Contents

I. M&A Regulatory Framework in India...................................................................................................2

Article I. Comprehensive check list of all the Laws.................................................................................2
Article II. Regulatory Framework in India................................................................................................4
Article III. Merger/Amalgamation.............................................................................................................5
Article IV. Income tax Provisions..............................................................................................................6
Article V. Competition Act, 2002.............................................................................................................7
Article VI. Take Over control.....................................................................................................................8
Article VII. Cross border M&A...............................................................................................................9
Article VIII. Foreign Direct Investment..................................................................................................10

Submitted To Submitted By
Prof. Sheeba Kapil Mam Jaspreet Singh Sahney
IIFT, New Delhi EPGDIB 18-20

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M&A Regulatory Framework in India

 Post liberalization, M&A activity has shown substantial growth.

 Regulatory framework also termed as legal due diligence.
 In this, various legal issues such as tax laws, competition laws, company act provisions, IPR,
consumer protection, contact act, public procurement need to be studied thoroughly.
 Most of the times companies prefer to take the service for legal firms such as Trustman, Nitish desai
Associates etc. for the legal advice.

Article I. Comprehensive check list of all the Laws

1. Basic Corporate Documents:

a. Articles of Incorporation, including all amendments.

b. By-laws, including all amendments.

c. Minutes of all meetings of directors, committees of directors and shareholders,

including copies of any written notices (if given) or waivers thereof and any written-
consent to action without a meeting.

d. List of all states where property owned or leased or where employees are located,
indicating in which states the Company is qualified to do business.

e. List of all countries where Company is doing business, indicating in which

countries the Company is qualified to do business.

f. List of all subsidiaries.

2. Documents for any Subsidiary: Same as those listed under No. 1 above.

3. Securities Issuances

4. Shareholder Information

5. Material Contracts

6. Patent and Trademark Matters

a. List of all foreign and domestic patents and patent licenses held by the Company.

b. List of any trademarks, trade names or service marks.

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 c. List of any copyrights.

7. Litigation and Audits

8. Environmental

9. Employees

a. Description of any significant labor problems or union activities the Company has
experienced including any collective bargaining agreements.

b. Number of employees broken down by major types of employees and a

management organization chart.

10. Management

a. Completed copies of Directors' and Officers' Questionnaires.

b. Detailed resume of directors and top management personnel.

c. Founders agreements, management employment agreements, indemnification

agreements, and ''golden parachute'' agreements, if any.

11. Other Review:

a. Copy of any internal or outside studies of the Company or the market for its
products (e.g., management consultants).

b. Summary of all OSHA inquiries (if any).

c. Summary of all EPA, EEO (etc.) inquiries (if any).

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 Article II. Regulatory Framework in India

Applicable to all companies including listed

companies

The Companies Act Income Tax Act Competition Accounting Standards

2013 1961 Act 2002

RBI and FEMA Laws Industry specific

regulation

Applicable only to listed companies

SEBI (LODR) Other relevant SEBI

Regulations, 2015 laws

Continuous Listing Back Door Listing

Obligation

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Article III. Merger/Amalgamation

Relevant provisions for merger & amalgamation

 Under Companies Act, 1956 – Section 390-396A.

 Under Companies Act, 2013- Section 230-2401

As such,

 The terms ‘merger’ and ‘amalgamation’ are not defined under the Companies Act, 2013.
 Section 230(1) of Companies Act, 2013 explains the term ‘arrangement’ as including a
reorganization of the company’s share capital by the consolidation of shares of different classes
or by the division of shares into shares of different classes, or by both of these methods.

 The provisions of Companies Act, 2013, sub-section 230–232 read with the Companies
(Compromises, Arrangements and Amalgamations) Rules, 2016, dealing with ‘arrangement’
enable a company to undertake a merger vide a scheme of arrangement.
 Section 233 permits fast track mergers and Companies Act, 2013,

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  Section 234 provides for cross-border mergers.

Article IV. Income tax Provisions

The Indian Income Tax Act, 1961 (“ITA”) contains several provisions that deal with the taxation of
different categories of mergers and acquisitions.

In the context of a merger/Amalgamation

Section 47 of the ITA specifically exempts from capital gains tax.

