Case Studies and practical aspects of

MERGERS AND DEMERGERS

Presentation by:
HEMANT SHARMA
Principal Associate - Dhir & Dhir Associates
 Need For Mergers & Demergers
A Panacea for corporate turbulence
Opening up of the Indian economy
Impetus for foreign investment
Interest of foreign companies in exploring
business relationships with India
Tax planning tool
Back door listing
Family settlement
 Advantages

Strategic Synergies
Growth in market share.
Diversification
Product range width
Global platform
Market penetration
Enhancement of technical know how
Financial Synergies
Available liquidity
Capital Structure flexibility
Tax and cost advantages
Regulatory Framework
Corporate Restructuring
Companies Act,
1956 Takeover
Acquisition Merger Demerger
Code Others

Share Asset Reverse

IncomeForward
Tax
Purchase Purchase ActMerger
Merger
Fact Specific
Regulations
Slump sale Itemized Capital
Sale Buyback
Reduction

Contractual Arrangement
 What is Merger / Amalgamation?

Mergers -------------- M -------- Marriages

De-mergers------ D --------- Divorces

Companies Act, 1956 (CA) facilitates compromise, arrangement or

reconstruction of a business (sections 390 to 396A of CA)
The terms ‘merger’ and ‘amalgamation’ are synonymous
In amalgamation, the undertaking, i.e. property, assets and liability of one or
more company (amalgamating company) are absorbed by an existing or a new
company (amalgamated company)
The amalgamating company integrates with amalgamated company and
the former is dissolved without winding up
Amalgamation -Definition under the
Income-Tax Act, 1961 [section 2(1B)]
Merger of two or more companies in such a manner that all assets
and liabilities of the amalgamating company immediately before
the amalgamation, become the assets and liabilities of the
amalgamated company
and
Shareholders holding not less than 3/4th in value of the shares in
the amalgamating company become shareholders of the
amalgamated company by virtue of the amalgamation
Sec 47(vii) of Income Tax (IT) Act, 1961 Exemption from Transfer
—

Any transfer by a shareholder, in a scheme of amalgamation, of shares

in the amalgamating company if transfer is made for consideration as
shares in the amalgamated company except where the shareholder itself is
the amalgamated company. (in a way, earlier CBDT circular of 1967
adopted).
 What is Demerger
Section 2(19AA) of the Income-tax Act defines
demerger as under:
‘ demerger’ in relation to companies means the transfer,
` '

pursuant to a scheme of arrangement under section 391 to

394 of the Companies Act, 1956 by a demerged company
of its one or more undertakings to the resulting company in
such a manner that-
i. All the property of the undertaking, being transferred
by the demerged company, immediately before the
demerger, becomes the property of the resulting
company by virtue of demerger;
Contd ...
 What is Demerger
ii. All the liabilities relatable to the undertaking, being
transferred by the demerged company, immediately
before the demerger, become the liabilities of the
resulting company by virtue of the demerger;
iii. The property and the liabilities of the
undertaking or undertakings, being transferred by the
demerged company are transferred at values
appearing in its books of account immediately
before the demerger;
iv. The resulting company issues, in consideration of the
demerger, its shares to the shareholders of the
demerged company on a proportionate basis (except
where the resulting company itself is a shareholder of the
demerged company);
 What is Demerger
v. The shareholders holding not less than three-fourth in
value of shares in the demerged company (other than
shares already held therein immediately before the
demerger, or by a nominee for, the resulting company or,
its subsidiary) become shareholders of the resulting
company or companies by virtue of the demerger;
otherwise than as a result of the acquisition of the
property or assets of the demerged or any undertaking
thereof by the resulting company;

vi The transfer of the undertaking is on a going concern basis.

Procedure for Scheme under section 391-394 .... Contd.

 To prepare the draft scheme of amalgamation/arrangement

 To get the valuation report for the purposes of Shares Exchange

Ratio

 To obtain fairness opinion from merchant banker on the

valuation report (clause 24 of the listing agreement)

 To inform the Stock Exchanges for holding Board

Meeting for approving the Scheme of
Amalgamation/Arrangement

 To hold Board Meeting for taking note of the valuation report

and share exchange ratio, draft scheme of amalgamation and
authorizing someone to sign all the application, petition,
affidavits etc. on behalf of the company.
Procedure ....Contd.

 To file draft scheme of arrangement/amalgamation with

the stock exchanges atleast a month before presenting it to the
Court (clause 24 of the listing agreement) along with auditor’s
certificate confirming the compliance of AS-14 and other related
documents

 Filing of application before the Hon’ble High Court under

section 391 of the Act for convening/dispensing with the
meetings of shareholders and creditors of the applicant companies
Procedure ....Contd.

 Whether joint application/petition (i.e. by all the companies together falling

under jurisdiction of one High Court) possible? Yes, there is no restriction
—

 Order of the High Court for convening of the meetings of the

shareholders/creditors under Rule 69 of the Company (Court) Rules, 1959 and
appointment of Chairman
 To finalize the draft notice of meetings of the creditors/shareholders in
Form 36 and advertisement of the notice of the meeting in Form 38
 To get the notice of the meeting approved from the Chairman appointed
by the Court & Registrar of the High Court
 To get the explanatory statement approved from the Chairman &
*

Registrar of the High Court. (In case of listed company, explanatory

statement should also comply with the Listing Agreement)
Procedure Contd.

 To get the notices along with the explanatory statement printed

 To send the notice (Form 36) individually to the shareholders /

creditors by the Chairman or under the name of the Chairman by the
Company within 21 clear days of the holding of the General Meeting
[along with copy of the Scheme, Explanation Statement, Form of Proxy
(Form 37) and also by way of advertisement in two newspapers, one in
English and other in vernacular language circulating in the area where
registered office of the Company is situated]

 To give advertisement in the newspaper at least 21 clear days before

the date of the meeting (Advertisement in From 38)
Procedure Contd.

