Introduction

The Companies Act, 2013 appears to be opening new and simple avenues
for mergers, acquisitions and restructuring operations in India. While the
Act retains the old provisions, it also adds robust and progressive new
ones. Changes made in it are likely to have a positive impact on the
manner in which corporate structuring is undertaken in India due to
numerous procedural changes.
The 2013 Act seeks to simplify the overall process of
acquisitions, mergers and restructuring, facilitate domestic and crossborder mergers and acquisitions, and thereby, make Indian firms relatively
more attractive to PE investors. While some of the changes to look for at
the conceptual level include merger/demerger processes, cross-border
and fast track mergers between small companies and holdings,
subsidiaries and provisions relating to minority shareholders protection
and exits, among others, a lot still needs to be done in terms of provision
of increased clarity on some critical areas and the overall interplay of the
2013 Act with other laws.
However, pending notification of the sections and rules in
relation to restructuring and absence of transitional provisions has led to
concern within industry and professionals engaged in restructuring in the
corporate world. The 2013 Act provides for
the constitution of the National Company Law Tribunal (NCLT) as the single
authority for all schemes relating to restructuring. However, there is no
clarity on the time that will be taken for the NCLT to be constituted and
become operational. Practical difficulties are expected in implementation
of provisions relating to restructuring till the MCA provides clarity on these
issues. This article looks at some key provisions relating to mergers,
compromises and arrangements in the 2013 Act and provides a quick
impact analysis of these.
A. Fast-track merger (short form mergers)
As in some overseas jurisdictions, the 2013 Act has introduced the new
concept of fast- track mergers and demergers. These provide the option of
a simplified and fast-track merge/demerger process, which can be used
for the following(and is an option for the companies):
Merger of two or more specified small companies1
Merger between holding company and its wholly owned subsidiary
Such other classes of companies as may be prescribed
In this case, the merger will have to be approved by Central
Government and there will be no requirement to approach NCLT.

1 A small company is a private company that meets either of the following

requirements: Its paid-up capital does not exceed INR5 million (or higher amount, as
may be prescribed, and should not be more than INR 50 million).
Its turnover (according to its last profit and loss account) does not exceed INR20 million
(or a higher amount, as may be prescribed, which will no t be more than
INR200 million).

