Regulatory Aspects of M&A

in India
Buy back of securities
• Applicable regulation is Securities and Exchange Board of India (Buy Back of Securities)
Regulations, 1998
• The regulations are applicable to buy-back of shares or other specified securities of a
company listed on a stock exchange.
• A company listed on a stock exchange cannot buy-back its shares or other specified
securities so as to delist its shares or other specified securities from the stock exchange.
• A company is permitted to buy-back its securities through any of the following methods:
• From the existing security-holders on a proportionate basis through the tender offer;
• From the open market through—
• book-building process,
• stock exchange;
• From odd-lot holders.
• Proportionate basis means proportionate amongst share-holders who
accept the tender offer.
• A company cannot buy-back its shares or other specified securities
from any person through negotiated deals, whether on or of the stock
exchange, or through spot transactions or through any private
arrangement.
• No person or insider is permitted to deal in securities of the company
on the basis of unpublished information relating to buy-back of shares
or other specified securities of the company.
Companies Act 1956/ 2013
• Section 77A authorises a company to purchase its own shares or other specified
securities out of its free reserves or securities premium account or the proceeds of any
shares or other specified securities. However, the prior issue cannot be of the same kind
as the shares or securities being bought back.
• The articles of the company will have to authorize the buy-back. Further, the buy-back
needs to be authorized by a special resolution passed in general meeting of the
company.
• The requirement of buy-back authority being provided in the articles, and share-holders’
special resolution is waived if the buy-back does not exceed 10 per cent of the paid up
capital and free reserves of the company. However, board resolution will be required,
and no other offer of buy-back without share-holders’ special resolution should have
been done in the preceding 365 days.
• In any case, buy-back cannot exceed 25% of the total paid up capital and free reserves of
the company. Further, buy-back of equity shares in a financial year is limited to 25% of
total paid-up equity capital.
• After the buy-back, the company’s debt (secured and unsecured) cannot be more
than twice its capital and free reserves.
• The shares or securities proposed to be bought back have to be fully paid.
• Buy-back of securities listed in a stock exchange is covered by the SEBI Regulations.
Buyback in other situations is covered by the Private Limited Company and Unlisted
Public Limited Company (Buy-back of Securities) Rules, 1999.
• While seeking permission of share-holders, the explanatory statement has to
include the following information:Full and complete disclosure of all material facts;
• Necessity for buy-back;
• Class of security intended to be purchased under the buy-back;
• Amount to be invested under the buy-back; and
• Time-limit for completion of buy-back.
• Buy-back has to be completed within 12 months from the date of passing the
share-holders’ resolution or board resolution.
• No issue of similar securities can be made for a period of 6 months from
completion of buyback.
• However, bonus issues and issues towards prior commitments, such as,
conversion of warrants, stock option schemes, sweat equity or conversion
of preference shares or debentures into equity shares are permitted.
• A company cannot buy-back its shares or other securities-
• through any subsidiary company including its own subsidiary companies; or
• through any investment company or group of investment companies; or
• if a default is subsisting in repayment of deposit, or interest payable on a deposit, or
• redemption of debentures or preference shares, or payment of dividend to any
shareholder, or repayment of any term loan or interest payable on term loan to any
financial institution or bank.
Substantial Acquisition of Shares and
Takeover
• One of the formats to acquire control over a company is by acquiring
a substantial stake in the company. Such transactions are covered by
the Securities and Exchange Board of India(Substantial Acquisition of
Shares and Takeovers) Regulations, 2011.
Compulsory Open Offer

Substantial Acquisition of Shares or Voting Rights

• A public announcement of an open offer for acquiring shares of the target company from
other share-holders must be made in the following situations:
• If the acquirer (together with persons acting in concert), acquires any shares or voting rights in the
target company, that take their voting rights in the target company to over 25% (including any shares or
voting rights held before such acquisition).
• In a situation where more than 25% of the voting rights (but less than the maximum permissible non-
public share-holding) are already held by the acquirer (together with persons acting in concert), if they
acquire more than 5% of the voting rights in any financial year.
• The acquirers will need to keep their total share-holding within the maximum permissible
non-public share-holding (which is the share-holding excluding the minimum public
shareholding required under the Securities Contracts (Regulation) Rules, 1957).
• The rules have set the minimum public share-holding requirement for listed companies at
25% in the case of private sector, and 10% for public sector enterprises.
• Thus, for private sector, the maximum permissible non-public share-holding would be 75%;
in the case of public sector enterprises it would be 90%.
Voluntary Offer

