Mergers and Acquisitions

Table of Contents
Unit 1 ................................................................................................................................................................. 4
Economic Categories of Takeovers and Merger ...................................................................................................... 4
Horizontal Integration ............................................................................................................................................................... 4
Vertical Integration.................................................................................................................................................................... 4
Conglomerate Integration .......................................................................................................................................................... 5
Buyouts ..................................................................................................................................................................................... 5
Divestment ................................................................................................................................................................................ 6
Reverse Merger ......................................................................................................................................................................... 6
Slump Sale................................................................................................................................................................................. 7
Asset Sale .................................................................................................................................................................................. 7
Reasons for Takeovers and Mergers......................................................................................................................... 7
Consequences of Mergers and Acquisitions ............................................................................................................. 8
Forms of Takeovers and Mergers ............................................................................................................................. 9
Acquisition of Voting Control ................................................................................................................................................... 9
Control of a Company ............................................................................................................................................................... 9
Levels of Shareholder Internal Control ..................................................................................................................................... 9

Unit 2 Mergers, Takeovers and Restructuring Routes- Indian Scenario ..................................................... 10

STATUTES HAVING A BEARING ON MERGERS & ACQUISITION ACTIVITIES ................................. 11
REGULATORY BODIES OF M& A AND THEIR ROLE ................................................................................. 11
Tribunal ................................................................................................................................................................................ 11
SEBI ..................................................................................................................................................................................... 14
Theories of Competitive Harm: ............................................................................................................................................ 16
UNIT 3 Sale of Undertaking .................................................................................................................................... 18
Numerical / Quantifiable Test of Undertaking ...................................................................................................... 18
Judicial Approach to Sale of Undertaking ............................................................................................................. 18
Complex Problems in Sale of Undertaking ............................................................................................................ 22
Slump Sale ................................................................................................................................................................. 22
Sale of Undertaking and Demerger......................................................................................................................... 23
Issues in Sale of Undertaking................................................................................................................................... 23
Reasons for demerger ............................................................................................................................................... 24
Procedure for Scheme of Arrangement .................................................................................................................. 24
Three main steps involved in implementing a scheme of arrangement: .................................................................................. 25
Procedure for Mergers ............................................................................................................................................. 25
Class under S. 230 ..................................................................................................................................................... 28
Judicial approach on classes requiring approval ..................................................................................................................... 28
Exercise of courts discretion ................................................................................................................................................... 29
Effect of Courts Sanction ........................................................................................................................................................ 29
Small companies Merger (Section 233 of the Companies Act,2013) .................................................................... 29
Merger under Section 237 & 238 of the 2013 Act .................................................................................................. 30
UNIT 4- Mergers and Restructuring of Banking Companies ...................................................................... 33
Reasons for Bank Mergers....................................................................................................................................... 33
Indian Scenario: Do mergers in Indian banking improve operational performance and ................................. 34
 efficiency of banks? .................................................................................................................................................. 34
Benefit of Bank Merger in India: ............................................................................................................................................ 34
Disadvantages of Bank Merger: .............................................................................................................................................. 34
Categories of Bank Mergers .................................................................................................................................... 34
(A) Voluntary amalgamation between private sector banks: ................................................................................................... 35
(B) Compulsory amalgamation of private sector banks: ......................................................................................................... 36
(D) Amalgamation of Public sector Banks (with a Public Sector Bank or a Private Sector Bank): ........................................ 39
(E) Merger between banks and Non Banking Financial Companies (NBFC) ......................................................................... 39
(F) Merger or amalgamation in the Cooperative Banking Sector: .......................................................................................... 40
(G) Merger of Regional Rural Banks: ..................................................................................................................................... 40
(H) Merger of a nationalized bank with the SBI: .................................................................................................................... 40
Regulation and supervision of amalgamation of banks by RBI: .......................................................................... 40
Banking Laws (Amendment) Bill , 2011 ................................................................................................................. 41
Law and procedure of Mergers under S. 237 of companies Act vs. S.45 of the banking regulation Act, 1949:
.................................................................................................................................................................................... 41
Section 237- Amalgamation in Public Interest under CA, 2013: ............................................................................................ 41
Section 45 of BR Act, 1949- Power of Reserve Bank to apply to Central Government for suspension of business by a
banking company and to prepare scheme of reconstitution of amalgamation: ........................................................................ 42

UNIT 5: SHARE ACQUISITION OF UNLISTED AND LISTED PUBLIC COMPANIES ..................... 44

I. ACQUISITION OF SHARES IN UNLISTED COMPANIES..................................................................... 44
Section 235 – Acquire shares from dissenting shareholders (by notice) ........................................................................... 44
Section 236 – Purchase of minority shareholding ............................................................................................................... 45
II. SHARE ACQUISITION AND TAKEOVER UNDER SEBI TAKEOVER REGULATIONS, 2011 .. 46
SEBI Takeover Regulations, 2011........................................................................................................................................ 46
Background: .......................................................................................................................................................................... 46
The Bhagwati Principles: ...................................................................................................................................................... 46
Important Definitions: .......................................................................................................................................................... 47
Substantial Acquisition of shares or voting rights in acquisition of control over a listed company: ............................. 49
Acquisition price under Creeping Acquisition ........................................................................................................................ 49
Exemptions: ........................................................................................................................................................................... 52
REGULATION 11 .................................................................................................................................................... 53
OPEN OFFER PROCESS [REGULATION 12 TO 23]........................................................................................ 53
REGULATION 12 : MANAGER TO OPEN OFFER ............................................................................................................. 53
REGULATION 13: TIMING OF THE OFFER ....................................................................................................................... 54
REGULATION 14: PUBLICATION ........................................................................................................................................ 54
REGULATION 15: CONTENTS .............................................................................................................................................. 54
REGULATION 16: FILING OF LETTER OF OFFER WITH THE BOARD .......................................................................... 54
REGULATION 19: CONDITIONAL OFFER .......................................................................................................................... 54
REGULATION 20: COMPETING OFFER ............................................................................................................................. 55
REGULATION 21: PAYMENT OF CONSIDERATION .......................................................................................................... 55
REGULATION 22: COMPLETION OF ACQUISITION......................................................................................................... 55
REGULATION 23: WITHDRAWN OF OPEN OFFER ........................................................................................................... 55

UNIT- 6: COMPETITION LAW ISSUES IN M&A ..................................................................................... 56

Meaning of Competition........................................................................................................................................... 56
Acquisition under the Competition Act – 2(A): ..................................................................................................... 56
Section 5, Competition Act, 2002 – Combinations: ............................................................................................... 56
Procedure for Reporting to CCI (Section 6) .......................................................................................................... 56
Threshold for notification to CCI ........................................................................................................................... 57
Roles of CCI and its features ................................................................................................................................... 57
Combination Regulations, 2011 ............................................................................................................................... 58
COMPETITION OR ANTI-TRUST LAWS ACROSS THE WORLD: ............................................................. 60
 Indian Merger Control Regime ............................................................................................................................... 60
EC Rules on Merger Control ................................................................................................................................... 61
Laws in the U.K. ....................................................................................................................................................... 61
Laws in the U.S. ........................................................................................................................................................ 62
U.S. Supreme Court Cases .................................................................................................................................................... 62
FEMA Cross Border Merger regulations............................................................................................................... 63
- In terms of the FEMA Regulations, valuation of the Indian company and the foreign company is required to be carried
out in accordance with Rule 25A of the Companies Merger Rules. ........................................................................................ 64
- The FEMA Regulations provide that the resultant company and/or the companies involved in the cross-border merger
shall be required to furnish reports as may be prescribed by the RBI. .................................................................................... 64

UNIT 7 ............................................................................................................................................................. 65
Amalgamation ........................................................................................................................................................... 65
Exemptions from Capital Gains Tax ...................................................................................................................... 65
Demerger and Taxation ........................................................................................................................................... 66
Stamp Duty................................................................................................................................................................ 66
Share Sale .................................................................................................................................................................. 67
Slump Sale ................................................................................................................................................................. 68
Parameters of a Slump Sale ..................................................................................................................................................... 68
Asset Sale ................................................................................................................................................................... 69
Tax Implications of Cross Border Mergers............................................................................................................ 71
UNIT 8- IPR IN M&A .................................................................................................................................... 72
Key issues that should be addressed in pre-transaction IP due diligence, as well as IP terms and conditions in
technology sector purchase agreements, include the following: ........................................................................... 72
MANAGING INTELLECTUAL PROPERTY DURING M&A ......................................................................... 74
PRECAUTIONS FOR IPRS PROTECTION DURING M & A .......................................................................... 75
IPR ASSESTS DURING M&A ............................................................................................................................... 75
 Unit 1
- Statutory basis for merger arises out of Section 232(8) and Chapter XV of CA, 13
- Explanation under 232(8) provides for two types of mergers
1. Merger by Absorption – When the undertaking, property and liability of one or more companies is
transferred to another existing company
2. Merger by formation of a new company - the undertaking, property and liabilities of two or more
companies, including the company in respect of which the compromise or arrangement is proposed, are
to be transferred to a new company

Key Terms
1. Merger – Two firms agree to integrate their operations and business on a relatively co-equal basis
- Arrangement whereby assets of 2 or more companies become vested in or come under control of one
company
2. Acquisition - directly or indirectly, acquiring or agreeing to acquire shares or voting rights in, or control
over, a target company. (Reg 2(b) of Takeover Code) (Target Company means listed company)
3. Takeover – A type of acquisition where the Target firm did not solicit the acquiring firms bid for outright
ownership
- Takeover – when one company acquires ‘control’ of another company
- Transaction/series of transactions
- Control over the assets of the Target
-Directly – Becoming owner of the assets
- Indirectly – control over mgmt
1. Hostile Takeover – Takeover is strongly resisted by the firm
2. Friendly Takeover – Target Company BOD agree to merger or acquisition by another company
Merger v Takeover
- Takeover – Direct or indirect control over assets vests with Acquirer
- Merger – No particular company will be in a position to dominate
4. Arrangement
- Includes reorganization of the company’s share capital by the consolidation of shares of different classes
or by the division of shares into shares of different classes, or by both of those methods (Explanation –
Sec 230 of CA, 13)

Economic Categories of Takeovers and Merger

Horizontal Integration

- between entities engaged in competing businesses which are at the same stage of the industrial process
- Advantages – Economies of Scale, Sharing of Common Costs, Elimination of Surplus Capacity
- Disadvantages – Concentration in an industry may increase leading to low competition
- Examples – Flipkart-Myntra, Ethihad & Jet, Tata Steel –Corus

Vertical Integration

- Vertical mergers refer to the combination of two entities at different stages of the industrial or production
process.
- Advantages – Reduces uncertainty and increases supply chain efficiency
- Disadvantges – Monopoly concerns due to opportunity for competitors being foreclosed
- Ex – Tata Motors- Trilix SRL, Time Warner and Turner Corpn
- Star India Pvt Ltd v Zee T.V Network Ltd & Ors.
• Star India – Agreement with Moon Network for exclusive distribution rights in Agra
• Held to be in contravention to Scheme of interconnection regulations issued by DoT

Conglomerate Integration

- A conglomerate merger is a merger between two entities in unrelated industries

- Not related horizontally or vertically
- Examples - Walt Disney and ABC, Diamler Benz
- Advantages - utilization of financial resources, enlargement of debt capacity, and increase in the value
of outstanding shares by increased leverage and earnings per share, and by lowering the average cost of
capital

Buyouts

- A type of acquisition where a group of investors purchase a controlling stake in a company

- Buy Out obtains control over the company
- Nature of Buyout is determined based on person acquiring the controlling stake and the source of
financing
- Types of Buyouts -
a) Leveraged Buyout
- Taken over by investors who use company’s assets as collateral to raise money
- Loans are repaid by cash flows or sale of assets
- Purchase price is finances through Leverage (Borrowing)
- LBO usually takes the form of a takeover Bid
- Example Tata Tea’s takeover of Tetley
b) Venture Capital Buyout
c) Management Buyout
- Acquisition of a division of a company or the shares of the company, in each case by the managers
who have been handling the affairs of the division or the company.
- Usually when owners want to sell and mangers envision a potential future
- Ex – Nitrocellulois Business of ICI paints (India) with Actis (UK)

- Samir C Arora v SEBI

• Whether a Fund Manager of a company can acquire controlling stake in said company towards MBO
• - Sections 11 (4), 11B and 19 of SEBI Act, 1992 and Regulation 11 of Securities and Exchange Board
of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market)
Regulations, 2003Regulations 4 and 5 of Securities and Exchange Board of India (Prohibition of
Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 1995
• Held that he can acquire a controlling stake provided that it is transparent open and fair.
- Punjab State Industrial Corpn Ltd v SEBI
• Exemption from making public offer sought when t/f of 50% of shares
• Grounds was that it was in public interest to save an ailing company
• Was allowed on grounds that Appellant failed to prove why it was against interest of SH and could not
show that they were in any manner aggrieved by such an order.
- Two ways in which MBO Takes place
• Partnership with Private Equity Players
➢ In this structure, since managers are not able to self-fund an MBO transaction, they only acquire a small
stake in the target, with the remaining major stake being taken up by private equity players who may
partner with the managers.
➢ It is common in scenarios where owners want to hive off entities with poor results and the management
lacks funds to hold on to the entity (and their jobs) and are, in turn, bailed out by the PE firm.”
• Classic Leveraged Structure
➢ Share Acquistion – Problems faced under Section 77(2) of CA, 13 for Financial Assitance
➢ Business Acquisition – Setting up an SPV to purchase the undertaking using a classic leveraged system.
No bar for this under Section 77(2)

d) Institutional Buyout
- Institutional Investors acquire business directly from vendors often with managers taking a small stake

e) Management BuyIns –
- Sold to a new team of Managers who take a majority stake
- Used as a means of selling a family concern
- Generally backed by Venture Capitalists
- Ex – Kasturi Lal and Sons Ltd

Divestment

- Demerger – Splitting of part of a company to become a new company which operates separately and
independently
- SH given an equivalent stake in ownership of new company
- Types of Demerger –
I. Spinoff - The Company’s division or undertaking is separated from the parent company. Once they are
spun- off, both the parent company and the resulting company act as separate corporate entities.
Converted into a wholly owned subsidiary. Ex – Kotak Mahindra Finance Ltd created subsidiary of
Kotak Mahindra Capital Corpn
II. Split Ups – Division of parent company into 2 or more companies wherein the parent company ceases
to exist after demerger
III. Divestitures – Sales of segment of a company for cash or for shares to an outside party
- L&T Ltd v Grasim Industries Ltd
• Original Scheme of Arrangements provided for Demerger of cement division and selling of shareholding
on given terms
• Earlier understanding between the parties for the sale of 15.73% of the equity capital held by Grasim in
L&T, to the L&T Employees' Foundation was superseded by (i) The Restructuring agreement; (ii) The
Scheme of Arrangement; and (iii) The Deed of Covenant
• Terms of Restructuring agreement
• Essential requirements of Novation under Section 62 of ICA fulfilled
- Corporate Ispat Alloys Ltd. Vs Jayaswal Neco Industries Ltd

Reverse Merger
- A reverse takeover or reverse merger takeover is the acquisition of a public company by a private
company so that the private company can bypass the lengthy and complex process of going public.
- Bidder becomes owner or controlled by target shareholders.
- In effect it is a takeover of the bidder by the target
- Alternative to IPO’s
 Slump Sale
- Assets and liabilities are transferred for a lump sum consideration without individually assigning values.
- Transferor Company will have Capital gains Liability
- Elements of a slump sale
a) Sale of an undertaking
b) Lump sum consideration
c) No separate values assigned to individual assets and liabilities
- "Slump sale" means the transfer of one or more undertakings as a result of the sale for a lump sum
consideration without values being assigned to the individual assets and liabilities in such sales. (Section
2 (42C) )
- "undertaking" shall include any part of an undertaking, or a unit or division of an undertaking or a
business activity taken as a whole, but does not include individual assets or liabilities or any combination
thereof not constituting a business activity.

Asset Sale
- Sale of certain assets
- Typically trade name, trade fixtures, inventory, leasehold rights, telephone numbers rights & goodwill

Reasons for Takeovers and Mergers

1. Assets at a discount

- Assets may be available for a discount in the following situations -

i. Target has not put its assets to their most efficient use
ii. Directors are unaware of true value of assets
iii. Inefficient capital structure
iv. Policy of limited Distribution of dividends
v. Poor market rating relative to its real prospects
vi. Substantial Tax Loss
- Target is low profit occupying freehold premises, the rental value of which would exceed targets profits.
In such circumstances higher profit can be made by sale of property and closing down existing business

2. Earnings at a discount

- Company with high P/E ratio can improve its EPS by acquiring a company with low P/E ratio.
- Known as boot strapping
- Its high price earnings will be applied to Total earnings

3. Trade advantages or synergy

A. Economies of Scale
- Higher output from existing facilities
- Usage of more sophisticated machinery
- Stream production of different products to different factories
- Close down number of factories
B. Financial Advantage – Raise funds easily both capital & equity
C. Access to raw material and outlets for sale
D. Acquisition of a competitor
E. Diversification and reduction of earnings volatility
F. Acquiring High quality mgmt
4. Method of Market Entry
- Company wishing to enter a new/ unfamiliar market can reduce chance of failure by acquiring an
established and successful company
5. Increasing the capital of the offeror
- Alternative to rights issue
- Increased resources by virtue of the liquid or readily realisable assets of the target
6. Management motives
- Desire of directors to build or extend a financial empire
7. Acquiring Minority held shares
- Gambotto v WCP Ltd
• The majority shareholders of WCP Ltd (WCP), wholly owned subsidiaries of Industrial Equity Ltd
(IEL), held about 99.7% of WCP’s shares. Giancarlo Gambotto and Eliandri Sandri, held approximately
0.094% of WCP’s shares. IEL wanted all of WCP’s shares so it could get taxation and administrative
benefits. IEL was unable to acquire the Gambotto and Sandri’s shares with alternative acquisition
mechanisms. IEL wanted to amend the company constitution to let a shareholder with more than 90%
shares forcibly acquire a minor shareholder’s shares. IEL proposed to buy the shares for $1.85 a share,
which Gambotto and Sandri saw as reasonable, but they still did not want to sell their shares
• The High Court held that the proposed amendment was invalid as it was not made for a proper purpose.
They rejected the classical “bona fide benefit test” found in Allen v Gold Reefs of West Africa Ltd as
inadequate.
• The majority laid down a two-limbed test that must be satisfied when wanting to amend a constitution
to permit expropriation:
1. The power is exercisable for a permissible purpose; and
2. Its exercise will not operate oppressively in relation to minority shareholders.
- ALLAN V GOLD REEFS OF WEST AFRICA LTD
• The company had altered its articles so as to give itself a lien on paid up shares in respect of the failure
of the shareholder to pay calls on other shares which had not been fully paid up.
• Alteration power under Section 50 must be exercised, not only in the manner required by law, but also
bona fide for the benefit of the company as a whole, and it must not be exceeded.
Consequences of Mergers and Acquisitions
- Major Org restructuring
- Expansion of resources in certain areas
- Plant closings, layoffs & reduced competition
Takeovers and Mergers & National Interest
- State interference – ensure maximum welfare to society
- India- Competition Act, 2002, Companies Act, 1956 – S 396/CA 2013- S.237
- US- Clayton Act, Anti Trust Act/ Merger Control Act
- UK – Monopolies and mergers act, 1965

Takeovers and Mergers & SH Interest

- Consent of SH through GM
- Majority to approve scheme
- Majority in number representing 3/4th in Value
- SH given adequate consideration when exiting from the company
M&A – Employees
- S. 25FF, 25 FFF of ID Act, 1947
- S.25 FF – Compensation to workmen in case of t/f of undertaking
- S. 25FFF - Compensation to workmen in case of closure of undertakings
M&A – Other Stakeholders
- Society
- Creditors
- Consumers
Forms of Takeovers and Mergers
- Takeovers can take place through a variety of methods
1. Acquisition for Cash
2. Acquisition through issue of shares
3. Cash + Shares
4. Merger through a new company
5. Acquisition of minority held shares of subsidiary
6. MBO
Acquisition of Voting Control
1. Acquiring all shares of target
2. Acquiring 50% of the share capital to have majority voting power
- Choice is Takeover Bid or Scheme of Arrangements under Ss. 230-233
Control of a Company
- Section 2(27) of CA, 13 - "control" shall include the right to appoint majority of the directors or to
control the management or policy decisions exercisable by a person or persons acting individually or in
concert, directly or indirectly, including by virtue of their shareholding or management rights or
shareholders agreements or voting agreements or in any other manner
- Section 2(e) of SEBI Takeover regulations
- Control through Shareholding takes place in the following manner –
a) Complete Ownership of share capital
b) Majority/Voting Control
c) Control by associate companies – Holding more than 20%
d) Minority (Effective control) – Due to high level of dispersion
Levels of Shareholder Internal Control
1. More than 50% - Can pass ordinary resolutions
2. More than 75% - Can pass Special resolutions
3. More than 25% - Power to block Special Resolutions
4. 20% - Takeover – Section 180(1)(a) – Sale of undertaking

P.S Offshore Case

If the question arises as to whether the major capital assets of the company constitute the undertaking
of the company while examining the authority of the board to dispose of the same without the authority
of the general body, the test to be applied would be to see whether the business of the company could
be carried on effectively even after disposal of the assets in question or whether the mere husk of the
undertaking would remain after disposal of the assets ? The test to be applied would be to see whether
the capital assets to be disposed of constitute substantially the bulk of the assets so as to constitute the
integral part of the undertaking itself in the practical sense of the term.
Unit 2 Mergers, Takeovers and Restructuring Routes- Indian Scenario
THE ROUTES OF CORPORATE RESTRUCTURING UNDER THE INDIAN LAWS

1.Business acquisitions under S.180(1)(a ) of the 2013 Act =293(1)(a)of 1956 Act
180. Restriction on powers of Board.— (1) The Board of Directors of a company shall exercise the
following powers only with the consent of the company by a special resolution, namely:—
(a) to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the
company or where the company owns more than one undertaking, of the whole or substantially the
whole of any of such undertakings. 112 Explanation.—For the purposes of this clause,—
(i) ―undertaking‖ shall mean an undertaking in which the investment of the company exceeds twenty
per cent. of its net worth as per the audited balance sheet of the preceding financial year or an undertaking
which generates twenty per cent. of the total income of the company during the previous financial year;
(ii) the expression ―substantially the whole of the undertaking‖ in any financial year shall mean twenty
per cent. or more of the value of the undertaking as per the audited balance sheet of the preceding
financial year;
2.Arrangements other than mergers in Sections 230-231 of the 2013 Act = 391-393 of the 1956 Act
Refer Bear Act, Super important

[Sri Kumaran Wind Energy Private Limited and Ors. vs. Janaki Ram Steel and Power Private Limited
–

Section 230(9) of the Companies Act, 2013, wherein it states that the Tribunal may dispense with calling
of meeting of creditor or class of creditors where such creditors or class of creditors, having at least
ninety per cent value, agree and confirm, by way of an 'Affidavit', to the scheme of compromise or
arrangement.

