Submitted by- Priyanka Grover, Roll 32A (MBA-IB 2017-20)

MERGER AND ACQUISITION IN INDIA: A LEGAL FRAMEWORK

Submitted to: Dr. Sheeba Kapil

By- Priyanka Grover, Roll 32A
.

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 Submitted by- Priyanka Grover, Roll 32A (MBA-IB 2017-20)
INTRODUCTION

Mergers and acquisitions (M&A) is the area of corporate finances, management and strategy dealing with purchasing
and/or joining with other companies. In a merger, two organizations join forces to become a new business, usually
with a new name. Because the companies involved are typically of similar size and stature, the term "merger of
equals" is sometimes used. In an acquisition, on the other hand, one business buys a second and generally smaller
company which may be absorbed into the parent organization or run as a subsidiary. A company under consideration
by another organization for a merger or acquisition is sometimes referred to as the target.

Mergers and Acquisitions is not new in the Indian Economy. In the past, companies have also used this form of
restructuring regime; Indian corporate houses are now refocusing on the lines of core competence, market share, and
global competitiveness. This process of refocusing has been accelerated by the arrival of foreign competitors.
Naturally, this requires companies to grow and expand in businesses that they understand well. Mergers and
Acquisitions is one of the most effective methods of corporate restructuring and has, therefore, become an integral part
of the long – term business strategy of corporate enterprises.

In this backdrop, Indian corporate enterprises have undertaken restructuring exercises primarily
through M & A within legal framework to create a better presence and expand in their core areas of interest. The legal
framework for Merger & Acquisitions in India is governed through the following regulations:
 SEBI’s(Regulation in relation to Mergers and Acquisition)
 Indian Companies Act 1956 in relation to Mergers and Acquisition.
 The Competition Act 2002
 Income-Tax Act 1961 in relation to Mergers and Acquisitions.

OBJECTIVES OF THE STUDY

 To study the legal environment for merger and acquisition in India.

Regulatory Framework of Mergers and Acquisition

M & A Laws Applicable in India

Competition Stamp Accounting RBI and Sector

The Income Tax Standards FEMA Specific
Act, 2002 Laws
Companies Act, 1961 Laws Regulations
Act, 2013
SEBI Laws
(Applicable
to Listed
Companies)

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 Submitted by- Priyanka Grover, Roll 32A (MBA-IB 2017-20)

The primary economic motives of merger and acquisition in India are synergy in operating economies, tax advantages,
growth and diversification etc. However, the practice of M & A must be within the following legal framework:

I. COMPANIES ACT, 2013 (REPLACED BY THE EARLIER ACT OF 1956

PROVISION OF THE INDIAN COMPANIES ACT 1956 IN RELATION TO MERGER AND
ACQUISITION
Sec 390, Sec 392, Sec 393, Sec 394, Sec 395 and Sec 396 of the Indian Companies Act 1956 govern the
merger in India.
Sec 390- This section provides that the expression “arrangement” includes a reorganization of the share capital of
a company by the consolidation of shares of different classes or by both these methods.
Sec 391- This section deals with the meeting of creditors/members and National Company Law Tribunal
(NCLT’s) sanction to scheme.
Sec 392- This section contains the powers of NCLT to enforce compromise and arrangement.
Sec 393- This section contains the rules regarding notice and conduct of meeting.
Sec 396- This section contains the power to Central Government to order amalgamation. In relation to merger and
acquisitions (M&A), Companies Act, 2013 has replaced the 1956 Act. The new Act enhanced disclosure norms
and providing protection to investors and minorities thereby making M&A smooth and efficient. It helps in the
overall process of acquisitions, mergers and restructuring, facilitate domestic and cross-border mergers and
acquisitions.