 Chairman to file affidavit stating that the directions regarding the

issue of notice of advertisement & dispatch of notices have been
complied with (at least 7 days before the date of the meeting)

 To convene meetings of the shareholders/creditors - Pass the

Resolution with requisite majority and arrange for filing of Chairman’s
Report as per directions of the Court

 To file petition for obtaining sanction of the Court for the scheme
along with all Annexures at the High Court for confirming
compromise/arrangement (Form 40) (within 7 days of filing report)
Procedure
 Publication in the newspapers of the notice of petition
 To follow up with the RD, ROC and OL for submitting their reports
that affairs of the Transferor Company and Transferee Company are
not prejudicial to the interest of the members or to public interest
 To ensure that RD and OL submit the report with the High Court
*

before the final date of hearing (Guidelines by MCA in next slide)

 To file certified true copy of the order within 30 days with the
Registrar of Companies
 To annex copy of the order of every copy of the Memorandum of
the company
Guidelines to RDs/ROCs for Schemes u/s 391-394
Contd.
...

 Ministry of Corporate Affairs, Government of India (“MCA”)

has issued General Circular No. 53 of 2011, with guidelines for
the Regional Directors RDs and Registrar of Companies
”)

(“ROCs”), in the matter of scheme of arrangement / amalgamation under

section 391- 394

 In order to streamline the procedure, guidelines along with timelines are

issued for strict compliance.
Guidelines to RDs/ROCs for Schemes u/s 391-
394: .. . Conta.
Timelines prescribed under the guidelines are as under :

 On receipt of notice from Court, RD should make an entry in

register/electronic form. In case the petition is filed with ROC in Form
61 same can be monitored directly from the system.

 RD shall send mail to ROC within 3 days.

 ROC should furnish his report online to RD within 7 days from receipt
of Form 61 without waiting for RD’s communication

 RD should then send a letter to local branch of Law Ministry / Assistant

Solicitor General requesting for nomination of an advocate.

 RD should send a letter to Company within 5 days to provide material

of valuation and Chairman’s report and the same should be finalized
within a week’s time thereafter.
 The finalized affidavit be sent to Standing Counsel for signature and it
should not take more than 5 days after which should be filed in Court
registry.

 ROCs to examine matter and send report to RDs – RD to consider the

same before finalizing their comment.
Issues to be examined by RDs
Contd.
...

 Whether companies forming part of scheme are sensitive sectors

categories companies ?
 Whether any of the companies are listed on any STX ? If so, NOC
from STX is submitted ?
 Whether any NRI/foreign interest in the Companies?
 Whether the companies or its directors have contravened any
provisions of Act?
 Whether the companies involved have been inspected u/s 209A ?
 Whether Valuation report submitted, if so share exchange ratio is as
per report and accounting principles ?
 Whether transfer of Employees and their interest is protected ?
 Whether Accounting Treatment clause is as per AS-14 and in tune
with provisions of section 211(3A)/ 211(3C) of the Act ?
Issues to be examined by RDs
 Whether meeting of class of shareholders/creditors is conducted ?
 Whether details of related party transactions are furnished ?
 Whether consideration is made in cash other than of shares ?
 Whether provisions of buy back is attracted ?
 Whether any reduction of share capital is involved ?
 Whether authorized share capital of transferee company is
sufficient?
 Whether any foreign entity is involved and necessary approvals
obtained ?
 Whether compliance of FEMA/RBI Guidelines has been done ?
 Whether any qualification has been made by Statutory Auditor ?
 Whether a listed company is merging with an unlisted company ?
 Whether the promoters holding in listed company is increased?
 Whether the companies have come up with the schemes under
principle of ‘Single Window Clearance ’, approval from High Court
has been obtained ?
Issues to be examined by ROCs

 Filing Position.
 Investor Grievances.
 Inspection / Investigation / Technical
Scrutiny.
 Pending Prosecution.
 Furnishes comments on the scheme.
Issues considered by Court in a Scheme of Arrangement

 Compliance with the Provisions

 Protection of interest - creditors and shareholders

 Reasonable arrangement
 Scheme in consonance with public interest
Issues considered by Court in a Scheme of Arrangement:

 In the case of In Re: Apex Investments Pvt. Ltd. (1992) CLA 20

(Del), the Hon’ble Delhi High Court held that an arrangement for
reconstruction or amalgamation of a company is essentially a
contract and therefore parties are free to decide:

 its terms and conditions

 consideration to be paid

 According to Section 10 of the Companies Act, 1956, the

jurisdiction for petition of amalgamation will lie with the High
Court of the State in which the Registered Office of the Company is
situated.
Appointed Date & Effective Date
Appointed Date: Date on which assets and liabilities of the transferor
company vest in and stand transferred to the transferee company

 Accounts on the appointed date form the basis for valuation of shares
and determination of share exchange ratio

 Appointed date relevant for the

Critical Issues purpose
of assessment of income of the transferor and transferee companies
[In Re: Marshall Sons (1997) 88 Comp Cases 528 SCJ
(Can future appointed date be fixed??)
Effective Date: Date on which scheme is complete & effective, i.e. certified
copy of the High Court order is filed with Registrar of Company or
the last of the approvals obtained
 From the effective date amalgamation becomes effective and transferor
company stands dissolved
(APIIC example)
 Valuation Aspects
 One of the most important part of the M&A Scheme
 Valuation is an art and not a science
 The Process involves:
 evaluating the value of the merging company or its
business and/or of its shares
 evaluating the securities of the issuing company on a
stand alone basis
 determining the Exchange Ratio for the securities so as
to ensure fair consideration
 The Report is subject to scrutiny by the lending and
investment institutions, Regional Director, Official Liquidator
 Valuation Aspects
 Approval of the Scheme and the Valuation Report by
majority of the shareholders and creditors does not mean that
the Court is bound to treat the same as fait accompli-Courtcan
view it from the test of fairness
 On some occasion, the Court does appoint independent
valuers where dissenting shareholders or creditors make a
strong case for such an action
 Valuation not required in case of merger of WOS
 No requirement under the law-only advisory in nature to
Board - Advance Plastics Pvt. Ltd. (2007) 138 Comp Cases 1006 (Bom)
 Contd...

