M&A – At the Onset of Companies Bill

Mergers and Acquisitions have been governed by a large number of individual laws in India. However, the Companies Act, 1956 is the prime regulator of companies when it comes to its legal framework and is guiding the reconstruction of Indian companies over 50 years from now. Since then there has been a substantive growth in the Indian economy and large number of global companies have invested in India market. However, changes in the business environment are meaningless without change in the corresponding legislation. The legal framework must therefore be efficient enough to respond to the evolving business scenario.

The Company Bill 2012 has brought in a significant change to the Amalgamation and corporate reconstruction regime in India. It seems to calibrate towards managing the needs of India companies, shareholders and the countries™ growing economy.

Merger is one of the most common forms of non organic corporate restructure program that is adopted by the corporate world forged so as to achieve growth for the company as a whole. In the strict economic sense of the word it would mean the union of two or more commercial interests, corporations, undertakings, bodies or any other entities. In the corporate business means the fusion of two or more corporations by the transfer of all property to a single corporation.

The corporation that merges the other with it continues to exist after having absorbed the other entity. The concept of mergers or the definition of the same has not, however, been clearly given in the Companies Act, 1956. It has instead been defined in the Income Tax Act, 1961; the Companies Act mentions of mergers in the section 394 while dealing with the powers of the National Company Law tribunal, and there is also some mention of the same in the sections 396 and 396A that deal with the power of the central government to merge or amalgamate companies in the public interest and the record maintenance by the merged entity.


According to Halsbury™s Laws of England,

Neither ˜reconstruction nor amalgamation™ has a precise legal meaning. Where an undertaking is being carried on by a company and is in substance transferred, not to an outsider, but to another company consisting substantially of the same shareholders with a view to its being continued by the transferee company, there is a reconstruction. It is none the less a reconstruction because all the assets do not pass to the new company, or all the shareholders of the transferor company are not shareholders in the transferee company, or the liabilities of the transferor company are not taken over by the transferee company. ˜Amalgamation™ is a blending of two or more existing undertakings into one undertaking, the shareholders of each blending company becoming substantially the shareholders in the company which is to carry on the blended undertakings. There may be amalgamation either by the transfer of two or more undertakings to a new company or by the transfer of one or more undertakings to existing companies.[1]

The clauses 230-240 of the Companies Bill 2012 contain the provisions regarding Mergers and Amalgamations. Their impact is discussed below.

Effect on Shareholders

Under the Bill, a scheme may be challenged only by persons having at least a 10% shareholding or 5% of the total outstanding debt. The 1956 Act contains no such restriction. The intention behind this new provision appears to be to limit the ability of shareholders with miniscule shareholdings to raise frivolous objections against a scheme.

The effect on share holders is that the resolution is valid and the arrangement is binding upon them. Nevertheless, any shareholder may, in specific circumstances, dissent from the sale or arrangement.

The dissenting shareholder is required under sub section (3) of this section to give notice of his dissent to the liquidator in writing within seven days after passing of the special resolution. A legal representative of deceased shareholder is also entitled to dissent. However, it is open for the liquidator to waive such notice.
The share holder who neither agrees to the scheme nor challenges it but refuses to accept shares in transferee company (especially if they are not fully paid) to avoid further liability , on these shares , shall be deemed to have permitted the liquidator to sell the new shares and pay him the net proceeds. The liquidator shall recover the expenses incurred on such sale from the proceeds of that sale. If there is more than one such shareholder, net proceeds shall be distributed proportionately.

Squeeze Out of Minority

The provisions relating to the squeeze out of dissenting minority shareholders, currently set out in Section 395 of the 1956 Act, have been incorporated into Clause 235. One relevant change introduced in the Bill is with respect to the acceptance thresholds that are required to be met in order to enable a squeeze out to be effected. Under the 1956 Act, in the case of a merger, where the transferee company has held more than a 10% stake in the transferor company prior to the merger, not only must the scheme have been accepted by 90% in value of the shareholders in the transferee company whose shares are sought to be transferred but in addition, these accepting shareholders must also constitute a majority of 3/4ths in number. In the Bill, however, the only acceptance threshold stipulated is that of 90% in value of the shareholders whose shares are sought to be transferred.

