This article is written by Kashika Mahajan from Bharati Vidyapeeth University’s New Law College, Pune and the article has been edited by Khushi Sharma (Trainee Associate, Blog iPleaders).

Introduction

Merger and Acquisition are most talked about subjects these days. Often these are interchangeably used although they have different legal meanings. Merger means integration of two entities into one. In short in India mergers are called Amalgamation.In Amalgamation, at least two entities are needed to form a new entity. The acquisition means absorbing or buying the entity. Basically, taking over the assets and liabilities of one entity and influencing the voting rights. Both the entities separately exist whereas in mergers there is the dissolution of one entity.

Examples of mergers: 

• In 2020, Indus Tower merged with Bharti Infratel.
• In 2019, Bank of Baroda merged with Vijaya Bank and Dena Bank.

Examples of Acquisition: 

Zomato acquired Uber Eats in 2020.

Walmart acquired Flipkart in 2018.

It is done for the purpose of expansion, diversification, optimum utilization of resources etc. to increase the GDP of the economy and also to help sick companies.  Through this one can achieve cost reduction, tax benefit, increase in market capitalization, employment, and access to foreign markets etc.

Laws Governing M&A in India

The Companies Act, 2013

Section 230-240 of the act covers the provisions relating to M&A including arrangements that cover companies, their members, and creditors. All sections except 234 became effective on 15th December 2016 and S-234 was notified on 13th April 2017.

These sections are completely different from The Companies Act, 1956. Moreover, we had only four sections relating to M&A i.e., 391-394.

Apart from these sections, we have Compromise, Arrangements and Amalgamation Rules, 2016 (‘CAA RULES’) 

S-230 is R.W. S-232.Talks about corporate re-structuring through compromise and arrangement.

Under S-231 Power is with NCLT to enforce compromise and arrangement by 

1. Accepting the proposal 
2. Modifying the proposal and
3. Lastly by rejecting the proposal i.e., winding up of a company if they are unable to pay a debt.

Section 232 talks about the procedure for the same. Moving ahead towards Section 233 is read with Rule 25 of CAA. It talks about fast-track mergers. This section was inserted to prevent companies from going through a lengthy procedure given under S-232. Provided they need to have approval from shareholders, directors, creditors of the company. In short, each person is directly related to a company. 

Merger schemes can be vested between the following companies:

1. Holding Company and its wholly-owned subsidiary company;
2. The merger between two or more small companies;
3. Such Other class or classes of companies as may be prescribed.

Prominent features of this section are:

1. No mandatory approval of NCLT is required.
2. No need of issuing public advertisements.
3. Less administrative burden.
4. Economic in nature.
5. Series of hearing may be avoided.

Section 235 & 236 deal with the purchase of minority shareholding in a company.  In the case of Foss V Hardbottle[1], it was held by the court that the will of majority shareholders will prevail and the court will not interfere in the internal management of the company. However, minority shareholders can’t be neglected or oppressed. But Court will ensure that majority shareholders are exercising their powers within their limits.

The concept of squeezing out of minority was given legal recognition by the ministry of corporate affairs under section 236 from 15^th Dec 2016. In this minority shareholders leave the company and sell their shares to majority shareholders.

Definition of minority shareholding has not been defined under the section it’s just written their shareholdings should not exceed more than 25%. 

The procedure for the same has been mentioned in the section.

Section 237 says that the central government has the power for amalgamation in the public interest and also lays down the procedure for the same. It is corresponding with Section 396 of the Companies Act, 1956.

National Company Law Appellate Tribunal (NCLAT) deals with all grievances under company law.

Competition Act, 2002

This act was replaced by MRTP Act 1969 to prohibit unfair trade practices, but it was not self-sufficient and had lots of loopholes.  To prevent monopolistic trade practices and win people’s trust competition act came into being. It dealt with all the challenges and holds a good command over globalization. This will help in increasing the GDP in the economy. This will be achieved when we will practice fair trade policies.

Objectives of this Act 

1. To protect the interest of consumers;
2. To prevent unhealthy trade practices;
3. To prevent abuse of power;
4. To prevent monopolistic markets and promote healthy competition in the market;
5. To provide the framework for the Competition Commission of India;
6. To investigate the matter therewith or incidental thereto;
7. To check anti-competitive practices.

This act is designed to regulate the activities and operation of combinations. This includes Mergers, Amalgamation and Acquisition. If the combinations exceed the threshold limit are prevented they will or are likely to cause adverse effects on the economy. But If CCI wants then they tell them to modify the same and then go ahead with the scheme.  The threshold limit is decided by the turnover and assets of the company. 

