This article has been written by Akshay Verma, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho.

Introduction 

The Companies Act is the primary legislation that controls company structures and M&A transactions in Singapore and India respectively. The beginning of 2020 saw an unprecedented challenge in the form of COVID-19 pandemic. In Singapore, the stock market fell to a ten-year low as of mid-March 2020. M&A in India had also faced the heat of pandemic. As of August 2020, India witnessed 776 M&A deals worth $ 44.8 billion which is a significant decrease of 14% from the previous year’s corresponding period.

Both India and Singapore are Asian countries and offer distinct environments for business. Singapore is a rule-abiding, free of corruption, market-based economy but India continues to suffer from high levels of corruption and nepotism. In this article, I will talk about the various laws and regulations governing M&A transactions in India and Singapore. 

Companies Act 

In India, Section 230 to 240 of the Companies Act, 2013 provides statutory provisions controlling M&As requiring arrangements involving Companies, their members and creditors. Before the Companies Act, 2013, the matters involving mergers and amalgamations were not dealt by a specialised judicial body. In 2016, after a long legal battle on constitutional validity of several provisions, the NCLT was constituted. The National Companies Law Tribunal is a focussed body for corporate law affairs. All the appeals against the orders of the NCLT lie with National Companies Law Appellate Tribunal (NCLAT) situated at Delhi. 

The Companies Act, 2013 also permits merger of Indian Companies into Foreign Companies subject to the laid down checks and balances. Section 234 of the Companies Act, 2013 deals with such matters of mergers between Companies registered under the 2013 Act and Companies incorporated in the jurisdictions of such nations as may be informed by the Central Government from time to time. 

For executing such scheme, the prior authorization of the Reserve Bank of India is required. The RBI (Reserve Bank of India) has provided draft rules in this matter which prescribes conditions for inbound and outbound schemes. Furthermore, Annexure B of CAA Rule 25A also provides the jurisdictions in which the overseas company is incorporated, with which cross border mergers can be undertaken.

The Companies Act, 2013 also provides a doorstep beyond which a stakeholder can object to the scheme of arrangement. A desired scheme can be only objected to by shareholders having not less than 10% shareholding or creditors whose debt is not less than 5% of the total outstanding debt as per the final audited financial statement or the temporary financial statements which are not mature than six months. The Companies Act, 1956 did not prescribe any threshold. The Company Secretaries, Chartered Accountants and Cost Accountants can also appear now before the NCLT. Before this, they could not appear as the High Courts were handling schemes of arrangement.

Whereas in Singapore, Section 210 of the Companies Act allows restructuring of a company. In order to clear the arrangement scheme, it must be allowed by the relevant statutorily prescribed majority at the scheme meeting and must be approved by the High Court. A successfully passed scheme will be binding on all shareholders of the target organization.

Section 215A-J of the Companies Act allows two or more companies which are incorporated in Singapore, to amalgamate and continue as one organization. The amalgamated organization may be one of the amalgamating organizations or a new organization, and all rights, property, obligations and liabilities, privileges of each of the amalgamating organizations will be transferred to the amalgamated organization. The amalgamation can be carried out without the orders of the Court if certain obligations are fulfilled, including acquiring the required approvals of shareholders and the provision of solvency statements by the directors of the amalgamating organizations.

Competition Act

In India, Section 5 and 6 of the Competition Act, 2002 are operative and substantive provisions for merger regulation while Section 29 to 31 in addition to the CCI (Procedure in regard to the transaction of business relating to combinations) Regulations,2011 (“Combination Regulations”) lay down the time bound procedural requirements in relation to combinations. The Competition Commission of India (CCI) assumes a regulatory role more than an adjudicatory role in merger control. 

If X and Y are two of the top cement companies of India and were to merge then as a result the merged entity could be in a position to cause an appreciable adverse effect on competition in the relevant market of cement companies because significant amount of competition could stand to get reduced by way of this transaction. It is up to the CCI to make this assessment. There are substantive and procedural provisions laid down in the Act for the CCI to carry out this assessment. On an appellate stage, the NCLAT (erstwhile Competition Appellate Tribunal) has been established to hear appeals under Section 53-B of the Act, arising out of combination orders passed by the CCI which then finally go to the Supreme Court of India, under Section 53-T of the Act, which acts as the final appellate body.