Critical Issues

• Whether valuation report is mandatory ?

 Contd...

Critical Issues

Companies Act:

 No specific reference for valuation report;

 Though listed companies are required to send

“fairness opinion” with notice of the meeting

 Valuation Report is not required in cases of de-

merger Refer:Larsen and Toubro Limited (supra)]
[

 Valuation report isnot mandatory even for mergers/

amalgamations, its only for reference of Board of
 Directors
)
 Contd...

Critical Issues

Companies Bill, 2012 (“Companies Bill”):

• Reference is made under clause 230 (2) (v) and 232 (2) (d).
The said clauses are reproduced hereunder

230 (2) (v) “A valuation in respect of shares and the property and all
assets tangible and intangible, movable and immovable of the
company by a registered valuer”

232 (2) (d) “The report of the expert with regard to the valuation if
any”
 Contd...
Critical Issues

Whether consent of the shareholder(s)/ creditors(s) can be

obtained by way of postal ballot ?
 Contd...
Critical Issues

Companies Act:

 Voting is allowed in person or by proxy at meeting.

 Was not permitted in the absence of any specific

provision in this regard.

[In Re: Bharti Airtel] Hon’ble Delhi High Court specifically

permitted to obtain the consent by way of postal ballot instead of
the meeting.
 Contd...
Critical Issues

Companies Bill :

• Specific permission in the Companies Bill permitting the voting by

postal ballot - Clause 230(4) provides that the consent o f
shareholders(s)/creditors can be obtained by way of postal ballot. The
said clause is reproduced hereunder:

230(4) A notice under sub-section (3) shall provide that the persons
"

to may vote in the meeting either themselves or through proxies or by

postal ballot to the adoption of the compromise or arrangement within
one month from the date of receipt of such notice"
 Contd...

Critical Issues

• To whom notice of the Scheme is required to be

sent??
 Contd...

Critical Issues

Companies Act:

• Notice of the scheme is to be served to

a)Central Government (section 394A);
b)Registrar of Companies;
c)Official Liquidator, if required;

as per High Court Directions

 Contd...

Critical Issues

• Notice of the Scheme :

Specific timeline of 30 days to respond to the notice for the

statutory authorities. The relevant portion of the said clause is
reproduced hereunder:

230(5) “ A notice under sub-section (3) along with all the

documents in such form as may be prescribed shall be sent to the
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 established under 7(1) of the Competition
Act, 2002, if necessary and such other sectoral regulators or
authorities which are likely to be effected by the compromise or
arrangement”
 Contd...

Critical Issues

• Whe the r p r o v i si o ns fo r di spe nsa ti o n o f m e e ti n g s o f

shareholders/creditors are provided in statute??
 Contd...
Critical Issues

Companies Act:

• No provision in this regard, governed by judicial pronouncements

Companies Bill:

Specific provisions inserted in this regard. If the consent of 90% of

the value of the creditors has been obtained then the High Court may
dispense with their meeting else the same has to be convened. (Clause
230(9)). The said clause is reproduced hereunder:

230 (9): “The Tribunal may dispense with calling of a meeting of

creditor or class of creditors where such creditors or class of
creditors, having atleast ninety percent value agree and confirm by
way of affidavit to the scheme of compromise or arrangement”
,
 Contd...

Critical Issues

• Whether latest provisional accounts are required to be filed before

HC or circulate it to the members ?
 Contd...
Critical Issues

Companies Act:

 Provisional accounts were not mandated; only latest audited

accounts (Section 391)
Companies Bill:

 Provisional/ supplementary accounts required. Clause

232(2)(e). The said clause is reproduced hereunder:

“a supplementary accounting statement if the last annual accounts of

any of the merging company relate to financial year ending more than
six months before the first meeting of the company summoned for the
purposes of approving the scheme”
 Contd...

Critical Issues

• Whether Auditor’s Certificate for Compliance of

Accounting Standards is also required for unlisted
companies??
 Contd...

Critical Issues

Companies Act:

• Earlier there was no requirement for obtaining such compliance

certificate in case of unlisted companies. Only required for listed
companies. [Refer: Clause 24(i) of the Listing Agreement]
 Contd...

Critical Issues

Companies Bill:

• Proviso to clause 230(7) provides that auditor’s certificate for

compliance of Accounting Standards for unlisted companies is also
required. The said clause is reproduced hereunder:

“Provided that no compromise or arrangement shall be sanctioned

by the Tribunal unless a certificate by the company’s auditor has
been filed with the Tribunal to the effect that the accounting
treatment, if any, proposed in the scheme of compromise or
arrangement is in conformity with the accounting standards under
clause 133” "
 Contd...
Critical Issues

• Time period for filing the order with the ROC

 Contd...
Critical Issues

Companies Act:

 Within 30 days or the time given in Order

 Power of Court to provide a period higher than 30 days also

 In calculating the time period- time taken in drawing up

and
obtaining a copy of order to be excluded (Sec 640A)

 But e-filing of Form 21 along with order within 30 days from

the date of receipt of order only otherwise, an objection
can be raised by RoC.
 Contd...
Critical Issues

Companies Bill:

• Now, position is clarified order is to filed within 30 days

from the receipt of the order. (Clause 230(8)
 Single window clearance
 Sanction of a Scheme without power to amalgamate in
the memorandum of association
[Hari Krishna Lohia v. Hoolungoree Tea Co. Ltd. (1996) : 4 Comp LJ 353
(Cal) ]

 Increase of authorized capital - Post amalgamation events

cannot be made subject-matter of objections to scheme of
compromise orarrangement
[Winfield Agro Services (P) Ltd. v. Hindustan Antipest (P) Ltd. (1996) : 3
Comp. LJ 347 (AP)]

 Change of object clause through the Scheme [In Re:

HCL Infosystems Ltd.]
Contd...
 Single window clearance
*

 Change of name of the amalgamated company to the name

of amalgamating company [In Re: Novapan India Ltd., (1997) 88
Com Cases, 596]
 Change of Registered Office of the transferee company [In the
*

matter of Indo Rama Synthetics Ltd.]