Section 3 of the act talks about anti-competitive practices. It restricts any kind of compromise, arrangement, acquisition which will cause or likely cause an adverse effect on the economy.

Section 4 talks about the abuse of dominant power. when two or more powerful companies come together and start creating a dominant position in the market and customers have no choice other than going them. The reason may be the product value or geographical location. But this exploits the customers a lot.

Section 5 deals with the regulation of combinations. It has exempted certain companies from this section if they fulfil certain criteria. However, these exempted companies don’t have any competitive impact on assessment under section 6 of the act

Section 6 talks about void combinations, this combination will cause or is likely to cause an adverse effect on the economy. If any company wishes to go ahead and follow the combination need to give prior notice to CCI. After that procedure for investigation takes place which is given under Section 29 of the act. And company need to go ahead as per the orders of the commission which is given under Section 31.

Chapter VI talks about appeals and penalties. The act has various sections that talk about the same. They are as under:

SECTION 27	Orders by Commission after inquiry onto agreements or abuse of dominant position
SECTION 28	Division of enterprise enjoying dominant position
SECTION 31	Orders of Commission on certain combinations
SECTION 32	Acts taking place outside India but having an effect on competition in India
SECTION 33	Power to issue interim orders
SECTION 39	Execution of orders of Commission imposing monetary penalty- IMPRISONMENT: Up to 3 years or Fine: Up to Rs 25 cr.
SECTION 42	Contravention of orders of Commission
SECTION 42A	Compensation in case of contravention of orders of Commission
SECTION 43A	Penalty for failure to comply with directions of Commission and Director

Act also has provision for Appellate tribunal and appeal appellate tribunal which is discussed under Section 53 and 53A. for hearing the matters under competition act we have Competition Appellate Tribunal, matte need to be filed within 60 days. After 2017 all the cases will go under the National Company Law Appellate Tribunal which is constituted under Section 410 of the companies Act, 2013 shall, on and from the commencement of Part XIV of Chapter VI of the Finance Act, 2017.

The Indian Income Tax Act, 1961

Meaning of term Amalgamation has been defined in this act under Section 2(1B),it means merger of one or more companies into another company or two or more companies merged to form a new company. The company which is merged is known as amalgamating company and coin which that company is being merged or formation of the company is known as the amalgamated company. Also, all the assets and liabilities of the amalgamating company become the assets and liabilities of amalgamating company.

Act also has the concept of capital gain, which means gains or profits that one receives after the sale of capital assets.  Any gain from the sale of assets is our income and hence we need to pay tax for that income in the year in which we have purchased it. It can be both short term and long term.

• Transactions that are exempted from capital gain tax in an amalgamation are as under:

Section 47 of the act exempts the following:

1. If the amalgamated company is an Indian company. Any assets transferred by amalgamating company towards amalgamating company shall be exempted.
2. Where the transfer of shares is made by shareholder has been made by an amalgamated company which is Indian Company along with that allotment of shares is also made by the amalgamated company.
3. If two foreign companies are amalgamated no tax is levied. When an Indian company and foreign company are amalgamated, and the resultant company is in India. This will result in a capital gain for shareholders.

Along with these income tax exempts inherited property as there is no sale or transfer of ownership. It also includes sales by way of gift or will. Tax will only be levied if further this property is sold to someone else. Then it will result in a capital gain.

The Indian Stamp Act, 1899

The act is in enforcing in the whole of India with respect to the rate of different instruments which are commercial in nature. This is enacted by the central government, but it gives power to the state government to either use the act as it is or can modify the same. Even they can enact a different act for stamp duty for their state. Some examples are as under:

1. States which have adopted the stamp duty act are Arunachal Pradesh, Jharkhand, Uttarakhand, etc.
2. States which have adopted Schedule 1A with amendments are Andhra Pradesh, Punjab, Assam, Bihar, Delhi, etc.
3. States that have their own stamp act are Gujarat, Maharashtra, Karnataka and Rajasthan, Kerala etc.

Stamp duty is charged under Section 3 of the act. It is to be paid to the state government in full and due time. If there is any delay in the payment penalty is enforced.

Constitutional provisions related to stamp duty are:

Schedule 7 has divided the powers among central and state governments. There are three lists which cover the items that will be covered by them like maters of union list are handled by the central government, items mentioned in sate list are handled by the state government and what is not by these two listed are governed by a concurrent list which is managed by both central and state government but in case of conflict, centre prevails overstate.

