Merger and acquisition activity plummeted in 2015. However, a steep rise in the same was expected owing to the renewed bankruptcy legislations. The previously applicable Companies Act, 1956 had been replaced by the Companies Act of 2013, with a view to react to the fast-evolving requirements and financial activities of India’s business models. While ‘merger’ suffered from a want of definition in the Companies Act, 1956; it has been elucidated under the 2013 Act. A merger is a union of two or more companies, in which one of them is absolutely absorbed by the other. The extant entities come to an end and form a single business. ‘Amalgamation’ has been defined under the Income Tax Act, 1961. The new Companies Act heralded a transparent and forward-looking stage in the legislative regulations regarding M&A’s. Sections 390-394 of the Companies Act prescribes provisions to regulate mergers between the companies. These provisions are so broadly and loosely structured that they govern almost each and every type of corporate structuring that a company may undertake, namely M&As, demergers, spin-offs, and all other negotiations, transactions, agreements and arrangements entered into between an entity and its members or its creditors. Hailed as a bold move, the Companies Act, 2013 sought to alter extant laws and reconcile with the liberal environment that exists today.
As the name suggests, cross border mergers are arrangements between companies belonging to different nations within the target nation. Section 391-394 of the Companies Act, 1956 permits foreign companies to enter into a merger with an Indian company. However, interestingly, it disallows an Indian entity from merging with its foreign counterpart. This was incorporated under the 2013 Act that envisaged the continued existence of the Indian company post the merger, which would then be governed by the Indian legislations.
Notwithstanding its merits, the provisions of the Act dealing with cross-border mergers suffers from certain pitfalls. These snags must be addressed whilst issuing regulations.
Critical Evaluation of Cross-Border Mergers under Companies Act, 2013:
1. Regulations pertaining to cross-border mergers must be loosened:
Owing to Section 394(4) (B), the Companies Act becomes unduly restrictive of cross border mergers. The regressive provision of permitting cross-border mergers solely with those foreign companies enumerated in the Central Government notified jurisdictions turns more narrow-sighted than its corresponding provision laid down in the 1956 Act. What this in turn does is only complicate the issue further instead of effectively tackling the same. It naturally follows that the jurisdiction notification requirement must be scrapped and the provision must necessarily be revised accordingly.
2. Notice requirements:
It has been argued that Section 230(5) which provides for a notice requirement to the Competition Commission of India or CCI is unnecessary as involving many authorities would only further complicate the matter. Also, procedural inconsistencies crop up as the present competition law itself adequately provides for the issue of notice. Section 6(2a) of the Competition Act, 2002 provides a period of 210 days during which the CCI may approve the merger proposal while the Companies Act, 2013 provides a period of only thirty days. Thus, the supra provision must be done away with. Moreover, dragging several regulators before the tribunal may further unduly delay the process. Likewise, section 234(2) deals with seeking RBI’s approval prior to the cross-border merger.
Despite the uproar that the provisions regarding cross-mergers was met with, the Companies Bill favoured status quo and failed to change the stance and permit Indian companies to merge into foreign entities. In spite of such ambiguities associated with the Companies Act, it has enacted effective measures to address the issues faced during a merger.