3.Merger through Ss 232 of the 2013 Act = 391 to 394 of the 1956 Act
Refer
4.Compulsory merger under S.237 of the 2013 Act=396 of the 1956 Act
Refer
5.Take over under S.235 & 236 of 2013 Act= 395 of the Companies Act.,1956
Refer
6.Cross border mergerS.234 of the Companies Act,2013
234. Merger or amalgamation of company with foreign company.— (1) The provisions of this Chapter
unless otherwise provided under any other law for the time being in force, shall apply mutatis mutandis
to schemes of mergers and amalgamations between companies registered under this Act and companies
incorporated in the jurisdictions of such countries as may be notified from time to time by the Central
Government: Provided that the Central Government may make rules, in consultation with the Reserve
Bank of India, in connection with mergers and amalgamations provided under this section.
(2) Subject to the provisions of any other law for the time being in force, a foreign company, may with
the prior approval of the Reserve Bank of India, merge into a company registered under this Act or vice
versa and 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.
7.Merger of Small companies
8.Mergers and Restructuring of banking companies under the Banking Regulation Act, 1949
Refer S 44A of Banking Regulations Act

STATUTES HAVING A BEARING ON MERGERS & ACQUISITION ACTIVITIES

1.The Companies Act, 2013-Ss.230-237

2.The SCRA ,1956-
3.SEBI Act, 1992-Chapter VA , s.12A-Prohibition of manipulative and deceptive devices , insider
trading and substantial acquisition of securities or control
4.The Industries (Development & Regulation ) Act,1951 . See Chapter Chapter III AA & III AB -
18FD(2) r/w18FF.
5.The Banking Regulation Act, 1949,( Take over/ acquisition) Part-II C Ss.36 AE-36AG. Merger See
S. 44A( Voluntary merger) & S. 45( Compulsory merger)
6.SARFAESI Act , 2002 ( The securitization and Reconstruction of Financial Assets and Enforcement
of security Interest Act , 2002) See S. 5 -Acquisition of rights or interest in financial assets.
7.SEBI Takeover Regulations,2011
7. The Competition Act, 2002-Ss. 3, 4, 5, 6 r/w S.19, 20 , 28 etc.
8. The Income Tax Act
9. Listing Agreement

REGULATORY BODIES OF M& A AND THEIR ROLE

Tribunal
BharatiJyothindra Sha v. Bombay Stock Exchange Ltd ( Orissa High court), 2012 ( Scheme of
arrangement for capital restructuring )
S 100-103 of 1956 Act refers to Special Reso for reduction of share capital and application to Court for
Order confirming the same.
The only question that arises for consideration is as to whether cancellation of unsubscribed 3,49,466
shares (which is entitlement of IMFA) would amount to reduction to share capital and the same attracts
the provisions of Sections 100 to 103 of the Companies Act.
The Companies Act makes express provisions with regard to reduction of capital and that provision
cannot be circumvented by obtaining an approval of the Court to a scheme or arrangement
under Sections 391 to 394. Since the case of respondent No.5 is that on expiry of 3 years unpurchased
share capital of IMFA would have to be cancelled and the share capital of IMFA would have to be
reduced to that extent there is absolutely no reason as to why Sections 100 to 103 will not apply.
SehgalM.M v. SeghalPaper Mills Ltd( 1986) 60 Comp Cas510 ( P &H)
The case concerned with take over and management of Segal Papers Ltd , which was in the course of
Winding up. An Application was moved by the former chairman of the said company under Ss. 391-
394. The same was objected by the Secured creditors . Against which the petitioner approached the
court under Rule 79 of the Company Court Rules .
1) When can the court invoke its jurisdiction under Ss.391-394?

S.P.Goyal J., “ To Invoke the jurisdiction of the court under S. 391 of the Act to sanction the scheme
the same must have been approved by the requisite majority as laid down in S. 391 ( 2 ). Unless the
scheme brought before was so approved the court will have no jurisdiction to entertain an application
under R. 79 of the company court Rules”
Who can file an application under S. 230 of 2013Act
a) Company or
( b) creditor
(c ) member
( d) liquidator incase of a company being wound up .

Coimbatore Cotton Mills Ltd and LakshmiCotton Mills Co.Ltd , In re ( 1980) 50 ComCas 623 (
Mad)
Facts : A scheme of amalgamation was proposed between two companies which produced the same
goods i. e yarn and cloth was approved by the requisite majority under S. 391( 2 ) . But the scheme
was opposed by the central govt on the ground that ( a) the ratio of the share exchange was not proper
( b ) no approval or sanction of the MRTP was sought. The High court negated all the contentions and
sanctioned the Scheme.

Issue –Role of the court under S. 391 of the Act ?-

J.Padmanabhan “ In the absence of any allegation of fraud or malafide on the part of the chartered
accountants , the exchange ratio had to be considered as fair and reasonable especially where the
scheme has been approved by an overwhelming majority of the shareholders and no shareholders have
disapproved the scheme.

“ In exercising its discretion under S. 391 & 394 of the Act , the court is not merely acting as a Rubber
Stamp . It is the function of the court to see that the scheme as a whole, having regard to the general
conditions and background and object of the scheme is a reasonable one and if the courts so finds it
, it is not for the court to interfere with the collective wisdom of the shareholders of the company……..
However if the scheme as a whole is fair and reasonable it is the duty of the court not to launch on
an investigation upon the commercial merits and demerits of the scheme which is the function of those
who are interested in the arrangement.

Komal plastic enterprises Ltd v. Roxy Enterprises P Ltd ( 1991) 72 ComCas61

The scheme of amalgamation was opposed by the secured creditor despite that the scheme was
sanctioned by the company court.
Y.K.Sabarwal J., “ The provisions of S. 391( 2) of the Companies Act,1956 are clear and
unambiguous . The company court has no jurisdiction to sanction a scheme if it is not approved by a
3/4thmajority of the creditors or each class of the creditors .
The question of court considering the scheme would arise only if it is been approved by the statutory
majority provided for under S. 391(2 ).
Where separate meeting are called to consider one composite scheme covering both secured and
unsecured creditors , it is necessary that both the meetings should pass the scheme by 3/4thmajority.

..if the secured creditors on the first meeting rejected the scheme the scheme has to be deemed to have
been rejected by the creditors generally and cannot be considered for sanctioning by the court. “

Miheer H. Mafatlal v. Mafatlal Industries (1996) 4 CompLj 585

In the present case, it was the objection of the petitioner that proper classification of the shareholders
from holding separate meeting to the class of shareholders as required under S. 391( 1 ) has not been
made , which has affected the validity of approval of the scheme by the court …?
C .K. Thakker and R. Balia J J., ….. “ No strait jacket rule can be laid down in which case the court
will decide or will not decide on a particular issue . It depends on the totality of the circumstances
bearing on the entire controversy and also the fact that whether the jurisdiction exercised its
discretionary one or obligatory one ………… It is for the court to proceed in a manner as it deems fit
in deciding the issues raised before it…. In doing so it commits no irregularity or illegality so as to
warrant interference on that ground alone in appeal. Ultimately it rests within the discretion of the
court.”

Sidhpur Mills Co.Ltd , Re(1980) 50 Comp Cas7( Guj)

Sidhpur Mills Co.Ltd was order to wind up due to insolvency.
Applications were filed by the creditors , members, workers and employers of the company at
different occasions for a scheme under S. 391 of the companies Act.
The Issue before the court was whether the court can fix any time limit in entertaining applications
under S. 391?( Whether the court had the power to adopt such a scheme of action )

Held that “ S. 391( s.230 under 2013 Act) confers upon the court discretion to order a meeting of the
creditors or the members of the company to be called and held in such manner as the court directs
on the application of the company or of any creditor or the liquidator . This rule does not preclude the
court from evolving in advance and following certain rules , precedence , standards or policies to
guide in it in exercise of its discretion as an when an occasion arises . So far as the discretion under S.
391 is concerned , in the very nature of the things , a scheme of amalgamation etc has to sub serve
various conflicting interests and meet with the approval of different classes.

There is no legal bar against the court laying down a rule or policy that it will not exercise its discretion
under s. 391 of the companies Act and convene the meeting of various classes of creditors and
shareholders and workmen to consider a new scheme after a certain limit. “

All India BluestarEmployees Federation v. Blue Star Ltd ( 2000) 27 SCL 265 ( Bom)
Sesa Industries v Krishna Bajaj
it is inter alia held that Court has discretion in the matter of granting sanction. The scope of inquiry by
the court is not limited to any rigid principles except in so far that, in addition to examining the statutory
compliance, it must be seen that the proposed scheme of arrangement is reasonable and can be viewed
as beneficial to those likely to be affected by it. Obviously the burden to prove this lies on the Petitioner.
It is not open to the court to sit in judgment over the views of the shareholders and the Board of Directors
unless their views were against the framework of law and public. Moreover, it is purely a business
decision based on commercial considerations in respect of which intervention of the court is
unwarranted.

AbhimanTechnologies Pvt. Ltd. and Ors. vs. QuikrPvt. Ltd.

Tribunal shall exercise only supervisory but no appellate powers shall be applicable to the Tribunal for
Schemes are given under Section 230 to 240 of the Companies Act, 2013.

S.M.Holdings Finance Ltd v. Mysore machinery manufacturers Ltd 1993:

“there is a substantial compliance of the statutory provision if 3/4thof the creditors have agreed to and
approved the scheme”
 The court has the discretion to dispense with the formal meeting under S. 230 if consent of the required
majority otherwise obtained .

In Re: Europlast India Ltd. 2010 (112) BomLR 281and in Idea Cellular Ltd v. Union of India
(2011)-Judgement by Supreme Court)
Scope of Power of Court under S. 230
The question as to what is the scope of power of the Company Court while exercising jurisdiction under
Section 391 and 392 of the Act is no more res integra.

The Apex Court went on to observe that the Parliament has, in its wisdom, conferred a power of wide
amplitude on the High Court in India to provide for its continuous supervision of carrying out of
compromise and/or arrangement and also the consequential power to make the supervision effective by
removing the hitches, obstacles or impediments in working of compromise or arrangement by
conferring power to give such directions in regard to any matter or for making such modification in the
compromise or arrangement as it may consider necessary for the proper working of the compromise
and/or arrangement.

It is further observed that the scheme sanctioned under Section 391 of the Act does not merely operate
as an agreement between the parties but has statutory force and is binding not only on the company but
even the dissenting creditors or members as the case may be.

Court has observed that the effect of the sanctioned scheme is to supply by recourse to the procedure
thereby prescribed the absence of that individual agreement by every member of the class to be bound
by the scheme which would otherwise be necessary to give it validity.
It is also observed that scheme represents a contract sanctified by Court's approval between the
company and the creditors and/ or members of the company.It is equally well established that the rights
which are enshrined in the scheme of the class of creditors cannot be impaired or superseded unless it is
by a new scheme approved in the same way as the earlier one. Further, sanction of the Court operates
as a judgment in rem”.

National organic Industries v. Mihir H.Mafatlal (2004) 118 Com Cas 265 ( Guj)-
there is no power on the court in a petition for sanction of a scheme to go into the validity of transfers
of shares , or entitlement of shares to shareholders.

SEBI
• Listed companies are bound by SEBI Regulations
• Pre-1992-Listing agreement governed substantial acquisition of shares( Clause 40A&40B)
• 1992-SEBI Constituted
• 1994-Take cover regulations notified
• 1997-Revamped take over regulations notified as per the Bhagavati committee Report
• 2009-TRAC constituted to review the regulations under the chairmanship of Smt Usha Narayan
• 2011 –New take over Regulations came into effect.
• SEBI Take over ( Regulations) 2011
 • SEBI is a body corporate created under the SEBI Act , 1992 to protect the interest of the investors in
securities , to promote the development of the securities market and to regulate it .( See S. 11(1) of the
SEBI Act, 1992).
• It is statutorily empowered to regulate the Substantial acquisition of shares and takeovers of Companies
( See S. 11(2)(h) of the SEBI Act , 1992)

Main Features of Takeover Regulations, 2011 are:

The Limits on the acquisition of shares and voting rights
Acquisition of control: When and How
Exemptions
Open offer-Trigger and Conditions
Key obligations of parties during open offer
Minimum public shareholding
Disclosure requirement

RBI in Bank mergers

• Differential treatment for banking companies compared to that of NBFCs?

• M&A of NBFCs-Chapter XV of Companies Act,2020
• S.44A(4) of Banking Regulation Act, 1949-Voluntary merger-approval of RBI
• S. 45( B.R. Act, 1949)-Compulsory merger-Approval of RBI.36
• S.36AE-36AG-Report to be submitted by RBI to central govt. for acquisition undertakings of banking
company.

Competition Commission
• Refer Competition Act, 2002
• See S.2(a) Acquisition
“acquisition” means, directly or indirectly, acquiring or agreeing to acquire—
(i) shares, voting rights or assets of any enterprise; or
(ii) control over management or control over assets of any enterprise;
• S.3-Anti-Competitive agreements
No enterprise or association of enterprises or person or association of persons shall enter into any
agreement in respect of production, supply, distribution, storage, acquisition or control of goods or
provision of services, which causes or is likely to cause an appreciable adverse effect on competition
within India.
(2) Any agreement entered into in contravention of the provisions contained in subsection (1) shall be
void.
• S.4-Abuse of dominant position
(1) No enterprise or group shall abuse its dominant position.]
(2) There shall be an abuse of dominant position [under sub-section (1), if an enterprise or a group].—-
(a) directly or indirectly, imposes unfair or discriminatory—
(i) condition in purchase or sale of goods or service; or
(ii) price in purchase or sale (including predatory price) of goods or service
• S.5-Combinations ( Mergers / Acquisition)

• Competition law forbids abuse of market power.

• Merger control is not simply about preventing future abuses , it is also about maintaining competitive
market structure which lead to better out comes for consumers.
• Competition authority is called upon to consider whether a merger will lead to harmful effects on
competition in the future .
• Most mergers must be notified to the CCI and cleared before they are put into effect.
• The competition authority will not only to predict the likely outcome of the merger but also to consider
the counter factual , that is to say the position if merger were not to occur.

• On 1stJune 2011-merger control provisions of the Competition Act ,2002 have come into effect. It is
known as The competition Commission of India ( Procedure in regard to the transactions of business
relating to combinations )
• As a result, M &A transactions resulting in certain thresholds need to be notified to the CCI and will not
be permitted to carry on business until cleared by the competition commission.
• Notifications to be made to the CCI within 30 days:
a. In case of a merger or amalgamation , granting of board approval for merger.
b. For acquisition of any shares , voting rights or assets , execution of any document conveying an
agreement or decision to make the acquisition.
• Obligation to file lies with the acquiring company and sanctions may be imposed for failure to do so
within prescribed 30 days period .

• CCI has a fixed period of 30 days from accepting the parties notification in which to conduct its initial
investigation and issue its prima facie opinion as to whether the combination will or is likely to have
an adverse effect on competition in the relevant market in India.
• However if CCI have any prima facie objection and launches an in depth review the parties have to wait
upto further 180 days for a final decision ( Min-30 days –maximum of 180 days)

Theories of Competitive Harm:

Most mergers cause no harm to the competition. However there may be cases where it can be predicted
that the changed structure of the market will provide the mergered entity with the incentive and ability
to exercise the market power in such a way that will be harmful to the consumer welfare .A competition
authority concerned about the particular merger will need to articulate its theory as to how competition
will be harmed .Various theories of competitive harm have been developed
a. Unilateral or Non-Coordinated Effects
Unilateral effects occur where ‘A’ merges with ‘B’ and the merged entity ‘AB ‘will be as a result of
the merger to exercise market power. There by the company may be able to increase the price , reduction
of output, quality, variety or innovation
b. Coordinated Effects
Coordinated effects occur where A merges with B and this result in a situation where AB will be able
or more able than when ‘A’ and ‘B’ were independent to coordinate their competitive behavior on the
market with other firms .
c. Vertical Effects
There may be circumstances in which a vertical merger could produce adverse effects, first, where
the possibility of foreclosure of a third party arise and second where the vertical integration of the AB
makes it more likely that there will be coordinated effects on the market.
d. Conglomerate Effects
Theory of harm in the case of conglomerate effect is particularly speculative –for example that ‘AB’
might decide to tie the two complementary products together in a way that will foreclose the
competitor or to price a unbundled package of both of them to similar effect. It is possible that tie-in
transactions and bundling practices would violate laws that forbid the abuse of dominant position.
 UNIT 3 Sale of Undertaking
- Section 180 of the Companies Act 2013 allows the Board of Directors of a company to excise certain
powers including that of sale of undertaking only after a special resolution has been passed by the
members of the company
- S. 180. (1) The Board of Directors of a company shall exercise the following powers only with the
consent of the company by a special resolution, namely:—
(a) to sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the
company or where the company owns more than one undertaking, of the whole or substantially the
whole of any of such undertakings.
- Sale of undertaking(s) is crucial and of concern to the members of a company,
- Section 110(1)(a) of Act, 2013 read with Rule 22(16)(i) of the Companies (Management and
Administration) Rules, 2014 provides that sale of the whole or substantially whole of the undertaking
can only take place through Postal ballot voting.
- It is pertinent to note that this provision applies only for only for the sale of Hall or substantially Hall
of the undertaking and not in order to lease or otherwise dispose of the property in accordance with
section 180.
- This is done to ensure maximum number of members of the company get an opportunity to vote for a
sale of undertaking

Numerical / Quantifiable Test of Undertaking

1. Undertaking – S. 180(1)(a) – Explanation
a) Undertaking in which investment of the company exceeds 20% of its net worth
b) Undertaking which generates 20% of the total income of the company during the previous financial year
2. Substantially the whole of the undertaking
- sale of 20% or more of the value of the undertaking as per the audited balance sheet of the previous
financial year would constitute sale of substantially the whole of the undertaking.
3. Undertaking- Income Tax Act – S. 2(19AA) – Explanation 1 - "undertaking" shall include any part of
an undertaking, or a unit or division of an undertaking or a business activity taken as a whole but does
not include individual assets or liabilities or any combination thereof not constituting a business activity.
It would therefore appear that undertaking not engaged in any business activity cannot form part of a
scheme of demerger.
Judicial Approach to Sale of Undertaking
1. P.S. Offshore Interland Services ( P) Ltd &another v. Bombay Offshore Suppliers and Services
.[1992] 75 ComCas. 583 ( Bom.)
- Respondent Co was involved in business of oil exploration and off shore drilling
- Proposed to sell one of the 3 vessels owned by it
- Approved sale by means of BOD resolution
Issue: Whether Sale of vessel constitutes sale of undertaking and whether GM has to be convened in
order to approve the sale
Held:
a) "undertaking" used in this section is liable to be interpreted to mean "the unit", the business as a going
concern, the activity of the company duly integrated with all its components in the form of assets and
not merely some asset of the undertaking. Having regard to the object of the provision, it can, at the
most, embrace within it all the assets of the business as a unit or practically all such constituents.
b) If the question arises as to whether the major capital assets of the company constitute the undertaking
of the company while examining the authority of the board to dispose of the same without the authority
of the general body, the test to be applied would be to see whether the business of the company could
be carried on effectively even after disposal of the assets in question or whether the mere husk of the
 undertaking would remain after disposal of the assets ? The test to be applied would be to see whether
the capital assets to be disposed of constitute substantially the bulk of the assets so as to constitute
the integral part of the undertaking itself in the practical sense of the term.
c) Application was rejected and sale was allowed
2. R.C Cooper v Union of India (Bank Nationalisation Case)
- The expression "undertaking" in section 4 of the Act clearly means a going concern with all its rights,
liabilities and assets as distinct from the various rights and assets which compose it. The obligations
and liabilities of the business form an integral part of the undertaking and for compulsory acquisition
cannot be divorced from the assets, -rights and privileges.
3. Brooke Bond India Ltd v UB Ltd and Ors
- Contract - Specific performance - Plaintiffs sought an injunction to restrain first Defendants from in any
manner disposing of alienating transferring encumbering or selling of shares of Company - Hence, this
Appeal - Held, agreement between Plaintiff and first Defendants merely contemplated sale of controlling
shares of KPL
- the sale of shares, whatever be their number, even if it amounts to a transfer of the controlling interest
of a company, cannot be equated to the sale of any part of the undertaking

4. Allan Cold storage Ltd v. Goa meat Complex Ltd ( 1997) 90 ComCas 50 ( Bom –DB)
- Tenders for utilisation of the idle or spare capacity of Goa Meat Complex – Whether such tend
- By the word 'undertaking', it was meant the entire organisation. It indicates that the company whether it
has plant or whether it has an organisation is considered as one whole unit and the entire business of the
going concern is embraced within the word 'undertaking'.
- It must include all the assets of the undertaking so as to leave nothing of the business of a running
concern in the business sense of the term after the asset intended to be disposed of is disposed of.
Therefore, the right to use the spare capacity of the slaughterhouse cannot by any (stretch of) imagination
amount to a transfer either by lease or disposal otherwise of the whole of (the) undertaking or
substantially the whole of (the) undertaking.

5. Yellamma Cotton, Woolen and Silk Mills Co. Ltd., In re: Bank of Maharashtra Ltd. V. Official
Liquidator
- Whether an English mortgage created over the property of the company by the bank amounts to disposal
of the undertaking of the company under s. 180(1)(a) of CA, 2013?
- “An undertaking is not in its real meaning anything which may be described as a tangible piece of
property like land, machinery or equipment: it is in actual effect an activity engaged in with a view to
earn profit”
- The essence of mortgage is that the company is permitted to retain the use of all its property and continue
to engage in its manufacturing or business activity and is not to be interfered with so long as it continues
to work and continues to repayment in the manner agreed upon between it and the lender. So long as
this result is ensured and the company continues to engage in its work, the form or language of the
instrument under which the money is borrowed is of little or no consequence and so long as such position
is assured , the company cannot be said to have parted with its undertaking or business or disposed of
its under taking within the meaning of clause ( a) of subsection (1) of section 293 of the Companies Act.
The company has not disposed of the whole or any part of its undertaking understood in the correct
sense
- Held: There was not disposal of the undertaking sense there was merely a creation of a floating charge
which was used to raise money for the day today working of the company
- Held : ‘ the bank was entitled to retain and take possession of the properties described in the documents
for the purpose of recovering the money due to it by enforcing the security against the said properties.
 It has also the power to sell the said property without the intervention of the court for the purpose of
recovering the moneys due to it in accordance with and by complying with the provisions of the Transfer
of Property Act and the contract Act governing the exercise of such power
- The court struck down one provision of the mortgage deed which allowed the bank to take control over
the management of the company in the event of failure to repay the mortgage.