Relief from Court Approval

Up till now, the merger process including that of two small companies and of a holding and wholly owned subsidiary had to go through procedures prescribed under the act that involved intervention of the High Court or the NCLT.

However, the new bill lays down a better procedure that is as follows:

As a first step, a scheme must be prepared by the companies, and the transferor and transferee must notify the registrar of companies and official liquidator of the proposed scheme. The registrar and liquidator are expected to give their objections or suggestions within 30 days of the date on which they receive notification of the scheme. The merging entities must then consider the concerns of the registrar and liquidator and approve the scheme in their respective general meetings. Next, both transferor and transferee companies must file a declaration of solvency with the registrar that has jurisdiction. The merging entities must also seek approval from their respective creditors.

The bill stipulates that any objection to the proposed scheme must be made only by persons that hold at least a 10% shareholding or with outstanding debt amounting to at least 5% of the total outstanding debt, as detailed in the last audited financial statement. On receipt of approval from the shareholders and creditors, the scheme must be filed with the NCLT and the registrar and liquidator that have jurisdiction. The bill also describes the process addressing situations where objections may again be raised by the relevant authorities. If no objections are raised, the NCLT will confirm, approve and register the scheme and thereafter notify the registrar. Registration of the scheme will have the effect of liquidating the transferor company or companies.

The process appears to be detailed, but several questions have arisen and more are expected during testing. For example, it is unclear whether the shareholders and creditors must approve the scheme in the same or in two separate general meetings. As the proposed provision requires no approval from the high court or NCLT, it is therefore aimed at providing substantial relief to small companies, as well as to their holdings and subsidiaries, when deciding on consolidation and mergers – particularly those that have so far desisted due to the cumbersome process involved.

Where objections are raised by the Registrar of Companies, the Official Liquidator or the Central Government, the scheme may be referred to the Tribunal, which will then consider it under the regular process set out in Clause 232. The Bill defines a small company as one that has a share capital of less than INR 50 lakhs or a turnover of not more than INR 2 crores or such higher amount as may be prescribed by the Central Government. The Central Government may prescribe other classes of companies to which these provisions will apply.

Given that the existing stamp duty statutes, as well as relevant case law, do not contemplate the possibility of a scheme taking effect without an order of a court/tribunal, one may expect to see States legislating to explicitly make such contractual schemes chargeable to stamp duty.

Cross-Border Transactions

In words of Justice Chandrachud; corporate reorganization is one of the means that can be employed to meet the challenges which confront business. A Cross border business reorganization is an arrangement between organizations in different countries. Such corporate

combinations play an important role in the global economy as they facilitate free flow of capital

across borders , enhance competition and globalised business.

The bill welcomes foreign investment opening the doors for cross-border mergers by allowing them to take place both ways.

Previously, the law stood as follows:

A foreign company can merge with an Indian company by following the procedure provided for in S. 391 to 394 of the Companies Act 1964, with the sanction of the concerned High Court. Section 394(4)(b) of the Act expressly excludes a foreign company from the expression ˜transferee company™.[2] Briefly, a scheme of arrangement has to be prepared by the Board. Then, the company approaches the High Court with the competent jurisdiction to pass an order of meeting. This order for meeting is made for every class of creditors and members. The scheme is said to have been approved after receiving a vote of three fourths in its favour.

In a dramatic change to the law, the draft provisions of the bill provide for both inbound and outbound cross-border mergers between Indian and foreign companies. A ‘cross-border merger’ refers to a combination of two or more companies belonging to, or registered in, different countries. The dual limitations imposed on such mergers are that:

  1. the foreign company be located in a country that has been notified by the central government; and
  2. prior approval be obtained from India’s federal bank, the Reserve Bank of India (RBI).

In recent years it has become clear that the regulatory authorities are determined to investigate corporate structures allegedly put together to take advantage of specific ‘tax havens’. At this point, it is unclear which jurisdictions are likely to be notified by the central government, but the list of notified countries will undoubtedly play a critical role in determining whether such cross-border provisions will have a positive or negative impact.

