TRANSACTION RELATED REGULATIONS- MERGERS AND ACQUISITIONS

Anand Prasad *
Nitika Chhabra**
CONTENTS
1. INTRODUCTION. ............................................................................................................................................ 1
2. MERGERS /AMALGAMATIONS. ................................................................................................................... 2
2.1 Companies Act. ..................................................................................................................................... 2
2.2 Competition Act.................................................................................................................................... 3
2.3 SEBI Regulations. ................................................................................................................................. 4
2.4 Income Tax. ........................................................................................................................................... 5
2.5 Employment Laws. ............................................................................................................................... 5
2.6 Stamp Duty. ........................................................................................................................................... 5
2.7 Transfer of licenses and contracts. ..................................................................................................... 5
3. ACQUISITIONS. ............................................................................................................................................... 6
3.1 Acquisition of Shares. ........................................................................................................................... 7
i. Substantial acquisition of shares/voting rights: .......................................................................................... 9
ii. Creeping acquisition: .................................................................................................................................. 9
iii. Acquisition of control:............................................................................................................................... 9
iv. Indirect acquisition of shares/control: ........................................................................................................ 9
3.2 Acquisition of Business. ....................................................................................................................... 9
3.3 Asset Sale. ............................................................................................................................................. 11
3.4 Demerger. ............................................................................................................................................. 12
4. CONCLUSION. ............................................................................................................................................... 12

1. INTRODUCTION.

In today’s globalized economy, mergers and acquisitions are increasingly being used by companies as a quick and
effective tool for growth in the market. Recent liberalization and economic reforms by the Government has
provided a new impetus to companies who are continuously seeking to grow inorganically.

Specifically, the recent and significant liberalization in our foreign direct investment policy has provided an
opportunity and prompted various foreign investors to consider India as a promising growth market. Moreover,
the bringing in of the Companies Act, 2013, introduction of significant changes to the archaic arbitration laws, the
new bankruptcy code and the relaxations in the anti-trust regime has enhanced in the ease of doing business in
India.

*Partner, Corporate Practice Group, Trilegal, Delhi; [email protected].

**Senior Associate, Corporate Practice Group, Trilegal, Gurgaon; [email protected].
Statistically, mergers and acquisitions deals involving Indian companies recorded 82% growth in the first half of
2016 at $27 billion (vis-à-vis the first half of 2015), the highest in the first six months in any year since 2011 led by
a four and a half times increase in overseas acquisitions by Indian companies at $4.5 billion1.

Given the recent trend and the liberalized regulatory framework, the expectation is to see a significant spur of
merger and acquisition transactions in India in the near future, potentially leading to tremendous growth and
opportunities for all.

In this context this article comments on the legal and regulatory framework involving mergers and acquisitions in
India. The regulatory framework is best understood in the commercial context in which these transactions take
place. Thus, in the sections that follow, we provide a general overview of the purpose of these transactions and
the laws and commercial considerations that would be of significance.

2. MERGERS /AMALGAMATIONS.

A merger is generally understood as a combination of two or more entities into one involving transfer of assets,
liabilities and securities of one company with another transferee company. While the term ‘merger’ is not
specifically defined either under the Companies Act, 1956 ("1956 Act") or under the Companies Act, 2013 ("2013
Act"),a merger transaction is implemented under the terms ‘compromise’ and ‘arrangement’ which are used in the
1956 Act and which amongst others cover transactions including mergers, demergers or hiving-off of a unit by a
company within their ambit.

Mergers are usually used as a tool by companies to bring operational and business synergies together, to enhance
valuation of the company (helps where an initial public offering, financial investment or sale is subsequently
contemplated), to introduce tax efficiencies or otherwise to achieve a strategic objective of getting a large balance
sheet.

As mentioned above, usually, a merger occurs by way of vesting the assets and liabilities of a company
("Transferor Company") with another company ("Transferee Company"). In such cases, the Transferor
Company would generally lose its identity and its shareholders could become shareholders of the Transferee
Company. Alternatively, assets and liabilities of two or more companies could be vested in a new company. In
such case, the two merging companies would lose their identity and the shareholders of the merging companies
could become shareholders of the new company.

While undertaking a merger, parties have to bear in mind certain regulatory requirements and considerations
pertaining to the transfer. Some of the key aspects involved in a merger have been discussed in this section below.