6. International cotton Corporation v. Bank of Maharashtra

- Against the order of company Judge in Yellamma cotton mills case an appeal was preferred by
International cotton corporation (unsecured creditor).
- Issue: Whether hypothecation and mortgages claimed by the bank invalid for contravention of the
provision of s. 293 of the companies Act?
- Under S. 293 (1) (a) of the companies Act, 1956 what is prohibited is a sale, lease or otherwise disposal
of the undertaking of the company without its consent. The word undertaking means any business or
any work or project which one engages in or attempts as an enterprise analogous to business or trade.
The business or undertaking of the company must be distinguished from the properties belonging to the
company”. ‘Mortgage was of properties of the company not of its undertaking
- Held “the clause in the mortgage deed which empowered the mortgagee to takeover the management of
the business of the company was invalid, but it was severable from the other clauses in the deed. The
mortgage deed as a whole was not invalid.

7. Pramod Kumar Mittal v. Andhra steel Corporation and others

a) Whether sale of a closed unit of a company amounts to sale of undertaking under the Companies Act
b) Weather committee of management appointed by the court has the power to sell a closed unit of the
company
- In the case before us, it is an admitted fact that the Dankuni unit of the company has remained closed
since December, 1976. In view of the fact that the Dankuni unit has not been in production for more
than five years past, it cannot be said that it is an " undertaking " of the company which is being sold in
this case. In that view of the matter, the restrictions imposed by Section 293 are not attracted in the
instant case and the provisions of Section 293(1)(a) in terms do not apply to the proposed sale of the
Dankuni unit of the company.

8. Brady v Brady
- The objects clause of the company enabled it to dispose of its assets for such consideration as it thought
fit
- Issue: If the company had not taken the consent of the shareholders would this amount to ultra vires the
company?
- he first plaintiff and first defendant, who were brothers, carried on a family business through B. Ltd. and
a number of subsidiary companies, one of which was jointly owned by the second plaintiff and the
second defendant, both of whom were sons of the first defendant. Two principal activities were carried
on: a road haulage business and the manufacture and distribution of drinks. The brothers quarrelled and
the resulting deadlock put the existence of the business in jeopardy. The first plaintiff petitioned under
section 75 of the Companies Act 1980 (now section 459 of the Companies Act 1985 ) for an order to
buy out the first defendant or for the company to be wound up. After negotiation, however, an agreement
was reached whereby the business would be split up so that one brother would acquire the haulage
business and the other the drinks business. The agreement provided for a scheme of corporate
reorganisation whereby the assets of the business were divided equally but the main company was left
in existence. The defendants later took the view that the assets had not been equally divided and they
refused to complete the transaction. The plaintiffs commenced an action for specific performance. At
 the start of the trial the defendants abandoned all their defences save an averment that the agreement
had been illegal on the grounds that it had been ultra vires as it required, inter alia, B. Ltd. to dispose of
its assets without consideration, and that the proposed arrangements constituted the giving by B. Ltd. of
financial assistance in connection with the purchase of its own shares contrary to section 42(2) of the
Companies Act 1981 (now section 151(1) and (2) of the Act of 1985 1 . The judge held that the principal
purpose of the giving of the financial assistance was not to reduce or discharge any liability incurred by
any person for the purpose of the acquisition of the shares, but was incidental to the larger purpose of
the arrangement and fell within the exception in section 42(4) of the Act of 1981 (now section 153(2)
of the Act of 1985 2 . He accordingly granted the order of specific performance. The Court of Appeal,
by a majority, allowed the defendants' appeal.
- On appeal by the plaintiffs:- (1) , that the transfer of assets from B. Ltd. was within the company's
corporate objectives and was therefore intra vires; that the reorganisation had clearly been made in good
faith in the interests of B. Ltd. and therefore within section 153(2)(b) of the Act of 1985; but that the
financial assistance had not been an incidental part of some larger purpose of the company within section
153(2)(a) and therefore prima facie it did not fall within the exception to the prohibition in section 151
of the Act against a company giving financial assistance for the acquisition of its own shares (post, pp.
761C-D,G-H,776A,777G - 778A,780F-H).

9. Managers of Niltan Carso Ltd v. Hawthorne

- The company entered into an agreement to lease its hotel premises to one of its directors for her to carry
on the business of a children's home there. The contract was made between the managing director of the
company, who was the father of the majority shareholder, and another director, who was the mother of
the majority shareholder. The agreement was made with the approval of the majority shareholder who
was also a director of the company.
- This was a claim by one of the receivers and managers of a company that they were entitled to sums
earned by one of its directors while carrying on a business for her personal profit from hotel premises
leased to her by the company pursuant to an agreement between herself and the company's managing
director, which he now alleged was in breach of sec. 48 of the Companies Act 1980.
- It was claimed that the agreement was made contrary to sec. 48 of the Companies Act 1980 because it
was an arrangement whereby a director acquired a non-cash asset of the company which exceeded the
requisite value, being ten per cent of the company's asset value, entered into without the approval by
resolution of the company in general meeting. Therefore he alleged that the agreement was illegal and
void.
- By sec. 87(1) of the 198O Act “non-cash asset” meant any property or interest in property other than
cash. A lease was undoubtedly an interest in property, so it was a “non-cash asset”. A person who alleged
that a non-cash asset exceeded the requisite value had to prove that fact and the receiver had adduced
no evidence as to what the value of the lease was nor had he produced any accounts of the company, to
show that that was the case. In the absence of evidence as to the latest accounts and the value of the
lease, it was impossible to hold that the agreement contravened Sec. 48.
- Sale, lease or otherwise disposal of the whole of the undertaking. For the purpose of lease of business
as well the company requires the consent of the shareholders.

➢ By an undertaking is meant a business or enterprise in which a company may be engaged as a gainful

occupation. Each one of several factories or manufacturing plants of a company will be considered an
undertaking from the business point of view. It does not consist of mere assets or property. It is a
productive organism, to speak and signifies a going concern engaged in the production, distribution etc.,
of goods or services
➢ S.180(1)(a) imposes restriction upon the competence of the board to dispose of company’s assets. It
does not have the effect of depriving the general body of shareholders who are the owners of the
company to dispose of the company’s assets according to their wishes and if the directors do not
collaborate with them, they can either replace directors or get a court order in that regard…. Kriparam
v. Shreyanprasad AIR 1951 Pat 390
1. A debenture executed by a company as security for payment of loan. Is it a sale of undertaking – Ans.
No
2. Leasing of the right to use the spare slaughterhouse to another company. Is it attracted by S. 293 – Ans.
No
3. A Decision taken by the board with the consent of the general body of shareholders to sell the
immovable property of the company. An Individual shareholder questioned the decision of general body
of shareholder. Can the court restrain the sale? – No.
➢ An agreement of sale would mean complete and exclusive transfer by the transferee to get the right to
hold , possess and control the undertaking in question -

Complex Problems in Sale of Undertaking

a) Taxation
b) Employee Interest
c) Shareholders (Minority & Majority)
d) Creditors (Charge)
e) Permission from Regulators (RoC, Regional Director etc)
Slump Sale
- Slump sale agreement is a contract. That, the slump sale agreement is for a lump sum price. That, in the
case of a slump sale, there is a transfer of the business activity for a lump sum price. That, in the case of
a slump sale, there is no sale value attached or attributable to specific items of assets.
- S. 2(42C) of Income Tax Act, 1961 - "slump sale" means the transfer of one or more undertakings as a
result of the sale for a lump sum consideration without values being assigned to the individual assets
and liabilities in such sales.
1. CIT v. Narkeshari Prakashan Ltd. [1992]196ITR438(Bom)
- Direct Taxation - reference - Sections 256 (2) and 41 (2) of Income Tax Act, 1961 - reference sought
against Tribunal's finding that sale of going business concern is at slump price and as such does not
attract Section 41 (2) - such challenge on ground that each branch could not be treated as separate entity
to have separate goodwill and specification of different price for different items dis-entitle terming such
sale as sale of going on concern as a whole for slump price - such aspect pertains to finding of facts and
reference against such finding not maintainable as no question of law involved.
- Two contentions were raised before the court on behalf of the Revenue:

i. Each branch could not be treated as a separate entity and, therefore, did not have independent goodwill.
ii. In view of the specification of the price of items of assets and liabilities in the agreements, it could not
be said that the sale were of the going concerns as a whole for a slump price.
- As a matter of pure principle, even a branch of a publishing house like this can have different goodwill
which depends upon a host of factors such as popularity, performance, circulation, peculiarities of the
region, etc. As regards the second submission, a mere look at the agreements would clearly indicate that
what was sold was the entire branch business as a whole - lock, stock and barrel. Several items were
such as would not be independently purchased. The value of the liabilities is adjusted against the value
of assets. An inventory has to be made for the purpose of identification, because inventory was made
and the value was indicated against each item and the overwhelming character of the transaction was
not changed
- The basic test in order to be a slump sale was that there should be a transfer of a business and not all the
businesses of the assessed.

2. Premier Automobiles Ltd. vs. ITO

- Premier Auto Limited entered into an agreement with Automobile Peugeot (AP) to establish a joint
venture company known as Kalyan Motors Co. Ltd. (KMCL) for manufacture and distribution of 60,000
Peugeot cars throughout India. and executed a slump sale agreement whereby PAL transferred and sold
its business to Kalyan Motor Co. Ltd., the said Kalyan undertaking as a going concern on "as is where
is" basis. PAL manufactured the body, seats, and various gadgets of 118 NE cars at Kalyan factory. PAL
assembled the said cars at Kalyan plant. PAL painted the cars at Kalyan plant. However, the gear box
shop for the said cars was located at Kurla and the machine shop was located at Pune. Therefore, Kalyan
business of manufacture of 118 NE cars was located at three sites.
- PAL submitted its return of income enclosing a P&L a/c in which it disclosed a book profit of Rs. 81.31
crores from the slump sale dt. 6th Jan 1995. The AO, however, took the view that it was a sale of itemized
assets. He, therefore, assigned the sale value to building, plant and machinery, paint shop, etc. separately
- Order of AO was reversed by the Bombay High Court. The basic test in order to be a slump sale was
that there should be a transfer of a business and not all the businesses of the assessed.
- That, mere execution of a conveyance of immovable property by itself would not constitute sale of
itemized assets. hat, mentioning of value/consideration in respect of land or building will not per se take
the transaction out of slump sale Narkeshari Prakashan Ltd.s case. That the assets transferred, constituted
running business and, therefore, there was a slump sale. That, merely because a conveyance of land and
building came to be executed on 27-05-1996 it cannot be said that there was no slump sale. If that test
is applied then there could never be a slump sale.
Sale of Undertaking and Demerger
- 180(1) (a) is an example of de-merger
- The term de-merger is also used to describe spinning off or hiving off an undertaking of a corporate
entity.
- A scheme of demerger is in effect a corporate partition of a company into two undertakings with it and
transferring the other undertaking to the resulting company (Lucas-TVS Ltd, In re C.P.No.588 and 589
of 2000( Mad) unreported)
Issues in Sale of Undertaking
- Will there be a reduction of share capital of demerging company? If so, can a demerging company
increase its share capital without the consent of the court?
- Reduction would in share capital occur with transfer of assets or repayments to departing faction or
group of members of the promoters of the company
- Ordinary Sale of Undertaking would not cause a reduction in Share capital of the Co
- In Re: Vast Textiles Ltd. (19.12.2006 - RAJHC)
- Company - Scheme of Arrangement - Para 19(c) of Section 4 of Scheme and Sections 391 and 394 of
Companies Act, 1956 - Present petitions filed under Sections 391 and 394 of Act, for sanctioning
Scheme of Arrangement between resulting company and demerged company - Held, Court do not find
any merit in this contention that in absence of no objection certificate from Bombay Stock Exchange,
scheme should not be sanctioned - Main Stock Exchange in present case was Jaipur Stock Exchange
and even otherwise consent of Stock exchange was not compulsorily required to be obtained - Second
objection of Regional Director that capital of company can be increased only after following procedures
prescribed under relevant provisions of Act and payment of requisite fees to Registrar of Companies
and Stamp duty to State Government had merit - Therefore, para 19(c) of Section 4 of Scheme providing
such increase cannot be ordered to be incorporated in Scheme - Scheme of Arrangement as prayed in
 paras (a) to (b) of prayer clause omitting para 19(c) of Section 4 was sanctioned - Resulting Company
and Demerged Company both shall pay amount each to Official Liquidator
- It must therefore follow the provisions of S. 61 in order to increase Share Capital which requires any
alteration to be approved by the tribunal

➢ In Re Europlast India Ltd

• Whether sale of properties of an unlisted company by the secured creditors without the consent of
unsecured creditors is valid? Whether S.180(1)(a) is applicable?
• Scheme sanctioned under Section 391 of the Companies Act does not merely operate as an agreement
between the parties but has statutory force and is binding not only on the company but even the
dissenting creditors or members as the case may be
Reasons for demerger
- Demerger is undertaken basically for two reasons.
- First as an exercise in corporate restructuring
- Second is to give effect to a family partition in case of family owned or controlled corporation.
- Where demerger is an exercise of corporate restructuring the undertaking sought to be demerged is
transferred from transferor companies to the transferee company.
- But where the demerger is a result of family partition the different undertakings of the company is
transferred to a newly incorporated transferee company to facilitate family partitions.
Wipro- Demerger
- Wipro hived off three units - Wipro Consumer Care & Lighting, Wipro Infrastructure Engineering and
Medical Diagnostic Product & Services business - into a separate unlisted company called Wipro
Enterprises. Together, the three units contributed 14 per cent to Wipro's revenue.

Procedure for Scheme of Arrangement

1. Decision at the Board level (Resolution)
2. Application to the tribunal under S. 230
3. Convening Separate meetings of members and Creditors [S. 230(1) & S. 230(3)]
- A notice of such meeting shall be sent to all the creditors or class of creditors and to all the members or
class of members and the debenture-holders of the company, individually at the address registered with
the company which shall be 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:
- The Tribunal may dispense with calling of a meeting of creditor or class of creditors where such creditors
or class of creditors, having at least ninety per cent. value, agree and confirm, by way of affidavit, to the
scheme of compromise or arrangement. [S. 230 (9)]

4. Disclosures to Tribunal [S. 230(2)]

a) All material facts relating to the company, such as the latest financial position of the company, the latest
auditor’s report on the accounts of the company and the pendency of any investigation or proceedings
against the company
b) Reduction of share capital of the company, if any, included in the compromise or arrangement.
c) Any scheme of corporate debt restructuring consented to by not less than seventy-five per cent. of the
secured creditors in value, including—
i. A creditor’s responsibility statement in the prescribed form.
 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.

5. Notice to regulators/authorities
- [S.230(5)]- They have a right to represent at the meeting
- Parties to which notice is to be sent: 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, & any other sectoral regulators or authorities which
are likely to be affected by the compromise or arrangement
- The above-mentioned authorities are required to make representations before the tribunal within a span
of 30 days from the date of receipt of notice & if they fail to make representations within the said time
period it will be presumed that they have no representations to make

6. If M+ 3/4th agree, Tribunal sanction the scheme [S. 230(6)]

- Where the scheme receives approval of 3/4th in value of the creditors or class of creditors or members
or class of members and the sanction of the tribunal the creditors and the company would be bound by
such scheme.
7. An order made by the Tribunal under sub-section (6) shall provide for all or any of the following matters,
namely: —
a) Where the compromise or arrangement provides for conversion of preference shares into equity shares,
such preference shareholders shall be given an option to either obtain arrears of dividend in cash or
accept equity shares equal to the value of the dividend payable.
b) The protection of any class of creditors.
c) If the compromise or arrangement results in the variation of the shareholders’ rights, it shall be given
effect to under the provisions of section 48;
d) If the compromise or arrangement is agreed to by the creditors under sub-section (6), any proceedings
pending before the Board for Industrial and Financial Reconstruction established under section 4 of the
Sick Industrial Companies (Special Provisions) Act, 1985 shall abate.
e) Such other matters including exit offer to dissenting shareholders, if any, as are in the opinion of the
Tribunal necessary to effectively implement the terms of the compromise or arrangement:
8. Order of the Tribunal with Registrar within 30 days [S. 230(8)]

Three main steps involved in implementing a scheme of arrangement:

1. First, a ‘compromise or arrangement’ is proposed between the company and its members or creditors.
2. Second, meetings of the members or creditors will be held to seek approval of the scheme by the
appropriate majorities.
3. Third, the scheme must be sanctioned by the court, and the order sanctioning the scheme is then
delivered to the Registrar of Companies.