 Transfer of capital assets by an amalgamating company to the amalgamated company if the

amalgamated company is an Indian company.
 Transfer of shares in an Indian company by an amalgamating foreign company to the
amalgamated foreign company if both the criteria below are satisfied:
a. At least 25% of the shareholders of the amalgamating company continue to remain
shareholders of the amalgamated company. Hence, shareholders of amalgamating company
holding 3/4th in value of shares who become shareholders of the amalgamated company
must constitute at least 25% of the total number of shareholders of the amalgamated
company.
b. Such transfer does not attract capital gains tax in the amalgamating company’s country of
incorporation.
 Transfer of shares in a foreign company in an amalgamation between two foreign companies, where
such transfer results in an indirect transfer of Indian shares. The criteria to be satisfied to avail this
exemption are the same as above.
 Transfer of shares by the shareholders of the amalgamating company in consideration for allotment
of shares in amalgamated company is not regarded as transfer for capital gains purpose. This
exemption is available if the amalgamated company is an Indian company.

Section 72A of ITA

When a sick and poorly performing company merges with a healthy company, the later can avail the
benefits of carry forward the losses and unabsorbed depreciation of the former, under the following
conditions.

 Accumulated loose remain unabsorbed for 3 or more years

 75% of book value to be held at least for 3 or more years
 Later company remains in business with the former for not less than 5 years from the date of
contract.
 Later holds at least 75% of the fixed assets of the former company.
 The resulting company is an Indian company.

Merger of subsidiary into the parent company is also referred as amalgamation if condition in section
2(1B) is satisfied and is tax neutral.

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Article V. Competition Act, 2002

Objective

 Promote and sustain competition

 Protect the interests of consumers
 Ensure freedom of trade carried on by other participants, in markets in India.
a. To ensure freedom of trade
b. Motto: Fair Competition for Greater Good
Goal
 To Promote Competition

Salient Provisions

 Prohibition of anti-competitive agreements Section 3

 Prohibition of abuse of dominant position Section 4
 Regulation of combinations among enterprises Section 5 & 6
 Advocacy Section 49 and Advisory Section 21 & 21A

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Article VI. Take Over control

Important Triggers for making an open offer

 Any acquisition of shares or voting rights in the target company by the acquirer and PAC
which entitle them to exercise in aggregate 25% or more voting rights.

 Any acquisition of shares or voting rights exceeding permissible creeping limit (5%) in a
financial year. This situation arises in cases where the acquirer and PAC have acquired and
holds shares or voting rights in the target company which entitles them to exercise 25% or
more but less than maximum permissible non-public shareholding and further acquires
more than 5% shares or voting rights in a financial year.

Meaning of open offer

Trigger for Open Offer Minimum Open Offer Size Other Conditions/Observations

• Direct acquisition of  26% of the total shares 
shares or voting rights
or control over the
target company
• Indirect acquisition
Where post open offer
of the target company shareholding of acquirer and
as of 10th working day PAC is in excess of the
from the closure of the maximum permissible non
tendering period. public shareholding:
 It must be reduced within 1
year;
 It shall not be eligible to
make a voluntary delisting
offer under SEBI Delisting
Regulations for 12 months
from the date of the
completion of the offer
period.

Voluntary open offer 10% of the total shares of

the target company. The
post acquisition holding in
such cases shall not
exceed the maximum
permissible non-public
shareholding.

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 Article VII. Cross border M&A

Popular Forms of Entry into

India

Indian Company (Pvt. or Foreign Entity LLP

Public)
 Wholly owned subsidiary  Liaison office  Limited Sectors
 Joint Venture  Branch office
 Project office

Issues of new Shares Acquisition of existing

shares/transfer of
shares

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Article VIII. Foreign Direct Investment
FDI can be divided into two broad categories:

 Investment under automatic route

FDI for virtually all items and activities can be brought in through the Automatic route under
powers delegated to the Reserve Bank of India (RBI).

 Investment with prior approval of the government:

a. For the remaining items and activities through Government approval; Government
approvals are accorded on the recommendation of the Foreign Investment Promotion
Board (FIPB).
b. SEBI introduced a new class of foreign investors in India known as the Foreign Portfolio
Investors (FPIs) effective from June 2014. It was formed by merging the following
existing classes of investors, namely, FIIs, QFIs, and the sub-accounts of FIIs.

Difference between FPI and FDI

FDI FII / FPI

 FDI applies to Equity finance only  NRI investment not counted

 Debentures / Bonds → No FDI cap
applied
 Fully convertible debenture → FDI
applies
 G-Sec / T-Bill → No FDI cap applied
(Debt instruments)
 Both debt and equity included but can’t buy T-
Bill
 G-Sec cap →30 billion
 Corporate bonds max.→ 51 billion

 Only one category “FDI”  Earlier sub-categories → FII, QFI

 Now SEBI → FPI & RBI → ReFPI

THE END

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