2.1 COMPANIES ACT.

Sections 390 to 394 of the 1956 Act (and Sections 230 to 234 of the 2013 Act) deal with mergers and schemes of
arrangements between a company, its shareholders and its creditors. The process is court driven and usually takes
between 4-12 months to complete. Broadly, the following steps are followed:

1 Joel Rebello,“Merger and acquisition deals up as Indian companies look abroad”, available at
http://economictimes.indiatimes.com/news/company/corporate-trends/merger-acquisition-deals-up-as-indian-
companies-look-abroad/articleshow/53059724.cms.
 i. As an initial step, parties are to file applications before the relevant High Court(s) in India having
jurisdiction over the Transferor Company and the Transferee Company (High Court(s)) for either
convening or dispensing the meeting of both the creditors' (secured and unsecured) and shareholders'
(Statutory Meetings) to approve the scheme of merger (Merger Scheme).

ii. The High Courts may either dispense with the requirement of convening the Statutory Meetings or
direct the parties to convene the Statutory Meetings. If such requirement is not dispensed with,the
transferor and transferee companies are to convene the Statutory Meetings.

iii. 3/4th of each class of shareholders and creditors by value (present and voting) of both the Transferor
Company and the Transferee Company are to approve the Merger Scheme. Upon such approval the
Transferor Company and Transferee Company are to file separate petitions before the concerned High
Court(s) seeking a sanction for the Merger Scheme (Petitions).

iv. Upon completion of hearings on the Petitions, the High Court(s) may pass orders approving the
Merger Scheme with such modifications as they consider appropriate (Orders).

v. The Orders will have to be stamped and subsequently certified and the duly stamped copy of the
relevant Orders are to be filed by the Transferor Company and the Transferee Company with the
concerned Registrar of Companies (RoC), which is achieved by uploading the Order on the Ministry
of Corporate Affairs’ website. Thereupon, the merger becomes effective.

vi. The approval accorded by the High Court(s) pursuant to Sections 390 to 394 of the 1956 Act is a
single window clearance and does not necessitate acquiring separate approvals for the process, unless
otherwise specifically provided for. From this perspective this process is beneficial to the parties
concerned as it reduces the number of compliances it would otherwise have had to conform with.

2.2 COMPETITION ACT.

The Competition Act, 2002 (Competition Act) deals with the regulation of, (a) anti-competitive agreements, (b)
abuse of dominant position, and (c) merger control. The Competition Commission of India (CCI) administers the
afore-mentioned aspects of the Competition Act. While the provisions relating to anti-competitive agreements and
abuse of dominant position came into force from May 2009, the merger control provisions were notified with
effect from June 2011. Under the merger control provisions of the Competition Act, all 'combinations' are required
to be notified to the CCI for its prior approval. A combination has been broadly defined to include any acquisition
of shares, voting rights, control or assets of an enterprise or any merger or amalgamation of enterprises, subject to meeting
the minimum specified thresholds.

A transaction upon the completion of which the combined size of the acquirer and the acquired enterprise would
exceed any of the specified thresholds as set out in the table below is required to be notified to the CCI for its
approval. The thresholds are based on the value of assets and turnover of the acquirer, the group of the acquirer
and the enterprise being acquired, as stated in their last audited financial statements.
 ASSETS TURNOVER

India Acquirer and INR 20 billion INR 60 billion

target
(collectively)
Acquirer's INR 80 billion INR 240 billion
group together
with the target
Worldwide Acquirer and USD 1 billionincluding USD 3 billionincluding a
target assets of at leastINR 10 turnover of at leastINR 30
(collectively) billion in India billion from its/their
operations in India
Acquirer's USD 4 billion worldwide USD 12 billion worldwide
group together including assets of at least including a turnover of at
with the target INR 10 billion in India least INR 30 billion from
its/their operations in India
‘Group’ will include all entities controlled by the ultimate parent entity, where such entity
directly or indirectly (i) exercises 50% or more of the voting rights, or (ii) appoints more than
50% of the members of the board of directors, or (iii) controls the company’s management or
affairs.

In the event these thresholds are met, the two enterprises are required to jointly notify the CCI within 30 days of
the approval of the final scheme of amalgamation by their respective board of directors.

Importantly, the CCI has identified certain categories of combinations which are ordinarily not likely to have an
appreciable adverse effect on competition in India, and therefore are not required to be notified to the CCI
regardless of the above thresholds. Amongst others, intra group mergers, i.e. a merger of two enterprises where
one of the enterprises has more than 50% shares or voting rights of the other enterprise and/or a merger of
enterprises in which more than 50% shares or voting rights in each of such enterprises are held by enterprise(s)
within the same group (provided that the transaction does not result in transfer from joint control to sole control)
is exempt from notification to the CCI.