1. Union List: Entry 91 of List I have given power to Union Legislative to prescribe the stamp duty. Subjects like Bills of Exchange, Cheques, Promissory Notes, Transfer Of Shares, Letter Of Credit, etc.
2. State List: Entry 63 of List II talks about this. It covers subjects other than mentioned in Entry 91 List I. Like: Issuance of Shares.
3. Concurrent List: Entry 44 List III. It covers all other matters which are not covered in the above two Lists. It means stamp duty other than duties collected by means of judicial stamp but not including rates of stamp duty.

The liability to pay stamp duty arises when the instrument is executed and secondly if the instrument is executed outside the state, laws of stamp duty of that state will be executed

Foreign Exchange Management Act, 1999

The concept of Cross border mergers is dealt with by FEMA. It means any merger, amalgamation, or arrangement between Indian and Foreign companies. FEMA regulations provide that any transaction taken with respect to cross-border will take place through RBI, as per the 25^th rule of CAA Rules, 2016. Amendment of 2017 in companies act added Section 234 to the act which talks about cross border merger. In 2018 RBI notified in the official gazette about inviting stakeholders for regulations. They will have a major role as they will keep an eye on the market situation. Before 1999 we had FERA 1973 i.e., Foreign Exchange Regulating Act. As the name suggests it was a regulatory body. They had no power of enforcing rules and make changes in the act. It couldn’t cope with the policy of LPG. There was an urgent need to repeal the act and form such an act that actually has an impact on the economy and people start taking it seriously.

Cross border mergers can be divided into two types:

1. Inbound Merger- means where a foreign company merges with an Indian company. Accordingly, all the assets and liabilities are transferred to the Indian Company.

Example: Daiichi Acquired Ranbaxy

2. Outbound Merger- means where an Indian company is merging with a foreign company and all the assets and liabilities are transferred to a foreign company. These mergers comply with both FEMA and Foreign rules.

Example: Tata steel Acquired Corus

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 

This regulation is important for the merger, acquisition, amalgamation, compromise, arrangement for the listed companies. It prescribes that an acquirer acquiring substantial offers or casting a ballot right i.e., 25% or more, should make an open proposal to every one of the public shareholders of the objective organization. Independent of the offers or casting a ballot right gained, the acquirer likewise should make an open proposal after obtaining control of the objective organization. It, in this way, becomes vital to considerably comprehend the significance of the word ‘control’ and its suggestions. Be that as it may, because of the clashing meanings of ‘control’ by Indian enactment and courts just as the uncertain understandings of the word, there is a shortfall of a thorough meaning of the word. Perceiving this vagueness and its likely effect on financial backers in the public space in India, the Protections Trade Leading body of India (Hereinafter “SEBI”) looked to characterize ‘control’ and start a public discussion process. This paper endeavours to clarify the idea of ‘control’.

Insolvency And Bankruptcy Code, 2016

Before IBC we had Sick Industrial Companies Act, 1985 i.e., SICA legislation.  This act was enacted to detect the sick units and revive them through mergers and acquisitions, if possible, if not then pass the order for winding up of sick companies. The main reason why this act came into being was to release the investment which has been locked up so that resources can be used in a different and efficient manner. Act also had two quasi-judicial bodies which have now been repelled.  After that in 2003 SICA legislation was repelled, and newly amended legislation was enacted. It had more stringent provisions and covered all loopholes which were there in the 1885 act. In 2016 SICA was fully repealed as it overlapped with provisions of the companies act. With the enactment of IBC, companies act sections from 253-269 were omitted and now Section 255 and Schedule XI deals with it. It is administered by NCLT and helps in auctioning the assets whose value has been depreciated. To start the process under the corporate insolvency resolution process one need to file an application to NCLT. Many amendments have been made timely. Recently in 2020 and 2021, it was made.

References

1. [1843] 67 ER 189, (1843) 2 Hare 461
2. Laws regulating Mergers and Acquisition, see here
3. Mergers And Acquisitions, see here
4. Mergers and Acquisition under Companies Act, 2013, see here
5. Why is Competition Law relevant to mergers and acquisitions and private equity, see here
6. Stamp Duty Implications Of Mergers And Acquisitions, see here
7. Tax Issues In M&A Transactions, see here
8. Cross Border Mergers- A Summary of Recent Developments, see here
9. SEBI Takeover Code, see here

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