This article is written by Pratyush Jain is a 5th-year student in the B.L.S. LLB Program at Government Law College, Mumbai.

Introduction

In the past few years, India has seen a tremendous growth in number of mergers and acquisitions (“M&As”) with more than 1,000 M&As in the year 2017 alone. These digits are highest in the current decade. Government’s initiative of ‘Make in India’ and thrive to improve its global ranking for ‘Ease of Doing Business’ has brought about many regulatory and judicial changes in the nation. In order to improve the grey areas and improve the market conditions, steps have been taken to liberalise the stricter norms and approval requirements in order to pave a way for fast and efficient merger transactions.

This article highlights some of the recent merger trends along with an analysis, observed in India in order show some light over the increased liberal initiatives adopted by Government paving a friendly regulatory environment.

Merger Trends

1. Merger of LLP into Company (Cross-entity)

National Company law Tribunal, Chennai bench (“Tribunal”) recently passed a landmark order in the matter of scheme of amalgamation between M/s. Real Image LLP with M/s. Qube Cinema Technologies Private Limited which paved a way for merger of LLPs with a private company. The current provisions for merger in both the Limited Liability Partnerships (“LLP”) Act, 2008 and the Companies Act, 2013 (“Act”) which are the governing statutes of LLPs and companies respectively does not permit expressly such cross-entity mergers. Tribunal stated that “If the intention of Parliament is to permit a foreign LLP to merge with an Indian company, then it would be wrong to presume that the Act prohibits a merger of an Indian LLP with an Indian company.” It further went upon to state “…the legislative intent behind enacting both the LLP Act, 2008 and the Companies Act, 2013 is to facilitate the ease of doing business and create a desirable business atmosphere for companies and LLPs.” to finally conclude that there does not appear any express legal bar to allow/ sanction merger of an Indian LLP with an Indian company.

Analysis: The merger order by Tribunal is much welcomed by the industry as it gives a thumbs-up to cross-entity mergers in cases of LLPs and companies. Moreover, with no statutory backing, the order per se could be further challenged at the appellate authority (in this case National Company Law Appellate Tribunal) and without any clear provisions there can be problems (tax implications, procedural delays, etc.) in implementing such schemes.

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2. Reverse merger

When a large/healthier company merges into a smaller or weaker company, it is called a reverse merger. The trend of reverse merger has been in picture with ICICI (Industrial Credit and Investment Corp of India) and two of its wholly-owned subsidiaries, ICICI Personal Financial Services and ICICI Capital Services, reverse-merged with ICICI Bank in 2002. With Government’s approval of merger between Vodafone India and Idea Cellular, the concept and structure of reverse merger has again taken up the limelight in the news. In this case, Vodafone India will merge with Idea Cellular thus creating country’s largest mobile phone operator with entity renamed as Vodafone Idea Ltd. The benefits of going public without raising money, reducing competition and increasing the market share have been the determinant grounds of this deal.

Analysis: Reverse mergers are found to be more attractive for companies intending to go public without the need of raising money. They can avail the no-IPO way by simply getting reverse merged with a listed company. Further the losses of weaker company can be carried forward and will eventually help the entity to pay lower taxes. With increased competition and disruptive telecom market in the country, Vodafone Idea merger is expected to start on a frail footing.

3. Matters relating to public interest

The compulsory merger order of 63 Moons Technologies Limited (“63 Moons”) formerly known as Financial Technologies (India) Ltd. & Ors with National Spot Exchange (“NSEL”) is one of the prominent merger order in the recent past. Section 396 of Companies Act, 1956 empowers the Central Government to pass necessary orders with respect to amalgamating two or more companies where it is satisfied that it is essential in public interest to do so. In this special order, 63 Moons was allowed to merge with NSEL (its fully owned subsidiary) to provide relief to hundreds of investors who were stuck with an outstanding amount of more than 5000 Crores. Ministry of corporate affairs ordered the said merger in the month of February 2016 which was further upheld by Bombay High Court[1] which went on to conclude that “…If exchanges such as these are permitted to be subverted or fail without honouring their obligations and commitments, the confidence in national economic institutions is bound to suffer and the repercussion to the national economy will be severe. In such situations, a negative perception about the business environment of the country is created, which has grave repercussions on the national economy. The Central Government, quite conscious of all such factors, has taken a balanced decision in the facts and circumstances of the present case”.

Analysis: Government’s step to merge such entities is much welcomed as it brings relief to investors by assuring that the holding company, 63 Moons doesn’t go scot free from the losses faced by its wholly owned subsidiary. This shows Government’s intervention in matters relating to public interest and its intention to primarily help the investors of the said entity. Aggrieved by the same order of Bombay High court, 63 Moons along with its promoter(s) have appealed to Supreme Court of India and the matter[2] is listed in late September this year.

4. Special Approvals

Insurance Regulatory and Development Authority of India’s (“IRDAI”) Guidelines for Listed Insurance Companies, 2016 restricts ownership of listed insurance companies to fifteen percent of the paid-up capital of entities operating in the financial sector. An exception to this rule is observed by Life Insurance Corporation (“LIC”) and Industrial Development Bank of India (IDBI Bank) merger in which LIC is permitted to take 51% stake in the entity. IRDAI approved the deal on a condition that LIC will reduce its stake in the coming years. This approval will infuse capital in debt-laden bank and help both entities to strengthen financially as well as their subsidiaries which offer financial products such as housing finance and mutual funds.

Analysis: Government’s special approval of merger of both these entities is a deviation from the general rule which listed insurance companies are expected to follow. However, looking into the wide-ranging synergy benefits for customers of both these entities, such merger would help LIC to realise its vision of becoming a financial conglomerate.

5. Deemed approval for Cross-border mergers

Reserve Bank of India (“RBI”) vide its notification dated March 20^th, 2018 provided for the much awaited Foreign Exchange Management (Cross-Border Merger) Regulations (“Regulations”) with explicit details with respect to both in-bound and out-bound mergers. Prior to these Regulations, Section 234 of the Act required that a foreign company (incorporated under notified jurisdictions) obtain prior approval from RBI before merging into a company registered under the Act or vice versa. However, with the introduction of these Regulations, all merger transactions which are compliant with it shall stand as ‘deemed approved’ by RBI.

Analysis: These regulations are the first foot steps towards a friendly regulatory environment in the country with respect to cross-border mergers. The deemed RBI approval would be much applauded by the market but somehow the advantage or relief proposed to be given by it seems to be overshadowed by Regulation 7(2) of the Regulations. Regulation 7(2) provides that companies involved in the cross-border merger shall ensure that regulatory actions, if any, prior to merger, with respect to non-compliance, contravention, violation, or, of the Foreign Exchange Management Act, 1999 or the rules or regulations framed thereunder shall be completed, thus, in a way making a company compliant with rules and regulations by itself (without intervention of RBI).

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Conclusion

Government’s steps to strengthen Indian economy and improve global ranking in World Bank’s Ease of Doing Business, have created a merger storm in the nation. With Alibaba’s acquisition in Paytm and the much heated Walmart-Flipkart merger has shown the rise of foreign investors’ interest in the Indian market. Further, with time lined and eased procedures in merger laws in the country, India will not only attract foreign investors but will also strengthen its position and help in making India the hub for foreign cross-border mergers.

[1]BHC WP-2743-2014

[2]SLP(C) No./4210/2018