Provisions relating to Cross Border M&A, Demergers & Class
Action Suits, Loans to Directors, Loans/Investments by Action Suits, Loans to Directors, Loans/Investments by Companies Dhinal Shah CharteredAccountant Tools of Re- structuring TOOLS OF RESTRUCTURING Merger / Amalgamation Demerger Financial Reconstruction Acquisition of shares Deals with section 391- 394 Deals with section 395 Consolidationof businesses/entities Divestnoncore business Acquiringinterestin newbusiness/entity Restructuringwithinthe Company Deals with section 391- 394 Deals with section 395 NOTE under Section 396 of Companies Act 1956 Central Government may Amalgamate two NOTE under Section 396 of Companies Act, 1956 Central Government may Amalgamate two Companies in public interest Key Drivers for Re- structuring Unlocking of Value and its Sustainability Restatement of Balance Sheet Business clarity to Investors and Analysts Positioning the businesses to be more competitive Improving Governance Processes Making Businesswise Fund raising possible Business Risk Business Risk Management Investor Relations Stock & Credit Re- rating Regulatory aspects under various statues Takeover Regulations Competition Accounting Competition Commission of India g Standards (IFRS) Companies Act, 2013 SEBI and Stock Exchanges Income Tax (DTC) Indirect Tax (GST) Stamp Duty FEMA HOW HOW P d t b f ll d Procedure under Sec 391-394 of Companies Act, 1956 Considering proposal for Merger and Amalgamation Procedure to be followed Considering proposal for Merger and Amalgamation Preparation of Scheme of Amalgamation , Valuation and Fairness Opinion (if Co. Approval of the Scheme by Board of Directors of the Companies p g , p ( is listed) Filing of Scheme with the designated Stock Exchanges for SEBI approval, if Co. is listed Filing of Application in High Court Convening of Shareholders and Creditors Meetings decision reported to Court Procedure to be followed Procedure under Sec 391-394 of Companies Act, 1956 Notice to Regional Director and Official Liquidator and submission of their NOC ith Hi h C t with High Court Fi l H i b Hi h C t Final Hearing by High Court Obtaining High Court Order and filing with Registrar of Companies Obtaining High Court Order and filing with Registrar of Companies Annexing the copy of High Court order with Articles of Association Post Merger compliances e g t e copy o g Cou t o de t t c es o ssoc at o Regulatory Moves in case of restructuring involves listed Company SEBI SEBI has also increase Transparency and more disclosure to protect the interest of investors after 4th February and 21st May 2013 Circular Valuation by independent chartered account mandatory other than those specifically exempted. ''Valuation Report from an Independent Chartered Accountant'' is not required in cases where there is no change in the shareholding pattern of the listed company / resultant company there is no change in the shareholding pattern of the listed company / resultant company. As per SEBI circular, vote by public shareholder through postal ballot and E-voting is required in such a case when additional shares have been allotted to promoters / promoter group, related party of promoter, associates of promoters. Acquisition of shares (Section 395 of Companies Act, 1956) Section 395 is the only provision in the Companies Act that deals with the compulsory acquisition of shares of minority shareholders. When 9/10th Value of shareholder accept the offer of Acquirer Company A i ill i ti t Mi it Di ti Sh h ld Acquirer company will give notice to Minority Dissenting Shareholders Th Di ti Sh h ld h th i ht ith ti t th t diti The Dissenting Shareholder have the right either negotiate the term condition or they have right to file their objection to Company Law Board Wide powers of discretion have been conferred on the Company Law Board to allow or reject an offer to squeeze out a minority group under section 395 Aparadigmshift 1/30/2014 Introduction of NCLT High Court BIFR CLB NCLT Modifications for Merger and Amalgamation under Companies Act, 2013 If Reduction of Capital is the part of Scheme then it has to be Companies Act 2013 disclosed to NCLT through affidavit Notice of any meeting relating to any Compromise and Arrangement shall also be given to CG Income Tax Authorities RBI SEBI Stock Exchanges OL CCI Representation has to give within a period of 30 Days f th d t f be