Procedures of Mergers and Acquisition in India

By- R Vighnesh Kaimal

The M&A scenario in India seems bustling with over 1000 deals happening last year1 itself. Some of
the largest deals were HDFC acquiring Max Life Insurance, Ola acquiring Food Panda, Axis Bank-
Freecharge and Flipkart taking over Indian subsidiary of Ebay(only to be itself acquired by Walmart
this year). The procedure in India dealing with M&A is dealt by several laws including Companies
Act, Competition Act, FEMA Regulations, Securities Law and Sectoral Regulators. This article seeks
to give gist of procedures entailed by myriad enactments governing M&As in India.

A. Indian Companies Act, 2013

1. Mergers
Mergers and Acquisitions are imputed within the wide definition of the word “Arrangements and
Amalgamations” in the Chapter XV of The Indian Companies Act 2013. The Following procedure
has to be followed as per the Indian Companies Act:

1) Application to the NCLT

The entire procedure begins according to section 232 when an application regarding merger is
made by both the transferee and the transferor companies to the NCLT. The application must be
made in the form of an arrangement/compromise application under mentioned under section 230,
and should sufficiently intimate to the Tribunal that the companies intend to merge2 or that the
whole or a part of the undertaking and liabilities of a company is being transferred to the other
company.3

2) NCLT orders a Meeting

The NCLT ought to order a meeting, depending upon the case, of the creditors or members or their
classes.4 These meeting also ought to take into considerations the provisions of section 230, namely
sub clauses 3, 4, 5 and 6. The notice of the meeting should contain a statement disclosing the
details of the M&A and the effects of the same on the creditors and members.5 A copy of valuation
report of the proposed merger must also be furnished in the same report. The statement attached
with the notice must also mention any material interests of directors or debenture holders in the
arrangement. The notice and the document to be attached must also be uploaded on the website of
the company. The notice of the meeting should also be sent to the Ministry of Corporate Affairs, the
income-tax authorities, the RBI, the SEBI, the Registrar, the respective stock exchanges, the Official

1
https://economictimes.indiatimes.com/news/company/corporate-trends/why-2018-may-become-a-blockbuster-
year-for-mergers-and-acquisitions/articleshow/63446545.cms
2
Section 232 (1) (a)
3
Section 232 (1) (b)
4
Section 232 (1)
5
Section 230 (3)
Liquidator, the Competition Commission of India and to the relevant sectoral regulators. These
authorities will make representations within 30 days of receipt of the notice if any ill-effect of the
arrangement of the merger is observed.

3) Documents to be distributed at the Meeting

The merging or demerging companies out to circulate the following documents in the meeting as
per the provisions of section 232:

 The termsheet, which is a draft of the proposed terms of the arrangement drawn up and
adopted by the directors of the merging company.
 A receipt of confirmation by the ROC stating that the termsheet has been filed with it.
 A report that is adopted by the directors of the merging companies explaining the effect
of compromise on each class of shareholders, key managerial personnel, promoters and
specify any difficulties relating to valuation.
 An expert valuation report.

4) Voting

Members and Creditors have to vote within one month from the date they receive the notice by
themselves, through a proxy or by post. Only a member with atleast 10 percent shareholding or a
creditor with an outstanding debt of atleast 5 percent is allowed to object the merger. The
arrangement is said to have been passed if it receives 75 percent votes from all the creditors or
members 6

5) NCLT gives orders on the Arrangement

NCLT after being satisfied that the companies have followed the directions with regards to the
Notice, Meeting and Voting, may give directions pertaining to7:

 The transfer of the property, undertaking and liabilities of the transferor company to the
transferee company.
 The allotment of shares, debentures and policies of the companies.
 The status regarding the legal disputes between the transferee and transferor companies.
 The dissolution, without winding-up, of any transferor company.
 The allotment of shares of the transferee company to non-resident or foreign shareholders.
 The transfer of the employees of the transferor company to the transferee company.
 Other such incidental, consequential and supplemental matters as are deemed necessary to
secure that the merger or amalgamation is fully and effectively carried out.