Procedure for Mergers

1. Application
 Where an application is made to the Tribunal under section 230 for the sanctioning of a compromise or
an arrangement proposed between a company and any such persons as are mentioned in that section,
and it is shown to the Tribunal—
a) That the compromise or arrangement has been proposed for the purposes of, or in connection with, a
scheme for the reconstruction of the company or companies involving merger or the amalgamation of
any two or more companies; and
b) That under the scheme, 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,
the Tribunal may on such application, order a meeting of the creditors or class of creditors or the
members or class of members, as the case may be, to be called, held and conducted in such manner as
the Tribunal may direct and the provisions of sub-sections (3) to (6) of section 230 shall apply mutatis
mutandis.
2. Disclosures to be made at the meeting [S. 232(2)]
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
3. The Tribunal may, by order, sanction the compromise or arrangement or by a subsequent order, make
provision for the following matters, namely:
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
authorised capital shall be set-off against any fees payable by the transferee company on its authorised
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
4. Every company in relation to which the order is made shall cause a certified copy of the order to be filed
with the Registrar for registration within thirty days of the receipt of certified copy of the order.
5. The scheme under this section shall clearly indicate an appointed date from which it shall be effective,
and the scheme shall be deemed to be effective from such date and not at a date subsequent to the
appointed date.
6. Every company in relation to which the order is made shall, until the completion of the scheme, file a
statement in such form and within such time as may be prescribed (Statement of Compliance – Form
CAA 8) with the Registrar every year duly certified 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.
7. Contravention - fine which shall not be less than one lakh rupees but which may extend to twenty-five
lakh rupees – Officers - 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.
Whether a shareholder or a creditor can initiate a scheme in circumstances where the company does not
approve of it?
➢ Re, Savoy Hotel Ltd.,[1981]Ch.351
➢ In which a shareholder, Trust House Forte Ltd, sought to acquire control of the company, Savoy Hotel
,using a scheme of arrangement. The shareholder sought an order of the court to convene the meeting to
consider the scheme, but this application was opposed by the company, which did not support the
scheme
➢ A company's share capital consisted of A and B shares, ranking pari passu in all respects in proportion
to amounts paid up thereon, except that on a poll the B shares carried 40 times as many votes as A shares
of an equivalent nominal value. The effect of that was that the holders of the A shares, who together
owned 97.7 per cent. of the equity, were only entitled to 51.45 per cent. of the votes, while the holders
of the B shares, who owned 2.3 per cent. of the equity, were entitled to 48.55 per cent. of the votes.
Moreover 65.26 per cent. of the B shares, with 31.68 per cent. of the votes, were held either beneficially
or as trustees by members of the board, so that control of the company by the A shareholders existed
only in theory, and in practice the B shareholders could control the company and could block any general
offer from outside.
➢ The applicant, which was the beneficial holder of 88,000 shares, of which 44,000 were registered in its
name, wished to gain control of the company by means of a scheme of arrangement under section 206
of the Companies Act 1948 1 but the board of the company regarded the proposals as unacceptable. The
applicant, therefore, issued an originating summons seeking liberty to convene separate meetings of the
A and B shareholders, and consequential directions for convening such meetings.
➢ Court did not approve the scheme because it is well settled law that such a scheme requires the agreement
of the company.
 ➢ The approval of the company to the scheme of arrangement was essential and, therefore, the court would
have no jurisdiction to sanction the proposed scheme without such approval
Class under S. 230
➢ The court does not itself consider what class of creditors or members should be made parties to the
scheme. This is for the company to decide in accordance with what the scheme purports to achieve.
➢ Eg., If the rights of the ordinary shareholders are to be altered but those of preference shareholders are
not touched, a meeting of ordinary shareholders will be necessary but not of preference shareholders.
➢ If there are different groups within a class the interest of which are different from the rest of the class or
which are to be treated differently under the scheme, such class must be treated as separate classes for
the purpose of the scheme.
➢ Great care must be taken what for the purpose of the scheme constitutes a class. If meeting of the proper
class have not been held, the court may not sanction the scheme.
Judicial approach on classes requiring approval
1. Sovereign Assurance Co Ltd v. Dodd
➢ Defendant taken to life insurance policies with the plaintiff. the policies despite having matured were
not paid to the defendant. The defendant had also taken loans from the plaintiff against the defendants
then proceeded to Institute a suit to recover the loan money these policies. Subsequently the plaintiff
company got merged with another company. as required the plaintiff company had called for a meeting
of all the policyholders in order to sanction the scheme of merger. the defendant did not provide his
sanction for this scheme.
➢ The defendants proceeded to Institute a suit to recover the amount of money due for the loan the plaintiff
argued to the same must be set off against the policy money that was due to him.
➢ The persons summoned to the meeting were the policyholders of the company, and no separate meeting
was summoned of those whose policies had, as distinct from those whose policies had not, matured
➢ In this case the court had to consider whether certain creditors formed a single class or two different
classes. Court had to consider whether policyholders policies which had matured and policyholders’
policies which had not matured formed distinct classes
➢ Bowen L.J-In this case the court found that persons whose interest were dissimilar had been treated as
a single class and accordingly it refused to sanction the scheme.
➢ The court heard that the insured persons whose policies had matured formed a distinct class of creditors
from those whose policies had not matured; that a separate meeting of such class ought to have been
held under the Act in order to make the arrangement binding upon the members of that class; and that
the arrangement did not, therefore, operate as a release by the defendant of his claim against the
plaintiffs.
2. Re, Hellenic and General Trust Ltd
➢ Scheme of Arrangement proposed – SH approval sought
➢ At a separate meeting of the ordinary shareholders summoned to consider, and if thought fit, approve
the scheme, approximately 91 per cent. of the shareholders by value attended and voted, and 84.67 per
cent. in value, including the votes of the wholly owned subsidiary voted in favour of the arrangement.
A minority shareholder, holding 13.95 per cent. in value, voted against the arrangement.
➢ The court held that the interests of a wholly owned subsidiary of an intended purchaser of shares under
a scheme of arrangement were different from those of the other ordinary shareholders and different
considerations applied in deciding whether to approve the scheme; that, therefore, the purchasers' wholly
owned subsidiary was in a different class from the other ordinary shareholders and, since the meeting
had not been properly constituted, the necessary approval under section 206 of the Act had not been
obtained and the court had no jurisdiction to sanction the scheme
➢ It is the responsibility of the applicants to see that the class meetings are properly constituted
 ➢ It was also suggested that a parent company owning 50% or more of the shares of the subsidiary
company can be assumed to have community of interest for the purpose of S. 425(English Companies
Act)
➢ Vendors consulting together with a view to their common interest in an offer made by the purchaser
would look doubtfully at the presence among them of a wholly owned subsidiary of the purchaser
Exercise of courts discretion
Before the court sanction a scheme it will normally need to be satisfied on four matters.
1. The statutory provision must have been complied with
- Resolutions are passed by the statutory majority in value and number in accordance with the legislation
at a meeting or meetings duly convened or held
2. The class must have been fairly represented
3. Majority who vote in favour of the scheme must be first a majority in number of those members of the
class who are present and voting and secondly it must be three fourth in value of the holdings of such
person
4. The arrangement must be such as a man of business would reasonably approve
5. Arrangement must be compatible with S. 230-231 of CA 13
Effect of Courts Sanction
➢ Once the sanction of the court has been given to the scheme, it is binding on all creditors or class of
creditors or on the members or class of members despite any defect or irregularity.
➢ Order sanctioning the scheme is not effective until an office copy of the order has been given delivered
to the registrar of companies for registration.
➢ The order of the court may qualify as a “conveyance or transfer on sale” within the meaning of Indian
stamp Act
➢ A copy of the order must be annexed to every copy of company’s memorandum of association.
Small companies Merger (Section 233 of the Companies Act,2013)
➢ 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 as may be prescribed
➢ S. 2(85) of CA 13 – “small company" means a company, other than a public company
➢ Demerger is not under the purview of this section
Procedure
a) A notice of the proposed scheme inviting objections or suggestions, if any, from the Registrar and
Official Liquidators where registered office of the respective companies are situated or persons affected
by the scheme within thirty days is issued by the transferor company or companies and the transferee
company
b) The objections and suggestions received are considered by the companies in their respective general
meetings and the scheme is approved by the respective members or class of members at a general
meeting holding at least ninety per cent. of the total number of shares.
c) Each of the companies involved in the merger files a declaration of solvency, in the prescribed form,
with the Registrar of the place where the registered office of the company is situated; and
d) The scheme is approved by majority representing nine-tenths in value of the creditors or class of
creditors of respective companies indicated in a meeting convened by the company by giving a notice
of twenty-one days along with the scheme to its creditors for the purpose or otherwise approved in
writing
e) The transferee company shall file a copy of the scheme so approved in the manner as may be prescribed,
with the Central Government, Registrar and the Official Liquidator where the registered office of the
company is situated. [S. 233(2)]
 f) 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. [S. 233(3)]
g) Objections if any must be sent within 30 days else it will be presumed that there are no objections
h) If the Central Government after receiving the objections or suggestions or for any reason is of the opinion
that such a scheme is not in public interest or in the interest of the creditors, it may file an application
before the Tribunal within a period of sixty days of the receipt of the scheme under sub-section (2)
stating its objections and requesting that the Tribunal may consider the scheme under section 232.
i) if the Tribunal, for reasons to be recorded in writing, is of the opinion that the scheme should be
considered as per the procedure laid down in section 232, the Tribunal may direct accordingly, or it may
confirm the scheme by passing such order as it deems fit [S. 233(6)]
j) A copy of the order under sub-section (6) confirming the scheme shall be communicated to the Registrar
having jurisdiction over the transferee company and the persons concerned and the Registrar shall
register the scheme and issue a confirmation thereof to the companies and such confirmation shall be
communicated to the Registrars where transferor company or companies were situated.
k) The registration of the scheme under shall be deemed to have the effect of dissolution of the transferor
company without process of winding-up.
l) the registration of the scheme shall have the following effects, namely: —
(a)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.
(b) 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.
(c)legal proceedings by or against the transferor company pending before any court of law shall be
continued by or against the transferee company; and
(d) 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.
m) 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.
n) The transferee company shall file an application with the Registrar along with the scheme registered,
indicating the revised authorised capital and pay the prescribed fees due on revised capital
o) A company covered under this section may use the provisions of section 232 for the approval of any
scheme for merger or amalgamation.
Merger under Section 237 & 238 of the 2013 Act
➢ Central government has the power to amalgamate the companies
➢ Compulsory amalgamation of companies in public interest.
➢ Through special order notified in the official gazette
➢ The Copies of every order shall be made before the parliament.
➢ Grounds on which the Central Government may exercise the power
➢ Assessment of compensation
➢ Remedies available to the aggrieved parties
➢ Merger under S. 237, need not comply with the procedure laid down in Ss. 230-233
➢ The observance of the procedure laid down in Ss. 230-233, will lead to prolonged delay which will be
detrimental to the national interest.
➢ Every member or creditor, including a debenture holder, of each of the transferor companies before the
amalgamation shall have, as nearly as may be, the same interest in or rights against the transferee
company as he had in the company of which he was originally a member or creditor
➢ No order shall be made under this section unless
a. A copy of the proposed order has been sent in draft to each of the companies concerned
b. The time for preferring an appeal under sub-section (4) has expired, or where any such appeal has been
preferred, the appeal has been finally disposed off
c. The Central Government has considered, and made such modifications, if any, in the draft order as it
may deem fit in the light of suggestions and objections which may be received by it from any such
company within such period as the Central Government may fix in that behalf, not being less than two
months from the date on which the copy aforesaid is received by that company, or from any class of
shareholders therein, or from any creditors or any class of creditors thereof.
63 Moons Technologies Ltd. and Ors. vs. Union of India (UOI) and Ors.
- Compulsory Amalgamation of 2 companies (parent and subsidiary) of initiated under section 396 of the
1956 Companies Act by the government. Amalgamation was initiated in order to merge 2 companies
which according to the government were maintaining separate identities merely to defraud investors.
Under the compensation order, compensation was granted only to a specific shareholder. The subsidiary
company odd large amounts of money to various creditors amalgamation with the parent company was
to ensure that these liabilities could be met.
- In the context of compulsory amalgamation of two or more companies, the expression "public interest"
would mean the welfare of the public or the interest of society as a whole, as contrasted with the "selfish"
interest of a group of private individuals. "Public interest" would mean the combining of resources of
two or more companies so as to impact production and consumption of goods and services and
employment of persons relatable thereto for the general benefit of the community. Conversely, any
action that impedes promotion of industry or obstructs growth which is in national or public interest
would run counter to public interest
- All the expressions used in relation to "public interest" have relation only to the businesses of the two
companies that are sought to be amalgamated. There is no interest of the general public as opposed to
the businesses of the two companies that are referred to. Leveraging of combined assets, capital, and
reserves is only to settle liabilities of certain stakeholders and creditors when the order is read as a whole
and given the fact that the businesses of the two companies were completely different.
- Fact that, the assessment order dated 1st April 2015 did not provide any compensation to either the
shareholders or creditors of FTIL for the economic loss caused by the amalgamation in breach of Section
396(3), it is clear that an important condition precedent to the passing of the final amalgamation order
was not met.
- Also, the Central Government order does not apply its mind to the essentiality aspect of Section 396 at
all. In fact, in several places, it refers to "essential public interest" as if "essential" goes with "public
interest" instead of being a separate and distinct condition precedent to the exercise of power Under
Section 396. On facts, therefore, it is clear that the essentiality test, which is the condition precedent to
the applicable to Section 396, cannot be said to have been satisfied
- Test: First and foremost, the Central Government has to be "satisfied", meaning thereby, that it must, on
certain objective facts, come to a conclusion that amalgamation between two or more companies is
necessary. This can only be done if the Central Government finds it "essential", i.e., necessary to do so.
Also, this can only be done in "public interest"
Cross Border Merger
➢ Companies registered under the Indian companies Act with companies incorporated in certain notified
jurisdictions
➢ Ref: FEMA (Cross border Merger Regulations) - Regulation 4 – Inbound Merger Regulation 5-
Outbound Merger
➢ Central government shall notify the jurisdictions
➢ Power to make rules for such mergers vested with both the central government and RBI
➢ RBI is the approving authority under section 234
➢ Tribunal has no jurisdiction in Section 234
➢ Rule 25A of Companies (Compromises, Arrangements and Amalgamations) Rule, 2016.
a) A foreign company incorporated outside India may merge with an Indian company after obtaining prior
approval of Reserve Bank of India and after complying with the provisions of sections 230 to 232 of the
Act and these rules. [Rule 25A (1)]
b) A company may merge with a foreign company incorporated in any of the jurisdictions specified in
Annexure B [Rule 25A (2)]
c) 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
d) The concerned company shall file an application before the Tribunal as per provisions of section 230 to
section 232 of the Act and these rules after obtaining approvals specified in sub-rule (1) and sub-rule
(2), as the case may be.
UNIT 4- Mergers and Restructuring of Banking Companies
Reasons for Bank Mergers
Benefits:
1. Scale:
A bank merger helps an institution scale up quickly and gain a large number of new customers instantly.
Not only does an acquisition give the bank more capital to work with when it comes to lending and
investments, but it also provides a broader geographic footprint in which to operate. That way, the bank
achieves their growth goals quicker.

2. Efficiency:
Acquisitions also scale a bank more efficiently, not just in terms of their efficiency ratio, but also in
terms of their banking operations. Every bank has an infrastructure in place for compliance, risk
management, accounting, operations and IT – and now that two banks have become one, they’re able to
more efficiently consolidate and administer those operational infrastructures. Financially, a larger
bank has a lower aggregated risk profile since a larger number of similar-risk, complimentary loans
decrease overall institutional risk.

3. Business Gaps Filled:

Bank mergers and acquisitions empower their business to fill product or technology gaps. Acquiring a
smaller bank that offers a unique revenue model or financial product is sometimes easier than building
that business unit from scratch. And, from a technology perspective, being acquired by a larger bank
might allow their institution to upgrade its technology platform significantly.

4. Talent and Team Upgrade:

While not a factor on the balance sheet, every bank benefits from a merger or acquisition because of the
increase in talent at leadership’s disposal. An acquisition presents the possibility of bolstering their sales
team or strengthening their team of top managers.

5. Restructuring Policies:
For a bank with growing ‘Non-Performing Assets’ and decreased lending, mergers allow for
restructuring the loan portfolio of the acquired bank. This may result in improved lending policies and
result in higher profits.

Drawbacks:
1. Poor Culture Fit:
A failure to assess cultural fit (not just financial fit) of the employees may make a bank mergers
ultimately fail.
2. Customer Impact and Perception:
Destroys the idea of decentralization as many banks have a regional audience to cater to and customers
often respond very emotionally to a bank acquisition
Indian Scenario: Do mergers in Indian banking improve operational performance and
efficiency of banks?
• Recently, the government in August 2019 had announced the merger of 10 public sector lenders into
four bigger and stronger banks. The mergers took effect on 1st April, 2020 and are as follows:
1. Oriental Bank of Commerce (OBC) and United Bank of India will be merged into Punjab National Bank
(PNB) to form the nation's second-largest lender after SBI.
2. Syndicate Bank will be merged into Canara Bank.
3. Union Bank of India will amalgamate with Andhra Bank and Corporation Bank;
4. Indian Bank will merge with Allahabad Bank.

• Customers, including depositors of merging banks are treated as customers of the banks in which these
banks have been merged. Following this merger, there are now 12 PSUs - six merged banks and six
independent public sector banks.
• This is an example of a merger guided by the government in India. In India, guided by the central bank,
most of the weak banks are being merged with healthy banks in order to avoid financial distress and to
protect the interests of depositors. Hence the motivation behind the mergers may not be increase in
operating efficiency of banks but to prevent financial distress of weak banks.
• The logic is that rather than having several of its own banks competing for the same pie (in terms of
deposits or loans) in the same narrow geographies, leading to each one incurring costs, it would make
sense to have large-sized banks. It has also been argued that such an entity will then be able to respond
better to emerging market trends or shifts and compete more with private banks.
Benefit of Bank Merger in India:
1. Merger helps to reduce the cost of operation.
2. It helps to improve the professional standard.
3. Provides better efficiency ratio for business operations as well as banking operations which is beneficial
for the economy.
4. These big banks would also be able to compete globally and increase their operational efficiency by
reducing their cost of lending.
5. Multiple posts get abolished, resulting in substantial financial savings.
6. Banking mergers improve risk management.
7. Merger helps the geographically concentrated regionally present banks to expand their coverage.
8. Lending capacity of the Public Sector Banks will increase and their balance sheet would also be strong.
Disadvantages of Bank Merger:
1. Acquiring banks have to handle the burden of weaker banks.
2. It is difficult to manage the people and culture of different banks.
3. Merger destroys the idea of decentralization as many banks have a regional audience to cater to and
customers often respond very emotionally to a bank acquisition.
4. Larger banks are more vulnerable to global economic crises.
5. Coping with staffers' disappointment could be another challenge for the governing board of the new
bank which could lead to employment issues.

Categories of Bank Mergers

• The Merger efforts in the Indian Banking sector can be broadly placed as per the nature of the entities
involved and of the mergers, into several categories:
a) Voluntary amalgamation between private sector banks
b) Compulsory amalgamation of a private sector banks
 c) Acquisition of banking companies by the central government in Part IIC of the Banking Regulation
Act,1949
d) Merger between public sector banks
e) Merger of a Non –Banking Financial Company (NBFC) with a private sector bank
f) Merger among co-operative banks
g) Merger between Regional Rural Banks
h) Mergers of State Bank of India and its associates.
There are four categories restructuring of Banking Companies under the Banking Regulation Act,1949
a) Voluntary Amalgamation
b) Compulsory Amalgamation
c) Scheme of arrangement between banking company and its creditors
d) Acquisition of banking companies by the Central Government under Part-IIC of the Banking Regulation
Act,1949
[NOTE: (1) The Procedures of both voluntary and compulsory mergers under the Banking Regulation
Act is applicable only to the Private Sector Banking Companies. Merger of Public Sector banks viz., the
Nationalized Banks and State Bank of India and its associates are being governed by the separate
statutes. Consolidation of Regional Rural banks are governed by the Regional Rural Banks Act, 1976.
(2) Reserve Bank of India (Amalgamation of Private Sector Banks) Directions, 2016, guides the
mergers of private sector banks in the Indian banking sector. The provisions of these directions shall
apply to all private sector banks licensed to operate in India by the RBI and to the Non-Banking Financial
Companies (NBFC) registered with the RBI.]
(A) Voluntary amalgamation between private sector banks:
• The statutory provisions governing voluntary amalgamation of banking companies is laid down under
section 44A of the Banking Regulation Act, 1949.
• Procedure: After the two banking companies have passed the necessary resolution proposing the
amalgamation of one bank with another bank, in their general meeting, by a majority in number
representing two thirds in value of the shareholding of each of the two banking companies, such
resolution containing the scheme of amalgamation is submitted to the Reserve Bank for its sanction. If
the scheme is sanctioned by the Reserve Bank, by an order in writing, it becomes binding not only on
the banking companies concerned but also on other shareholders.
• A dissenting shareholder who has either voted against the scheme or has given notice of such dissent in
writing, is entitled to receive the value of his shared as may be determined by the RBI (S.44A(3)).
• Prior to 1960, the amalgamation of banks could be only in terms of section 44A of the Banking
Regulation Act, 1949, on a voluntary basis. In order to accelerate the process of integration, additional
statutory and regulatory powers for the reconstruction or compulsory amalgamation of banks were
inserted by the amendment of the Act, 1960. Banking Companies (Second) Amendment Bill,1960
proposed for the introduction of Section 45 and Section 44A (7) to the Banking Regulation Act,1949.
• Madras High court in Bank of Madura, Shareholders Welfare Association v Governor, Reserve Bank of
India and Others, has held that the provisions of the Banking Regulation Act constitute a complete code
in themselves on the amalgamation of banking companies.
• Scope of S. 44-A of the Banking Regulation Act, 1949: The provision of Section 44A of the Banking
Regulation Act, 1949 comes into effect only if the transferor and transferee are both banking companies
within the meaning of The Banking Regulation Act, 1949. Since Nationalized banks, Co-operative
banks, Regional Rural Banks and State Banks of India are governed by the separate statutes, the
merger provisions of the Banking Regulation Act and the Companies Act, 1956 is not applicable to it.
• S.44A of the B. R. Act , 1949 is said to be a ‘Self-contained provision and a complete code on the
amalgamation of banking companies’ similar to S.391 of the companies Act, 1956 (S.230 of Companies
Act, 2013).
 • S.44A of the Banking Regulation Act , 1949 comes into play only in case of the transferor and transferee
companies are both banking companies.
(B) Compulsory amalgamation of private sector banks:
• Section 45 of the Banking Regulation Act- RBI has the power to force the merger of a weaker bank
with a stronger Bank, without the consent of creditors or members.
• It is done in (1) public interest or in the (2) interest of the depositors of the distress bank or (3) to
secure proper management of a banking company, or in the (4) interest of the banking system.
• The main objective is to protect the interest of the depositors of the weak bank. When a bank has shown
symptoms of sickness such as huge NPAs and substantial erosion of net worth, RBI has intervened and
merged the weak bank with the strong bank.
• In case of a banking company in financial distress, which has been placed under the order of
moratorium, under Sec.45(2) of the Act, on an application made by the Reserve bank to the Central
Government, the Reserve bank can, for the foregoing reasons, frame a scheme of amalgamation for
transferring the assets and liabilities of such distressed bank to a much better and stronger Bank.
• Such a scheme framed by the RBI is required to be sent to the banking companies concerned, for their
suggestions or objections, including those from the depositors, shareholders and others.
• After considering the same, RBI sends the final scheme of amalgamation to the central government for
sanction and notification in the official gazette. The notification issued for compulsory amalgamation
under S.45 of the Act is also required to be placed before the two houses of parliament.
• Reserve Bank of India had issued guidelines in May 2005, which laid down various requirements for
the process of such merger including- determination of the swap ratio, disclosures, stages at which the
boards will get involved in the merger process etc.
• The policy objective of the RBI is to ensure that considerations like sound rationale for the
amalgamation, systemic benefits and the advantage accruing to the residual entity are evaluated in detail.
• While sanctioning the scheme of Amalgamation, RBI takes into account the financial health of two
banking companies to ensure inter alia, that after the amalgamation, the new entity will emerge as a
much stronger bank.
• The experience of the RBI has been by and large satisfactory in approving the schemes of amalgamation
of the private sector banks in the recent pat and it had no occasion to reject any such scheme.
• Constitutional validity of the BR Act was challenged in Shivkumar Tulsian and ors. v. UOI, wherein the
Bombay High Court held that Section 45 is in conformity with the constitutional provisions of Art.19
and 14.
• In Bank of Madura Shareholders Welfare Association v. Governor, Reserve Bank of India, it was held
that if the shareholders were aggrieved that the market value of shares of both the companies had not
been determined properly, it was always open to it to get the market value evaluated by the Reserve
Bank of India and that the court would not go into the question whether the share exchange ratio adopted
in the scheme was fair or not.
Cases-
• Re, ICICI Ltd, ( 2004) 119 comcas.941
The difficulty in arriving at share valuation was discussed in detail in.

Facts: A scheme was prepared for the amalgamation between ICICI Capital Services Ltd. and ICICI
Personal Financial Services Ltd. with ICICI Bank Ltd. The petitioner and two other companies are the
transferor companies are to be amalgamated with the ICICI Bank Ltd., the transferee company.

Petitioners two main objection were-

o The approval of the RBI was not sought for a scheme of amalgamation as the transferee was a banking
company
o Valuation of shares was not arrived at properly.

Held: To the first question court held that the objection has no substance, in as much as, the provisions
of section 44A come into play only in case the transferee and transferor, both the companies are Banking
Companies. In the said case, though the transferee company is a banking company, none of the transferor
companies are banking companies. The objection did not sustain.

While deciding second issue, the court referred Piramal Spg & Wvg. Mills Ltd and cited what was there
as that the valuation of shares is a technical matter which requires considerable skill and expertise. There
are bound to be differences of opinion as to what the correct value of the shares of any given company
is, simply because it is possible to value the shares in a manner different from the one which has been
adopted in a given case, it cannot be said that the valuation which has been agreed upon is unfair.
Court thus held that what is important is that all shareholders of both companies have unanimously
accepted the valuation which has been arrived at by the auditors of the transferor and transferee
companies, under these circumstances, the application cannot be rejected on the ground that the
valuation of shares is unfair to the shareholders of the transferor-company.

• Bank of Baroda Ltd v. Mahindra Ugaine Steel Co.Ltd , MANU/ GUJ/003/1975.

Company - amalgamation - Section 391 of Companies Act, 1956 and Banking Regulation Act, 1949 -
petition under Section 391 for sanction of Court to scheme of amalgamation - scheme approved by
majority vote - statutory provisions complied with - cash option figure determined in scheme fair and
reasonable and approved by substantial majority of affected persons - ratio of exchange of shares
reasonable and fair - petitioner discharged burden of proving that scheme is fair, reasonable, workable
and man of business would reasonably approve - interests of employees ensured - no grounds exists to
withhold sanction of scheme - sanction granted.

• In Re, Indus Ind Enterprises and Finance Ltd, (2004)

Facts: A company petition was filed by the petitioner IndusInd Bank Limited for sanction of Scheme
of Arrangement between Ashok Leyland Finance Limited (‘transferor company’) and IndusInd Bank
Limited (‘transferee company’) and their respective members and creditors.

The Regional Director’s main objection was that the transferee company is required to pay requisite
stamp duty under the Bombay Stamp Act, 1958 and the registration fees to the Registrar of
Companies, Mumbai, Maharashtra, as provided under Section 611 read with clause 3 of Schedule X
of the Companies Act. In view of this, the proposal contained in Clause 15 Sub-clause (iii) of the Scheme
is objectionable and, therefore, the Regional Director submitted that the same should be deleted as it
amounts to loss of revenue to the Government fees and stamp duty.