given to CG, Income Tax Authorities, RBI, SEBI, Stock Exchanges, OL, CCI for their representation Notice of any meeting relating to any Compromise and Notice of the meeting will also from the date of receipt of letter Notice of any meeting relating to any Compromise and Notice of the meeting will also specify the impact of scheme on Creditors, KMP, Promoter, Non-promoters Members Wider shareholder participation through voting by postal ballot possible Only those shareholders can raise objection to the scheme who holds not less than 10% of the y j shareholding Modifications for Merger and Amalgamation under Companies Act, 2013 Only those creditors can raise objection to the scheme who holds 5 % of the total outstanding debt Companies Act 2013 of the total outstanding debt The tribunal may provide the order for Exit option to dissenting shareholders based upon the valuation by Registered Valuer In case of buyout of a company when the majority holding 75 negotiate secretly for a higher price then such gain shall be shared with the minority shareholders on pro-rata basis Creditors meeting not required if > = 90% in value agree and confirm by affidavit Titled of Single window clearance has been taken off in case of Buy Back of shares (including cooling period of one year) Takeover through scheme of arrangement allowed in accordance with regulations to be framed by SEBI Certificate from Statutory Auditor that accounting treatment complies with prescribed accounting standards (Currently applicable to listed Companies) Comparison Compromises, Arrangements & Amalgamations Pointsofcomparison CompaniesAct,2013 CompaniesAct,1956 COMPROMISES&ARRANGEMENTS TakeoverOffers Anycompromiseorarrangementmay includetakeoveroffermadeinsuchmanner asmaybeprescribed. In case of listed compa nies takeover offer Nospecificprovisionsonthisissue astowhethercompromiseor arrangementcaninclude'takeover offers' Incaseoflistedcompanies,takeoveroffer shallbeaspertheguidelinesissuedbythe SEBI. offers Buybackofsecurities Compromiseorarrangementshallnotinclude any buy back of securities [See section 68 of the Noexpressstipulationaswhether "compromise or arrangement" anybuybackofsecurities[Seesection68ofthe 2013Act] compromiseorarrangement includesbuybackofsecurities. Detaileddisclosuresby affidavittotheTribunalby h li ( Allmaterialfactsrelatingtothecompany, suchasthelatestfinancialpositionofthe h l di ' h Nosuchdetaileddisclosures required. theapplicant(companyor anycreditorormember) company,thelatestauditor'sreportonthe accountsofthecompanyandthependency ofanyinvestigationorproceedingsagainst thecompany; Compromises, Arrangements & Amalgamations Pointsofcomparison CompaniesAct,2013 CompaniesAct,1956 Reductionofsharecapitalofthecompany,if any,includedinthecompromiseorarrangement; Anyschemeofcorporatedebtrestructuring consentedtobynotlessthan75%ofthesecured creditorsinvalue,including (i) acreditor'sresponsibilitystatementinthe prescribedform, (ii) safeguardsfortheprotectionofother securedandunsecuredcreditors, (iii) reportbytheauditorthatthefund requirementsofthecompanyafterthe corporatedebtrestructuringasapprovedshall conformtotheliquiditytestbaseduponthe estimatesprovidedtothembytheBoard, (iv) wherethecompanyproposestoadoptthe corporatedebtrestructuringguidelinesspecified bytheReserveBankofIndia,astatementtothat effect,and (v) avaluationreportinrespectoftheshares andthepropertyandallassets,tangibleand intangible,movableandimmovable,ofthe companybyaregisteredvaluer. Compromises, Arrangements & Amalgamations Pointsofcomparison CompaniesAct,2013 CompaniesAct,1956 Personsentitledtoobject totheschemeof Personsholdingnotlessthan10%oftheshare holdingorpersonshavingoutstandingdebt Noexpressprovisionsinthis regard. compromise or arrangement amountingtonotlessthan5%ofthetotal outstandingdebtasperthelatestauditedfinancial statement. Nosanctionfor Nocompromiseorarrangementshallbesanctioned Nosuchrequirement compromiseor arrangementifaccounting treatmentnotAS Compliant bytheTribunalun less: Theaccountingtreatment,ifany,proposedby thecompanyproposedintheschemeofcompromise orarrangementisincon formity withtheaccount ing standardsspecified undersection133ofthe2013Act;and Acertificatetothateffectfromthecompany's auditorhasbeenfiledwiththeTribunal PowerofTribunalto enforcesanctioned Merenonworkabilityofsanctionedschemeis notenoughtowindupthecompany. schemecompromiseor arrangement