II. SEBI REGULATION IN RELATION TO MERGERS & ACQUISITION

1. Takeover and listing agreement exemption clauses 40A and 40B of listing agreement.
i) Clause 40A of Listing Agreement: It deals with substantial acquisition of shares and requires the offeror and the
offeree to inform the stock exchange when such acquisition results in an increase in the shareholding of the acquirer
to more than 10%

ii) Clause 40B of Listing Agreement: It deals with takeover efforts. It refers to change in management. Where there is
no change in management, clause 40B of listing agreement will not be applied. However sub clause 13 of
amendment of clause 40B also provides an exemption to the scheme approved by BIFR. There is no provision
under clause 40B for exemption of non BIFR companies.
SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997
On the basis of recommendations of the Committee, the SEB1 announced on Febuary20,1997 the revised takeover
codes as per Securities and Exchange Board of India (Substantial Acquisitions of shares and Takeovers)
Regulations, 1997. The objective of these regulations is to provide an orderly framework within which substantial
acquisitions and takeovers can take place. Salient features of this new takeover codes (Regulations 1997) may be
enumerated as follows:
i. Any person, who holds more than 5% shares or voting rights in any company, shall within two months of
notification of these Regulation disclose his aggregate shareholding in that company, to the company which in
turn, shall disclose to all the stock exchanges on which the shares of the company are listed, the aggregate
number of shares held by each such person.
ii. Any acquirer, who acquires shares or voting rights which (taken together with shares or voting rights, if any,

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 Submitted by- Priyanka Grover, Roll 32A (MBA-IB 2017-20)
held by him) would entitle him to more than 5% shares or voting rights in a company- (a) in pursuance of a
public issue, or (b) by one or more transactions, or (c) in any other manner not covered by (a) and (b) above,
shall disclose the aggregate of his shareholding or voting rights in that company, to the company within four
working days of the acquisition of shares or voting rights, as the case may be.
iii. Every person, who holds more than 10% shares or voting rights in any company, shall, within 21days from the
end of the financial year, make yearly disclosures to the company, in respect of his holdings as on 31st March
each year.
iv. No acquirer shall agree to acquire, of acquire shares or voting rights which (taken together with shares or voting
rights, if any, held by him or by persons acting in concert with him), entitle such acquirer to exercise 10% or
more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of
such company in accordance with the Regulations.
v. No acquirer holding, not less than 10% but not more than 25% of the shares or voting rights in a company, shall
acquire, additional shares or voting rights entitling him to exercise more than 2% of the voting rights, in any
period of 12 months, unless such acquirer makes a public announcement to acquire shares in accordance with the
Regulations.
vi. The minimum offer price shall be the highest of- (a) the negotiated price under the agreement; (b) average price
paid by the acquirer for acquisitions including by way of allotment in a public or rights issue, if any, during the
twelve month period prior to the date of public announcement; (c) the price paid by the acquirer under a
preferential allotment made to him, at any time during the twelve month period up to the date of closure of the
offer: (d) the average of the weekly high and low of the closing prices of the shares of the target company during
the 26 weeks preceding the date of public announcement.
vii. The public offer shall be made to the shareholders of the target company to acquire from them an aggregate
minimum of 20% of the voting capital of the company provided that acquisition of shares from each of the
shareholders shall not be less than the minimum marketable lot or the entire holding if it is less than the
marketable lot.
viii. Within 14 days of the public announcement of the offer, the acquire must send a copy of the draft letter to the
target company at its registered office address, for being placed before the Board of Directors and to all the stock
exchanges where the shares of the company are listed.
ix. Any person other than the acquirer who had made the first public announcement, who is desirous of making any
offer, shall, within 21 days of the public announcement of the first offer, make a public announcement of his
offer for acquisition of some or all of the shares of the same target company. Such offer shall be deemed to be a
competitive bid. No public announcement for an offer or competitive bid shall be made during the offer period
except during 21days period from the public announcement of the first offer.
Upon the public announcement of a competitive bid or bids, the acquirer(s) who had made the public
announcement (s) of the earlier offer(s), shall have the option to make an announcement revising the offer or
withdrawing the offer with the approval of the SEBI.

III. REGULATION OF COMBINATIONS (SEC 6, THE COMPETITION ACT, 2002)

1. No person or enterprise shall enter into a combination which causes or is likely to cause an appreciable
adverse effect on competition within the relevant market in India and such a combination shall be void.

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 Submitted by- Priyanka Grover, Roll 32A (MBA-IB 2017-20)
2. Subject to the provisions contained in sub-section(1), any person or enterprise who or which proposes to
enter into a combination, shall at his or it’s option give notice to the commission, in the form as may be
specified, and the fee which may be determined by regulations, disclosing the details of the proposed
combinations.