The petitioner company agreed to take all the necessary steps and pay all the necessary fees to effect
the increase in the Authorised Capital of the Petitioner Company from Rs. 2,50,00,00,000 to Rs.
3,00,00,00,000 and accordingly, Clause 15(ii) of the Scheme of Arrangement would be inoperative.

Held: Scheme of Arrangement was sanctioned as it was fair, sound and reasonable and based on experts’
opinion and above all, the scheme is backed by the majority decision of the concerned parties,
including shareholders, creditors or unsecured creditors. Furthermore, the scheme, as such, was not
even against the public policy or against public interest.
(C) Acquisitions of Banking Companies by Central Government- Banking Regulation Act, 1949
Part-II C of the Banking Regulation Act, 1949 deals with the acquisition of the undertakings of
banking companies by the Central government. Part IIC of the Banking Regulation Act was added
at a time when government decided to acquire the control of privately operated banking companies. It
was in the year 1968 the Banking companies (Acquisition and transfer of undertaking) ordinance
was issued, which became the Bank Nationalization Act, 1969.
Part -IIC was added for the government to exercise the power to acquire the private banking companies.
Part II C Ss. 36AE to 36AJ
Section 36AE- does not confer suo-moto power to the Central government to acquire the business
of a banking company. A report by RBI is essential and RBI is entitled to submit the report only if the
banking company has failed to conform to its directions under section 21 or under Section 35A or if it
was managed in a manner detrimental to the interest of its depositors.
S. 36AF- Power of the central Government to make scheme of arrangement- the corporation, or the
company incorporated for the purpose, to which the undertaking including the property, assets and
liabilities of the acquired bank may be transferred; constitution of the first board of management,
continuance of service by employees, continuance of a pension or other superannuation or
compassionate allowance or benefit of a person from the acquired bank; manner of payment of
compensation to shareholders; effectual transfer of assets and liabilities; other matters necessary for
business.
Section 36AG- Compensation to be given to the shareholders of the Acquired bank.
Section 36AH- Constitution of the Tribunal-
By CG- 1 Chairman (is/was Judge of a High Court or of the Supreme Court) and 2 Members (One with
experience of commercial banking and other chartered accountant)- may choose one or more persons
having special knowledge or experience of any relevant matter to assist it in the determination of such
compensation
Section 36AI- Powers of the Tribunal-
(1) of a Civil Court-
(a) summoning and enforcing the attendance of any person and examining him on oath;
(b) requiring the discovery and production of documents;
(c) receiving evidence on affidavits;
(d) issuing commissions for the examination of witnesses or documents.
(2) Tribunal shall not compel the Central Government or the Reserve Bank,—
(a) to produce any books of account or other documents which the Central Government, or the Reserve
Bank, claims to be of a confidential nature;
(b) to make any such books or documents part of the record of the proceedings before the Tribunal; or
(c) to give inspection of any such books or documents to any party before it or to any other person.
Section 36AJ- Procedure of the Tribunal-
(1) The Tribunal shall have power to regulate its own procedure.
(2) The Tribunal may hold the whole or any part of its inquiry in camera.
(3) Any clerical or arithmetical error in any order of the Tribunal or any error
arising therein from any accidental slip or omission may, at any time, be
corrected by the Tribunal either of its own motion or on the application of any of
the parties
The Banking Companies (Acquisition and Transfer of Undertakings) and Financial Institutions Laws
(Amendment) Act, 2006
 The Banking Companies (Acquisition & transfer of undertakings ) Act, 1970 & The Banking Companies
( Acquisition and transfer of undertakings ) Act, 1980→ Bank Nationalisation Act, 1970

(D) Amalgamation of Public sector Banks (with a Public Sector Bank or a Private Sector Bank):
BR Act does not apply in the case of Nationalised/Public Sector Banks.
The amalgamation of public sector bank is governed by Section 9 of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970 & 1980→ known as the Bank Nationalisation
Act, 1970.
The Act authorizes the central government to prepare a scheme of amalgamation in consultation with
RBI for the transfer of one bank to another corresponding new bank. The scheme framed under there
will be placed before both the houses of parliament for approval.
A nationalized bank may be amalgamated with any other nationalized bank or with any other banking
Institution i.e. banking company /SBI/Subsidiary
‘Central Govt after consultation with the RBI may make a scheme providing for (a) the reconstitution
of any corresponding new bank into two or more corporations (b) the amalgamation of any
corresponding new bank with any other corresponding new bank or with another new banking
institution(c) transfer of the whole or any part of the undertaking of a corresponding new bank or a
banking institution or (d) the transfer of the whole or any part of the undertaking of any other banking
institution to a corresponding new bank’.
(E) Merger between banks and Non Banking Financial Companies (NBFC)

The RBI has discretionary powers to approve the voluntary amalgamation of two banking companies

under the provisions of Section 44A of the Banking Regulation Act, 1949. However, the voluntary
amalgamation of an NBFC with a banking company is governed by sections 232 to 234 of the
Companies Act, 2013, subject to the approval of the RBI.
Chapter –III B of the Reserve Bank of India Act, 1934 confers powers to the Reserve Bank of India to
regulate the Non-Banking companies and financial institution’s deposit taking business. But the merger
between banks and non-banking companies are sanctioned by High court under Ss. 232-234 of the
Companies Act, 2013.
When an NBFC proposes to amalgamate with a banking company, the banking company has to obtain
the approval of the Reserve Bank of India after the scheme of amalgamation is approved by its Board
and the Board of NBFC. Wherein, the RBI may or may not approve the said merger. For instance, the
RBI refused to give its permission for the amalgamation between Lakshmi Vilas Bank and Indiabulls
Housing Finance Ltd.
 Reserve bank of India has issued guidelines (2005) and directions to be followed by banking companies
in case of merger or acquisition between a bank and non-banking financial institutions. RBI direction
on Acquisition of NBFCs states that Prior written approval of the Reserve Bank would be required
before approaching the Court or Tribunal under Section 391-394 of the Companies Act, 1956 or
Section 230-233 of Companies Act, 2013 seeking order for mergers or amalgamations with other
companies or NBFCs.
Power of RBI v. Role of NCLT
RBI- To approve the scheme of merger prior to approaching NCLT. (RBI may or may not approve)
NCLT- powers of NCLT under Section 232-234
(F) Merger or amalgamation in the Cooperative Banking Sector:
As Co-operative banks are under dual control of both RBI and the RCS (Registrar of cooperative
societies) for a merger to take place, the RBI must issue a no-objection certificate to RCS.
Amalgamation and merger of Co-operative banks fall under the purview of the Registrar of Cooperative
Societies (RCS). As per the relevant provisions of the Co-operative Societies Act of the respective states,
the RCS is empowered to amalgamate two or more co-operative banks in public interest for the
appropriate management of one or more co-operative banks.
Reserve bank of India has issued two guidelines on the issue of merger to the Co-operative banks in the
year 2005 and 2009.
RBI’s 2005 guideline allow co-operative banks to merge with any other co-operative banks or banks
registered under the Multi-state co-operative societies Act.
Procedure for such mergers- An application for merger giving the proposed scheme will have to be
submitted by the banks concerned to the Registrar of Cooperative Societies/Central Registrar of
Cooperative Societies. The acquirer bank will also forward a copy of the scheme to the Reserve Bank
along with the draft scheme, valuation report and other information relevant for consideration of the
scheme of merger.
Reserve Bank issued another set of guidelines in January 2009 for merger/acquisition of UCBs having
negative net worth as on End-March 2007. According to the new guidelines, the Reserve Bank would
also consider scheme of amalgamation that provides for (i) payment to the depositors under section
16(2) of the Deposit Insurance and Credit Guarantee Corporation Act, 1961; (ii) financial contribution
by the transferee bank; and (iii) sacrifice by large depositors.
(G) Merger of Regional Rural Banks:
Regional Rural banks are governed by the RRB Act, 1976 & the provisions of the Companies Act do
not apply.
Provisions of the B.R.Act, 1949 as specified under S.51 of the B.R Act apply to the extent specified
therein.(Ref. S. 51 It excludes the applicability of merger laws to certain banks mentioned therein).
S. 23A of the RRB Act, 1976 laid down that the central government can amalgamate two regional rural
banks in the interest through a notification in the official gazette after consultation with the NABARD,
the respective state govts and the sponsored banks.
(H) Merger of a nationalized bank with the SBI:
In a nationalized bank the shares are held by the central Govt., whereas in SBI controlling shares are
held by RBI. Therefore, a scheme of merger between Nationalised bank with SBI require the approval
of RBI and the central Govt.
S. 9(2)(c) r/w explanation 1 to section 9(5) of the Bank nationalization Act,1970 contemplates the
merger of a public sector bank with the state bank of India.
Regulation and supervision of amalgamation of banks by RBI:
The power under S.45 is observed by RBI when it is observed that the financial condition of any banking
company deteriorates and such power does not suffer from any infirmity of unwarranted delegation .
 In Amrit Bank Ltd and ors v. Union of India and others [1968] it was held that the ‘RBI exercise its
powers under S.45 for declaring moratorium and framing subsequently a scheme of amalgamation …’
All India Bank Employeess Association v. National Industrial tribunal ( bank disputes )[1962]
While considering the question of position of the employees under S. 45(5)(i) Supreme court held that
‘the RBI has the intimate knowledge of the banking structure of the country as a whole and of the affairs
of each bank in particular and hence there is no ground for apprehension of any arbitrary action or
decision by the banks.
Banking Laws (Amendment) Bill , 2011
Section 5 and 6 of Competition Act, 2002 requires prior approval from the government before any
merger- the bill sought exemption from the requirement of approval for forced mergers of distressed
banks by RBI.
The Banking Laws (Amendment) Bill, 2011 proposed amendments to various provisions of Banking
Regulation Act,1949.
RBI sought exemption of Bank mergers from the applicability of Competition Act, 2002. (Bill proposed
to insert a new section 2A in the Banking Regulation Act, 1949).
“The exemption of mergers of banking companies from the scrutiny of the CCI would allow the RBI to
approve mergers of banking companies in public or depositors interest, in the interest of banking system
in India and to secure the proper management of the banking company in a timely manner without
waiting for the approval of the CCI”.
But the corporate affairs ministry has turned down the RBI’s request for blanket exemption from the
Competition Act.
Law and procedure of Mergers under S. 237 of companies Act vs. S.45 of the banking regulation
Act, 1949:
Under CA, 2013- The Scheme of Arrangement has to be sanctioned by a tribunal. Whereas under BR
Act, it has to be approved only by the RBI and it is the sole authority in all matters relating to banking
companies.
Section 237- Amalgamation in Public Interest under CA, 2013:
• Section 237 of the Companies Act 2013 (Section 396 of Companies Act 1956) provides the Central
Government power to provide for amalgamation of companies in the interest of public.
• The Central Government has power to order for a forced amalgamation of two or more companies if it
is satisfied that such amalgamation is essential for the interest of public.
• If the Central Government is satisfied that it is in the interest of public, where two or more companies
shall amalgamate into a single company with such constitution, property, rights, powers, interests,
privileges, liabilities and obligations as specified in the order by the government, then such
amalgamation is considered to be valid and in the interest of public.
• Every member of the amalgamating company must be given equal, or near to equal, interest and rights
in the amalgamated company as he/she originally held in the amalgamating company.
• In case any of such condition is not complied by the amalgamated company, the member can claim
compensation from the amalgamated company. To enforce the order of amalgamation by Central
Government, a copy of order must be provided to the companies concerned; and modifications suggested
or objected to by the concerned companies are considered by the government in the draft order.
• Procedure:
• Board Meeting– initial step is that the company must convene a board meeting where it resolves to
amalgamate with the other company.
• Application is to be filed in the stock exchanges via electronic mode for approval. The company shall
obtain approval letter from the stock exchanges.
 • Application to the tribunal– the company shall make an application to the tribunal, which is the National
Company Law Tribunal (“NCLT”) of the relevant jurisdiction under Form-1. Such application is to be
accompanied with- Form No. NCLT-2 (notice of admission), affidavit in Form no. NCLT-6, a copy of
scheme of amalgamation, Fees prescribed in the Schedule of Fees and the companies shall disclose to
NCLT the basis on which each class of creditor or member is identified for the approval of scheme. It
should be noted that, it is upon the concerned companies’ discretion if they want to make a joint
application.
• Notice of meeting– a notice shall be sent to all the members or class of members and creditors or class
of creditors and debenture holders of the company in prescribed Form no. CAA 2, by the chairperson
appointed for the meeting.
• Advertisement for notice of meeting as per Form No. CAA 2 in one English newspaper and one
vernacular newspaper. A copy of notice shall also be provided in the website of the company.
• Notice to statutory authority– notice along with copy of the scheme shall be sent to the Central
Government, IT authorities, RBI, Registrar of Companies (Form GNL- 1), Official Liquidator,
Competition Commission of India and other relevant authorities.
• Affidavit of service– an affidavit shall be filed before NLCT in not less than seven days before the date
fixed for the meeting o date of first meeting, stating that the directions with respect to the issue of notice
and advertisement shall be complied to.
• A meeting of members and creditors shall be convened to accord the sanction of the scheme. The scheme
shall be approved if three-fourths of the persons, comprising of creditors or class of creditors and
member or class of members agree to it.
• Order on petition– upon the agreement over the scheme by the members and creditors, company shall
file Form no. CAA 5 before NCLT within 7 days from the Chairperson’s report. NCLT shall fix the
final date of hearing. The NCLT will pass a final order.
• Post-Final order compliances.

Section 45 of BR Act, 1949- Power of Reserve Bank to apply to Central Government for suspension of
business by a banking company and to prepare scheme of reconstitution of amalgamation:
• Grounds-
a) in the public interest; or
b) in the interests of the depositors; or
c) in order to secure the proper management of the banking company; or
d) in the interests of the banking system of the country as a whole
• Where it appears to the Reserve Bank that there is good reason so to do, the Reserve Bank may apply to
the Central Government for an order of moratorium in respect of a banking company- CG may make an
order of moratorium staying the commencement or continuance of all actions and proceedings against
the company for a fixed period of time (not more than 6 months).
• the banking company shall not during the period of moratorium make any payment to any depositors or
discharge any liabilities or obligations to any other creditors
• RBI may prepare scheme for reconstruction or amalgamation
• A copy of the scheme prepared by the Reserve Bank shall be sent in draft to the banking company and
also to the transferee bank and any other banking company concerned in the amalgamation, for
suggestions and objections
• The scheme shall thereafter be placed before the Central Government for its sanction and the Central
Government may sanction the scheme without any modifications or with such modifications as it may
consider necessary, and the scheme as sanctioned by the Central Government shall come into force on
such date as the Central Government may specify in this behalf.
• On and from the date of the coming into operation of the scheme or any provision thereof, the scheme
or such provision shall be binding on the banking company, or, as the case may be, on the transferee
bank and any other banking company concerned in the amalgamation and also on all the members,
depositors and other creditors and employees of each of those companies and of the transferee bank, and
on any other person having any right or liability in relation to any of those companies or the transferee
bank
• the properties, assets and liabilities of the banking company shall, by virtue of and to the extent provided
in the scheme, stand transferred to, and vest in the transferee bank.
• Copies of the scheme or of any order shall be laid before both Houses of Parliament, as soon as may be,
after the scheme has been sanctioned by the Central Government, or, as the case may be, the order has
been made.
Additionally- Section 44 A of the Banking Regulation Act, 1949 shows that it departs from the
provisions of the Companies Act, 1956 in primarily two aspects, namely (1) the High court is not given
the power to grant its approval to the scheme for merger of banking companies instead the Reserve Bank
, which is the central bank of the country and supreme regulatory authority in banking supervision and
( 2) The Reserve Bank of India is also empowered to determine the market value of shares of the
shareholders who has voted against the scheme of amalgamation.
 UNIT 5: SHARE ACQUISITION OF UNLISTED AND LISTED PUBLIC COMPANIES

I. ACQUISITION OF SHARES IN UNLISTED COMPANIES

Governed by section 235 (S. 974-991 of the English Companies Act) and 236 of the Companies Act,
2013.
- There are no special provisions for takeover bids (transfer of voting control w shares) but this section is
applicable in those cases.
- Takeover bids must be in accordance w the companies act, 2013 and rules applicable for unlisted public
companies.

Section 235 – Acquire shares from dissenting shareholders (by notice)

[s. 395- 1956 Act]
Only for unlisted companies- in the interest of the company.
Only applicable when an offer is made on the same terms for all the shares/all the classes of shares.
1. When holders of at least 9/10th of the share value have approved a transfer of shares within four months,
the transferee company within 2 months after the 4 months can give notice to dissenting shareholders
regarding their interest in acquiring such shares along w an indication of the payment to be made to the
minority. - the power to issue an acquisition notice.
(In deciding the 90% value, shares already owned / shares contracted to be acquired at that date
by the transferee will not be included)
(When a notice is given, a copy must be sent to the transferor company w a statutory declaration
that the conditions required have been complied with- Failure/ false declaration is a criminal offense)
2. Unless dissenting, shareholders file an application in the tribunal, the shares are to be transferred within
one month of such notice. _
(Within 6 weeks of receiving such a notice, minority shareholders may apply to the court for an
order to prevent compulsory purchase)
3. After the expiry on one month/ disposal off of the case, if filed in the tribunal, the transferee company
might send a copy of the notice to the transferor company which shall appoint a person on behalf of the
dissenting shareholders to:
a. Register the shares in the name of the transferee
b. within one month of the date of such registration, inform the dissenting shareholders of the fact of such
registration and the receipt of the amount from the transferee
(transferor may buy out minority shareholder on the terms of the offer)
4. The sum received by the transferor is to be in a separate bank account and distributed to the receiving
shareholders within 60 days.
‘Dissenting Shareholder’ - one who has refused to transfer his shares.

JUDICIAL TREATMENT:
*Caltern Holdings Ltd. v. Priam Investments Ltd.:
Under section 235, the transferee company is given the right to acquire people’s property, and therefore
there must be a certain level of strictness in its application.
A dissenting shareholder should not be penalized or treated differently for not approving the transfer
offer.
The option to exercise the power of compulsory acquisition is entirely a matter for the transferee
company.
*Government Telephone Board ltd v. Horumusji Manekji Seervi
 Where at least 90% of the shareholders in the transferor company approve the offer prima facie, the
offer must be considered as a proper one.
For a court to order otherwise, the reason must be supplied by the dissenting shareholders as they hold
the onus to prove the contrary.
*Vishwanathan v. East India Distiliires and Sugar factory Ltd.
The court cannot pass an order to favor transferee where the offer appears to be unfair or where the court
is satisfied that the sanction of the majority has been obtained by fraud.
Further, the power of acquisition of shares of the dissenting minority is not ultra vires to the Constitution
of India.
*Leela Mahajan v. T. Stanes and co. Ltd.
Court has the discretion to dismiss or allow the application of the dissenting shareholders.

JUDICIAL REVIEW IN S. 235:

*Re, Buggle Press Ltd.:
Held, that in this case, the provision was invoked to expropriate the shares of minority shareholders and
therefore was invalid. Even though if strictly applied, the 90% requirement was fulfilled, if the intention
is to get rid of minority shareholders whom the others did not like, the provision will not be applicable.
*Re, Grierson Oldham, and Adams ltd.:
Fairness if the offer as a whole is essential.
*Cheznico restaurants Ltd:
A letter of offer to all shareholders is only an invitation to offer and will not be considered as a takeover
bid.

DIRECTOR’S ROLE IN A TAKEOVER:

*Dawson International Pls v. Coats Paton Pls:
A director has to be honest in all communications regarding the takeover bid. A director has the duty to
not share any misleading information.
*Hogg v. Cramphone Ltd.
A director might not use their position to prevent a takeover bid.

Section 236 – Purchase of minority shareholding

1. If a person or a group of people (transferee) acquires 90% of the shares of a company by amalgamation,
share exchange, etc. (indirect acquisition), they may notify the company of their intention of buying the
remaining shares.
2. The acquirer must offer a price determined by a registered value for the minority shares in accordance
w prescribed rules.
3. Minority shareholders may offer to the majority(acquiror), their equity shared as per the rules prescribed
under (2).
4. The majority shareholders must deposit the amount to be received by the minority in a separate bank
account which is to be operated by the transferor for at least one year and such money must be disbursed
among the minority within 60 days.
Provided, if the minority does not receive the money in 60 days, disbursement shall continue for
one year.
5. In case of a purchase under this section, the transferor company must act as an agent between the acquirer
and the minority shareholders.
6. In case of non-transfer of share certificates in a stipulated time, the transferor company shall issue shares
in lieu of the cancelled shares and make payment to the minority out of the advance deposited under (4).
 7. In case of deceased shareholders whose heirs/assignees, etc., have not been brought on record, an offer
for sale of minority equity shareholding shall continue and be available for a period of three years from
the date of majority acquisition or majority shareholding.
8. When minority shares are acquired under this section and shareholders holding 75% or more of the
minority equity negotiate a higher price without disclosing the likelihood of transferring their shares,
such added amount is to be disclosed by the acquirer to the minority on a pro-rata basis.
9. When the majority shareholder fails to acquire full minority equity, the provisions of this section shall
still apply to a residual minority even though:
a. Shares of the residual minority have been delisted.
b. The period under the SEBI Act, 1992 has expired.

JUDICIAL TREATMENT
*Heron International Ltd v. Grade:
Any offer for shares must comply with the AOA of that company.
If the shareholders are compelled to accept a lower bid, they may invoke remedies for grounds under
oppression and mismanagement.
*In Re Hoare and Company Ltd.:
Where at least 90% of the shareholders in the transferor company approve the offer prima facie, the
offer must be considered as a proper one.
The shares of dissentients may be acquired by the transferee company on the original terms.
For a court to order otherwise, the reason must be supplied by the dissenting shareholders as they hold
the onus to give a reason for non-transfer of their shares.

o Under the English Companies Act, if the offeror has failed to achieve the necessary number of
acceptances, he may apply to the court to still be allowed to give notice of acquisition of shares if the
reason for the shortfall is that the shareholders along with the untraceable ones would amount to 90%.

II. SHARE ACQUISITION AND TAKEOVER UNDER SEBI TAKEOVER REGULATIONS, 2011
SEBI (Substantial Acquisition of Shares and takeovers) Regulations, 2011
Takeover Code – Rules applicable to a takeover of listed public companies.

SEBI Takeover Regulations, 2011

• Section 11 (1) SEBI Act,1992- Created a body corporate SEBI to protect the interest of the investors,
promote securities development, and regulate it.
• Section 30 SEBI Act, 1992- Gives the power to make notification regulations to regulate the acquisition
of shares and takeovers.
• Takeover regulations are for the benefit of all the shareholders of any company.