Approval process
Under this process, the schemes approved by the boards of directors of
companies will need to be sent to the Registrar of Companies (RoC) and
the Official Liquidator (OL) for their
suggestions or objections within 30 days. The scheme will then be
considered in the meetings of shareholders or creditors, along with their
suggestions or objections, and will have to be approved by the following
classes of persons:
Shareholders holding 90% of the total number of shares at a general
meeting
Majority creditors (representing nine-tenth in value) in a meeting
convened with 21 days notice
Currently, under the 1956 Act, the criterion of present and voting is
essential for the conduct of shareholders and creditors meetings.
However, the similar concept of present
and voting has not been included in the 2013 Act, and there is no clarity
on whether voting through a postal ballot will now be an acceptable
mechanism. This requires clarity from the Ministry.
After the approval mentioned above, the scheme will have to be filed with
the OL, RoC and the Central Government. In the event of there being no
objection, this will be deemed as approved.
However, in the event of objections from the RoC or OL, the scheme may
be referred by the Central Government to the NCLT for it to consider the
scheme under the normal process
of a merger. In this case, the NCLT can either mandate that the scheme is
to be considered a normal merger or it may confirm the scheme by
passing an order to this effect. Therefore, a
company is at risk of the process being considered a normal merger
process instead of a fast-track merger. In addition to the above, both the
companies (transferor and transferee) will need to file a declaration of
solvency with the RoC.
Among the various features of fast-track mergers of companies, one is the
exemption from the need to obtain auditors certificates of compliance
with applicable accounting standards.
This is a welcome step that will result in reduction in the administrative
burden, timelines and costs of smaller companies that fall within threshold
limits. However, on the flip side, there is no clarity on whether fast-track
mergers will be allowed prior to NCLT becoming operational. Moreover,
under existing tax laws, there is no need for a company to seek the
approval of a court to prove the tax neutrality of a merger or demerger.
However, clarity in this regard will be required in the case of fast -track
mergers involving non-court approved schemes
B. Cross-border mergers
With businesses no longer limited by borders, cross-border M&A
transactions present significant opportunities for economic gain and
increased shareholder or investor value. Various factors influence the
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spurt in recent cross-border mergers and acquisitions, including the everincreasing need of companies to tap new markets and set up global
operations in these, achieve cost reduction and synergies and secure
natural resources.
Cross-border M&A is also supported by technological advancements, low
cost financing arrangements and robust market conditions, which have
made deal-makers confident and
think more creatively about their global growth strategies. The flow of
transactions could be inbound (non-residents investing in India) or
outbound (Indian businesses making
investments abroad).
Current laws only permit inbound mergers (foreign companies merging
with Indian ones) and not the other way round. The 2013 Act proposes to
allow both inbound and outbound cross-border mergers between Indian
companies and foreign ones. It provides for the merger of an Indian
company into a foreign one, whether its place of business is in India or in
certified jurisdictions (to be notified by the Central Government from time
to time), subject to the NCLTs and RBIs approval. The consideration of a
merger, which will also be subject to the approval of the RBI, could either
be in cash or depository receipts 2, or partly in cash and partly in
depository receipts2. The provisions mentioned above could have a farreaching impact that will facilitate cross-border transactions and increase
their
flexibility. Cross-border mergers could have ground-breaking significance
in plotting India on the global M&A landscape, since corporate deals have
fallen through or failed to meet their desired objectives in the past due to
the lack of such provisions in the 1956 Act.
Enabling of cross-border mergers is expected to help Indian companies in
more ways than one, including in the following:
Restructuring their shareholdings, wherein they can migrate ownership
to an international holding structure
Facilitating listing of entities, which may have Indian assets in overseas
jurisdictions
Providing exit routes to current investors in overseas jurisdictions
However, corresponding amendments are required in existing laws
including the Income Tax Act, Exchange Control Regulations (relating to
ownership of real estate in India,
sectoral caps, definitions of overseas holdings, etc.), security related laws
(change in rules regarding dual listings), etc. Currently, tax laws do not
provide any tax-neutral provisions
to enable such cross-border mergers. The debate on whether cross border
mergers should be taxable or not is an interesting one, since in some
mergers, companies may be moving some value outside India. If they are
operating companies, they will need to move out their Indian operations
before the mergers, to avoid operational and tax-related complications.
2 For this purpose, depository receipts are defined as any instrument in the form of a
depository created by a domestic company in India and authorised by oneincorporated
outside India, which is making an issue of such depository receipts.

Furthermore, the impact of payment of cash/depository receipts or any

other modes on the tax neutrality of the amalgamations will need deep
analysis.
A key aspect to look for will be notification of the specified jurisdictions
for cross-border mergers and the amendment of Exchange Control
Regulations. This may restrict the scope of outbound mergers as well as
inbound ones, which are currently allowed from any jurisdiction that allow
cross-border mergers under their domestic laws. Moreover, the
requirement of approval from the RBI is expected to play a major role in
such
cross-border mergers.
C. Demergers defined
The draft rules released by the MCA clarify that the term demerger is to
be included within the compromise or arrangement defined in the 2013
Act. As opposed to the 1956
Act, the Rules provide a clear definition of the term. It defines a demerger
in relation to companies and includes transfers, pursuant to the scheme of
arrangement by a demerged
company of one or more undertakings to any resulting company in such
a manner as provided in section 2(19AA) of the Income Tax Act, 1961 (IT
Act), subject to it fulfilling
the conditions stipulated therein and shares allotted by the resulting
company to the shareholders of the demerged company against transfer
of its assets and liabilities.
Furthermore, the Rules provide for the accounting treatment for the
demerger till a specific accounting standard has been prescribed for it,
which is in accordance with the conditions
stipulated in section 2(19AA) of the IT Act. The rules prescribe that the
difference in the value of assets and liabilities in the books of a demerged
company will be credited to its capital reserve or debited to its goodwill.
Moreover, the difference in the net assets taken over and shares issued as
consideration will be credited to the capital reserve (excess) or debited to
goodwill (deficit) in the books of the resulting company. As compared to
the IT Act, which ignores revaluation of assets for the purpose of
determining book value, the rules of the 2013 Act enable a company to
ignore any revaluation or write- off of assets,
only of the preceding two financial years. A certificate from a Chartered
Accountant will also be required to be submitted to the NCLT to the effect
that the accounting treatment is in
compliance with the conditions so prescribed. Although the rules are at
the draft stage as of date, one can look for guidance for accounting for
demergers in them. The rules give clarity to the way forward for them.
This is expected to restrict alternative accounting methodologies used in
the past by corporate organizations in the past to account for
reserves arising due to demergers within the scheme.
D. Treasury shares
Indian promoters of companies, including listed ones, have in the past
used the route of issuing treasury stocks to consolidate their holdings in
companies to raise funds and as an avenue to control voting rights.
4