Itmustalsobeestablishedthatthecompanyis unabletopayitsdebtsasperthescheme. Compromises, Arrangements & Amalgamations Pointsofcomparison CompaniesAct,2013 CompaniesAct,1956 AMALGAMATIONS&DEMERGERS Division (de merger) Specific mention of 'division' (i e demergers) in No mention of 'division'/ Division (demerger) Specificmentionof division (i.e.demergers)in section232dealingwith mergers/amalgamations. Nomentionof division / 'demergers' PowerofTribunaltoallow setoffoffeespaidby transfer or company on its TheTribunal'sorder(i.e.ordersanctioningthe schemeorsubsequentorder)may,inacase where the transferor company is dissolved HighCourtnotexpressly empoweredtoprovideforsuch set off transferorcompanyonits authorizedcapitalagainst feespayablebytransferee wherethetransferorcompanyisdissolved, providethatthefee,ifany,paidbythe transferorcompanyonitsauthorizedcapital shallbesetoffagainstanyfeespayablebythe transferee company on its authorized capital setoff. transfereecompanyonitsauthorizedcapital subsequenttotheamalgamation. Wherein amalgamation/mergerthe transferor company is a TheTribunal'sorder(i.e. ordersanctioningtheschemeorsubsequent order) may contain certain provisions where the Noprovisionforsuchsituation. transferorcompanyisa listedcompanyandthe transfereecompanyisan unlistedcompany. order)maycontaincertainprovisionswherethe transferorcompanyisalistedcompanyandthe transfereecompanyisanunlistedcompany. Compromises, Arrangements & Amalgamations Pointsofcomparison CompaniesAct,2013 CompaniesAct,1956 Crossbordermergers Indiancompaniesmaybemergedwithforeign companies or viceversa (cross Section394ofthe1956Act defined 'transferee company' as : companiesorvice versa(cross bordermergers) defined transfereecompany as: "transfereecompany"doesnot includeanycompanyotherthan acompanywithinthemeaningof this Act; but "transferor thisAct;but transferor company"includesanybody corporate,whetheracompany withinthemeaningofthisActor not. In other words, under the not.Inotherwords,underthe 1956Act,ascheme amalgamationwhere transfereecompanyisr.a 'company'(Indian company) company (Indiancompany) cannotbesanctioned. Compromises, Arrangements & Amalgamations Pointsofcomparison CompaniesAct,2013 CompaniesAct,1956 ReportfromtheROC/OL that the affairs of the Therequirementforsuchreport(as contained in the 1956 Act) has been Nocompromiseor.arrangement proposed for the purposes of, or in thattheaffairsofthe companyhavenotbeen conductedinamanner prejudicialtotheinterests of its members or to containedinthe1956Act)hasbeen omittedbythe2013Act. proposedforthepurposesof,orin connectionwith,aschemeforthe amalgamationofacompany,whichis beingwoundup,withanyothercompany or companies. shall be sanctioned by Court ofitsmembersorto publicinterest orcompanies.shallbesanctionedbyCourt unlesstheCourthasreceivedareport fromRegistrarthattheaffairsofthe companyhavenotbeenconductedina manner prejudicial to the interests of its mannerprejudicialtotheinterestsofits membersortopublicinterest. Noorderforthedissolution(without windingup)ofanytransferorcompany shall be made by the Court unless the shallbemadebytheCourtunlessthe OfficialLiquidatorhas,onscrutinyof booksandpapersofcompany,madea reporttotheCourtthattheaffairsofthe company have not been conducted in a companyhavenotbeenconductedina mannerprejudicialtotheinterestsofits memberspublicinterest. Compromises, Arrangements & Amalgamations Pointsofcomparison CompaniesAct,2013 CompaniesAct,1956 Simplifiedprocedurefor merger or amalgamation Section233ofthe2013Actprovidesforsimple procedure for merger or amalgamation Nosuchprovisionsinthe1956 Act. mergeroramalgamation ofcertaincompanies proce dureformergeroramal gamation between: i. twoormoresmallcompanies; ii. a holding company and its wholly owned Act. ii. aholdingcompanyanditswhollyowned subsidiary (WOS)company; i. suchotherclassorclassesofcompaniesas may be prescribed maybeprescribed Compromises, Arrangements & Amalgamations Pointsofcomparison CompaniesAct,2013 CompaniesAct,1956 Powertoacquireshares ofshareholders Section235ofthe2013Actomitsthis requirementof75%innumber. Wheresharesinthetransferor companyofthesameclassasthe dissentingfromschemeor contractapprovedby majority. Section235ofthe2013Actprovides fortimebounddisbursalofpurchase considerationreceivedbytransferor companytoitsshareholders(within60 shareswhosetransferisinvolvedare alreadyheldby,orbyanomineeof