 Reduction of Share capital [In Re: ManekChowk and
Ahmedabad Mfg. Co. Ltd]
 Conversion of status of a company (Private Limited to
PublicLimited and vice-versa) [In Re: Maharishi Ayurveda
Corporation Pvt. Ltd.]
 Contd...

Critical Issues

Can Indian Company be merged with the Foreign

Company?
 Contd...

Critical Issues

Companies Act:
 Only Foreign Company can be merged with the Indian
Company.
 Sec 394(4)(b) of the Companies Act defines-

a. Transferee Company to include any company within the

meaning of the Companies Act.

b. Transferor Company to include any body corporate, whether

a
Company under this Companies Act or not.

 Foreign Co. can be a transferor company but can’t

be a transferee company [1. Moschip Semiconductor
Technology Ltd., (2004) 120 Comp Cas 108 (AP) 2.
Jindal Saw Ltd. (Allahabad High Court]
 Contd...

Critical Issues

Companies Bill:

• Specific Insertion - Clause 234 of the Companies Bill provides

for merger of the Indian Company with the Foreign Company and
vice-versa subject to restrictions stipulated in the clause. Relevant
part of the clause is reproduced hereunder for ready reference:

234(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 amalgamation between
companies registered under the Act and companies incorporated in
the jurisdictions of such countries as may be notifiedfrom time to time
by the Central Government.

(2) a foreign company, may with the approval of the RBI, merger
. ... ..

into a company registered under this Act or vice-versa and terms and
conditions . . . . . . . . . "
 Contd...

Critical Issues

• Can insignificant minority object to the scheme

 Contd...

Critical Issues

Companies Act:

• No provision in the existing Companies Act specifically barring the

insignificant minority to object to the scheme

[Refer: UB Nizam Breweries P. Ltd. In re (2011) 167 Comp Cas

562 (Kar)]

Hindalco Industries Ltd., Bombay High Court

 Contd...

Critical Issues

Companies Bill :

• Proviso to clause 230(4) provides that a scheme can only be objected

by persons holding
(a) 10% or more of the shareholding; or
(b) 5% or more of the total outstanding debt.

The said proviso is reproduced hereunder:

"Provided that any objection to the compromise and arrangement

shall be made only by person holding not less than ten percent of the
shareholding or having outstanding debt amounting to not less than
five percent of the total outstanding debt as per the latest audited
financial statement "
 Contd...

Critical Issues

• Exit to minority??
 Contd...

Critical Issues

 Recently, the Division Bench (“DB”) of Delhi High Court, in the matter of
Ram Kohli V. Indrama Investment Pvt. Ltd. and Select Holiday Resorts
Ltd., has dismissed the appeal rejecting the objections raised by a minority
shareholder against a scheme of amalgamation sanctioned by the Company
Court/Single Bench Date of Decision: 16th May, 2013 in Company Appeal
70/2012

 “Shareholders holding miniscule percentage of shares in the company would not

be permitted to hold the company to ransom when substantial majority has
approvedthe scheme providing for exit to minority”
 A scheme of amalgamation was duly passed
LMN, a minority shareholder objected stating that he has been forcibly exited,
since he held fractional shares as per the scheme.
He stated that he constituted a separate class.
Delhi High Court while rejecting the objections raised by Objector, held that
minority can’t suppress the scheme passed by majority
EXITING MINORITY SHAREHOLDERS BY DECISION OF MAJORITY:

ITW Signodge India Limited. In Re (2004) 52 SCL 147 (AP)

Matther and Platt Pumps Limited In re C.P. 69 of 2010

Hoganas India Ltd In Re [2009] 148 Comp Cas Bom

Organon India Limited 2010 (4) Bom CR 268

Sandwik Asia Limited 2009 (3) BOM CR 57

Reckitt Benckister (India) Ltd. 122 (2005) DLT 612

 Contd...

Critical Issues

• Can Treasury Shares be issued in lieu of shareholding of

Holding and subsidiary??
 Contd...

Critical Issues

Companies Act:

 No provision restricting/prohibiting the company to hold the

treasurystock. However, companies are prohibited from
holding own stakes under normal course;
 No specific requirement for cancellation of inter company
stakes on merger. Treasury shares can be created instead of
cancellation of inter-company shareholdings;
 In different schemes like Reliance, Jaypee, Network 18,
treasury shares have been created
 Contd...

Critical Issues

Companies Bill:

• Treasury shares cannot be issued under clause 230(3)(b) proviso. The

said clause is reproduced hereunder:

“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” '
Can a Partnership Firm be merged with a company?
Sec 390(a) of Act defines company for Sec 391-393 as a company liable to
be wound up under this Act.
‘Company liable to be wound up’ –

all co.’s to which provisions of winding up applies & Part X of the Act deals
with winding up of an unregistered company.

Unregistered Co. as per Sec 582(b) includes any partnership firm,

association or co. consisting of more than 7 members at the time of
presenting the petition. (minimum 8)

CLC Corporation and Spentex Industries Ltd. (Co. App.

(Main)15/2005)
 Back Door Listing through Scheme:
Listing of a company without IPO
A Ltd. (Listed Company) B Ltd. (Listing through Scheme)

Activity A Activity B Activity B

Compliance of Circular of SEBI (CFD/SCRR/01/2009/03/09) dated

September 3, 2009
 Contd...