Before the amendment in the Act in 2007, merger notification was considered to be an “optional proposition” i.e., the parties were at liberty to notify after the consummation of the transaction. After the amendment in 2007, the merger control regime introduced the mandatory requirement of filing a notification as a suspensory obligation. Suspensory obligation requires parties to make a notification to the CCI regarding the nature of their proposed transaction immediately after the approval of the Board of Directors of the Company and not consummate it before they receive the approval of the CCI.

Not all combinations are required to be notified. The following transactions under Section 5 of the Act constitute combinations for the purposes of the Act:

1. Direct and indirect acquisition of control, shares, assets, or voting rights or control of an enterprise;
2. Acquiring of control by an individual over an enterprise when such individual has direct or indirect control over another enterprise engaged in production, distribution or trading of a similar or identical or substitutable goods or provisions of a similar or identical or substitutable service; and 
3. Mergers and amalgamations of two or more enterprises.

However, small transactions are exempted from filing a notification, the Indian Government has exempted those combinations where the target enterprise (which is sought to be acquired, merged or amalgamated) has assets not exceeding INR 350 crores or a turnover not exceeding INR 1000 crore in India up till the year 2022 (“Target Exemption Thresholds”). If a particular division of an enterprise is targeted then the financials of that division will be assessed as per the Target Exemption Thresholds. This is the initial level of assessment which is generally done at preliminary level to determine or filter out transactions which need not be notified. If the parties fail to get the required target exemption, then as a part of the second level of assessment, the assets and turnover of the combining parties will be examined on the basis of certain jurisdictional thresholds which is known as the Parties Test and the Group Test.

If the assets and turnover of the parties breach these thresholds, then a mandatory notification will have to be made to the CCI. These thresholds are also applicable to foreign transactions if they have the required assets and turnover present in India. 

Depending on the complexity of the transaction, parties are required to file either a short form (Form-I) or a long form (Form-II) which is known as “Notice” under Section 6(2) of the Act. In India, the merger control regime is obligatory and its violation amounts to “gun jumping” under Section 43-A of the Act. This can result in fine under Section 43-A of the Act that may extend up to 1 percent of the worldwide turnover or assets of the combination, whichever is higher. The fine is imposed on the party responsible for the filing.

Whereas in Singapore, All the agreements which are in a position to effect, prevent, distort or restrict the competition within Singapore are prohibited under Section 34 of the Competition Act. Section 47 prohibits the conduct that will lead to the abuse of dominant position in any market of Singapore. Section 54 prohibits mergers that are expected to create adverse effect on competition within any Singapore market for goods or services. 

In Singapore, the merger notification regime is voluntary and parties to a merger are not required to notify the CCCS of their desired or completed trade combinations. The CCCS can Suo-motu start an investigation. However, it is not likely to interfere in a merger situation involving small organizations i.e., where turnover in the financial year preceding the transaction of each party is less than SGD 5 million and the combined global turnover in the financial year preceding the transaction of all the parties is below SGD 50 million.

Also, the CCCS is not likely to investigate unless the merged entity will have a market share of more than 40% or 40% or, between 20% and 40% and after merger the market share combined of the largest firms is 70% or more.

Securities laws 

The Securities in the market of India are regulated by the regulations and guidelines provided by the Securities and Exchange Board of India (SEBI). The M&A transactions are also involved under the regulation of SEBI in ‘Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) (Second Amendment) Regulation, 2018. The Government started the new economic policy in the last decade of the 20th century which included globalization, privatization and liberalization and therefore, it resulted in the upliftment of economy of India which created an aggressive competitive business environment around the globe, and it encouraged many other organizations to restructure their business entities and bring new corporate planning which involved the equipment like takeovers, M&A etc.