2.3 SEBI REGULATIONS.

A merger involving a listed company requires certain additional compliances to be followed. The Securities and
Exchange Board of India (SEBI) has, pursuant to the SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015, set out the steps required to be undertaken by the concerned companies as part of the court
approval process.

To elaborate this further, a listed company desirous of undertaking a scheme of arrangement or involved in a
scheme of arrangement, is to file the draft scheme of arrangement under Sections 391 to 394 of the 1956 Act or
under Sections 230 to 234 of the 2013 Act, as applicable, with the stock exchange(s) for obtaining observation
letter or no-objection letter.

Such an observation letter or no-objection letter has to be issued by the stock exchange(s) within a period of 30
days of receipt of the draft scheme of merger. The observation letter or no-objection letter, once received, is to be
placed before the High Court(s) at the time of seeking sanction for the Merger Scheme.

Apart from the above, the process as prescribed under the 1956 Act continues to apply for a merger.
 2.4 INCOME TAX.

Mergers lead to the transfer of capital assets and any gain arising from such a transfer is liable to be taxed unless
specifically exempted. However, a merger can be tax neutral from an income tax perspective, subject to fulfilment
of certain conditions, as listed out below:

i.All the property of the merging company must become the property of the merged company,

ii.All of the liabilities of the merging company must become liabilities of the merged company, and

iii.Shareholders of 75% or more in value of the shares in the merging company must become shareholders of the
merged company.

Further, no capital gain on the transfer of capital assets will arise in the hands of shareholders if the transfer is
made in consideration of the allotment of shares in the merged company and the merged company is an Indian
company.

2.5 EMPLOYMENT LAWS.

A merger would involve transfer of employees of the Transferor Company to the Transferee Company. Under
Indian law, employees are categorised as workman or non-workman. An employee can be classified as a workman
if the employee engages in manual, unskilled, skilled, technical, operational work, etc., and is not engaged in a
managerial or administrative capacity. While the transfer and termination of non-workman is largely governed by
their employment agreement, the workman category of employees would require to be transferred with continuity
of service and on terms no less favourable than those which were employed prior to their transfer in order to avoid
payment of retrenchment compensation.2 The employees who opt not to be transferred will be entitled to
retrenchment compensation on being retrenched.

2.6 STAMP DUTY.

The High Court(s) Orders approving the Merger Scheme which has the impact of transferring all the assets and
liabilities of the Transferor Company is liable to be stamped as ‘conveyance’ under the Indian Stamp Act, 1899.
The stamp duty is usually a percentage of the consideration amount, with the consideration being valued on the
basis of a share exchange ratio.

Interestingly, very recently, in the matter of Chief Controlling Revenue Authority, Maharashtra State, Pune and
Superintendent of Stamp (Headquarters), Mumbai vs .Reliance Industries Limited, Mumbai and Reliance Petroleum Limited,
Gujarat, a full bench of the Bombay High Court held that orders sanctioning a scheme of arrangement, under
Sections 391 to 394 of the 1956 Act involving different high courts are separate instruments and accordingly, stamp
duty would be payable on all the orders (and consequently, in all the states) without the benefit of remission, rebate
or set-off.

2.7 TRANSFER OF LICENSES AND CONTRACTS.

The Order, generally, has the effect of transferring all licenses held by the Transferor Company to the Transferee
Company. Subsequent to the merger, the relevant authorities are approached to have such licenses mutated in
favour of the Transferee Company.

2The Industrial Disputes Act, 1947, S. 25FF.

However, express conditions in the relevant governing statutes under which the licenses, authorizations and
consents are granted or the terms of the licenses, authorization and consents themselves may prohibit their transfer
or require certain procedures to be complied with.

Similarly, for business contracts where the contracting parties to an agreement have expressly agreed that the rights
and obligations in such an agreement cannot be assigned by a party without the other party's express consent, the
rights and obligations of the first mentioned party cannot be transferred by way of a scheme of arrangement
without the consent of the other party.

However, if no such express clause prohibiting assignment is agreed in the said business contract, then such
contracts are deemed to be assigned to the Transferee Company pursuant to the Order.