• An acquirer, who together with persons acting in concert with him, already holds
twenty-five per cent or more but less than the maximum permissible non-public
shareholding, is entitled to voluntarily make a public announcement of an open offer
for acquiring shares. After completing the open offer, their share-holding cannot go
above the maximum permissible non-public shareholding.
Offer Size
• Compulsory public offer has to be for at least twenty six per cent of total shares of the
target company, as of tenth working day from the closure of the tendering period.
• Voluntary public offer has to be for acquisition of at least such number of shares as
would entitle the holder thereof to exercise an additional ten per cent of the total
shares of the target company. Further, post-acquisition, the share-holding cannot cross
the maximum permissible non-public share-holding limit.
• The following standards are relevant in accounting for mergers and
acquisitions.
• AS 14: Accounting for Amalgamations
• AS 10: Accounting for Fixed Assets
• AS 26: Intangible Assets
• ASI 11: Accounting for Taxes on Income in case of an Amalgamation
• Ind AS 103: Business Combinations
AS 14: Accounting for Amalgamations
• It deals with accounting for amalgamations and the treatment of any resultant
goodwill or reserves. Share acquisitions are not covered by this standard.
• In an amalgamation, one or more companies cease to exist.
• In a share acquisition, the acquired company is not dissolved. It continues to be in existence.
Only the share-holding / control of the acquired company changes hands.
• “Fair value” is the amount for which an asset could be exchanged between a
knowledgeable, willing buyer and a knowledgeable, willing seller in an arm’s length
transaction.
• “Pooling of interests” is a method of accounting for amalgamations, the object of
which is to account for the amalgamation as if the separate businesses of the
amalgamating companies were intended to be continued by the transferee company.
Accordingly, only minimal changes are made in aggregating the individual financial
statements of the amalgamating companies.
Types of Amalgamations

• Those amalgamations where there is a genuine pooling, not merely of the assets and
liabilities of the amalgamating companies, but also of the shareholders’ interests and of the
businesses of these companies, are amalgamations which are in the nature of ‘merger’.
• The accounting treatment of such amalgamations should ensure that the resultant figures of
assets, liabilities, capital and reserves more or less represent the sum of the relevant figures
of the amalgamating companies. This is the ‘pooling of interests’ method of accounting.
• In the second category are those amalgamations which are in effect a mode by which one
company acquires another company and, as a consequence, the shareholders of the company
which is acquired normally do not continue to have a proportionate share in the equity of the
combined company, or the business of the company which is acquired is not intended to be
continued. Such amalgamations are amalgamations in the nature of ‘purchase’. They are
accounting through the ‘purchase’ method of accounting.
Pooling of Interests Method of Accounting
• Under the pooling of interests method, the assets, liabilities and reserves of the transferor
company are recorded by the transferee company at their existing carrying amounts. However,
if, at the time of the amalgamation, the transferor and the transferee companies have
conflicting accounting policies, a uniform set of accounting policies has to be adopted following
the amalgamation.

Purchase Method of Accounting

• Under the purchase method, the transferee company accounts for the amalgamation either by
incorporating the assets and liabilities at their existing carrying amounts or by allocating the
consideration to individual identifiable assets and liabilities of the transferor company on the
basis of their fair values at the date of amalgamation. The identifiable assets and liabilities may
include assets and liabilities not recorded in the financial statements of the transferor company.
• Where assets and liabilities are restated on the basis of their fair values, the determination of
fair values may be influenced by the intentions of the transferee company. For example, the
transferee company may have a specialised use for an asset, which is not available to other
potential buyers.
Goodwill
• Goodwill arising on amalgamation represents a payment made in anticipation of
future income and it is appropriate to treat it as an asset to be amortised to income
on a systematic basis over its useful life.
• Due to the nature of goodwill, it is frequently difficult to estimate its useful life with
reasonable certainty. Such estimation is, therefore, made on a prudent basis. It is
considered appropriate to amortise goodwill over a period not exceeding fi ve years
unless a somewhat longer period can be justified.
• In estimating the useful life of goodwill arising on amalgamation, some of the factors
to consider are as follows:
• the foreseeable life of the business or industry;
• the effects of product obsolescence, changes in demand and other economic factors;
• the service life expectancies of key individuals or groups of employees;
• expected actions by competitors or potential competitors; and
• legal, regulatory or contractual provisions affecting the useful life.
Threshold limit for disclosure of substantial
holding
• Acquisition goes to 5%, 10% or 24.9%- disclosure to target firm and
concerned stock exchange within 2 days of acquisition
• If holding between 25% and 55% and does trades of 2% or more,
required to disclose cumulative holding every year to target firm and
stock exchange
• Holding more than 25%- required to make disclosure every year for
dividend declaration
• Target company needs to submit share ownership details every year
to stock exchange
Threshold limit for open offer
• If ownership goes to 25% or more-required to make minimum public
offer of additional 26% of remaining shareholders
• More than 25% and less than 55%- for any additional purchase of 5%,
required to make open offer of remaining 26% of shareholders
• More than 55% but less than 75%- entitled to make open offer of
additional 26% of remaining shareholders