Background:
• Until 1994, the only rules for takeover of listed companies were clause 40A and 40B of the listing
agreement but these couldn’t create obligations for non-listed acquirers.
• 1994 – Introduction of SEBI (Substantial acquisition of shares and takeover) regulations, 1995.
• A committee was set up under CJI Bhagwati because of certain deficiencies who made the Committee
Report on Takeovers, 1997.

The Bhagwati Principles:

Laid down principles to guide the application of takeover regulations-
 1. Equality of treatment and opportunity.
2. Interest of the investors.
3. Fair disclosure of material information in offer documents and public announcements.
4. No information to be offered exclusively to any one group of shareholders.
5. Availability of sufficient time to make an informed decision.
6. Offer is to be announced only after proper consideration.
7. Acquirer and other intermediaries to maintain highest standard of care and accuracy in preparation of
documents.
8. All persons in the process must recognise that there might be limitations on their actions.
9. All parties to an offer to refrain from creating a false market in securities.
10. Target company can’t take actions to frustrate an offer without shareholders’ approval.

Important Definitions:
- S. 2(a) – Acquirer: Directly or Indirectly:
i. Acquires shares/ voting rights/ control by himself
ii. Agrees to acquire shares/ voting rights/ control by himself
iii. Acquires shares/ voting rights/ control with any person concerting with him
iv. Agrees to acquire shares/ voting rights/ control with any person concerting with him.
Indirect Acquisition of shares: Acquisition of the target by the virtue of acquisition of listed or unlisted
public companies. Contemplates acquisition of a controlling stake.
As per the Bhagwati committee’s recommendations, an indirect company is to be considered as a
takeover if:
1. shareholding in the second company constitutes a substantial part of the assets of the first company.
2. One of the main purposes is to acquire the first company was to secure control of the second company.
*In Re NRB Bearings Ltd.:
‘Indirect’ does not mean only acquisition of Indian companies that hold shares in listed Indian
companies.
*Kiran Mardarsi Financier’s v. SEBI
Acquisition means to become the owner of a certain property.
*Swedish match AB v. SEBI:
‘Any person’ has to be understood to be of ‘wide amplitude’. Also includes non-residents.
A partnership firm cannot be considered as an acquirer because of lack of a separate entity.
Passive acquisition: In the context of corporate actions such as buyback and cancellation of shares, the
question whether a person becomes an acquirer w/o any positive action becomes relevant.
In case of buyback, when a target company buy-backs its shares and its share capital is reduced, the
shareholders who end up owning a larger percentage of the target company’s share might end up
triggering an open offer to acquire.

- S. 2(e) – Control: is inclusive of:

i. Right to appoint majority directors of the company
ii. Right to control the management
iii. Right to control policy decisions
Control may be acquired by:
1. Shareholding
2. Management rights
3. Shareholders agreement
4. Voting agreements
 De facto Control is the state of being in control without any legal right to state as such. But this section
only defines control as a right.
*Ashwin Doshi v. SEBI
Holding a large block of shares in a target with dispersing shareholding must trigger the consequences
under takeover regulations of acquiring control.

- S. 2 (q) – Persons acting in concert: A person whose common objective and purpose of substantial
acquisition of shares or voting rights or gaining control over the target company pursuant to an
agreement or understanding to cooperate by agreeing to/acquiring shares/voting rights or control.
Elements:
1. One or more persons with a common objective.
Commonality is essential to decide if two persons have acted in concert.
*Modi Spinning and Weaving Co. v. SEBI:
One of the several promoters made an open offer but refused to acquire the shares of his co-promoters
on the grounds that the other promoters were acting in concert with him.
SAT held that seller of shared could not be considered as a PAC and that co-promoters cannot be
considered as PAC on the basis of the mere fact that they are the co-promoters.
2. Objective for the substantial acquisition.
*Alliance Capital Mutual Fund v. SEBI (Securities Appellate Tribunal, 2011)
Held that common objective must be to acquire substantial shares or control over the target and not
maximising profits.
3. Direct or Indirect cooperation to acquire or agree to acquire.
Cooperation may be direct/ indirect or through an agreement.
4. Cooperation must be pursuant to a formal/informal agreement or understanding.
An agreement/understanding is required for the people to be classified as PAC.
*For East Investments Ltd. And European Investments Ltd. V. SEBI
In this case, it was seen that two overseas corporate bodies were accused of being PAC as the subscribers
to the MOA were the same individuals; were managed by the same company in Mauritius and buy and
sell orders of both the companies were done through the same pattern.
But it was held that that it was not a case of concert as the beneficial owners of the two companies were
different.
Bhagwati Committee: acquirer can acquire shares/voting rights in a company in concert with another
person in a manner that the acquisition maybe remains below the threshold limit though taken together,
it exceeds the limit.
The question of whether two people are concerting is a question of fact.
Takeover regulations make Pac jointly and severely liable with the acquirer for violation of the
regulations.
Further, SEBI has held that the target company cannot be the person acting in concert with the acquirer.
*Pheroz Sethana v. SEBI
Person’s acting in concert aren’t the same as the acquirer they can’t in concert with.
Concert under 2(q) have to exist in each acquisition separately. Therefore, two persons may act in
concert in one acquisition but may not in another.
*Kishore Chabaria’s case:
When shares have been acquired in different points in time, SEBI alleged that in each of these
acquisitions, two groups had acted in concert with each other. SAT however found that for same
acquisitions in 1993, the elements of concert hadn’t been proven so it was held that there has been no
concert.
 Substantial Acquisition of shares or voting rights in acquisition of control over a listed company:
- Both the company making a bid and the company for which the bid is being made are subject to a set of
laws and regulations which effect the companies as well as their directors, promoters, etc.
- These rules are governed by SEBI (Substantial acquisition of shares and takeovers)
REGULATION 3(1): INITIAL TRIGGER THRESHOLD
- No person shall acquire shares/voting rights in a target company
- if those shares when taken together with the shares/ voting rights already held by him (if any) and by
persons acting in concert with him
- entitle them to 25% or more voting rights
- unless an open offer is made for acquiring shares in accordance with these regulations.

REGULATION 3 (2): CREEPING ACQUISITION

Facilitates consolidation by person already in control of a substantial number of shares.
- No acquirer who, with his person in concert, has acquired and holds 25% or more voting rights in a
target company
- in accordance with these regulations,
- but less than maximum non-public shareholding
- shall acquire voting rights/ shares in such a target entitling them to exercise more than 5% of voting
rights within a financial year
- unless a public announcement of an open offer is made.
Provided, such acquirer shall not acquire shares/voting rights that would take the aggregate shareholding
by the pursuant over the maximum permissible non-public shareholding.
Explanation – For determining the quantum of acquisition of additional shares:
i. Gross acquisitions along shall be considered regardless of any fall in shareholding or dilution due to
fresh issue
ii. In case of acquisition by issue of new shares, the difference between pre-allotment and post-allotment
voting percentage shall be covered.

Acquisition price under Creeping Acquisition

- Creeping acquisition is not defined under Takeover Regulations.
- S. 50 of the Trade practises Act, 1974 of Australia defines it as:
“Conduct that comprises the accumulated effect of a number of small individual transactions , which
when considered in isolation at the time each transaction occurred would not breach S. 5O of the said
Act.”
- Another definition given in one of the discussion paper published by Australian Government under the
trade practice Act is:
“Term creeping acquisition encompasses wide range of situations . While it can refer to a series of
acquisition over time , that individually do not raise competitive concerns , but when take together , the
acquisition have significant impact .
The term creeping acquisition also refers to a firm with substantial market power enhancing its market
power through one or more acquisition which individually do not lessen competition.”

PUBLIC ANNOUNCEMENT
- According to regulation 3(1), when acquirer and the PAC acquire more than 25% of shares/voting rights,
they must make a public announcement for an open offer.
- Regulation 3(2) states if acquiror and PAC hold shares between 25%-75%, a public announcement for
an open offer must be made for them to acquire more than 5% voting rights.
- Both these regulations are mutually exclusive so an acquisition can trigger either of these regulations.

REGULATION 4: ACQUISITION OF CONTROL

- No acquirer shall directly/indirectly acquire control over a target company unless the acquirer makes a
public announcement for an open offer.

REGULATION 5: INDIRECT ACQUISITION OF SHARES OR CONTROL

1. For the purposes of regulation 3 and 4, acquisition of shares/ control over any other company/entity that
would enable the acquirer and PAC to exercise or direct the exercise of such percentage of voting rights/
control over a target company, the acquisition of which would otherwise attract the obligation to make
a public open offer shall be considered as an indirect acquisition.
2. In case of an indirect acquisition where –
a. The proportionate net asset value of the target company as a percentage of the consolidated net asset
value of the entity is being acquired
b. The proportionate sales turnover of the target company as a percentage of the consolidated sales turnover
of the entity is being acquired
c. The proportionate market capitalism of the target company as a percentage of the enterprise value for
the entity is being acquired
Is in excess of 80% on the basis of recent audited annual financial statement, such indirect acquisition
shall be regarded as a direct acquisition for all purposes.

REGULATION 6: VOLUNTARY OPEN OFFER

1. An acquirer along with the PACs holds shares entitling them of 25% or more voting rights but less than
the maximum permissible non-public shareholding, shall be entitled to voluntarily make an open offer
subject to these regulations and their aggregates shareholdings after completion of the open offer not
exceeding the maximum permissible non-public shareholding.
Provided that:
- If Acquirer/PAC has acquired shares of the target company in the past 52 weeks without attracting the
obligation to make a public announcement, he shall not be eligible to make an open offer.
- During the offer period, the acquirer shan’t be entitled to acquire any shares other than under the open
offer.
2. An acquirer/PAC who have made a public announcement under this regulation to acquire shares of target
company shall not be entitled to acquire any shares of the target for a period of 6 months after completion
of the open offer except pursuant to another voluntary open offer.
Provided, such prohibition shall not restrict the acquirer from making a competing offer upon any person
making an open offer for acquiring shares of the target company.
3. Shares acquired through bonus issue or stock splits shall not be considered for purposes of the dis-
entitlement set out in this regulation.

VOLUNTARY OFFER (REGULATION 6) AND OFFER SIZE (REGULATION 7)

- As per Regulation 7, any offer under regulation 3 and 4 would be for at least 26% of the total shares as
on the tenth working day after closure of tendering period.
Provided, this includes any increase in the total number of shares after the announcement.
Provided further, that offer size shall proportionately increase with the increase in number of shares.
- 7(2) - Voluntary open offer under regulation 6 shall be made for acquisition of shares representing at
least 10% but shan’t exceed the permissible non-public shareholding limit under listing regulations.
Provided, in case of a competing offer, the acquirer has the right to increase his offer limit.
Provided further, such increase shall be made within 15 days from the public announcement of
competing offer.
- 7(3) – Upon increasing the offer size, the offer shall be considered as a mandatory open offer under
regulation 3.
- 7(4) – If the resulting shareholding of acquirer and PAC is more than maximum permissible non-public
shareholding, the acquirer shall be required to bring down the non-public shareholding to the level
specified and within the time permitted under Securities Contract (Regulation) Rules, 1957.
- 7(5) – Acquirer whose shareholding exceeds the maximum limit, he shall not be eligible to make
voluntary delisting offer under Securities and Exchange Board of India (Delisting of Equity Shares)
Regulations, 2009, within the next 12 months.
- 7(6) – Any open offer made under these regulations shall be made to all shareholders of the target
company for sale of shares of the target company.

DIFFERENCE BETWEEN REGULATION 3(2) AND REGULATION 6

- Regulation 3(2) provides for a mandatory bid whereas regulation 6 provides for the provisions for a
voluntary bid.
- Reg. 3 which provides for a mandatory open offer requires at least 26% of shareholding of the company
after completion of the open offer whereas for a person to make a voluntary open offer under Reg. 6
should be holding at least 10% after completion of the offer.
- When during a voluntary offer, a competing offer is made, the acquirer making the voluntary offer is
entitled to increase the number of shares as he deems fit and in such a situation, the voluntary offer
becomes a mandator offer under Regulation 3(2).

REGULATION 8 : OFFER PRICE

The minimum open offer price shall be the highest of the following:
- Highest negotiated price per share of the target company under the agreement that attracted the open
offer.
- Volume-weighted average price paid or payable for acquisition by the acquirer or PAC during 52 weeks
preceding the date of the public announcement.
- Highest price paid or payable for any acquisition by the acquirer or PAC during 26 weeks preceding the
date of the public announcement.
- If shares are frequently traded- volume weighted average market price of the target company during 60
trade days immediately preceding the date of the public announcement.
- Where shares are infrequently traded- The price determined by acquirer and manager to the open offer
taking into account valuation parameters including book values, etc.
- In case of Deemed Direct Acquisition where net asset value/ sales turnover of the target company is
more than 15% of the consolidated net asset/ sales turnover or the enterprise value of the entity or
business being acquired, the per share value of the target company as computed by the acquirer.
Exemptions:

REGULATION 10
Regulation 10 (1) provides for automatic exemption from the open offer obligations triggered under
regulation 3 and 4 of the Takeover Regulations. This does not include exemption from disclosure
obligation. Such exception is available under the following situations:

Regulation 10(2) provides exemptions from the obligation to make an open offer under takeover
regulation 3 on acquisition of shares of a target company, which does not result in change of control
over such target company, which is pursuant to a scheme of corporate debt restructuring. Such a scheme
 should have been authorized by a special resolution passed by postal ballot, subject to applicable
provisions and circulars of Reserve Bank of India.

Moreover, an increase in voting rights in a target company pursuant to buy-back of shares shall be
exempted from the obligation to make an open offer, provided such shareholder reduces his shareholding
in such a way that his voting rights falls below the threshold limit referred to under Regulation 3 (1) of
the Takeover Regulations within 90 days from the closure of the buy-back (Regulation 10 (3)

REGULATION 11

Regulation 11 empowers the Board (“SEBI”) to provide exemption to the acquirer/ target company, for
reasons recorded in writing, from open offer obligations and/or any procedural requirement or
compliance, if it deems fit. The company seeking such exemptions shall have to file an application
supported by an affidavit and a non-refundable fee of Rs. 5 lacs, post which, the Board may refer the
case to a panel of experts constituted and on appropriate recommendations shall pass and host the
exemption order on its website.

OPEN OFFER PROCESS [REGULATION 12 TO 23]

REGULATION 12 : MANAGER TO OPEN OFFER

(1) Prior to making a public announcement, the acquirer shall appoint a merchant
banker registered with the Board, who is not an associate of the acquirer, as the manager to the open
offer.
(2) The public announcement of the open offer for acquiring shares required under
these regulations shall be made by the acquirer through such manager to the open offer.

- Who is a merchant banker – ( Merchant Banker’s ) Regulations , 1992 defines Merchant banker as ‘any
person who is engaged in the business of issue management either by making arrangements regarding
selling , buying or subscribing to securities or acting as a manager , consultant, advisor or rendering
corporate advisory services in relation to such issue management.’
- The role of a merchant banker is two fold:
1. They act as the interface between the acquirer and SEBI
2. Secondly , they ensure compliance by acquirers with the takeover regulations
 REGULATION 13: TIMING OF THE OFFER
- SAST obliges the merchant banker to the open offer to make the public announcement within 4 working
days of the date when an agreement is entered into for acquiring shares or voting rights exceeding the
relevant percentage.
- The public announcement referred to in regulation 3 and regulation 4 shall be made in accordance
with regulation 14 and regulation 15, on the date of agreeing to acquire shares or voting rights
in, or control over the target company.
- The public announcement made under regulation 6 shall be made on the same day as the date
on which the acquirer takes the decision to voluntarily make a public announcement of an open
offer for acquiring shares of the target company.
- Pursuant to the public announcement made under sub regulation (1) and sub regulation (3), a
detailed public statement shall be published by the acquirer through the manager to the open
offer in accordance with regulation 14 and regulation 15, not later than five working days of the
announcement.
- The Public Announcement is made to ensure that the shareholders of the target company are aware of
an exit opportunity available to them.

REGULATION 14: PUBLICATION

- The public announcement shall be sent to all the stock exchanges on which the shares of the
target company are listed, and the stock exchanges shall forthwith disseminate such information
to the public.
- A copy of the public announcement shall be sent to the Board and to the target company at its
registered office within one working day of the date of the public announcement

REGULATION 15: CONTENTS

- The disclosures in the announcement include the offer price, number of shares to be acquired from the
public, identity of acquirer, purpose of acquisition, future plans of acquirer, if any, regarding the target
company, change in control over the target company, if any, the procedure to be followed by acquirer
in accepting the shares tendered by the shareholders and the period within which all the formalities
pertaining to the offer would be completed.

REGULATION 16: FILING OF LETTER OF OFFER WITH THE BOARD

- Within five working days from the date of the detailed public statement made under sub regulation
(4) of regulation 13, the acquirer shall, through the manager to the open offer, file with the
Board, a draft of the letter of offer containing such information as may be specified along with
a non-refundable fee.

REGULATION 17 provides for provision of escrow and REGULATION 18 talks about the other
procedures along with filing of the draft letter.

REGULATION 19: CONDITIONAL OFFER

- An open offer may be made conditional upon minimum level of acceptances, the acquirer and
persons acting in concert with him shall not acquire, during the offer period, any shares in the target
company except under the open offer and any underlying agreement for the sale of shares of the target
company pursuant to which the open offer is made.
 REGULATION 20: COMPETING OFFER
- Upon a public announcement of an open offer for acquiring shares of a target company being
made, any person, other than the acquirer who has made such public announcement, shall be
entitled to make a public announcement of an open offer within fifteen working days of the date
of the detailed public statement made by the acquirer who has made the first public announcement.
- Meaning of competitive Bid – “ A process whereby an underwriter submits a sealed bid to the issuer .
The issuer awards the contract to the underwriter with the best price and contract terms”.
- Competitive bid is an offer made by a third person, other than the acquirer who has made the first public
announcement.
- Competitive bid have to be made within 15 days of the public announcement of the first offer.

REGULATION 21: PAYMENT OF CONSIDERATION

- For the amount of consideration payable in cash, the acquirer shall open a special escrow account with
a banker to an issue registered with the Board and deposit the sum together with the cash transferred
under sub regulation 17 (10) (b).
- Subject to provisos to sub-regulation (11) of regulation 18, the acquirer shall complete payment
of consideration whether in the form of cash, or as the case may be, by issue, exchange or transfer
of securities, to all shareholders who have tendered shares in acceptance of the open offer, within
ten working days of the expiry of the tendering period.
- Unclaimed balances, if any, lying to the credit of the special escrow account referred to in sub-
regulation (1) at the end of seven years from the date of deposit thereof, shall be transferred to the
Investor Protection and Education Fund.

REGULATION 22: COMPLETION OF ACQUISITION

- The acquirer shall not complete the acquisition of shares or voting rights in, or control over, the
target company, whether by way of subscription to shares or a purchase of shares attracting the
obligation to make an open offer for acquiring shares, Until the expiry of the offer period.
- The acquirer shall complete the acquisitions contracted under any agreement attracting the
obligation to make an open offer not later than twenty six weeks from the expiry of the offer
period.

REGULATION 23: WITHDRAWN OF OPEN OFFER

- The offer once made can not be withdrawn except in the following circumstances:
• Statutory approval(s) required have been refused;
• The sole acquirer being a natural person has died;
- Such circumstances as in the opinion of the Board merits withdrawal.
- In the event of withdrawal of the open offer, the acquirer shall through the manager to the open
offer, within two working days, make an announcement in the same newspapers Providing the
grounds and reasons for withdrawal of the open offer.
- Simultaneously with the announcement, inform in writing to,
(i) the Board;
(ii) all the stock exchanges on which the shares of the target company are listed, and the stock
exchanges shall forthwith disseminate such information to the public; and
(iii) the target company at its registered office.
 UNIT- 6: COMPETITION LAW ISSUES IN M&A

Meaning of Competition
U.K. Competition Commission defines it as a process of rivalry between the firms seeking to win their
customers.
Competition Law consists of rules that are intended to protect the process of competition in order to
maximise welfare. System of competition Law is concerned with practices harmful to the competitive
process. It includes:
1. Anti-competitive agreements : Agreements that restrict competition. Section 27 of the Indian contracts
Act restricts any agreement made in restraint of a lawful profession, trade or business. (Section 3,
Competition Act, 2000)
2. Abusive Behaviours: Abusive behaviour by monopolists or a dominant firm with substantial market
power may be condemned by competition law. (Ex.: Predatory Prising); (Section 4, Competition Act,
2000).
3. Mergers: That could be harmful to the competitive process can be investigated by a competition
authority. Many systems provide non-completion of mergers without the approval of a competition
authority.
Acquisition under the Competition Act – 2(A):
“Acquisition” means, directly or indirectly, acquiring or agreeing to acquire—
(i) shares, voting rights or assets of any enterprise; or
(ii) control over management or control over assets of any enterprise;

Section 5, Competition Act, 2002 – Combinations:

The acquisition of one or more enterprises by one or more mergers or amalgamations shall be a
combination of such enterprises if –
a. Acquisition is of control, shares, voting rights or assets:
The value of assets and turnover of the acquirer(or acquirer group, for calculating group-level
thresholds) and the target enterprise, whose assets, shares, voting rights or control are being acquired,
are required to be taken into account for calculating jurisdictional thresholds.
b. Acquisition is of control by a person over an enterprise where such person has control over another
enterprise engaged in similar/identical business:
The value of assets and turnover of the enterprise(or group to which the enterprise would belong, for
calculating group-level thresholds) over which control has been acquired along with the enterprise over
which the acquirer already has direct or indirect control, are required to be taken into account for
calculating jurisdictional thresholds.
c. It’s a Merger or amalgamation where the enterprise remaining is a result of such amalgamation have the
specified turnover or asset value:
The value of assets and turnover of the enterprise (or group, for calculating group-level thresholds)
remaining after the merger or created as a result of the amalgamation should be taken into account for
calculating jurisdictional thresholds.

Procedure for Reporting to CCI (Section 6)

- In case the combinations exceed the threshold set in section 5 of the act, they become reportable to the
Competition Commission of India.
- In case of mergers or amalgamations, a notice under Section 6(2)(a) of the Act is required to be filed
with CCI within 30 days of the board resolution approving the merger or amalgamation passed by the
board of directors of the enterprises concerned with such merger or amalgamation.
- In the case of an acquisition, a notice under Section 6(2)(b) of the Act is required to be filed with CCI
within 30 days of the execution of any agreement or other document for acquisition.
As per Section 6(1) r/w Section 20(4), any combination which are likely to cause appreciable adverse
effect on competition within relevant markets in India are void.
Failure to notify would attract a penalty, under Section 43A of the Act, which may extend to one per
cent of the total turnover or assets of the combination, whichever is higher.