3. ACQUISITIONS.

A pure ‘acquisition’ transaction can be structured as purchase of share or the assets and/or liabilities of a target
company.

An acquisition in an unregulated sector is usually the quickest mode for a company to get control of another
company. It would provide an acquirer with the ability to access the running work-force, customer-base and
distribution channels of a company and thus provide immediate presence in the market. Specifically, in the context
of a foreign investor, an acquisition would give them the ability to get an immediate and substantial presence in
India. At times acquisitions are also undertaken to gain market share in a sector. In certain cases, acquisitions are
also structured in the form of mergers for taxation purposes or other regulatory purposes. Further, an acquisition
of a minority or a majority stake may also, at times, result in formation of joint ventures.

As an initial step in the acquisition process, an acquirer would usually initiate a due diligence on the target company.
In addition to assessing liabilities associated with the target company, the primary purpose of conducting such
diligence would be for the acquirer to identify and assess the legal and contractual non-compliances by the target
company, if any, and which of such non-compliances are necessary to be rectified to have a legally running business
post acquisition. Such rectifications are usually termed as ‘Conditions Precedent’ to the acquisition. Another
important consideration is for the acquirer to assess if the valuation being provided to the business is appropriate
or a lower valuation should be provided on the basis of the findings of the due diligence. Apart from a legal due
diligence, an acquirer would also usually undertake a financial, accounting and a tax due diligence, to identify any
necessary aspects/non-compliances under the above heads and build in the necessary protections in the share
acquisition agreement.

To ensure a smooth completion of the acquisition, a key element is the structuring of the transaction in the most
legal and tax efficient manner. While structuring the transaction, it is important for lawyers and the acquirer to
consider the risks that could arise post completion of the transaction and rectify such risks before-hand to ensure
that the business runs successfully during post-acquisition phase.

All of the above considerations are built into the share acquisition agreement wherein the existing shareholders
agree to transfer their securities to the acquirer. Apart from the acquisition agreement, the acquirer would typically
enter into a joint venture/shareholders’ agreement with the existing shareholders (unless it is an acquisition of the
complete ownership from the existing shareholders, in which case, the need to have joint venture/shareholders’
agreement would not arise). The joint venture/shareholders’ agreement records the rights and obligations of each
of the shareholders’ vis-à-vis the target company, and amongst others, includes, management and veto rights
available to the shareholders, exit rights for each shareholder, business plan to be adopted by the target company,
deadlock mechanisms and the manner for adjudication of disputes.
 Difference arises in cases where the securities of the target company are listed on a stock exchange, necessitating
the acquirer to comply with the regulations issued by SEBI pursuant to an acquisition. The SEBI has in this regard
issued the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Code) which
deals with the direct or indirect acquisition of shares or voting rights or control over an Indian listed target
company. As discussed in detail below, the Takeover Code mandates an acquirer to make a public offering to the
public shareholders of the listed company it proposes to acquire.

While acquiring shares/voting rights of a listed company,parties attempt to structure the transaction in a manner
to expend the least possible payout to the public shareholders. Also, it is important to note that the joint venture
agreements involving a listed company are fairly regulated and shareholders typically cannot have very robust inter-
se arrangements and protections. In a listed company, very often, an acquirer may also be interested in subsequently
delisting the company, in which case, relevant considerations pertaining to the same also need to be considered.

Discussed below are the key regulatory aspects that are to be taken into consideration in an acquisition of shares
and the acquisition of a business.

3.1 ACQUISITION OF SHARES.

3.1.1 COMPETITION ACT.

As discussed above, the CCI administers aspects relating to the Competition Act including anti-competitive
agreements, abuse of dominant position and merger control. An acquisition of shares, voting rights, control or
assets of an enterprise meeting the specified thresholds, as already mentioned, would require notification to the
CCI.

In the context of acquisitions certain additional exemptions are provided by the CCI. Most importantly, an
exemption has been provided to smaller transactions where the size of the acquired enterprise does not exceed
INR 3.5 billion in terms of the assets in India and INR 10 billion in terms of the turnover in India (Target
Exemption). The Target Exemption does not apply in the case of mergers and amalgamations.