Whereas in Singapore, the Singapore Code on Takeovers and Mergers is issued by the Monetary Authority of Singapore pursuant to Section 321 of the Securities and Futures Act. The Takeover code applies to the acquisition of voting control of listed companies. However, unlisted public organizations and unlisted registered business trusts with more than 50 shareholders or unitholders and having net tangible assets of S$5 million or more are also required to observe the letter and spirit of the Takeover Code as set out in its General Principles and Rules. The Securities Industry Council (“SIC”) is the regulator which oversees the Takeover Code.

Tax Laws

In India, the Income Tax Act,1961 includes various provisions dealing with the taxation of distinct types of mergers and acquisitions. A merger of organization is usually done through an arrangement scheme prescribed under the Companies Act,2013. A merger is said to be tax neutral when it meets the required criteria and meets the requirement as an amalgamation under the Income Tax Act.

Section 47 of the Income Tax Act exempts certain transfers from capital gains tax liability:

• Capital assets transfer by an amalgamating organization to the amalgamated organization if the amalgamated organization is an Indian organization.
• Transfer of shares in an Indian organization by an amalgamating foreign organization to the amalgamated foreign if both the criteria given below are satisfied:
  1. At least 25% of the amalgamating organization’s shareholders continue to be shareholders of the amalgamated organization. Hence, the amalgamating organization’s shareholders who are holding 3/4th in value of shares who become shareholders of the amalgamated organization must comprise at least 25% of the total number of shareholders of the amalgamated organization.
  2. Such type of transfer does not attract capital gains tax in the amalgamating organization’s Nation of incorporation.

• Transfer of shares in a foreign organization in an amalgamation between two foreign organizations, where such transfer leads to an indirect transfer of Indian shares.
• Transfer of shares by amalgamating organization’s shareholders in consideration for issuance of shares in amalgamated organization is not considered as transfer for the purpose of capital gains. The exemption can be claimed only if the amalgamated organization is an Indian organization.

Whereas in Singapore, there are no specific taxes related to a merger. However, stamp duty or GST will have to be determined based on the transactions and the assets involved in the combination. For instance, if a combination involves the transfer of a beneficial interest in the shares of underlying Singapore organizations, stamp duty will be payable.

The Singapore Companies Act, under Sections 215B to 215G provides a tax framework for corporate amalgamations. Under this tax framework, most of the tax consequences of a continuing business will be applicable to the amalgamated organization. The tax treatment of trading stocks, capital allowances, prepayments, accruals and so on, transferred to the amalgamated organization is determined on the basis that businesses of the amalgamating organizations that have been taken over completely have not ceased but continue in the amalgamated organization, as a part of the business of the amalgamated organization.

Conclusion

M&A transactions are regulated by various statutes both in Singapore and India. M&A transactions in India are dealt by a specialized judicial body called NCLT (National Companies Law Tribunal) whereas in Singapore, transactions are dealt by High Courts. There is also a difference in competition laws of Singapore and India. In India, those combinations where the target enterprise (which is sought to be acquired, merged or amalgamated) has assets not exceeding INR 350 crores or a turnover not exceeding INR 1000 crore in India up till the year 2022 (“Target Exemption Thresholds”) are exempted from filing a notice. Whereas in Singapore, the limit for assets is SGD 5 million and for turnover is SGD 50 million.

The Takeover Code in India is regulated by the Securities and Exchange Board of India (“SEBI”) whereas in Singapore, the Takeover Code is regulated by Securities Industry Council (“SIC”). The tax aspects related to M&A transactions in India are governed under Income Tax Act,1961 whereas in Singapore, there are no specific taxes related to a merger. However, stamp duty or GST will have to be determined based on the transactions and assets involved in the combination. 

References

• https://practiceguides.chambers.com/practice-guides/corporate-ma-2020/singapore 
• https://taxguru.in/company-law/merger-acquisition-india-issues-challenges.html 
• https://www.mondaq.com/india/withholding-tax/819540/tax-issues-in-ma-transactions 
• https://uk.practicallaw.thomsonreuters.com/7-502-1598?transitionType=Default&contextData=(sc.Default)&firstPage=true 
• https://www.mayerbrown.com/-/media/files/perspectives-events/publications/2018/05/brief-guide-to-ma-in-southeast-asia/files/brief_guide_to_ma_in_se_asia/fileattachment/brief_guide_to_ma_in_se_asia.pdf 

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