thetransfereecompanyorits subsidiarycompaniestoavalue daysfromdateofreceiptbytransferor company).Thiswasnotthecaseinthe 1956Act. greaterthan10%oftheaggregateof thevaluesofallthesharesinthe companyofsuchclass,theholders whoapprovetheschemeorcontract, besidesholdingnotlessthan90%in valueoftheshares(otherthanthose alreadyheldasaforesaid)whose transferisinvolved,shouldnotbeless than75%innumberoftheholdersof thoseshares Purchaseofminority shareholding Newprovisions "squeezeoutprovisions" (section236ofthe2013Act)introducedby Nosqueezeoutprovisionsinthe1956 Act. g ( ) y the2013Act. Rehabilitation of Sick Companies All the Companies, whether Industrial Company or not, are covered now now Criteria for erosion of 50% Net Worth erosion knocked off Power has been entrusted with Secured Creditors, representing 50% or More of the Debt of the Company. Net Worth (old law )Vs Repayment of debt(New law ), Provisions of new Act are on lines with Chapter XI of US Bankruptcy Law Introduction of Rehabilitation and Insolvency Fund IssueandImpactAnalysis Issues Due to Involving of so many authorities the speed of Compromise Arrangement may effect, In case of fast track merger approval required form Members holding 90% Shares and Creditors holding 90% in value this may be difficult Shares and Creditors holding 90% in value, this may be difficult, Other statutory regulations need alignment; Income Tax RBI SEBI FEMA Accounting Standards Delisting regulations Delisting regulations Impact Internal Restructuring will increase due to separate provision for Small Companies (Only Private Companies) and Holding and Wholly Owned Companies (Only Private Companies) and Holding and Wholly Owned Subsidiary Company under Fast Track Merger, Only relevant issue on Compromise and arrangement will be raised due to prescribed limit for objecting the Scheme, Dissenting shareholder will easily exit the Compromise and Arrangement, Th ill b C B d T ti i f f M d There will be more Cross Border Transaction in form of Merger and Amalgamation Role of other authority like Income Tax, RBI etc becomes important, y , p , Under Class Action Suit Members or depositors may seek damages or suitable action from or against the auditor in connection with any of the following : Anyimproperormisleadingstatementinauditreport Anyfraudulentactorconduct Anyunlawfulorwrongfulactorconduct Nodistinctionhasbeenmadebetweenwillfulorgrosslynegligentactsand errorscausedunintentionally Tribunals order would be binding on the company, all its members, depositors, auditor or any other person associated with the company Where the auditor is a firm, liability shall be that of theauditfirm,aswellas , everyerringpartner Registered Valuers Overviewandkeychanges Conceptofvaluationbyregisteredvaluerintroduced Registered valuer to be a person with such qualifications and experience and registered as a Registeredvaluertobeapersonwithsuchqualificationsandexperienceandregisteredasa valuer,inamannerasmaybeprescribed Registeredvaluertovalueassetsornetworthorliabilitiesrequiredtobevaluedunderthe 2013Act Theregisteredvaluer: Makeanimpartial,trueandfairvaluation Exerciseduediligence Make valuation in accordance with the prescribed rules Makevaluationinaccordancewiththeprescribedrules Notundertakeanyvaluationofanyasset(s)inwhichheisinterested Eligiblepersontobeappointedasregisteredvaluer isprescribedunderruleswhichincludes amongotherqualifiedpersonsCA,CS,CWA. Followingapproachesareprescribedunderrules Assetapproach incomeapproach; Marketapproach. Registered Valuers Overviewandkeychanges Therulesspecifythefollowingmethodsforthepurposeofvaluation: Netassetvaluemethod MarketPricemethod: Yieldmethod/ProfitEarningCapacityValue DiscountedCashFlowMethod Comparable Companies Multiples Methodology ComparableCompaniesMultiplesMethodology ComparableTransactionMultiplesMethod PriceofRecentInvestmentmethod Sumofthepartsvaluation Keyimpact F l ti t b d f d l i i l i t d l Liquidationvalue WeightedAverageMethod Forvaluationstobeusedfordualpurposes,companiesmayinvolveregisteredvaluers, otherwise,thesameasset/liabilitymaygetvalueddifferentlyfordifferentpurposes WhethertherequirementwillapplytoactuarialvaluationrequiredunderAS15 Companies with inhouse capabilities to perform certain fair valuation e.g. fair valuation of real Companieswithin housecapabilitiestoperformcertainfairvaluatione.g.fairvaluationofreal estate,maystillrequireinvolvementofregisteredvaluers