Additionally, the following acquisitions are also exempt from notification to the CCI:

i.Acquisition of not more than 25% shares or voting rights of the acquired enterprise, solely as an investment or in
the ordinary course of business, not leading to acquisition of control, OR

ii.Acquisition of shares or voting rights, where the acquirer prior to the acquisition has 50% or more shares or voting
rights in the acquired enterprise, except where such a transaction results in a transfer from joint to sole control,
OR

iii.Acquisition of shares or voting rights or assets, by one person or enterprise, of another person or enterprise within
the same group, except in cases where the acquired enterprise is jointly controlled by enterprises that are not part
of the same group, OR

iv.Acquisition of assets not directly related to the business activity of the acquirer, or made solely as an investment
or in the ordinary course of business, not leading to control of the target enterprise, OR

v.Acquisition of stock-in- trade, raw materials, stores and spares, trade receivables and other similar current assets
in the ordinary course of business.
3.1.2 FEMA.

Foreign investment in India is governed by the Foreign Exchange Management Act, 1999 (FEMA) read with
regulations framed thereunder as well as Consolidated FDI Policy (FDI Policy) and certain Press Notes issued by
the Department of Industrial Policy and Promotion from time to time.

The FEMA regulations segregate foreign investments into the following key categories:

(a) Foreign direct investment, being an investment by a non-resident entity/person resident outside India in the
capital of an Indian company in accordance with the terms and conditions set out in the Schedule 1 of the Foreign
Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000
(FEMA Transfer Regulations),

(b) Foreign institutional investment and foreign portfolio investment, being an investment by a registered foreign
institutional investor (FII) and a foreign portfolio investor (FPI) in terms of Schedule 2 and 2A of the FEMA
Transfer Regulations, respectively, in the capital of an Indian company under the portfolio investment scheme
with an individual holding up to 10% of the capital of the company and the aggregate limit for all FII/FPI
investment to 24% of the capital of the company,

(c) Investment by non-resident Indians, by acquisition of securities or units on a stock exchange in India on
repatriation basis under the portfolio investment scheme in terms of Schedule 3 of the FEMA Transfer Regulations
or acquisition of securities on a non-repatriation basis in terms of Schedule 4 of the FEMA Transfer Regulations,
and

(d) Foreign venture capital investments, being an investment by a SEBI registered foreign venture capital investor
in the capital of an Indian company engaged in certain specified activities as set forth in Schedule 6 of the FEMA
Transfer Regulations.

Most common of all, the FDI route is adopted by many foreign investors to route their strategic investments in
Indian companies in different sectors. Under the FDI Policy, FDI can be made under two broad routes i.e. the
automatic or the approval route. Under the automatic route, FDI can be made without prior government approval,
whereas such approval is required for FDI in cases falling under the approval route. Additionally, the FDI Policy
lists norms and caps for investment by a foreign investor in each sector as well as the minimum capitalization and
lock-in restrictions, if any.

Further, the FDI Policy sets forth the requirements and compliances to be met in case of transfer/issuance of
shares of an Indian company. Importantly, pricing forms an important aspect while structuring transactions
involving a foreign investor. The FDI Policy provides a cap and a floor price (as the case may be) determined on
the basis of the fair value of the shares, for acquisitions (by issuance or transfer) involving residents and non-
residents. Additionally, it also prescribes requirements for timely reporting of the transactions to the Reserve Bank
of India, through an authorized dealer bank.

3.1.3 SEBI REGULATIONS.

Takeover Code.

As mentioned above, the Takeover Code deals with the direct or indirect acquisition of shares or voting rights or
control over an Indian listed Target Company.
 The Takeover Code mandates an acquirer to make a public announcement of an offer if it (along with a person
acting in concert) proposes to acquire a specified percentage of shares of an Indian listed company. Such open
offer for acquiring shares by the acquirer and persons acting in concert is to be at least 26% of the total shares of
the target company. The requirement to make a public announcement is triggered in the following situations:

i.Substantial acquisition of shares/voting rights: acquisition of shares or voting rights equal to 25% or more in the target
company,

ii.Creeping acquisition: acquisition of shares or voting rights amounting to 5% or more in the company in the event the
acquirer and a person acting in concert with him already holds shares or voting rights amounting to 25% in the
company,

iii.Acquisition of control: if such an acquirer acquires control over the company, or

iv.Indirect acquisition of shares/control: where a substantial acquisition of shares, voting rights or control of a company
occurs indirectly through the acquisition of shares or control of a holding company or other entity, either on
account of a global acquisition or otherwise.

Further, an acquirer who holds between 25% and 75% of shares or voting rights in the company can also
voluntarily make a public announcement for an open offer for acquiring additional shares of a company, subject
to the aggregate shareholding after completion of the open offer not exceeding 75%.