6) Dissenting Shareholders

As per section 235, once the four months have passed since the arrangement of merger has been
offered by the transferee company and ninety percent of the shareholders have acceded to the said

6
Section 230 (6)
7
Section 232 (3)
arrangement, the transferee company has the right to acquire the right of the dissenting
shareholders. The notice for the acquisition should be sent two months after the expiry of
aforementioned fourth months. The transferee company acquires those shares on the same terms
as the approving shareholders of the transferor company acquire the shares of the transferee
company.

2. Acquisitions
Acquisitions unlike mergers are not always a mutually predicated arrangement. It is done through an
acquisition of existing shares or by subscription to new shares of the target company. Here are certain
Indian Companies Act provisions that are to be followed in the case of an acquisition:

1) Transferability

Transferability of shares is restricted in a private company as per the requirement in section 2(68),
while in public companies although there are provisions for free transferability of shares, the
transfer is still subject to conditions mentioned in the Articles of Association. Hence in any form of
acquisition of either types of companies the procedure for transfer must be taken cognizance of.

2) Reduction of Share Capital and Minority Squeeze Out

Once the acquirer, or persons acting in concert with the acquirer have a majority shareholding they
may acquire the target company through two ways a) by the way of reduction of share capital
(Section 66) or b) minority squeeze out (Section 236). Section 66 (1) (b) of the Act allows the
company, through a special resolution to reduce the share capital by paying off any paid-up share
capital which is in excess of the wants of the company. This can be used to oust the unwanted
shareholders. An advantage in going through section 66 is that only 75% voting power is required
by the acquirer to pass a special resolution for reduction of capital while in order to initiate a
minority squeeze out under section 236 the acquirer needs to have 90% or more of issued equity
share capital of the company under his control.

Minority squeeze out is governed by section 236, it says that when an acquirer or person acting
with the acquirers hold atleast 90% or more of issued equity share capital of the target company,
they ought to offer to buy the equity shares held by the minority. The valuation of these shares
offered to the minority shareholders of the company for buying the equity shares occurs at a price
determined on the basis of valuation by a registered valuer.

B. Securities Law
1) SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
  Trigger Warning-No acquirer or a person acting in consonance with him is allowed to
acquire more than 25 percent or more of the voting rights of a listed company unless he
makes an open offer publically stating his intentions to acquire more shares.8
 Creeping Acquisition- If the acquirer and the person acting under him already hold
between 25 percent voting right but less than maximum permissible non-public
shareholding(75 percent), and further acquire any additional shares or voting rights
amounting to 5 percent of the total voting rights they ought to make mandatorily make an
open offer publically stating their intentions to acquire more control.9
 Indirect Acquisition- In an event that an acquirer or any person acting in concert acquire
such a shareholding or voting power which allows them to exercise control over the
company as would otherwise be subject o mandatory offer mentioned in rule 3(1) and (2),
the acquisition shall be called indirect acquisition of control.10
 Direct Acquisition- Direct acquisition occurs if a) the proportionate net asset value of the
target company as a percentage of the consolidated net asset value of the entity or business
being acquired is in excess of 80 percent, or, b) the proportionate sales turnover of the
target company as a percentage of the consolidated sales turnover of the entity or business
being acquired is in excess of 80 percent, or, c) the proportionate market capitalisation of
the target company as a percentage of the enterprise value for the entity or business being
acquired is in excess of 80 percent.
 Voluntary Open Offer- An acquirer and a person acting in concert with him hold more
than 25 percent of the shares but less than the maximum permissible non-public
shareholding(75 percent), they may voluntarily make a public announcement of an open
offer for acquiring additional shares of the company subject to their aggregate shareholding
after completion of the open offer not exceeding 75%11
 Offer Size and Price- The oper offer should be for the acquisition of atleast 26 percent of
the shares and it can also be subjected to a minimum level of acceptance as per Rule 19.
Rule 8 (2) and (3) lay down the procedure for price calculation in direct and indirect
acquisition respectively.
 Competitive Bid- Any person other than the acquirer and the person acting in concert with
him can also make an open offer within 15 days of the first offer.12 The offer of the second
bidder should be atleast of the sum of the total number of shares held by the first
bidder(and his PAC) and the total number of shares that the first bidder has bid for. Either
of the bidder may withdraw his bid13
 Delisting Permitted- An acquirer is allowed delist the company post acquisition as per the
Delisting Regulations. This is only allowed if he declares the same at the time of making the
open offer.