Promoters have followed the practice of transferring the shares of their

subsidiary companies to trusts and issuing shares of holding companies
pursuant to the mergers of wholly owned or partially owned subsidiaries
with holding companies, instead of cancelling such shares. Past
precedents include Escorts, Mahindra & Mahindra and Jaiprakash
Associates.
However, the 2013 Act restricts a transferee company from holding shares
in its own name or in the name of a trust. Any inter-company investments
between companies involved in
mergers need to be mandatorily cancelled in this event. The provisions
given above should result in greater transparency and reduce the scope of
unconventional or ambiguous practices, particularly where valuation and
accounting considerations are involved. This change is also in line with the
1956 Act, which prohibits a company from owning its own shares. A
related concern is how treasury stock holdings already created under the
1956 Act will be treated in the future whether they can continue in the
same manner or they need to be unwound.
E. Mergers of listed companies with unlisted ones
The 1956 Act does not contain any specific provision governing the
merger of a listed company with an unlisted one. It is generally assumed
that shares issued pursuant to the merger of a listed company with an
unlisted one (or vice versa) need to be listed on the stock exchanges
where the transferor company was listed. There have been cases, even in
the present scenario, where the resulting company has continued to be
unlisted after the demerger. Recent precedents include the schemes of
demerger of Wipro Ltd. and Sundaram Clayton Ltd. The 2013 Act sets out
formal guidelines and provides an option to a transferee company to
remain unlisted till it is listed or applies for listing, provided the
shareholders of the merged listed company are given an exit opportunity.
It also provides that provision should be made by the NCLT for an exit
route for the shareholders of a transferor company who decide to opt out
of the transferee company by making payment amounting to the value of
the shares and other benefits, in accordance with a pre-determined price
formula or after a valuation report is produced (which should not be less
than the value prescribed by SEBIs regulations). An analysis of the new
provisions brings to light attempts made
to codify the existing practice while providing more clarity on valuation
requirements. While, prima facie it seems that shareholders deciding to
opt out can exercise this option even if the transferee company is listed,
this requires lucidity. A specific provision in the 2013 Act will encourage
companies to explore this option as an alternative or in addition to the
Delisting Guidelines. It will be interesting to see the interplay between
SEBIs delisting regulations (and revisions, if any) and these provisions,
especially in light of the requirements of delisting regulations, where
minority shareholders effectively determine their own exit price (which is
generally at a significant premium). One would expect the provisions
between SEBI and MCA to be aligned while coming into force. Practical
questions may also arise on the applicable date for valuation of shares
(e.g., the appointed date, the effective date, etc.) and procedures for
5