In the absence of specific methodology, the requirement for seeking prior approval from the RBI has the potential to act as a deterrent. The inherent paperwork and lengthy timelines surrounding regulatory approval, particularly when the regulators will themselves take time to understand the process, could prove practically onerous for the entities involved. It is also unclear how such cross-border mergers will be affected by other laws, such as the antitrust laws, both of India and of the other jurisdiction in question. For example, should notification of the merger become mandatory, necessitating prior approval of the antitrust regulator, it could affect the completion of the transaction. In general, speed and short timelines are key to the successful closing of any cross-border activity.

Therefore, although the introduction of cross-border mergers can be perceived as an effective tool for Indian companies to globalise their business operations, the number of regulations requiring compliance is doubled, on account of the two jurisdictions. Strategic harmonisation will be a crucial component for ensuring a smooth, effective and successful cross-border merger. With time, it may become necessary to provide for a single window clearance to deal efficaciously with cross-border mergers.

Notification to authorities

Under Clause 230(5), the notice of a scheme that is to be provided to the shareholders and creditors of a company must also be sent to the Central Government, income tax authorities, the Reserve Bank of India (the “RBI”), the Securities and Exchange Board of India (the “SEBI”), stock exchanges, Competition Commission of India (the “CCI”), if necessary, and such other sectoral regulators or authorities that are likely to be affected by such scheme. Should these authorities have any concerns about, or objections to, the scheme, they may make representations to the Tribunal in respect of the scheme within thirty days of receipt of the notice.

Even though there is a limited period within which authorities may raise objections, there still is scope for mergers to be delayed, especially where any regulatory filings with authorities have not been completed.

The provision does not clarify when it is necessary to notify each of these authorities and when this is not required. For example, should it be assumed that a notice to the SEBI and stock exchanges is not required in the case of mergers that do not involve listed companies and is a notice to the CCI required regardless of the size and turnover of the merging companies?

Merger of listed Companies

Clause 232(3)(h) now provides that in the case of a merger between a listed transferor company and an unlisted transferee company, the transferee company shall remain unlisted after the merger. This expressly excludes the possibility of backdoor listings through reverse mergers. Clause 232 also stipulates that in the case of such a merger, the shareholders of the listed transferor company must be given an exit option at a price not less than what may be specified by the SEBI for this purpose.

No Treasury Stock

The proviso to Clause 232(3) prohibits the retaining of any treasury stock pursuant to a merger and requires all such shares to be cancelled or extinguished. Clause 233(10) also applies similarly in the case of merger schemes that take effect without an order of the Tribunal. The view of the Ministry of Corporate Affairs in this regard is that such a ban on treasury stock is necessary to ensure good corporate governance and prevent market manipulation by companies indulging in trading their own shares.


In light of Clause 230(8) of the Bill, where a scheme involves a buyback of securities, such a buyback must be in accordance with Clause 68, which is the provision governing buybacks (corresponding to Section 77A of the 1956 Act). While courts have, in the past, approved schemes involving buybacks where the buybacks were not in accordance with Section 77A, this will not be possible under the provisions of the Bill.


The amended bill contains a number of significant and welcome changes that have potential of making mergers simpler and convenient to implement in the future.

Looking ahead, the Government would also need to issue notifications and introduce certain rules in order to give effect to some of these provisions, particularly those relating to cross-border mergers. Marriage of two lame ducks will not give birth to a race horse. Any acquisition whether one where an Indian company acquires a foreign company or where a foreign company acquires an Indian company, cannot be accomplished unless the procedural requirements prescribed by the law of the land are fulfilled. With the recent global trends of M&A and India being a favourite destination, the country may regain the status of being the Golden Bird.

According to Sir George Bernard Shaw, we are made wise not by the recollection of our past, but by the responsibility to our future and the future of India is bright indeed with the company law reforms and a good regulatory framework.

[1] The Halsbury™s Laws of England, Vol. VII(2) para 1462 page 1103

[2] Though in Moschip case [(2004) 59 CLA 354], the High Court of Andhra Pradesh observed that a liberal view of

the Section should be taken and recommended a suitable modification.

Tags: BillBusinessCompanies ActCorporate lawIndiaMergers and acquisitionsNCLTShareholderThe Companies Act 1956

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