2) SEBI (Prohibition of Insider Trading) Regulations, 2015

8
Rule 3(1), SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
9
Rule 3(2), SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
10
Rule 5(1), SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
11
Rule 6, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
12
Rule 20, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
13
Rule 23, SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
In the previous regulation(1992) there were inherent ambiguity about the disclosure of
unpublished price sensitive information to other parties which were contracting for mergers. Many
companies would refuse such information in fear of contravening the 1992 regulation. SEBI
(Prohibition of Insider Trading) Regulations, 2015 were issued to redress this concern amongst
many others. The disclosure is allowed if the company is making an open offer to acquire another
company.14

3) SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009

If the arrangement of M&A of a particular transferor listed company involves the issue of new
equity shares or securities convertible into equity shares to the transferee then the provisions of
the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 have to be followed. If
an acquirer is not a promoter, the lock in period of one year prescribed from the date of trading
approval. If the acquirer holds any equity shares of the target before the allotment during the
arrangement of merger then the prescribed lock in is 6 months from the date of trading approval

4) SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

 A listed company which is indulging in a merger as a transferor or transferee have to file the
scheme of arrangement with the stock exchange for obtaining an “Observation Letter” or a
“No Objection Letter”15
 A listed company ought to file with the exchanges an auditor’s certificate ensuring that the
accounting during the arrangement shall occur as per the Accounting Standards specified in
the Companies Act.
 The company must also disclose to the exchange every effect the arrangement shall have on
the performance of the company.16

C. Competition Act, 2002

Two points are to be taken into consideration with regards to the arrangement of acquisition and
mergers when it comes to the competition regime. Firstly, the entire arrangement of mergers and
acquisitions is treated as a “Combination”17 under the competition act 2002. Following tables
explain what construes as a combination under the Competition Act:18

Enterprise Level Assets OR Turnover

India > INR 2000 crore OR > INR 6000 crore
Globally (with >USD 1 billion with OR >USD 3 bn with at least INR
India component) at least INR 1000 3000 crore in India
crore in India

14
Rule 3(3) and (4), SEBI (Prohibition of Insider Trading) Regulations, 2015
15
Regulation 11, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
16
Regulation 58, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
17
Section 5 of Competition Act, 2002
18
Notification No. S.O. 675(E) dated March 4, 2016
 OR

Group Level Assets OR Turnover

India > INR 8000 crore OR > INR 24000 crore
Globally (with > USD 4 billion OR > USD 12 bn with
India component) with at least INR at least INR 3000
1000 crore in India crore in India

The assets and turnover mentioned in the tables above are of the both acquirer and the target
company (transferor company) combined. If an arrangement of merger or acquisition qualifies as a
combination as per the aforementioned threshold, then it is imperative to give notice to the
Competition Commission of India.19

Another catch in the situation is the vague wordings of section 6 (2)(b) which says that such notice
must be given 5 years from the execution of “any agreement or document” with regard to the
“combination”. This means that all the documents like share holders agreement, termsheets and
scheme of arrangement are deemed to be trigger documents, the CCI has to be notified once any of
them is entered into. Under the Competition law the merger regime is deemed to be suspensory in
nature, which means that unless the approval is granted by the Competition Commission of India or
a waiting period lapses (221 days after a notice has been given) the merger or an acquisition is
deemed to be incomplete. “Gun jumping”20 is penalized heavily by CCI.

D. FEMA
In the event of a merger between an Indian and Foreign Company the Foreign Exchange
Management Laws come into picture. The approval by RBI is also made mandatory under the
proviso of Section 234 of the Indian Companies Act read with Rule 25A of the Companies Merger
Rules. The Foreign Exchange Management (Cross Border Merger) Regulations, 2018 was issued
with regards to the same. The Regulation differentiates between inbound merger and outbound
merger, providing directions for the occurrence of same.