compensating shareholders if the NCLT process consumes considerable

time. Further clarity will also be required in the event of any dispute on
the exit price determined on the basis of the valuation (e.g., where SEBIs
price is not a true reflection of the true intrinsic value of a listed company)
and the redressal mechanism for such disputes.
Capital gains and other tax implications in the hands of existing
shareholders, the tax neutrality of the scheme of arrangement (if more
than 25% of the shareholders opt for the exit route), etc., will need to be
evaluated prior to corporate organizations following this route.
F. Minority buyout
The 2013 Act has introduced an exit mechanism for minority shareholders
with the intent of reducing litigation with minority shareholders. The Act
grants access to the acquirer or person acting in concert or a person or a
group of persons becoming registered shareholders of 90% or more of the
issued equity share capital of the target company (listed or unlisted) by
virtue of amalgamation, share exchange, conversion, securities or for any
other reason. Such an acquirer, person or a group of persons will notify
minority shareholders about their intention of buying the remaining equity
shares. In addition, minority shareholders may also offer their shares suomotto to majority shareholders.
As provided in the draft rules, the price mechanism for the minority buyback in the case of a listed company will be the price according to SEBIs
regulations, but this needs to be
carried out by a registered valuer. Whereas, for an unlisted company,
various factors are taken into consideration, i.e., the highest price paid for
an acquisition during the last 12 months and the fair price of shares to be
determined after taking into account valuation parameters as prescribed.
In addition, an registered valuer will provide a valuation report to the
board of directors of a company, justifying the methodology of arriving at
such a price. On the other hand, the shares of minority shareholders need
to be acquired by majority shareholders and not by the company and will
entail outflow of funds in the hands
of the majority shareholders.
The provisions virtually recognize minority squeeze out as a legal option.
This has been undertaken by corporate organizations through various
corporate restructuring means in
the past. However, there is not much clarity on whether this is a
mandatory exit mechanism and a scenario where one minority
shareholder desires to exit would the acquirer be forced to buy out all.
G. Other key changes to the procedure of compromise or
arrangement
The 2013 Act provides that a notice for a meeting for the scheme should
be sent to the Central Government (i.e., the Regional Director, Registrar of
Companies (ROC), the Official Liquidator (OL), Income Tax authorities, the
RBI, SEBI, the Competition Commission of India (CCI) and other sectoral
regulators for their comments/ suggestions/ objections within 30 days. In
case no representation is made within 30 days, it will be presumed that
they have approved the scheme. Although the relevant section has not
been notified, the MCA is taking steps to increase the role of other
6

authorities in implementation of such schemes. In a recent circular, the

MCA has clarified that the RD will invite specific comments from the
Income Tax department within 15 days of receipt of the notice before filing
his response to the Court. Furthermore, the RD will also consider the
feedback required from any sectoral
regulator if it appears necessary to him. Additionally, the Bombay High
Court (in its recent order) gave specific instructions and detailed timelines
to be followed during the RD process after admission of a petition,
restricting the timeline from the date of service of petition on the RD to
the date of filing of an affidavit by the RD in the High Court.
However, whether the other jurisdictional High Courts adopt a similar
approach is a wait and watch game.
The 2013 Act envisages a paradigm shift in the process of
compromise/arrangement. It envisages that all the powers and functions
of the Company Law Board, Company Court BIFR under the Sick Industrial
Companies Act will henceforth be exercised by the NCLT. Establishment of
a single forum, which is dedicated to corporate matters, is a welcome
move, and removes the problem of multiple regulators. However, setting
up of such quasi-judicial tribunals has been a constant point of litigation,
either on its legal competence or non-compliance with the provisions of
the NCLT with the principles laid down in the past Apex Court ruling. A
recent petition filed in the Apex Court (against the formation of the NCLT)
has delayed the process of recruiting judicial and technical members of
the NCLT, which could mean further deferral in setting up of the NCLT,
which found its way into the 2013 Act after almost a decade of a legal
battle.
Furthermore, with a view to reduce the timelines involved in a
restructuring exercise, the 2013 Act has introduced a minimum threshold
for raising objections to the scheme of arrangement, i.e., only persons
holding a 10% shareholding or with a minimum outstanding debt of 5%
can object to the scheme. These limits may be considered high, especially
in the case of listed companies, where the minority would need to commit
substantial effort in pooling stakes if they are to raise valid objections,
unless a large institutional shareholder takes up the cause. However, it
provides a safeguard against frivolous litigations by shareholders with
negligible stakes (which happens in
many schemes), thereby avoiding unnecessary delays.
The 2013 Act also empowers the NCLT to dispense with meetings of
creditors if at least 90% of the creditors in value agree and confirm this by
affidavit, thereby reducing the discrepancy in practice followed by
different High Courts while granting their approval on the basis of consent
letters obtained. However, there is the absence of an explicit provision for
dispensation from shareholders meetings.
The 2013 Act also requires the valuation report for the share swap ratio
to be sent along with the notice for the meeting to all stakeholders, as is
currently applicable to listed companies, thereby opening doors for larger
scrutiny on the share swap ratio by shareholders, even in the case of
unlisted companies.