Provisions related to Inter corporate Deposits, Loans & Investments Loanstodirectorsandsubsidiaries Overviewandkeychanges 2013Actcontainsrestrictiononadvancingofloan/guarantee/providingsecuritytoanydirectororany person in whom director is interested. personinwhomdirectorisinterested. Personinwhomdirectorisinterestedincludes: anybodycorporate,theBoardofdirectors,managingdirectorormanager,whereofisaccustomedto actinaccordancewiththedirectionsorinstructionsoftheBoard,orofanydirectorordirectors,of thelendingcompany. Unlike1956Act,nopossibilityforseekingCentralGovernmentapprovalformakingprohibited loans/guarantees Unlikethe1956Act,the2013Actdoesnotcontainspecificexemptionwithregardto loan/guarantee/securitygivenbyprivatecompanyorbyholdingcompanytoitssubsidiary. Restriction on loan does not apply to : Restrictiononloandoesnotapplyto: Makingofloantomanaging/wholetimedirectoraspartofserviceconditionextendedbycompanyto allitsemployeesorpursuanttoanyschemeapprovedthroughspecialresolution Acompany,whichinordinarycourseofitsbusinessprovidesloans/guarantees/securitiesandinterest chargedisnotlessthanthebankratedeclaredbyRBI. The1956Actdoesnotcontainthisexemption. Keyimpact Whether the holding company will be able to give loan /guarantee/security on behalf of its subsidiary? Whethertheholdingcompanywillbeabletogiveloan/guarantee/securityonbehalfofitssubsidiary? Provisions related to Inter corporate Deposits, Loans & Investments Loanstodirectorsandsubsidiaries Overviewandkeychanges Companycannotmakeinvestmentthroughmorethan2layersofinvestmentcompanies. However requirementnottoeffect: AcquisitionofcompanyincorporatedoutsideIndiaifsuchcompanyhasinvestmentsubsidiaries beyondtwolayersasperlawofthatcountry Subsidiarycompanyhavinginvestmentsubsidiaryformeetinglawrequirement. I t t C h i i l b i i th i iti f h InvestmentCompanymeansacompanywhoseprincipalbusinessistheacquisitionofshares, debenturesorothersecurities. Prohibitscompanyfromgivingloans/guarantees/securitytoothercorporateoracquiringsecuritiesofother corporateexceedinghigherof 60%ofpaidupcapital,freereservesandsecuritiespremiumor p p p , p 100%offreereservesandsecuritiespremium 2013Actextendstherestrictiontoprovisionofloanto/guarantee/securityonbehalfofanypersonor entity 2013Actallowstoprovideloan/guaranteeexceedingthelimitbypriorapprovalthroughspecialresolution. The1956Actallowstoprovideguaranteeexceedingthelimitwithoutpriorapprovalifthesameis confirmedwithin12monthsatgeneralmeeting.Thisaspectisnotthereinthe2013Act. Fulldisclosureinthefinancialstatementoftheloansgiven,investmentsmadeorguaranteegiven/security providedalongwithpurpose. Provisions related to Inter corporate Deposits, Loans & Investments Loanstodirectorsandsubsidiaries Overview and key changes The rate of interest cannot be lower than prevailing Key impact Prohibition on more than two layers of investment p g yield on one year, three year, five year or ten year Government security closest to tenor of loan. Under 1956 Act, the rate cannot be lower than prevailing bank rate i.e., the standard rate made public under section 49 of the Reserve Bank of India Act, 1934. y may require many groups to reconsider their investment structures Removal of exemption for holding company for loans made/guarantee/security given by holding company to its wholly owned subsidiary will create hardship Unlike 1956 Act, no exemptions provided for following under 2013 Act Private Company, unless subsidiary of public company Loans made by holding company to its wholly y y p for many subsidiary Loans made/guarantee/security on behalf of any person or entity will also be included in maximum limit The disclosure of transactions in the financial Loans made by holding company to its wholly owned subsidiary Guarantee given or security provided by holding company to its wholly owned subsidiary Acquisition by holding by way of subscription, The disclosure of transactions in the financial statements will also be subject to audit No specific transitional provision have been prescribed Change regarding interest may apply only to new loans or upon change in terms q y g y y p purchases the securities of wholly owned subsidiary loans or upon change in terms. Prohibition on having more than two layer of investment may apply to existing investments also Whether interest rate prescribed meets the test of the arms length principle under the IT Act.