 In Bound Merger: A merger wherein a foreign company merges into an indain

company in such w way that all or some of its property, liabilities and undertakings
transfers to the Indian company is called an in-bound merger.
 Any issue of shares in such an event by the resultant Indian company to any
non-resident in connection to the inbound merger should comply with the
pricing guidelines, entry routes and FDI sectoral caps. Reporting of the transfer

19
Section 6 of Competition Act, 2002
20
In the instance where a part or whole of the transaction is completed by the merging companies without
notifying or seeking approval from CCI, the CCI penalizes them heavily. Notable instance was GE/Alstrom, C-
2015/01/241
 of shares shall be done as per the Foreign Exchange Management (Transfer or
Issue of Security by a Person Resident Outside India) Regulations, 2017.
 Any office of the foreign company that is acquired becomes the deemed
branch/office of the acquiring Indian company as per the Foreign Exchange
Management (Foreign Currency Account by a person resident in India)
Regulations, 2015.
 Any outstanding offshore liability that the foreign company may bring to the
Indian Company as a result of the merger shall be dealt with as per the
provisions of the External Commercial Borrowing provisions
 No remittance can be made for the repayment of such liability from India, within
the abovementioned period of two years.
 Out-Bound Merger: A merger wherein an Indian Company merges into a foreign
Company and all the property, liabilities and undertakings of the Indian company gets
passed on to the foreign company the merger is said to be Out-Bound.
 A resident who is a holder of an Indian Company is permitted to acquire
securities of the resultant foreign company subject to the guidelines of the
Overseas Direct Investment Regulations. The fair market value of any securities
acquired by the resident of the foreign company shall be as per the Liberalised
Remittance Scheme.
 An Office of the Indian Company that merges with the forign company shall be
deemd to be the branch office of the resultant foreign company in India and shall
have to comply with the provisions of the Foreign Exchange Management
(Establishment in India of a branch office or a liaison office or a project office or
any other place of business) Regulations, 2016
 The outstanding liabilities of the Indian Company that was acquired shall be
deemed to be the liabilities of the resultant foreign company as shall be paid by
the resultant company as per the scheme authorized by NCLT. Other FEMA
provisions must kept in mind and a no objection certificate from the creditors
should be availed by the resultant foreign company.
 The resultant company should open a Special Non-Resident Rupee Accont in
accordance with the Foreign Exchange Management (Deposit) Regulations,
2016. The account remains operational for a period of two years from the
effective date of sanction.

E. Tax Implications
Capital Gains in Mergers and Demergers- Mergers are covered in the Income Tax Act 1961 by the
phrase “Amalgamation”. Section 2(1B) defines Amalgamation as a merger of two or more
companies in a way that:

 All the properties and liabilities of the amalgamating company must become the properties
and liabilities of the amalgamated company by virtue of the Amalgamation; and
  Shareholders holding at least 3/4th in value of the shares in the amalgamating company
(not including shares held by a nominee or a subsidiary of the amalgamated company)
become shareholders of the amalgamated company by virtue of the Amalgamation.

While demergers are covered in section 2(19AA) as a scheme of arrangement pursuant to Sections
391 to 394 of The Companies Act 195621 in a way that:

 All the properties and liabilities of the undertaking immediately before the demerger must
become the property or liability of the resulting company by virtue of the demerger. 2.
 The properties and liabilities are transferred at book value. 3.
 In consideration of the demerger, the resulting company must issue its shares to the
shareholders of the demerged company on a proportionate basis (except where the
resulting company itself is a shareholder of the demerged company).
 Shareholders holding at least 3/4th in value of shares in the demerged company become
shareholders of the resulting company by virtue of the demerger. Shares in demerged
company already held by the resulting company or its nominee or subsidiary are not
considered in calculating 3/4th in value.
 The transfer of the undertaking must be on a going concern basis.

Both the mergers and demergers are deemed to be tax neutral and attract no tax liability if the
consideration is paid in equity shares. The statute says:

 If the resulting companies are Indian Companies-The arrangement is exempted from

capital gains tax if there is a transfer of shares merging companies to the merged company
or from the demerging company to the companies it is splitting into
 If the resulting companies are Foreign Companies- The companies are exempted from
Capital Gains tax in case of a merger(or a demerger) only when the following two conditions
are met. Firstly the shareholders of the merging(or demerging) company who hold 3/4th of
the shares in the merging(or demerging) company must be the shareholders of atleast 25
percent of the shares in the merged(or demerged) company(ies). Secondly, the
arrangement should not be charged with capital gains tax in the country of the resultant
foreign company, this provision was added due to the proportionality principle.