FUTURE
The 2013 Act provides that until the Government notifies a date for
transfer of all matters, proceedings or cases sent to the NCLT, the
provisions of the Act in regard to the jurisdiction,
powers, authority and function of the current Company Law Board and the
Company Court will continue to apply. The 2013 Act does not provide for
any transitional provisions to govern the restructuring in progress at the
time of notification of such
a date.
Furthermore, if the restructuring currently ongoing under the 1956 Act is
to be continued under the 2013 Act, any nonconformity of the portion of
the process completed under the
1956 Act with the provisions of the 2013 Act is a question that remains
unaddressed. For example, an ongoing scheme of a merger envisages the
creation of treasury stock, would this need to be deleted, and the swap
ratio to be reworked if the relevant section governing treasury stock
becomes effective prior to the final sanction of the scheme by the court.
The implementation of the 2013 Act will also require updates in other laws
to link these with the new provisions. Laws including Stamp Duty (the
conveyance rate provided for orders under section 391394 of the 1956
Act), Exchange Control regulations (for holding of real estate, sectoral
limits, etc.) and tax laws (definition of mergers, demergers and other
conditions for tax neutrality) will need amendments prior to notification of
sections relating to merger provisions, to provide the effect of benefits
envisaged by the 2013 Act.

Conclusion
To conclude, the overall impact of the 2013 Act on mergers, compromises
and arrangements is to introduce certain simplistic and forward-looking
concepts, and
also codify in law certain concepts (such as dispensation, statutory auditor
certificates and demerger accounting), which were followed in practice,
put not contained in law. As of now, the full impact of the law is not very
clear, since many matters will be governed by rules, which will be
formalized once feedback from stakeholders is received by the MCA and
incorporated in the final rules to be issued. On the whole, the 2013 Act is
a step toward bringing greater transparency and accountability in the ageold procedures of M&A, thereby visibly making the Indian Corporate Law
relatively friendlier and more acceptable in the global arena.

MERGER, DE-MERGER, AMALGAMATION,

COMPROMISES AND ARRANGEMENTS.

SUBMITTED BY
SUBMITTED TO

MANAS SONAWALA 1283057

IPSITA DAS

Prof.

(BA.LLB) SEC (A)

9

ACKNOWLEDGEMENT
I

HAVE TAKEN EFFORTS IN MAKING THIS PROJECT.

HOWEVER,

IT

WOULD HAVE NOT BEEN POSSIBLE WITHOUT THE KIND SUPPORT

AND HELP OF MANY INDIVIDUALS .

WOULD LIKE TO EXTEND MY

SINCERE THANKS TO ALL OF THEM.

WOULD

ALSO LIKE TO EXPRESS MY SPECIAL GRATITUDE AND

THANKS TO MY FACULTY OF

MS. PRATITI NAYAK

COMPANY LAW MS. IPSITA DAS

FOR GIVING ME A CHANCE TO MAKE THIS

PROJECT AND PRESENT IT.

AND

AM FEELING VERY GLAD TO BE A PART OF IT.

10

TABLE OF CONTENTS
INTRODUCTION
a. Fast Track Merger.
b. Cross Border Merger.
c. Demergers Defined.
d. Treasury Shares.
e. Mergers of listed companies with unlisted ones.
f. Minority buyout.
g. Other Key changes to the process of compromise and arrangement.---PAGE1-8
FUTURE----------------------------------------------------------------------------------------------------------PAGE8
CONCLUSION-------------------------------------------------------------------------------------------------PAGE9

11

DEMATERIALISATION AND
REMATERIALISATION OF SECURITIES.

SUBMITTED BY
SUBMITTED TO

SOUMITRA MOHANTY 1283052

IPSITA DAS

Prof.

(BA.LLB) SEC (A)

12

13