Critical Issues

 Merger of listed company with unlisted company:

 Contd...
Critical Issues

Companies Act:

• No specific provision for such reverse mergers, involving a listed and

an unlisted company. SEBI vide its circular dated September 3, 2009
provides for terms for such mergers.

Companies Bill:

Specific provisions included for such mergers [Section 232(3)(h)]

Exit opportunity being provided for shareholder(s) of listed transferor

company [Clause 232 (3) (h)]

 Contd...
Critical Issues

However, SEBI, vide its circular dated February 04, 2012 (by
superseding the earlier circular) has significantly revised the
requirements in respect of listed companies and desirous of
undertaking a scheme of arrangement (including without limitation,
an amalgamation, a merger, a reconstruction or a reduction of
capital) under Chapter-V (covering section 390-396A) of the
Companies Act, 1956.

New Circular is not clear for the following:

a) Whether it is applicable to all the schemes proposed by listed
company or only the schemes for seeking exemption u/r 19(2)(b)?

b) Whether it is applicable to reduction of capital simplicitor u/s

100 ??

c) Method of obtaining shareholders approval ??

 Contd...

Critical Issues

Procedure under the new Circular issued by SEBI:

a) Valuation Report to be placed before Audit Committee.

b) STX to SEBI in 3 days (scheme and other docs)

c) Independent CA Clarification

d) Objection or No objection letter by STX to SEBI within thirty (30)

days from the date of application, or within seven (7) days from the
receipt of the last clarification sought from the company or CA

e) SEBI, after its evaluation, shall submit a report to STX within thirty
(30) days from the later of: (a) Date of receipt of clarification from
company, if any, sought by SEBI; or (b) Date of receipt of opinion of
CA, if sought by SEBI; or, (c) Date of receipt of the no-objection (or
objection, as the case may be) from the Stock Exchange(s).
 Contd...
Critical Issues

f) STX within 7 days from SEBI’s comments shall issue an

Observation letter to the Company, which shall produced before
the Court and also sent to the members.

g) Obtaining the shareholders approval through a special resolution

passed by postal ballot and e-voting.

h)The Scheme must also provide that the special resolution shall
be acted upon only if the votes cast by the public shareholders in
favour of the proposal, amount to at least two (2) times the number
of the votes cast by public shareholders against it.
 Contd...
Critical Issues

Subsequent to the Circular No. CIR/CFD/DIL/5/2013 issued by

Securities and Exchange Board of India (“SEBI”) on February 4, 2013 -
SEBI has issued Circular No. CIR/CFD/DIL/8/2013 dated May 21, 2013
(“Circular”). The said Circular addresses the concerns of the market
participants that were facing operational difficulties in implementing
certain provisions. This Circular aims at providing clarification and
modifying certain provisions of the earlier circular.
 Contd...
Critical Issues

Applicability:

The aforesaid circular is applicable to all the Schemes of

Arrangement, including amalgamation, merger, reconstruction and
reduction of capital. Further the Circular clarifies that it is even
applicable to cases where no exemption from Rule 19 (2) (b) of
Securities Contracts (Regulations) Rules, 1957 (“SCRR”) is sought
from SEBI
 Contd...
Critical Issues

Valuation Report from independent Chattered Accountant

(“CA”) not required in some cases:

It has been clarified that a Valuation Report from an

independent CA is not required in cases where there is no
change in the shareholding pattern of the listed company/
resulting company.
 Contd...
Critical Issues

Modifications to the erstwhile circular:

 A listed company can choose the stock exchange having
nation-wide trading terminals as the designated stock exchange
for the purpose of coordinating with SEBI.
 Companies listed solely on regional stock exchange wherein
exemption from SCRR is sought, the company is required to
"obtain in-principle approval for listing of equity shares on any
stock exchange having nationwide trading terminals.
 Those companies which have not sought the required exemption
from SCRR, one of the stock exchanges having nationwide
trading terminal shall provide a platform for dissemination of
information of such Schemes, by charging reasonable fees from
such companies
b
 Contd...

Critical Issues

Voting by public shareholders through postal ballot and e-voting:

The Circular provides that in the following cases, Listed Companies are to ensure that
the Scheme submitted with the Hon’ble High Court for sanction, provides for voting by
public shareholders through postal ballot and e-voting. Such Schemes shall also provide
that the Scheme shall be acted upon only if the votes cast by the public shareholders in
favor of the proposal are more than the number of votes cast by the public shareholders
against it.
a) Where additional shares have been allotted to Promoter/ Promoter Group, Related
Parties of Promoter/ Promoter Group, Associates of Promoter/ Promoter group,
Subsidiary/ (s) of Promoter Groups ( “Promoters”) of the listed company or;
b) Where the Scheme of Arrangement involves the listed company and any other
entity involving Promoters;
 Contd...
Critical Issues

Voting by public shareholders through postal ballot and e - voting:

c) Where the parent listed company, has acquired the equity shares of the subsidiary,
by paying consideration in cash or kind in the past to any of the shareholders of the
subsidiary who may be Promoters of the parent listed company, and is the subsidiary is
being merged with the parent listed company under the Scheme.
 Contd...

Critical Issues

• Whether the liability in respect of any offence committed before

merger gets absolved after merger ?
 Contd...

Additions:

• [Section 232(7)] 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 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 the Tribunal or not.
Stamp Duty Aspects Contd.
...

 Every instrument for transfer of property, whether movable or

immovable, attracts stamp duty prescribed in Schedule-I of the
Indian Stamp Act, 1899 (“Stamp Act”)
 Instrument attracts duty not the transfer/conveyance
 In order to create a valid charge for levy of stamp duty on
conveyance, the following ingredients must exist; (i) there should be an
instrument of transfer, and (ii) the property, whether movable or
immovable, should be transferred inter-vivos between the parties
 It is also pertinent to note that stamp duty is a State subject. The
applicability is determined on two grounds: the State/states(s) in
which the registered office of the Companies is situated and the situs
of the properties being transferred under the Scheme.
 ... Contd.