IV. PROVISION OF THE INCOME TAX ACT, IN RELATION TO MERGER & ACQUISITIONS

Income Tax Act, 1961 is vital among all tax laws which affect the merger of firms from the point view of
tax savings/liabilities. In case of mergers and amalgamations, a number of issues may arise with respect to
tax implications. Some of the relevant provisions may be Depreciation U/S 32, Capital Expenditures,
Exemption from Capital Gains Tax, Carry Forward Losses of Sick Companies and Amalgamation
Expenses.

V. INDIAN ACCOUNTING STANDARDS

In today’s era of financial inclusion and a competitive global market, several countries are adopting
substance based universal accounting principles, i.e., International Financial Reporting Standards
(IFRS), to make their accounting reports comparable with global players and facilitate comparative
evaluation of their performances. India Inc., being no different, is adopting principles of IFRS in the
form of the Indian Accounting Standards (Ind-AS) . The adoption of Ind-AS and the resulting fair value
accounting is bound to have far reaching implications on the M&A landscape.

While the impact on M&A transactions can be imported out of different Ind-AS, Ind-AS 103
“Business Combination” deals specifically with M&As. The scope of Ind-AS 103 includes all
transactions that would result in an acquirer obtaining control (by way of share purchase, amalgamation,
demerger, slump sale, capital reduction, etc.) as opposed to the conventional Accounting Standard – 14,
which dealt only with legal entity consolidation.

VI. RBI and FEMA Laws

 Section 234 of the Companies Act, 2013 (notified with effect from 13 April, 2017) provided for the
cross border merger of Indian and foreign companies. Further, Companies (Compromises,
Arrangements and Amalgamation) Rules, 2016, as amended by the Companies (Compromises,
Arrangements and Amalgamation) Amendment Rules, 2017 (Co. Rules) were issued. Section 234
provides for prior Reserve Bank of India (RBI) approval in case of cross border merger.
 On 26 April, 2017, the RBI issued draft regulations relating to cross border mergers for comments
from the public.The Foreign Exchange Management (Cross Border Merger) Regulations, 2018 have
now been notified vide notification no. FEMA 389/ 2018-RB dated 20 March, 2018 and are effective
from the date of notification.
 As per the Regulations, merger transactions in compliance with these regulations shall be deemed to
have been approved by RBI, and hence, no separate approval should be required. In other cases,
merger transactions should require prior RBI approval.

