriram Chits Tamil Nadu Private Limited is within the jurisdiction of NCLT, Chennai Bench.
- As part of and upon the sanctioning of the Scheme, in relation to the Transferee Company, it was proposed to change the name from its current name to ‘Shriram Chits (India) Private Limited’ and to shift the registered office to Tamil Nadu. It was also proposed to increase the authorized share capital to facilitate issue of equity shares under the Scheme. Further, the accounting treatment in the Scheme mentioned that any differences arising due to difference in accounting policies of the Petitioner Companies will be adjusted in the General Reserve of the Transferee Company.
- Any differences in accounting policy between the Transferor Companies and the Transferee Company, to be quantified and adjusted in the Capital Reserve of the Transferee Company, instead of General Reserve;
- In relation to the change of name and shift of registered office of the Transferee Company, Petitioner Companies have to undertake to comply with section 13 of the Companies Act, 2013, read with Rules 29 and 30 respectively of the Companies (Incorporation) Rules, 2014;
- In relation to increase in authorized` share capital, the NCLT may pass orders to comply with section 61, read with section 13, section 64 and other sections of the Companies Act, 2013.
Accounting Standards have the effect of law under the Companies Act, 2013 and the accounting treatment in a scheme cannot override provisions of the law.
Further, the NCLT’s view makes it sufficiently clear that an order sanctioning a Scheme is a single window clearance and a complete code in itself. Therefore, once the NCLT approves a scheme, no separate procedure is required. While there might be some procedures required to be followed, the view adopted by the NCLT in the instant case does not impel compliance of separate procedures as long as they are affected as a part of the Scheme. However, certain steps will be required to be undertaken to update the MCA records.
Drafted by Rashmi Senthilkumar, B.B.A.,L.L.B.(Hons), Sastra University, Thanjavur.“The statements, views, and opinions contained in handbook are those of the author and are not endorsed by, nor do they necessarily reflect the opinions of VS Legal Associates or its team. However, in case of any discrepancy, reach out to us on firstname.lastname@example.org”
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