Stamp Duty Aspects

*

 Whether order of the Court for amalgamation is an instrument of

conveyance under the Stamp Act or not?
 Maharashtra, Gujrat, Karnataka, Rajasthan, Chattisgarh, Madhya
Pradesh, Andhra Pradesh, West Bengal and Uttar Pradesh –have included
the orders passed u/s 394 of the Companies Act in the definition of
‘Conveyance’.
Hindustan Lever Vs. State of Maharashtra (2004) 1 CLJ 148 (SC) - held that
order of the Court is an instrument constituting a transfer inter-vivos and
therefore, falls within the ambit of the definition of conveyance
The Hon’ble High Court of Calcutta vide its order dated 8th February, 2012, in
the matter of Emami Biotech Limited (CP. No. 627 of 2011) and ITP Limited (CP
No. 398 of 2011) and Brijbhumi Agents Private Limited (CP No. 474 of 2011) held
that an order sanctioning a scheme of amalgamation or demerger under Section
394 of the Companies Act answers to the description of the words "instrument"
and "conveyance" within the meaning of the Indian Stamp Act, 1899 as applicable
in the State of West Bengal and is, accordingly, exigible to stamp duty.
 Stamp Duty Aspects Contd.
...

Further, it states that the judgment as given in Madhu Intra Limited V.

Registrar of Co. [2005] 58 SCL 160 (CAL) does not hold good in light of
the Hindustan Lever case.
 Delhi Towers Limited vs. G.N.C.T. of Delhi [(2010) 159 Comp Cas
129 (Del)] it was held that the order of the High Court under section 394
of the Companies Act constitutes an instrument by virtue of which the
assets and liabilities of the transferor/demerged company are transferred
and vested in the transferee/resulting company disregarding the fact that
there is no specific entry in the schedule-I of the Delhi Stamp Act and
hence, made such order eligible to stamp duty.
 Stamp duty in Delhi on instrument of conveyance for transfer of
property is 3% on the consideration set forth in the instrument and in
case of transfer of immovable property, and additional transfer duty of
3% of the consideration amount shall be applicable
 The Allahabad High Court in the case of [Hero Motors Limited vs.
State of Uttar Pradesh (2009) 2 AWC 1336] vide order dated 23.01.2009,
held as under:
 Stamp Duty Aspects ...Contd.

the scheme of arrangement sanctioned by the Court is a

conveyance and an instrument within the meaning of Sections 2 (10) and
2 (14) of the Indian Stamp Act as applicable in Uttar Pradesh.

a scheme of arrangement involves transfer of business of a going concern.

The consideration of transfer under a scheme of arrangement would be
the shares allotted by the transferee company to the shareholders of
the transferor company. The valuation of the shares would therefore be the
consideration upon which stamp duty would be payable at the rate
provided for conveyance of movable property. A going concern or an
undertaking transferred under a scheme of arrangement would
therefore be ‘movable property’ . In view of the aforesaid discussion, I am
of the opinion that the scheme of arrangement is covered by Article 23 (b) of
Schedule 1-B of the Indian Stamp Act as applicable in U.P.”
 Stamp Duty Aspects
 Notification No. 1 dated January 16, 1937, issued by the
Finance Department, Central Board of Revenue, provided for
remission of stamp duty chargeable on instruments evidencing
transfer of property in cases, where the transfer of properties is
between a parent company and its subsidiary company, where the
transferor is the beneficial owner of not less than 90% of the issued
share capital of the transferee or vice-versa.
 The said notification was superseded by Notification No. 13 dated
25th December, 1937

 Notification No. 1 dated January 16, 1937 is withdrawn in Delhi

vide notification number No. F.l( 423 )/Regn.Br./HQ/Div.Com./lO/
266 dated 1st June, 2011.

 What about Notification No. 13 dated 25th December, 1937?

Fast Track Scheme (under Companies Bill, 2012)

The Companies Bill, 2012 (Bill) has introduced a (fast track) concept
whereby they have simplified the procedures in respect of merger
and amalgamation of:

Holding company and its wholly owned subsidiary or such other

class of companies, as may be prescribed; OR

Two or more small companies subject to the process given under

clause 233 of the Companies Bill
Fast Track Scheme (under Companies Bill, 2012)

Clause 2(85): Small Company means a company other than a public company
whose:

(a) paid up share capital does not exceed Rs. 50 Lac or such higher amount as may
be prescribed which shall not be more than Rs. 5 crore; OR
(b) turnover of which as per its last profit and loss account does not exceed Rs. 2
crore or such other amount as may be prescribed which shall not be Rs.20 crore.

Further the definition of small company excludes a holding company and its
subsidiary, Section 8 (presently section 25 company), a company or body
corporate governed by any special act.
 Fast Track Scheme (under Companies Bill, 2012)
Fast Track Process Steps:

1) Notice of the proposed scheme is to be sent to the ROC and OL or

any persons affected by the scheme and they are to provide their
objections or suggestions within 30 days of this notice at the registered
office of the Transferor and Transferee Company(s).

2) These objections and suggestions have to be considered at a general

meeting of the respective companies and the scheme has to be duly
approved by at least 90% of the total number of shares. (There is no
clarification on present and voting)
 Fast Track Scheme

3) Each of the companies involved is required to file a declaration of

solvency with the concerned ROC

4) Scheme is to be approved by 9/10th in value of the creditors or class of

creditors either by way of written consents or by a meeting wherein
notice is to be sent to these creditors at least 21 days in advance

5) Transferee Company shall file a copy of the approved scheme with the
Central Government, ROC and OL
 Fast Track Scheme
6) In case the ROC and the OL have no objection, the Central Government shall
approve and register the scheme and also issue a confirmation in this regard to
the companies.