Indirect Transfer- As a reaction to the unfavorable judgment in the Vodafone case22, Section
9(1)(i) of ITA was amended to incorporate another explanation, which now says that any foreign
asset which gets its value from India shall be deemed to have situs in India. The explanation also
acts retrospectively through the words, “shall always be deemed to have been situated in India”.
The Finance Act 2015 added Explanation 7 to the section, which stated that the gains for the

21
Predecessor provisions of Chapter XV of the Indian Companies Act, 2013
22
Vodafone International Holdings B.V. v. Union of India & Ors; Vodafone case involved a contention by the Indian
revenue authorities that the acquisition of an entity located in the Cayman Islands by Vodafone’s Dutch subsidiary
involved an indirect transfer of underlying assets situated in India. Consequently, the revenue authorities claimed
that the gains arising on the transfer were liable to capital gains tax in India. The Supreme Court ruled in favor of
Vodafone stating that the impugned provision did not cover such transactions within its scope.
purpose of tax in this regard would be valued on a pro-rata basis on Indian assets vis-à-vis global
assets.

Carry Forward of Losses- Unabsorbed Depreciation allowance cannot be carried forward to be set
of a business owner by a succeeding business owner, only the tax payer who has incurred such a
loss is allowed the benefit of setting off. Section 72A allows for an exception to this rule if the
following conditions are taken into consideration:

 The merged company continues to hold atleast 75 percent of the assets in value of the
merging companies for a period of atleast 5 years.
 The merged company shall remain operating in the business that the merging
company(whose losses are to be carried forward) was engaged in.
 Before merging, the company whose losses are to be carried forward to the merged
company should have remained in that business for a period of preceding three years.
 As per rule 9C of the Income Tax Rules, the merged company should have achieved atleast
50 percent production capacity four years from the date of merger.

As per section 79, even if the provisions of section 72A are not met carry forward is allowed if a)A
company is not described in section 2(18), that is the company is such in which public is not
substantially interested and b) 51% of voting shares held by the previous shareholder (prior to
change in shareholding) are continued to be held “beneficially” by the same shareholder.

Some available exemptions-

 Eligibility of amalgamated company for the deduction in respect of any asset representing
expenditure of a capital nature on scientific research (Section 35(5)).
 Eligibility of amalgamated company for the deduction in respect of acquisitions of patent or
copyrights (Section 35A(6)).
 Similar deduction in respect of expenditure of know-how as provided in Section 35AB(3).
 Amortization of expenditure for obtaining telecom licenses fees. (Section 35ABB(6)).
 Amortization of certain preliminary expenses (Section 35D(5) r/w Rule 6AB).
 Amortization of expenditure on amalgamation (Section 35DD).
 Amortization of expenditure on prospecting etc. for certain minerals (Section 35E(7) r/w
Rule 6AB).
 Writing off bad debts (Section 36(1)(vii)).
 Deduction in respect of any expenditure for the purposes of promoting family
planning(Section 36(1)(ix)).
 Computation of written down value of the transferred fixed assets in the case of
amalgamated company (Explanation 2(b) to Section 43(6)).
 Continuance of deduction available (Section 80-IA and Section 80-IB)
F. Stamp Duty
The orders of a court or as it is in the case of M&A, order of a tribunal in the case of a Amalgamation
is considered to be a “Instrument” under the purview of the Indian Stamp Act(as well as state stamp
acts). It is charged with stamp duty In case of Karnataka Stamp Act 1957, Article 20(4)(i) of the
Schedule says that whichever is higher of the following, is chargeable as Stamp Duty.

 3% on the market value of the property of the transferor company located within the State
of Karnataka and transferred to the transferee company.

 An amount equal to 0.7% of the aggregate value of shares issued or allotted in exchange, or
otherwise and in case of a subsidiary company, shares merged (or cancelled) with parent
company and in addition, the amount of consideration if any, paid for such amalgamation.