PROCEDURE:
1. The notice in respect of a combination is required to be filed in original, along with one (1) copy, and
an electronic copy thereof, with the registry of the CCI.
2. The notice should be complete in all respects (must be filed in required format) and accompanied by
filing fees. (See Regulation 13(1) of the Combination Regulations)
3. In the event the parties are claiming confidentiality on certain information provided by them in the
notice, a public version of the notice, and an electronic version thereof, is also required to be filed. (See
proviso to Regulation 13(1) of the Combination Regulations)
4. The notice must also be accompanied by summaries of the combination, as required in terms of
Regulations 13(1A) and 13(1B) of the Combination Regulations, along with separate electronic copies
thereof.

Threshold for notification to CCI

As per the 2016 Amendment of the Competition Act of section 5 and the notification by the CCI,
Threshold limits include:
- Assets including intangible assets
- Turnover including value of sales and services.
If threshold limits are met, a notice is required to be given to the CCI in the form with the specified fee
within 30 days of a trigger event. The combination cannot be given effect until the expiry of certain
deadlines.
Other instances triggering notification to the CCI include:
- Approval for a proposal of merger/amalgamation by the BOD
- Execution of any other agreement/document.
Acquisitions where enterprises whose control, shares, voting rights or assets are being acquired (i.e. the
target enterprise), have assets of not more than Rs. 350 crores in India or turnover of not more than Rs.
1000 crore in India, are exempt from Section 5 of the Act for a period of 5 years as per the 2016
notification.

Roles of CCI and its features

The CCI was set up in October, 2003 under the Competition Act, 2002 by the 2007 amendment act. The
role of CCI is to:
- Prevent practices having adverse effect on competition.
- Promote and sustain competition
- Protect consumers’ interest
- Ensure freedom of trade carried on by other participants.

COMPOSITION
1. Chairperson
2. Not less than two and not more than 10 members who shall be appointed by the Centre.
3. Currently, the CCI has a Chairperson and two members.
 The commission’s Chairperson and other members shall be full-time Members.

INQUIRY PROCESS
1. The CCI inquiry process begins with the receipt of information or Suo-motu cognizance.
2. Followed by prima facie analysis of the case.
3. Next, a detailed investigation is launched
4. The DG submits investigation reports to the commission within a specific time.
5. Then the commission sends the report to both parties for any questions
6. After further analysis and hearing the parties, CCI passes the appropriate order.

FUNCTIONS:
1. Making sure that the Indian market works for the benefit and welfare of the consumers.
2. Ensuring fair and healthy competition in the economic activities of the nation.
3. Execution of competition policies that enables the efficient utilization of resources.
4. Effective undertaking competition advocacy.
5. Spreading awareness on the benefits of competition among the stakeholders to create and foster
competition culture in the Indian economy.
6. The CCI is an antitrust ombudsman for smaller organisations which are not able to defend themselves
against large corporations.
7. It also has the power to notify organisations that sell in India if it feels they are creating negative impacts
on competition in India’s domestic market.
8. The Competition Act ensures that no enterprise abuses its dominant position in the market through the
control of supply, manipulation of the purchase prices or adopting practices that may refute market
access to other competing firms.
9. A foreign company that seeks entry into India through an acquisition or merger should abide by India’s
competition laws and will come under the scrutiny of CCI.

Combination Regulations, 2011

Notified by CCI on 11th May, 2011.
SUSPENSIVE REGIME- The merger control regime in India is suspensive in nature, i.e., no combination
can be consummated unless it is first approved by the Commission. Combinations disapproved by the
Commission are considered void.
REGULATION 2(1)(B)
“Combination” means and includes combination as described in section 5 of the Act and any reference
to combination in these regulations shall mean a proposed combination or the combined entity, if the
combination has come into effect, as the case may be.

REGULATION 5: Form of notice for the proposed combination

1. Any enterprise that proposes to enter into a combination shall give notice of such combination to the
CCI.
2. The notice under section 6(2) of the act shall be frilled in form I in schedule II of these regulations.
3. Notwithstanding anything in (2) , parties may fill form II where:
a. Parties are engaged in production, supply, distribution, storage, sale or trade of similar or identical or
substitutable goods and the combined market share of the parties to the combination after such
combination is more than fifteen percent (15%) in the relevant market
b. The parties to the combination are engaged at different stages or levels of the production chain in
different markets and their individual or combined market share is more than twenty five percent (25%)
in the relevant market.

RESULATION 8: Failure to file notice

1. Where parties fail to file notice under 6(2) of the competition act, commission may under section 20(1)
of the act, inquire into whether such combination has adverse effect or not.
2. The Commission may, without prejudice to any penalty which may be imposed or any prosecution which
may be initiated under this Act, shall direct the parties to the combination to file notice in Form I or
Form II.
3. The notice, referred to in sub-regulation (2), shall be filed, within 30 days of receipt of communication
from the Commission, by the parties to the combination.

REGULATION 9: Obligation to file notice

1. In case of acquisition , form I or II shall be filled which shall be duly signed by persons under regulation
11 of the CCI general regulations, 2009.
2. In case the enterprise is being acquired without its consent, the acquirer shall furnish information
available to him in form I or II. (HOSTILE TAKEOVERS)
3. In. case of merger or amalgamation , form I or II shall be filled which shall be duly signed by persons
under regulation 11 of the CCI general regulations, 2009.
4. Where the ultimate intended effect of a business transaction is achieved by way of a series of steps or
smaller individual transactions, a single notice, covering all these transactions, shall be filed by the
parties to the combination.
5. The requirement of filing notice under regulation 5 of these regulations shall be determined with respect
to the substance of the transaction and any structure of the transaction(s), comprising a combination.

REGULATION 10 (Obligation to pay fee)

The person or enterprise filing notice under regulation 5 or regulation 8 of these regulations shall pay
the fee as specified under regulation 11 of these regulations.

REGULATION 11 (Amount of Fee)

1. Amount of fee in. form I – Rs. 15,00,000
2. Amount of fee in. form II – Rs. 50,00,000

REGULATION 19: Prima facie opinion on the combination

1. The CCI shall form a prima facie opinion under section 29(1) of the act and on the notice files in form
I/II as to whether the combination is likely to cause any adverse effect or not within 30 working days.
2. To form such opinion, the commission may require the parties to file additional information or accept
modification offered.
Provided, such time taken for modification is to be excluded from period provided.
3. The commission may call for information from any other enterprise while inquiring as to whether a
combination has caused or is likely to cause an appreciable adverse effect on competition in India.
Provided, time taken for this shall not exceed 15 days.
REGULATION 28(6)
Provides that the Commission shall endeavour to make its final determination on the combination notice
within 180 days of filing of the notice.
 REGULATION 31
Provides certainty on the applicability of the law.
Only those mergers or amalgamations or acquisitions, where the proposals have been approved by the
respective boards or binding documents have been executed on or after June 1, 2011are required to make
a filing to the Commission.
This regulation has been omitted by the 2016 amendment regulations.

*Joint venture between Google and Johnson & Johnson (2015)

Google-Ethicon- Johnson & Johnson entered into a JV to form ‘Warren Robotics Inc’ to carry out
research and development in respect of robotic systems for surgical intervention.
CCI has entertained filings by joint venture companies relating them to the acquisition of an ‘enterprise’
under section 5 of the Act.
*Acquisition of Samsung Electronics’ printer business by HP Inc.
Approved by the CCI. With this acquisition, HP aims at leveraging Samsung's multifunction printer
technology.

COMPETITION OR ANTI-TRUST LAWS ACROSS THE WORLD:

3 main contours:
1. Prohibition of Anti-Competitive agreements.
2. Prohibition of abuse of dominance
3. Regulating mergers and Acquisition

Indian Merger Control Regime

- Under the MRTP Act, 1969, Section 23 r/w s. 20 originally stated the approval of the Central
government for any scheme of merger or amalgamation or any proposed takeover relating to an
undertaking is required if the value of the assets which was not less than 100 crs or which was dominant
undertaking having the value of assets not less than 1 cr.
- But these provisions were deleted by the MRTP (Amendment) act, 1991
COMPETITION ACT, 2000
- The provision has revived under the competition act, 2000 and the competition commission of India
(Procedure in regard to the transactions of business relating to combinations) Regulations , 2011.
- The merger control provision of the Competition Act came into effect on 1st June 2011.
- As a result, as per section 5 & 6, qualifying transactions that meet a certain turnover or asset based
threshold test must be notified to the competition commission of India for clearance prior to completion
of such transaction.
- Any acquisition, merger or amalgamation that meets the following jurisdictional thresholds, as provided
in Section 5 of the Competition Act, 2002 is termed as a combination. – Regulates the companies within
and outside India.
- Sec.6 of the Act mandate filing of the notice in form I and 2 to the commission within 30 days of the
decision of the parties boards of directors or execution of any agreement or other document for effecting
combination.
- Fees is provided under Regulation 12 of the combination regulations.
- Once the CCI has been notified, the act requires a 210b day waiting period for the CCI to review such a
transaction. A transaction would be deemed to be approved by the CCI if it takes no final action within
this waiting period.
 EC Rules on Merger Control
- European Commission proposal for a Regulation of the council of ministers on the control of
concentration between undertakings was proposed as early as 1973 .
- Council of ministers finally adopted Regulation 4064/ 1989 and it entered into force on 21 September
1990.
- Regulation 4064/1989 was amend significantly by Reg 1310/97 and was repealed and replaced by the
Current ECMR( Reg 139/2004) in 2004.
PROVISIONS:
- Mergers with a community dimension have to be pre-notified to the commission. It is an offence to
consummate mergers without prior clearance from the commission.
- To decide if a merger has a community dimension, turnover of the undertaking in a transaction is
concerned.
- However in some cases, the jurisdiction of a community dimension merger wholly or in part might be
ceded to a member state.
- There are also cases where the member states may transfer jurisdiction to the commission even if they
do not have a community dimension.
- Once the commission has jurisdiction it is required within fixed time limits , to determine whether
merger could significantly effect competition in the common market or substantial part of it .
- In conducting this assessment commission asks in particular whether the merger could create or
strengthen a dominant position.
- PHASE I : 25 working days after notification. Most cases are completed within this time.
- PHASE II: Is commenced if the commission has doubts about the compatibility of the merger with the
market at the end of phase I. This may take additional 90 days and may be extended for another 35 days.
- Commission has the power to reject the merger.
- Full College of commission takes the most important decisions under the European Commission Merger
Regulation.
- Power delegation may be done by the commission to the commissioner for competition and further to
the director general for competition.

IMPORTANT ARTICLES OF THE ECMR:

- Art. 3: Meaning of competition
- Art. 1 & 5: Community dimension
- Art. 4( 4) & 9: Referral of concentrations having community dimensions to the competent authorities of
the member states .
- Art. 4( 5) & 22: Referral of concentrations not having a community dimension by the member states to
the commission
- Art. 21( 4 ): Legitimate Interest clause - Member states are not allowed to apply their domestic
competition law to concentrations that have community dimension except in the circumstances in which
Art 4( 4) or Article 9 are applicable.

Laws in the U.K.

- UK law on merger control is now contained in Part -3 OF Enterprises Act, 2002. and it came into force
on June 2003 .
- Merger Control was first introduced in UK by the Monopolies and Mergers Act , 1965 which was
replaced by the Fair Trading Act, 1973.
OVERVIEW
- Chapter 1 of part 3 of Enterprise act – Duty to make references. Deals with jurisdictional matters and
relevant merger references.
- Chapter 2 contains public interest cases.
- Chapter 3 addresses special cases.
- Chapter 4 rules on enforcement which set out the various undertaking that can be accepted by the Office
of fair trading (OFT) and competition commission (CC) in course of merger investigations and orders.
It also include certain restrictions on the integration of firms during the pendency of investigation.
Majority of the cases are decided by the OFT while a very small number are referred to the CC. Decisions
by both are subject to the judicial review by CAT (Competition Appeal Tribunal).
- OFT has the duty to refer certain merges to CC if it suspects that there is a realistic prospect of significant
lessening of competition(SLC).
- There is no obligation on the undertaking to notify the OFT though they can do so on a voluntary basis.
- CC when conducting an investigation under the Act must determine whether the merger would lead to
an SLC. It Must also decide on appropriate remedies.

Laws in the U.S.

- In US, the first legislation which prohibited the anti-competitive agreements was the Clayton Act, 1914.
- Section 7 of the act prohibited the Acquisition of a stock or other specific capital of another corporation
, where the effect of such acquisition may be to substantially lessen the competition between the
corporations.
U.S. Supreme Court Cases
1. The Brown Shoe Case, 1962
In 1962, the Supreme Court decided this case that involved the third and eighth largest shoe retailers,
whose merged retail shoe chain would have had 5% of retail shoe sales in over one hundred
communities.
Even though there had been prior mergers in the industry, the market was still, in the Court's words,
"fragmented." In many cities there were a large number of competitors. Viewed with today's eyes, the
merger did not appear likely to create market power -- that is, the ability of a firm to raise price above
competitive levels.
But the Supreme Court ruled that the removal of even a relatively small competitor from the market
presented a significant threat to competition.
By blocking an acquisition in a unconcentrated market in order to protect small businessmen, the court
chose to ignore the possibility that a somewhat larger shoe store chain would be more efficient and result
in lower prices for consumers.
2. Philadelphia national bank case, 1963
In 1963, the Court decided another landmark case, Philadelphia National Bank. This time the merging
parties were the second and third largest commercial banks in the Philadelphia area. Their combined
share of a highly concentrated market would have exceeded 30% and concentration among the leading
firms would have increased by 33%.
This was precisely the kind of acquisition that Congress sought to prevent by amending the Clayton Act.
The Supreme Court established some important rules of law in that case:
There should be a strong but rebuttable presumption of illegality for mergers that produce a firm with
an "undue" percentage share of the market and result in a significant increase in concentration.
In other words, mergers in concentrated markets are so likely to create market power and put consumers
at risk of anticompetitive prices that they are presumptively unlawful.
The Court based this presumption in part on the economic theory that "competition is likely to be
greatest when there are many sellers, none of which has any significant market share."
 We thus see in Philadelphia National Bank the seeds of an economics-based examination.
3. Von’s Grocery case
Von's Grocery reverted to a Brown Shoe kind of analysis, relying perhaps even more heavily on a simple
numerical count of competitors and the beginnings of a trend toward concentration.
The Supreme Court held unlawful a merger of two grocery store chains holding a combined share of
7.5% of the grocery market in Los Angeles, where the four leading firms accounted for 24.4% of sales,
and the top eight firms accounted for 40.9%. The total number of grocery stores in Los Angeles was in
the thousands.
The market share and concentration figures did not approach those in Philadelphia National Bank.
Yet the Court did not engage in an analysis of likely competitive effect, other than noting the trend
toward concentration -- single-store groceries in Los Angeles had declined from 5,365 in 1950 to 3,818
in 1961.
The focus on preserving competitors, maintaining fragmented markets and pursuing other social goals
shifted to a critical economics-based examination of market power and how it might be exercised.
The change was announced in the Supreme Court's 1974 decision in United States v. General Dynamics
Corp..
The case involved the merger of two firms engaged in the production and sale of coal. The Court held
that General Dynamics' share of the market after the acquisition, while within the range that had resulted
in condemning other mergers, was not an accurate indication of the company's competitive position.
This was because a substantial portion of its coal reserves were already committed under contract for
future sales, and it was unlikely to obtain additional reserves.
The company's depleted reserve position limited its ability to compete for long-term contracts in a
market "where the price of coal is set by long-term contracts." Thus, the company could not manipulate
coal prices in the future or exercise market power because it would not control enough of the unsold
coal entering the market.
FEMA Cross Border Merger regulations
Section 234 of the Companies Act, 2013 (Companies Act) and Rule 25A of the Companies
(Compromises, Arrangements and Amalgamations) Rules, 2016 (Companies Merger Rules) permit
mergers and amalgamations between Indian companies and companies incorporated in certain
jurisdictions. These provisions mandate prior approval of the Reserve Bank of India (RBI) for any such
cross-border mergers.
After extensive public consultations, the RBI issued the Foreign Exchange Management (Cross Border
Merger) Regulations, 2018 (FEMA Regulations) on 20 March 2018 to address various issues that may
arise in relation to cross border mergers from an exchange control perspective.
- The FEMA Regulations provide that any transaction undertaken in relation to a cross-border merger in
accordance with the FEMA Regulations shall be deemed to be approved by the RBI (as required in terms
of Rule 25A of the Companies Merger Rules).
- 'Cross border merger' has been defined in the FEMA Regulations as "any merger, amalgamation or
arrangement between Indian company and foreign company in accordance with Companies
(Compromises, Arrangements and Amalgamation) Rules, 2016 notified under the Companies Act,
2013".
- In an Inbound Merger, a foreign company will merge into an Indian company and accordingly, all
properties, assets, liabilities and employees of the foreign company will be transferred to the Indian
company. The FEMA Regulations stipulate the following conditions in relation to Inbound Mergers:
o Issuance or transfer of security by Indian company to non-resident
o Merger of joint venture (JV) / wholly owned subsidiary (WOS) with its Indian parent company
o Offshore offices of foreign company to become branch/office of the Indian company outside India
o Guarantees or outstanding borrowings from overseas sources obtained by the merging foreign company
o The Indian company may acquire and hold any asset outside India of the foreign company (pursuant to
a cross border merger).
- In an Outbound Merger, an Indian company will merge into a foreign company and accordingly, all
properties, assets, liabilities and employees of the Indian company will be transferred to the foreign
company. The FEMA Regulations stipulate the following conditions in relation to Outbound Mergers:
o Residents permitted to acquire securities of foreign company pursuant to Outbound Merger
o Offices of Indian company deemed to be branch office of the foreign company
o Borrowings of Indian company to be transferred to foreign company
o The foreign company may acquire and hold assets in India which a foreign company is permitted to
acquire under FEMA.
o The foreign company is permitted to open a Special Non-Resident Rupee Account (SNRR Account) in
accordance with the Foreign Exchange Management (Deposit) Regulations, 2016 for a maximum period
of two years.
- In terms of the FEMA Regulations, valuation of the Indian company and the foreign company is required
to be carried out in accordance with Rule 25A of the Companies Merger Rules.
- The FEMA Regulations provide that the resultant company and/or the companies involved in the cross-
border merger shall be required to furnish reports as may be prescribed by the RBI.
UNIT 7
➢ The Indian Income Tax Act, 1961 contains several provisions that deal with the taxation of different
categories of mergers and acquisitions.
➢ In the Indian context, M&As can be structured in different ways and the tax implications vary based on
the structure that has been adopted for a particular acquisition.
1. Merger
2. De merger
3. Slump sale
4. Share Purchase
5. Asset sale
Amalgamation
➢ S. 2(1B) of ITA - “The merger of one or more companies with another company or the merger of two
or more companies to form a new company”.
➢ For the purpose of the ITA, the merging company is referred to as the “amalgamating company” and
the company into which it merges or which is formed as the result of merger is referred to as the
“amalgamated company”.
➢ An Amalgamation must satisfy the following criteria:
1. 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
2. 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.
➢ Hence, shareholders of amalgamating company holding 3/4th in value of shares who become
shareholders of the amalgamated company must constitute at least 25% of the total number of
shareholders of the amalgamated company
➢ It is only when a merger satisfies all the above conditions, that the merger will be considered as an
Amalgamation for the purposes of the ITA.

Exemptions from Capital Gains Tax

➢ Section 45 of the Income Tax Act names profits and gains arising out of sale of capital assets as part of
total income
➢ section 47 of the Income Tax Act exempts certain transfers from the ability to capital gains tax
a) S. 47(vi)- any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company
to the amalgamated company if the amalgamated company is an Indian company;
b) S. 47(via) - Any transfer, in a scheme of amalgamation, of a capital asset being a share or shares held in
an Indian company, by the amalgamating foreign company to the amalgamated foreign company, if—
i. at least twenty-five per cent of the shareholders of the amalgamating foreign company continue to
remain shareholders of the amalgamated foreign company, and
ii. such transfer does not attract tax on capital gains in the country, in which the amalgamating company is
incorporated;
c) S. 47 (viaa) - Any transfer, in a scheme of amalgamation of a banking company with a banking
institution sanctioned and brought into force by the Central Government under 45(7) of the Banking
Regulation Act, 1949 of a capital asset by the banking company to the banking institution.
d) S. 47(viab) - Any transfer, in a scheme of amalgamation, of a capital asset, being a share of a foreign
company, which derives, directly or indirectly, its value substantially from the share or shares of an
Indian company, held by the amalgamating foreign company to the amalgamated foreign company –
subject to same conditions as S. 47(via)
 e) S. 47 (vib) - Any transfer, in a demerger, of a capital asset by the demerged company to the resulting
company, if the resulting company is an Indian company
f) S. 47(vic) - Any transfer in a demerger, of a capital asset, being a share or shares held in an Indian
company, by the demerged foreign company to the resulting foreign company - subject to same
conditions as S. 47(via)
➢ Indirect Taxes: There is no VAT incidence upon transfer of properties and liabilities under an
amalgamation or a demerger.