7) In case the ROC or OL have objections they are to communicate the same to the
Central Government within 30 days, otherwise it shall be presumed that they
have no objections.

8) In case the Central Government, after receiving the objections from ROC and
OL, is of the opinion that the scheme is not in public interest or the interest of the
creditors, the same shall be referred to the Tribunal within 60 days of receipt of
scheme stating its objections and requesting the court to invoke clause 232
 Fast Track Scheme
9) On receipt of an application from Central Government or from any person, 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 u/s 232, the
Tribunal may direct accordingly or confirm the scheme by passing such order as
it deems fit;

10) If CG does not have any objection or has not filed any application with Tribunal,
it shall be deemed that it has no objection to the scheme.

11) Once the scheme is approved by the Tribunal a copy of the order shall be filed
with the ROC having jurisdiction over the transferee company. ROC shall
register the same and issue a confirmation to the companies and ROC of the
transferor company.
 Whether Takeover Code is applicable on a Scheme
u/s 391-394?
Arrangement involving Target Company
(including amalgamation, merger and demerger)

Direct Acquisition Indirect Acquisition

Exempted Exempted

Proviso 2 : -
Proviso 1 : -
Where after implementation of
Reporting is mandatory under The component of cash the scheme of arrangement,
Reg.10(7) in respect of and cash equivalents in persons directly or indirectly
acquisitions arising out of the consideration paid holding atleast 33% of the
inter-se transfers of shares, being less than 25 % of voting rights in the combined
arrangement or reconstruction the consideration paid entity are the same as the
not directly involving the target under the scheme. persons who held the entire
company including vo ti n g ri g ht s b ef o re t he
amalgamation, merger or implementation of the scheme.
demerger.
Competition Act, 2002
 REGULATIONS OF COMBINATIONS

 Applicable Provisions – Sections 5 6; Sections 29 30 of the Competition Act;

— —

Competition Commission of India (Procedure in regard to the transaction of business

relating to combinations) Regulations, 2011 (“Combination Regulations”)

 Combination is an acquisition of one or more enterprises by one or more persons or a

merger or amalgamation of enterprises, where such acquisition, merger or
amalgamation meets the thresholds specified in Section 5 of the Competition Act and
involves:
 REGULATIONS OF COMBINATIONS

 any acquisition of control or shares or voting rights or assets of

* —

enterprises ;
 acquiring of control by person over an enterprises, where such person already
has direct or indirect control over another enterprise engaged in
production, distribution or trading of a similar or identical or substitutable
goods or provisionof a similar or identical or substitutable service ;
 any merger or amalgamation between enterprises
 REGULATIONS OF COMBINATIONS APPLICABLE THRESHOLD
—

Thresholdforproposed combination Threshold for group post acquisition

(acquirer + target)

in india in or outside india in india in or outside india

assets assets assets assets

Jointly worth more Jointly worth more Jointly worth Jointly worth more than US
than Rs 1500 crores than US $750 million more than Rs $3 billion (including assets
(INR 15 billion) (including assets worth 6000 Crores worth at least Rs 750 crores
at least Rs 750 crores (INR 60 billion) (INR 7.5 billion) in India)
Click to edit (Rupees 7.5 Billion)
in India

turnover turnover turnover turnover

Jointly worth more Jointly worth more Jointly worth Jointly worth more than US
than Rs 4500 Crores than US $2.25 billion more than Rs $9 billion (including at
(INR 45 billion) (including at least Rs 18000 Crores least Rs 2250 Crores (INR
2250 Crores (INR (INR 180 billion) 22.50 billion) in India)
22.50 billion) in India)
 REGULATIONS OF COMBINATIONS - EXEMPTIONS

Acquisitions, share subscriptions or financing facilities entered into by public financial

institutions, FIIs, banks or VCF, pursuant to a covenant of a loan agreement or
investment agreement Exemption under Section 6(5) of the Competition Act
—

 Acquisitions made solely as an investment or in ordinary course of business provided

the shares or voting rights held by the acquirer does not exceed 25% of the total shares
or voting rights;

 Acquisitions where the acquirer already has 50% or more shares or voting rights in the
target enterprise;

• Acquisitions not directly related to the business of acquirer and such acquisition does
not lead to control over the target enterprise except where the assets being acquired
represent substantial business operations in a particular location or for a particular
product or service of the target enterprise;
 REGULATIONS OF COMBINATIONS - EXEMPTIONS

 Acquisitions of share or voting rights pursuant to a bonus issue or stock splits or

consolidation of face value of shares or subscription to rights issue, not leading to
acquisition of control;

 Acquisitions made by one person or enterprise of another person or enterprise within

the same group; amended or renewed tender offer where a Notice to CCI has been filed
prior to such amendment or renewal of the offer, subject to intimation of any change
being duly made to CCI —

 Overseas combinations with insignificant local nexus and effect on markets in

India.
 REGULATIONS OF COMBINATIONS CCI NOTIFICATIONS
-

 Combinations that meet the applicable thresholds must be notified to

the CCI through a Notice in the Form and with the fee.

 A Notice to CCI needs to be given within 30 days of:

Approval of the proposal relating to merger or amalgamation, by the
board of directors of the enterprises concerned with such merger
or amalgamation, as the case may be;

 The execution of any agreement or other document for acquisition or

acquiring of control referred under the relevant provisions.
 REGULATIONS OF COMBINATIONS CCI NOTIFICATIONS
—

 An acquisition, share subscription or financing facility entered into by a public

financial institution, FII, bank or VCF pursuant to any covenant of a loan
agreement or investment agreement Details of the acquisition must be filed
—

within 7 days of the date of acquisition

 A notifiable combination cannot be brought into effect until the expiry of 210
days or till the approval thereof by CCI under the Competition Act.

 The Combination Regulations have, however, kept a target for CCI of issuing an
order within 180 calendar days of filing the Notice by the parties - However
statutory limit for the issuance of a final order i.e. 210 days under the
Competition Act has remained unchanged
RECENT AMENDMENTS :

.The Competition Commission of India (‘CCI’) vide Gazette Notification No.