3.1.4 TAX.

Gains derived from the transfer of capital assets (including shares) are subject to be taxed as capital gains in the
year of the transfer. Capital gain arising in a corporate transaction is taxable in the hands of the entity that transfers
a capital asset and receives consideration in lieu thereof.

A capital gain is computed by reducing the costs of acquisition and improvement of the asset from the sale
consideration received. The gains can be short-term capital gains or long-term capital gains depending upon the
period for which the shares were held by the seller, the rate of which varies between 20 to 30%(however, no long
term capital gains tax is levied for shares acquired on stock exchange).

3.1.5 STAMP DUTY.

Stamp duty equivalent to 0.25% of the value of, or the consideration paid for, the share is payable on the execution
of the share transfer deed in relation to the transfer of shares. Additionally, stamp duty is also payable on the share
acquisition agreement and the shareholders’ agreement, depending upon the state in which such agreement is
executed.

An important aspect to consider is that no stamp duty is payable on the share transfer deed if the shares are in a
dematerialized form.

3.2 ACQUISITION OF BUSINESS.

As an alternate to share acquisition, an acquirer could also, depending upon its commercial objective, choose to
acquire, (a) the business of a company as a going concern i.e. acquiring all assets and liabilities pertaining to a
particular business of a company, or (b) selected assets and liabilities of a company i.e. cherry picking of the assets
and liabilities that the said company is desires to acquire. To record such understanding, parties usually enter into
an agreement to agree to transfer, namely, a business transfer agreement or an asset transfer agreement.
 Alternatively, parties can also approach the courts to sanction spin-off of a business into another entity. Such
process is called a ‘demerger’ and is usually considered for its tax related benefits.

Discussed below are the key considerations pertaining to a slump sale, asset sale and a demerger.

3.2.1 SLUMP SALE.

The Income Tax Act, 1961 (IT Act) defines a slump sale as a 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 (though
valuation of individual assets and liabilities are expressly permitted for stamp duty, registration and like purposes).
Further, an 'undertaking' has been defined under the IT Act, to include any part of an undertaking, or unit or a
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.

Thus, for a transaction to constitute a slump sale, the essential requirements are:

I.What is being transferred must be a functional 'undertaking' or 'business activity', and not merely a collection of
assets and liabilities, and

II.Individual values should not have been attributed to individual assets and liabilities comprising the undertaking or
business activity.

Importantly, parties have to bear in mind that all liabilities associated with the business would be transferred to the
purchaser, however, parties can document the transaction in a manner that only known liabilities associated to the
business are transferred (as opposed to unknown liabilities) to the purchaser.

Set out below are some of the key considerations to be factored in by parties while undertaking a slump sale.

3.2.2 CONSENTS AND APPROVALS.

3.2.2.1Corporate approvals.

The board of directors of the seller and purchaser entities would be required to approve the transfer of the
undertaking to the purchaser. Shareholders consent would also be required for sale of whole or substantially whole
of the undertaking3.

3.2.2.2 Creditors approval.

In the event if any loan(s) have been secured by way of a charge/mortgage over the existing movable/immovable
assets of the transferred undertaking, then prior approval of the lenders for transfer of the movable/immovable
properties in favour of the purchaser would also be required.

3.2.2.3Business authorisations.

A slump sale would involve transfer of all business related licenses/ permits, which transfer would depend on the
terms and conditions of issue of such license and permits. In certain cases, prior government approval may also
be required for transfer of various licenses and permits or in certain cases the purchaser may be required to obtain
such licenses afresh from the concerned authorities in order to continue the business.

3 The Companies Act, 2013, S. 180(1).

 3.2.2.4 Third party consents.

As part of the slump sale process, contracts of the undertaking being transferred would need to be assigned and
in certain cases, where the contract so provides, consent of the counter parties may also be required to be sought.

3.2.3 TRANSFER OF EMPLOYEES.

Consideration similar to as set forth for mergers in Section II would be applicable for a slump sale as well.

3.2.4 STAMP DUTY.

Stamp duty plays an important consideration in a slump sale and the implications would depend on the nature of
assets being transferred. The business transfer agreement, being in the nature of an agreement to acquire and not
actually conveying any property could in most states be stamped with nominal stamp duty at the stamp rates of
the state in which the agreement is executed.