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 Submitted by- Priyanka Grover, Roll 32A (MBA-IB 2017-20)
A summary of the Regulations is given below in the context of inbound and outbound mergers.
Particulars Inbound merger
Definition Cross border merger in which the Resultant
Company is an Indian company.
Conditions for issue  Compliance with FEMA regulations
of security by the concerning inbound investments,1
Resultant Company including pricing guidelines, entry routes,
sectoral caps, attendant conditions and
reporting requirements.
 Additionally, compliance required with
FEMA regulations concerning outbound
investments2 in the following cases:
− Where transferor foreign company is a
joint venture (JV)/ wholly owned
subsidiary (WOS) of the Indian company.
− Where the merger results in
acquisition of step-down subsidiary
(SDS) of JV/ WOS outside India.
Treatment of office  Any office of the transferor foreign company
of transferor outside India will be deemed to be the
company branch/ office outside India of the resultant
Indian company.
 Relevant FEMA regulations to be
complied with4 post-merger.
Guarantees and  Guarantees and borrowings of the
outstanding transferor foreign company from overseas
borrowings of sources, which become guarantees and
transferor company borrowings of the resultant Indian
company to comply with the relevant
FEMA regulations.
 Timeline of two years prescribed for above
compliance. No remittance for repayment
can be made within these two years.
 Conditions with respect to end-use would
not apply.
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Outbound merger
Cross border merger in which the
Resultant Company is a foreign company.
The foreign company should be
incorporated in a jurisdiction specified in
Annexure B to Co. Rules.
 Compliance with FEMA regulations
concerning outbound investments2.
 Compliance with FEMA regulations
concerning outbound investments3.
 In case shareholder of transferor
Indian company is a resident
individual, the fair market value of
foreign securities should be within the
limits prescribed under
the Liberalised Remittance Scheme.
 Any office of the transferor Indian
company in India will be deemed to be
the branch/ office in India of the resultant
foreign company.
 Relevant FEMA regulations5 to be
complied with post-merger.
 Resultant foreign company should not
acquire any liability payable to local
Indian lenders, which is not in
conformity with FEMA or guidelines
issued thereunder - NOC to be obtained
from lenders in India.
 Guarantees and borrowings of the
transferor Indian company to be repaid
as per terms of the scheme that may be
sanctioned by the National Company
Law Tribunal
 Submitted by- Priyanka Grover, Roll 32A (MBA-IB 2017-20)
Particulars Inbound merger Outbound merger
Bank account in  Resultant Company permitted to open a bank  The Resultant Company is permitted to
country of transferor account in foreign currency in the overseas open a Special Non-Resident Rupee
entity jurisdiction for putting through transactions Account (SNRR Account) in accordance
incidental to the merger. with relevant FEMA regulations6.
 This bank account can be maintained for a  This bank account can be maintained for
maximum period of two years from the a maximum period of two years from the
date of sanction by the NCLT. date of sanction by the NCLT.
Acquisition/  Resultant Company permitted to acquire and  Resultant Company permitted to acquire
holding of any hold asset outside India to the extent and hold any asset in India to the extent
other asset of permitted under FEMA guidelines. permitted under FEMA guidelines.
transferor entity  Asset or security not permitted to be  Asset or security not permitted to be
acquired or held under FEMA guidelines acquired or held under FEMA guidelines
should be sold within two years from the should be sold within two years from the
date of sanction by the NCLT. date of sanction by the NCLT.
 Proceeds to be repatriated to India  Proceeds to be repatriated outside
immediately on sale India immediately on sale
− Proceeds could be utilised for payment of − Proceeds could be utilised for repayment
an overseas liability not permitted to be of Indian liability within the two-year
held under FEMA guidelines within the period.
two- year period.
Other conditions  Valuation 
Valuation of the Indian company and the
foreign company to be in accordance with
Rule 25A of the prescribed Co. Rules, i.e.,
internationally accepted principles on
accounting and valuation.
 Compensation
Payment of compensation by the Resultant
Company, to a holder of a security of the
Indian company or the foreign company to
be in accordance with the Scheme
sanctioned by the NCLT.
 Regularisation of non-compliances
Companies to ensure completing
requisite regulatory actions prior to
merger with respect to any non-
compliance, contravention, violation
under FEMA.
 Reporting compliances
Certificate confirming compliance with
above guidelines to be furnished by the
managing director/ whole-time director and
company secretary (if available) to be
submitted to the NCLT.

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 Submitted by- Priyanka Grover, Roll 32A (MBA-IB 2017-20)
VII. STAMP LAWS

Any Mergers & Amalgamations in India is such a complex process involving various regulators
at various point of time and with different mindsets. Stamp Duty being the last step in Merger &
Amalgamation, has most of the times in our experience, for companies who have executed the
restructuring process rigorously have made then land in a fix in terms of cost. It comes to the company
as quite a shock, that Stamp Duty can be the highest component of an entire transaction of Mergers &
Amalgamation but yet occupies the least time during the structuring exercise as it at the end of the road.
The entire cost of Mergers & Amalgamation transaction has gone haywire when the actual calculations
of Stamp duty payable are received by the companies. The current updates add to the worries for
companies going through interstate restructuring.

VIII. Other Industry related laws

Companies in certain industry/sectors are also subject to respective industrial laws, for example,
Banking Companies are regulated by RBI, Financial Companies are regulated by RBI and SEBI,
Insurance Companies are regulated by Insurance Regulatory and Development Authority if India.
Therefore, any Company going for M&A should work as per the industry-specific laws and conditions,
which may include regulatory approvals/intimations.

References

1. www.mca.gov.in

2. https://www.sebi.gov.in

3. https://www.rbi.org.in/scripts/Fema.aspx

4. Indian Stamp Act, 1899

5. www.icai.org