F.No.3-1/Amend/Comb. Regl./2013/ CD/CCI - dated April 04, 2013 has
published the “The Competition Commission of India (Procedure in regard to the
transaction of business relating to combinations) Amendment Regulations, 2013
(No. 1 of 2013)”, under section 64 of the Competition Act,2002 further amending
the existing Competition Commission of India (Procedure in regard to the
transaction of business relating to combinations) Regulations, 2011.
(“Combination Regulations”).

The changes are all in Schedule I of Regulation No. 4 of the Combination

Regulations.
RECENT AMENDMENTS :

Category 9 has been substituted by inserting that there is no requirement to file

the notice if a merger or amalgamation of two enterprises where one of the
enterprise has more than 50% shares or voting rights of the other enterprise,
and/or merger or amalgamation 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 to sole
control. This means that the exemption granted to the intra-group mergers
and amalgamations between holding companies and its subsidiaries and
between subsidiaries owned by enterprises belonging to the same group, by
the 1st Amendment has now been modified to the above extent
Other Important Aspects

FIPB/RBI Issues

Labour Issues

Excise Issues

NBFC Issues
Accounting Aspects

Accounting Aspects

Amalgamation Demerger Slump sale

Governed by AS-14 Not Governed by Any Specific AS

 Terms Used in AS-14

Shareholders Consideration : Issuance of

shares and payment, in cash
or kind, to shareholders of
amalgamating company

Amalgamating Amalgamated Amalgamated

(
company Company Company
Transferee
( )

Transferor )
merged

Amalgamation As per Companies Act, 1956

:

or any other statute applicable to companies

Terms Used in AS-14
Reserve :
 portion of earning or receipt,
 surplus of an enterprise (whether capital
or revenue)
 appropriated by the management for
general or specific purpose

Excluding -
 other than provision for –

(a) depreciation;
(b) diminution in the value of asset;
(c) for a known liability
Key Provisions of AS-14

2 Types of merger

Amalgamation in the nature Amalgamation in the nature

of merger of purchase

Pooling of interest method Purchase method

Case Study
 Facts of the Case before Restructuring :

Mr. B.G. and Mr. C.G.

G Group

Listed company
Consisting of G Inc
manufacturing G Private (a foreign subsidiary

and Investing Limited G.P.F company of

a registered partnership firm the G Group

Company
(

division having 10 of the family members incorporated

of the G Group as the partners under the laws of USA)
Facts Cont

 Requirement -1 Both brothers wants to restructure the

entities under the G Group in order to attain
controlling interest in the individual capacity with no
interference from the other brother
 Requirement -2 Both the brothers want the listed
company after the restructuring
 Requirement 3 None of the brothers want the
Foreign Company in their kitty
 Objectives of the Case Study :

Resolving the stumbling issues.

,
Explain the routes available for getting a
company listed

How the family settlement can be made

through Corporate Restructuring ,

Section 391-394 of the Companies Act as the

single window clearance.
Resolving the 1st problem:
i.e. both brothers wants listed entities:

 Demerger of the Investment division into the private company of

the Group under Section 391-394 of the Companies Act, 1956,

 Applying to SEBI and STX for Back Door Listing in compliance

of Circulars issued by SEBI
 nd
Resolving the 2 problem:
i.e. no brother wants the partnership firm :

 Merger of the G.P.F. with listed company (remaining company

having M division)
 All companies liable to be wound up under the Act[Sec 390(a)]
 Not only company but also any member or any creditor or by
the liquidator in case company is in winding up [Sec 391]
 Courts interpretation of the term ‘Liable to be wound up’
 [Sec 582]
 Transferee Company must be a company incorporated under
the Companies Act [Sec 394(4)(b)]
 Resolving the 2nd issue contd .....

Sec 390(a) of Act defines company for Sec 391-393 as a

company liable to be wound up under this Act .

‘Company liable to be wound up’ –

All co.’s to which provisions of winding up applies & Part X of the

Act deals with winding up of an unregistered company
G.PF. Partnership Firm to be treated as an Unregistered
Company.
Unregistered Co. as per Sec 582(b) includes any P.F., association
or co. consisting of more than 7 members at the time of presenting
the petition. (minimum 8)

Rugs India & others with Riveria Home Furnishings Ltd .

 Resolving the 3rd Issue
(i.e. no brother wants the foreign entity):

 Merger of Foreign Company with Private company to be listed after

the restructuring under the Companies Act, 1956

 Sec 394(4)(b) of CA, 1956 defines-

i. Transferee Company to include any co. within the meaning
of this Act.
ii. Transferor Company t o i n c l u d e a n y b o d y c o r p o r a t e ,
whether a co. under this Act or not.
Resolving the 3rd issue contd......

Foreign Co. Transferor Co. due to Sec 2(7) +Sec

—

394(4) of CA after complying law of both the Countries

but cant be Transferee
Moschip Semiconductor Technology Ltd.- In Re
California based company was merged into an Indian
Company.
No separate dissolution of Foreign Co. is required —

only laws of California to be complied with.

Role of Company Secretaries in Restructuring
 Conceptualization of structures; analysing the implications
under Companies Act, 1956, Stamp duty provisions,
competition act provisions, SEBI provisions with tax advisors
 Ground work for the restructuring
 Obtaining and follow up for the report of Regulatory Authorities
 Replies to queries of Regulatory Authorities
 Post Scheme Compliances
 Level playing field with other professionals in the era of NCLT
 Certificate under clause 232(7) [Companies Bill, 2012]
 Fast Track Merger (under Companies Bill, 2012)
 THANK YOU
For any further clarifications, please contact: Mr. Hemant Sharma
(Principal Associate), Dhir & Dhir Associates,
[email protected] +91-9818368356
;

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