Demerger and Taxation

➢ A demerger must also be conducted through a scheme of arrangement under the Companies Act with
the approval of the High Court.
➢ The ITA defines a demerger under Section 2(19AA) as a transfer pursuant to a scheme of arrangement
under Sections 230-234 of the Companies Act, 2013 , by a “demerged company”, of one or more of its
undertakings to a “resulting company” and it should satisfy the following criteria:
i. 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.
ii. The properties and liabilities must be transferred at book value.
iii. In consideration of the demerger, the resulting company must issue its shares to the shareholder of the
demerged company on a proportionate basis (except where the resulting company itself is a shareholder
of the demerged company)
iv. 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.
v. The transfer of the undertaking must be on a going concern basis.
vi. The demerger must be subject to any additional conditions as notified by the Central Government under
Section 72A(5) of the ITA.
➢ If all the above criteria are satisfied, the demerger will be considered as tax neutral and exempt from
capital gains tax

Stamp Duty
➢ Stamp duty on transfer of assets is governed by the relevant state Stamp Act.
➢ In terms of stamp duty, though the state laws provide for rates of stamp duty to be paid on various
instruments, it is observed that generally there is no specific entry for a High Court order sanctioning
the scheme of amalgamation or demerger, in the absence of which High Courts have taken the view that
the High Court order involving the transfer between two juristic persons of certain movable and
immovable property, is a ‘conveyance’ and should therefore be chargeable to stamp duty under that
head, and the scheme of arrangement itself is an ‘instrument’ under which the going concern is
transferred.
➢ This position has been consolidated by the Supreme Court in Hindustan Lever and Anr. v. State of
Maharashtra and Anr((2004) 9 SCC 438). - Company - civil - Bombay Stamp Act - Section 2, 3, 34 -
Levy of stamp duty - Conveyance includes sales as well as every other instruments liable to be levied
stamp duty - Duty charged by the state legislature is on the instrument and on the execution of the
instrument - Basis for computation stamp duty can be determined by the state legislature - Company can
effect transfer of property - Appeal dismissed
➢ The Bombay High Court has held that a scheme of arrangement entails transfer of a going concern, and
not of assets and liabilities separately.
➢ As a going concern, the value of the property transferred under a scheme of arrangement is reflected
from the shares allotted to the shareholders of the transferor company under the scheme.
 ➢ Accordingly, under the Bombay Stamp Act, 1958 (applicable in the state of Maharashtra), stamp duty
payable on conveyance relating to amalgamation of companies is 10% of the aggregate of the market
value of the shares issued or allotted in exchange or otherwise and the amount for consideration paid for
such demerger, provided that it shall not exceed
(i) 5% of the total true market value of the immovable property located within the state of Maharashtra and
as transferred by the transferor company to the resulting company; or
(ii) 0.7% of the aggregate of the market value of the shares issued or allotted and the amount of
consideration paid for the demerger, whichever is higher

Share Sale
➢ The major tax implications of share acquisition are (i) liability to a tax on the capital gains, if any, and
(ii) liability under Section 56(2)(viia) of the ITA.
➢ Capital Gains: if the shares qualify as capital assets under Section 2(14) of the ITA, gains arising upon
the transfer of shares would attract a capital gains tax liability. The taxable rate in India would depend
on
(i) whether the capital gains are long term capital gains or short term capital gains,
(ii) whether the target company is a public listed company, public unlisted company or a private company,
(iii) whether the transaction has taken place on the floor of the stock exchange or by way of a private
arrangement, and
(iv) whether the seller is a resident or a non-resident.

➢ Further, in respect of a cross-border share sale, the relevant Double Taxation Avoidance Agreement
(“DTAA”) would determine whether capital gains are taxable in India or in the other country
➢ An existing shareholder may realize a gain or loss on a share transfer. The taxation of gains realized on
share transfer would depend on whether such shares are held as capital assets or as stock-in-trade. In
case shares are held as stock-in-trade, profits and gains from the transfer of shares will be chargeable to
tax under head ‘profits and gains from business and profession’.
➢ Where the shares are held as capital assets, profits and gains arising from the transfer of the shares will
be chargeable to tax under the head ‘capital gain’ according to section 45 of the ITA.
➢ Section 2(14) of the ITA defines the term ‘capital asset’ to include property of any kind held by the
taxpayer, whether or not connected with his business or profession, but does not include any stock-in-
trade or personal assets subject to certain exceptions.
➢ Determination of the character of investment, whether it is a capital asset or stock-in-trade has been the
subject of a lot of litigation and uncertainty. The Central Board of Direct Taxes (“CBDT”) has, vide
circulars and notifications, laid down the following principles in respect of characterization of income
arising on sale of securities
i) In respect of income arising from sale of listed shares and securities which are held for more than 12
months, the taxpayer has a one-time option to treat the income as either business income or capital gains
and the option once exercised, is irreversible.
ii) Gains arising from sale of unlisted shares are characterized as capital gains, irrespective of the period
of holding of such unlisted shares, except in cases where (i) the genuineness of the transaction is in
question, (ii) the transfer is related to an issue pertaining to lifting of the corporate veil, or (iii) the
transfer is made along with control and management of the underlying business. In such cases, the CBDT
has stated that the Indian tax authorities would take an appropriate view based on the facts of the case.
iii) The CBDT has clarified that the third exception i.e. where the transfer of unlisted shares is made along
with control and management of the underlying business, will not be applicable in case of transfer of
unlisted shares by Category-I and Category-II Alternative Investment Funds registered with the
Securities and Exchange Board of India (“SEBI”)
 Capital Gains Tax Rates for Different Forms of Share Sales

➢ GST is not applicable on sale of shares as ‘securities’ are specifically excluded from the definition of
‘goods’ and ‘services’ under the CGST Act
➢ Stamp Duty - Transfers of shares in a company are liable to stamp duty at the rate of 0.25% of the value
of the shares when held in physical form. However, as per the amendment made by the Finance Act,
2019 with effect from July 1, 2020, transfer of shares is liable to stamp duty at the rate of 0.015% on the
value of shares transferred. Earlier, no stamp duty was levied in case the shares were held in an electronic
(dematerialized) form with a depository (and not in a physical form). However, the Finance Act, 2019
also amended to limit such exemption to transfer of securities from a person to a depository or from a
depository to a beneficial owner.

Slump Sale
➢ A ‘slump sale’ is defined under the ITA as the sale of any undertaking(s) for a lump sum consideration,
without assigning values to individual assets or liabilities.
➢ Undertaking’ has been defined to include an undertaking, or a unit or a division of an undertaking or
business activity taken as a whole. However, undertaking does not mean a combination of individual
assets which would not constitute a business activity in itself.
➢ The ITA explains on the taxation of a slump sale. The ITA states that the gains arising from a slump
sale shall be subject to capital gains tax in the hands of the transferor in the year of the transfer.
➢ In case the transferor held the undertaking for a period of 36 (thirty-six) months or more, it would be
taxable as long term capital gains, otherwise it would be short term capital gains.
➢ The amount subject to capital gains shall be the consideration for the slump sale less the ‘net worth’ of
the undertaking, which has been defined to mean the aggregate value of assets of the undertaking /
division less the value of liabilities of the undertaking / division. The value of the assets and liabilities
to be considered for the computation is the depreciated book value of such assets or liabilities, with
certain exceptions.
➢ (Ref: Explanation 1 to Section 2 (19AA) 17. Section 50B of the ITA)

Parameters of a Slump Sale

i) Transfer by way of sale:
➢ The definition of slump sale under the ITA suggests that a transfer by way of ‘sale’ is necessary to
constitute a slump sale and not a transfer by any other mode.
➢ In CIT v. R.R. Ramakrishna Pillai, the Supreme Court confirmed that transfer of an asset for
consideration other than for monetary consideration is an exchange and not a sale.
➢ The Delhi High Court, in SREI Infrastructure Finance Ltd. v. Income Tax Settlement Commission
held that on the transfer of business in exchange of another asset, there is indeed a monetary
consideration which is being discharged in the form of shares. The Delhi High Court further held that it
would not be appropriate to construe and regard the word ‘slump sale’ to mean that it applies to ‘sale’
in a narrow sense and as an antithesis to the word ‘transfer’ as used in Section 2(47) of ITA.
 ➢ However, a contrary view was taken by the Bombay High Court in CIT v. Bharat Bijlee Ltd where it
has held that for any transaction to be considered a ‘slump sale’, an essential element is that the transfer
of the undertaking must be for cash consideration. Accordingly, this issue is yet to be settled by judicial
precedent.
ii) Transfer of an undertaking:
➢ The continuity of business principle also assumes that all assets and liabilities of the concerned
undertaking are transferred under the sale. This view has been upheld by the Supreme Court, whereby
it held that an ‘undertaking’ was a part of an undertaking / unit / business when taken as a whole in the
R.C Cooper Case
➢ While an essential element of a ‘slump sale’ is that the assets and liabilities of the undertaking are
transferred to ensure continuity of business, for a transaction to be characterized as a ‘slump sale’, it is
not essential that all assets are transferred
➢ Even if some assets of the transferor are retained by it, and not transferred to the transferee, the
transaction may still retain the characteristic of a slump sale. However, for a transfer to be considered a
slump sale, what is crucial is that the assets (along with the liabilities) being transferred forms an
‘undertaking’ in itself, and can function ‘without any interruption’, i.e. as a going concern (CIT v. Max
India Ltd.)
iii) Transfer as a going concern
➢ The Bombay High Court while dealing with the concept of ‘slump sale’ generally, clarified that one of
the principle tests for determination of whether a transaction would be a ‘slump sale’ is whether there is
continuity of business (Premier Automobiles Ltd. v. ITO)
➢ Thus, the concept of ‘going concern’ is one of the most important conditions to be satisfied when
analyzing whether a transaction can be regarded as a slump sale. (CIT v. Max India Ltd.)
iv) Lump-sum consideration
➢ The consideration for the slump sale must be a lump-sum figure without attributing individual values to
the assets and liabilities forming part of the transferred undertaking
Indirect Tax implications of Slump Sale
➢ There should be no GST on sale of the business as a slump sale. This is because what is being sold is
the undertaking or the business on a slump sale basis, and ‘business’ per se does not qualify under the
definition of ‘good’
➢ In re Innovative Textile Ltd. (GST AAR Uttarakhand)
➢ Business transfer agreement as a going concerned on slump sale basis is exempted from the levy of GST
in terms of sl. no. 2 of the notification no. 12/2017 central tax (Rate) dated 28-06-2017

Asset Sale
➢ In an itemized sale of assets, for determining taxability of capital gains, a distinction is drawn between
depreciable and non-depreciable assets.
1. Non-depreciable Assets: Assets which are not held for the purpose of business use on which
depreciation is not available under Section 32 of ITA are considered non-depreciable assets. On sale of
all assets not being depreciable assets, capital gains are calculated as per Sections 45 and 48 of the ITA,
i.e., the amount by which the sale consideration of the asset exceeds its cost of acquisition. Each asset
is assigned a value, and the consideration for such asset is also determined. The gains from the sale of
each asset is determined and the transferor is liable to capital gains tax on the gains (if any) from the
sale of each asset. Further, whether the sale would result in short term or long-term capital gains would
need to be analyzed individually depending on the holding period for each asset by the transferor.
Accordingly, it may be possible that certain assets result in short term capital gains, while some result
in a long-term capital gain, despite being sold as part of the same transaction.
2. Depreciable Assets - Section 50 of the ITA provides for computation of capital gains in case of
depreciable assets i.e. assets inter-alia being building, plant or machinery etc. on which depreciation is
available under Section 32 of the ITA. The capital gains form transfer of depreciable assets are
determined as the difference, if any, between the sale consideration from the transfer of the concerned
assets, together with the transfer of any other asset within that block in the same financial year, and the
aggregate of (i)expenditure incurred in connection with such transfer, (ii) depreciated value of the
concerned block of assets at the beginning of the financial year, and (iii) actual cost of any asset acquired
during that year and forming part of that block. If the sale consideration does not exceed the aggregate
of the above values, then there is no capital gains which are said to arise from the sale of the asset even
if the sale consideration exceeds its cost of acquisition. In such a situation the sale consideration is
adjusted within the block and the value of the block is reduced by the amount of sale consideration of
the asset.

➢ GST could be applicable depending on the nature of asset sold and could be as high as 28%.
Tax Implications of Cross Border Mergers
➢ Tax issues arise in cross border deals when two jurisdictions seek to tax the same income or the same
legal person, causing double taxation of that income. Most countries acknowledge that double taxation
acts as a disincentive for cross border trade and activity, and therefore, with the primary objective to
encourage cooperation, trade and investment, countries enter bilateral DTAA to limit their taxing rights
voluntarily through self-restraint, thereby avoiding overlapping tax claims.
UNIT 8- IPR IN M&A
Intellectual property (IP) assets often constitute the most significant component of technology sector
businesses. As a result, IP legal issues are of crucial importance in merger and acquisition transactions.
There are several key issues that should be addressed in pre-transaction IP due diligence, as well as IP
terms and conditions in technology sector purchase agreements.

Key issues that should be addressed in pre-transaction IP due diligence, as well as IP terms
and conditions in technology sector purchase agreements, include the following:

1. Identify the IP: The scope of IP assets obviously will depend on the nature of the particular business,
and IP assets exist in a variety of formats, but most significant IP assets are comprised of registered
patents, trademarks and copyrights, as well as software, trade secrets, internet domains and technology
licenses. Identification of what IP is important or necessary in the target's business will include an
assessment and categorization of what IP is owned, used and licensed in or out by the target. Once the
relevant IP is identified, acquirors, investors and their advisors can evaluate IP operational risks and
determine how to best address them before consummating the transaction.
2. Ownership of IP: To determine ownership of registered patents, trademarks and copyrights, a good
starting point is to search the registration databases of the Patent and Trademark Office and Copyright
Office. However, IP law includes some subtle variations from traditional property ownership principles
that may not be apparent from ownership searches. For example, if a patent is registered in the name of
multiple co-inventors, each co-inventor has separate rights to grant licenses and receive royalties. A
complex ownership question also may arise if the target is a business unit or division within a family of
affiliated companies, and technology is shared among the affiliates. In such cases, an intercompany
license and/or transition services agreement may be needed. Ownership rights of employees, agents and
independent contractors also must be addressed.
3. Employee and Contractor Rights: IP laws recognize ownership rights of individual inventors and
authors, so if a company's IP is developed by individual employees, agents or contractors, the parties
need to resolve those ownership rights in the transaction process. Generally, without an express
assignment, an employee inventor retains ownership of patent rights unless the employee was employed
to create the specific invention or the invention was otherwise within the scope of employment. For
works of authorship and software, the copyright law "work for hire" doctrine may operate to vest title
in the employer to the extent the work was created by the employee within his or her scope of
employment. To ensure clarity and avoid potential disputes, the best practice is to obtain IP assignments
from all employees, agents and contractors who have contributed to the development of the target's IP,
including patent assignments from all employees and agents who are co-inventors and copyright
assignments from all co-authors. As to independent contractors who have contributed to inventions or
works of authorship, the terms of relevant independent contractor agreements should be reviewed to
assess any potentially unresolved contractor IP rights.
4. Liens and Encumbrances: With the increasing prominence of IP as a balance sheet asset, it is common
for lenders to include IP as collateral in secured debt financing. Thus, a buyer needs to determine if the
target has granted liens on specific IP assets, including liens on patents, trademarks and copyrights,
software, internet domain names, etc. There are complex IP lien perfection rules, and due diligence
regarding IP liens is multifaceted.
5. Licensed IP: Even if it is clear that a target company is the owner of an IP asset free and clear of liens,
the IP asset still may be the subject of third-party rights pursuant to a license granted by the IP owner.
Alternatively, there may exist crucial IP assets being used by a target company that it does not own, but
are available under license from a third party. In either case, a buyer must pay close attention to the
 relevant license agreement terms to determine the respective rights, obligations and terms of use
regarding the licensed IP. Key issues often addressed in IP licenses include duration, royalties and fees,
scope of use, exclusivity, territorial limits, sublicense rights, rights to enhancements and improvements,
and assignability.
6. License Assignability: The law with respect to assignments of IP licenses is different in some respects
from general contract law regarding assignments. Under the contract law, in the absence of express
restrictions agreed to by the parties, contracts are assignable without the requirement for consent. Thus,
it is often assumed that if a contract is silent as to assignability, the courts will uphold an assignment.
However, due to the strong deference in IP law to the rights of registered patent and copyright owners,
case laws generally provides that patent and copyright licenses are not assignable without the consent
of the licensor, unless the terms of the license agreement expressly provide otherwise. Consequently, in
the M&A diligence process, the buyer needs to assess the transferability of the target's licenses to
determine if any third-party consents are necessary.
7. Infringement: Even if the Patent office has issued a patent or trademark, and even if it is established that
a party holds clear title to such IP, it is possible that a third party could own IP rights that are infringed
by the issued patent or trademark, so a buyer still needs to consider whether the target IP infringes any
rights of third parties. Similarly, it is possible that a third party may be infringing the target's IP. A buyer
can partially address this risk via standard "non-infringement" representations, warranties and
indemnification in the purchase agreement, but the risk of a post-closing IP infringement dispute may
still remain. Steps that can be taken in the diligence process to reduce this risk include assessment of
any prior infringement claims, as well as analysis of the merits of any prior demand letters, cease/desist
letters or invitations to license. If the target assets include a specific registered patent or trademark that
is of particular importance or value, the buyer may consider retaining IP legal counsel to perform a pre-
closing infringement analysis and to provide a formal legal opinion as to its conclusions.
8. IP Validity: Even if there is no evident infringement risk, another potential concern, particularly with
patents, is whether the IP was "validly issued." For example, it is possible that during the original patent
application process, an important component of "prior art" was not considered by the patent
subsequently could be challenged on the basis that the "prior art" was not appropriately considered in
the initial application process. If a patent is a key asset in a proposed transaction, this concern may
warrant retention of a professional search firm to conduct a prior art search, or retention of IP legal
counsel to perform a validity analysis and to provide a validity opinion. Even if this level of diligence
is pursued, there still may be no absolute certainty on the validity question without a judicial
determination. For critical registered patents and trademarks, another matter to consider is whether all
necessary government maintenance fees have been paid and whether all renewal filings have been made
in order to avoid expiration or lapse of registration.
9. Open Source Software: If a buyer is seeking to acquire exclusive rights to use and/or license a particular
software product, the buyer should attempt to determine if the software includes any "open source"
components. A list of open source software is available online. As a condition of using open source
code, the user must comply with the applicable open source license terms. If target assets incorporate
open source components, the entire software package may be subject to free use rights. Parties can take
various actions in order to identify open source software issues with particular software, including
software audits by independent experts and code scanning by service providers.
10. Transfer Documents/Filings and Trademark Assignments: Upon consummation of an assignment and
transfer of registered IP, assignment filings should be made with the applicable IP registrar to evidence
the transfer. Internet domain name filings also should be made with the applicable domain name
registrars. Note that for a trademark assignment to be valid, the "goodwill of the business" related to the
trademark must be assigned along with the trademark. The concept underlying this requirement is that
a trademark should not have inherent value apart from the product or service associated with the
 trademark. Thus, appropriate language should be included in a trademark assignment including transfer
of the goodwill related to the assigned trademark.
Case: SKOL BREWERIES LTD. VS. SOM DISTILLERIES AND BREWERIES LTD. AND ORS.
MANU/MH/1194/2009
- Sections 2(1)(r)(ii) and 53 of Trade Marks Act, 1999 .
- Section 2(1)(r)(ii) of Act recognizes use of registered trade mark by persons other than registered
proprietor and registered user in certain circumstances and situations . Section 2(1)(r)(ii) of Act does not
deal with persons who have acquired proprietary right in trade mark by assignment or transmission. In
present case, second defendant has assigned all its rights in disputed trade mark in favour of plaintiff
and same now stands vested in plaintiff - Fact that plaintiff has not as yet been shown in register as
proprietor thereof does not lead to conclusion that rights in respect of trade mark are not vested in
plaintiff - In any event bar contained in Section 53 of Act does not apply to person not covered by
Section 2(1)(r)(ii) of Act.

MANAGING INTELLECTUAL PROPERTY DURING M&A

Below are areas that require special attention during M&A transactions.
1. Doing Due Diligence Before An Acquisition: Due diligence is critical before a company merger or
acquisition to protect both parties from unnecessary risks. In relation to IP, the goal of the due diligence
stage is to take inventory of a company’s intangible assets, and to determine whether there are
outstanding transfer pricing and tax risks associated with the intangibles. Specific documentation is
necessary to properly assess the ownership of IP, which requires advisors to trace each asset back to its
source to determine who owns it and whether it’s legally protected IP (e.g. patents) or economically
owned IP (e.g. goodwill). Based on this documentation, the combined company can assess what transfer
pricing risks may exist and make critical go-forward determinations. Details like these should be
addressed before an acquisition is finalized. Companies should consider consulting an intellectual
property attorney to review IP inventories and intercompany contracts during the due diligence phase.
i. DUE DILIGENCE CHECKLIST:
a) Ownership: A preliminary level is to make an inventory of every right that is registered, and to verify
the ownership. Checking the registered rights from the concerned registries - depending on the
jurisdiction- would be the first step. Since registration confers an exclusive right to use and provides
legal certainty, identifying the beneficiary is of great importance.
Ownership of the IP generally sticks with that entity or person who developed it, at least this is the most
common case. What is more to that would be, the right to use and the freedom to operate.
b) Freedom to Operate: It is also crucial to see the scope of the registered rights such as patents, and whether
they cover the products or services that the company is acquiring. Making sure they have the freedom
to operate is actually more important than having a registry.
2. Determining the Value of Intellectual Property.
3. Non-disclosure agreement- to protect the interests of the parties, it is important to enter into a non-
disclosure agreement in case something goes wrong. The thing which is to be protected is the secrets of
the parties that can’t be disclosed to any outsider. It includes the following aspects-
- the information must not be readily accessible for people.
- it should be secret.
- the owner should protect information from leakage.
4. IP DOCUMENTATION
a) Definitions of Transferred IP.
b) Licenses and Assignment.
c) Transition Licenses.
 d) Transition Service Agreements.
e) Representations and Warranties.
f) Allocation of IP Risk.
g) Indemnification.
h) Integration of Acquired IP with the Existing IP Portfolio.

PRECAUTIONS FOR IPRS PROTECTION DURING M & A

• Arbitration clause – The parties may decide to submit their disputes to the arbitration process so as to
avoid the court delays and for a speedy and effective remedy.
• Third parties rights – the parties may include clauses to protect the interest of the third parties with
whom they already have legal relationships. For example
o A condition that the acquirer shall not refuse to provide technology to the parties that are already
mentioned by the acquired.
• Cultural Assessment to identify their difference and accept and appreciate it without any discrimination.
Also, encourage free and healthy communication.
• New Strategic plan- Develop a new strategic plan including the goals, objectives, identify their problems
and solutions for it. One should use appropriate teams to merge departments and make decisions
regarding issues.
• Future expense – The parties may decide as to who will bear the expenses that might occur in the future
course of events like the expenses of filing, registration, renewals, and maintenance of copyrights and
other IPRs, etc.
• Periodic assessment- Set up periodic re-evaluation over the years to be addressed by the newly merged
company, its employees and their working.
• Parties may change their mind – There can be a right to exit on notice at one’s own will can be included
in the agreement to provide safeguards for a right to terminate the contract in case of breach by the other.
It can also involve compensation paid to the innocent party.

IPR ASSESTS DURING M&A

1. First there is “Company IP” which includes IPRs such as registered IPRs and unregistered IP such as
trade secrets, know-how and so on. This is the IP asset class where the company basically sells its own
assets.
2. Then there is “Transferred IP” which is owned by the target and needs to be transferred to the buyer as
a part of the transaction.
3. Last but not least, there is “Retained IP” which is typically license.
a. When these three all come together, they create the basis for the sufficiency of assets which constitute
all of the IPRs that the company needs to operate its business.