However, for effecting transfer of immovable property and intangible property, a deed of conveyance shall be
executed, adequately stamped and registered with the concerned authority. The rate of stamp duty payable on the
deed of conveyance is on ad valorem basis which would vary from state to state in which the immovable property
is located. On the other hand, movable properties are usually transferred by mere delivery of possession.

3.2.5 TAX.

The IT Act makes a specific provision for computation of capital gains in the event of slump sale. Capital gains
are calculated on the difference between the consideration agreed for the transfer and the 'net-worth of the
business' as on the date of transfer. The net-worth of the business denotes the aggregate value of the assets of the
business less the aggregate value of the liabilities thereof.

Furthermore, it may be noted that capital gains realized on a slump sale would be taxed as long term capital gain,
if the undertaking has been held for more than 36 months and as short term capital gain if the undertaking has
been held for less than 36 months.

An added benefit for undertaking a transaction as a slump sale would be the exemption from payment of value
added tax (VAT). VAT is levied on the sale of movable goods in India, and given that the sale of an entire business
as a going concern is not a 'sale of goods' and hence an exemption is thus available from payment of VAT.

3.3 ASSET SALE.

The other alternative for acquiring a business would be to cherry pick the assets and liabilities by an acquirer
desirous of purchasing, also known as an ‘Asset Sale’ or an ‘Itemized Sale’. In an asset sale, values are assigned to
individual assets being sold. In such case, since the business would not be sold as a going concern, except the
statutory liabilities and such liabilities that are directly linked to the transferring assets, a purchaser may choose not
to acquire the other liabilities connected to the assets.

The process involved in implementing an itemized sale is identical to a slump sale except that, as mentioned above,
a separate valuation for each of the assets and liabilities being transferred will need to be undertaken. An itemized
sale is sometimes a preferred option as it allows certain liabilities of a business to be retained by the transferor and
not passed on to the transferee. However, apart from having the same income tax related inefficiencies of a Slump
Sale, such transfer also attracts the incidence of VAT on the transfer of the movable assets of the transferred
business.
 3.4 DEMERGER.

Demerger is a mode of acquisition of business, whereby a corporate entity transfers one or more of its business
units to another corporate entity. The term ‘demerger’ has not been defined under the 1956 Act or the 2013 Act,
however finds mention under section 2 (19AA) of the IT Act, where it is defined as “the transfer, pursuant to a
scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company
of its one or more undertakings to any resulting company in such a manner that…”.

A demerger is carried out pursuant to filing of a scheme of demerger by the Transferor and Transferee Company
with the relevant High Court(s). The process, in case of a demerger, is similar to that of a merger (as discussed in
Section II above) and entails similar considerations.

Demergers are undertaken for the specific purpose of spinning out the business of a company into another
company. It may also have certain strategic reasons from a transferor companies’ perspective, where it desires to
isolate certain kinds of risk attached to a business from its other businesses. Very often, parties may want to bring
in a new investor to only some part of a business, in which case, such particular business could be spun off to
another entity. In comparison to a slump sale, a court approved demerger is often adopted for its tax advantages.
Subject to meeting the certain conditions, as set out under the IT Act, an ‘income tax neutral’ demerger is not
liable to capital gains tax.

From an implementation perspective, under a demerger process, generally all licenses and contracts are transferred
to the Transferee Company as a part of the order of the High Court sanctioning the scheme of demerger.
Subsequent to the demerger, the relevant authorities are approached only to have such licenses mutated in favour
of the Transferee Company. However, express conditions in the relevant governing statutes under which the
licenses, authorizations and consents are granted or the terms of the licenses, authorization and consents
themselves may prohibit their transfer or require certain procedures to be complied with.

Additionally, it becomes relevant for parties to consider and structure the segregation of the business post
demerger. Specifically, employees would need to be migrated to another entity and amongst others, a migration
plan for the employees needs to be implemented by the parties.

4. CONCLUSION.

Mergers and acquisitions are indicators of a growing and opportunist economy. With the host of consolidations
and acquisitions in the recent years, it could be said that the Indian economy is moving at an extremely fast pace
and in the right direction. The legal framework plays an important role in this regard and it is therefore important
that processes are streamlined, made easy and facilitative without unnecessary regulatory hurdles.

Today, the Government appears to be on a constant move to introduce norms for ease of doing in India. This has
not only provided a boost to foreign investors looking to set up in India, but also to Indian companies that desire
to be global names. The current approach and mind set is what is needed for India to become a truly global
economy, and today, it can be said that we are on the right path.