LEGAL ISSUES IN

M&A
Compiled and edited by Dr. Dipti Saraf
 COMPANIES ACT
Compiled and edited by Dr. Dipti Saraf
INTRODUCTION
▪ The companies Act,1956 is one of the most important legislations in India that empowers the
central government to regulate the formation, financing, functioning, and winding up of
companies.
▪ The terms ‘Merger’ and ‘Amalgamation’ have not defined in the Companies Act, 1956.
▪ The provisions related to mergers and amalgamation are contained in Sections 390-396,
which deal with matters pertaining to ‘arrangement’ and ‘compromise’
▪ The act empowers the central government with the right to do the following:
▪ Inspect the books of accounts of a company
▪ Direct special audits and order investigations into affairs of a company.
▪ Launch a prosecution in case of violation of the Act.

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SECTIONS (390-396)

Sec 390 Sec 390(1) Sec 391(2)-(7)

This section deals with the This section deals with ‘compromise’. It These sections state that every
‘arrangement’ that includes is an arrangement carried out at the scheme of arrangement and
reorganization of the share behest of the court on an application compromise should be
capital of the company. made by the company, or any creditor, approved by 3/4th of the
This is done either by member, or the liquidator where a creditors or members present
consolidation of shares of company is being wound-up. and voting either in person or
different classes or by the Compromise is generally carried out by proxy.
division of shares into different between the company and its creditors
classes or both. or between a company and its members.
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SECTIONS (390-396)
Sec 393(1)
• This section deals with disclosure of the terms of arrangement and compromise.
• It clearly states that the notice calling the meeting of creditors or members should clearly state the terms of
arrangement and compromise and their effects.
• If the notice is given through an advertisement, the same should give details of the place from where the copies
of the statement on the terms of the arrangements and compromise can be obtained.
• The copies are to be provided by the company at free of cost.

Sec 393(2)
• This section states that if the arrangement and compromise are likely to affect the rights of the debenture holders,
a statement giving information and explanation relating to the trustees of the deed for securing debenture capital
needs to be given.
• These sections provide that if these provisions are violated, the company and every officer of the company shall
be punishable with a fine that may extend up to Rs.50,000. In addition, any officer who is required to give
information on self but fails to do so shall be punishable with a fine that may extend up to Rs.5,000.
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 SECTIONS (394)
Sec 394

• This section provides that the court has powers to sanction a compromise or arrangement scheme proposed in
connection with a scheme for reconstruction of the company or amalgamation of the two companies
• The court may provide for the following sanctions: -
• The transfer of whole or part of the property or liabilities of the transferee (target) to the transferor (Acquirer).
• Allotment or apportioning the shares, debentures, or other like interests among the transferor or transferee.
• Continuing the suit by or against the target by or against the acquirer.
• Dissolution, without winding up, by the transferor.
• Dissent by any person to the scheme of compromise or arrangement within stipulated time and in a stipulated manner.
• Matters that are necessary to carry out the scheme in a complete and effective manner.
• Once the scheme is approves, the following changes shall take place: -
• All the property and liabilities shall stand transferred to the transferee company.
• All the property that was under any ‘change’ should be deemed to be free from the said charge once an order to that
effect is passed. The order should accordingly be incorporated in the records of the company.
• Once the order is passed, the company should file acertified copy of the order with ROC, failing which every officer who is
at default shall be punishable with a fine up to Rs.500.
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 SECTIONS (394A)
Sec 394A

• This section states that the court should communicate the details of all the notices of the
compromise and arrangements to the central government. It should then seek and consider the
representations made by the central government before passing any order.
• Once the order is passed, copies of the same should be filed with the ROC and annexed with every
copy of memorandum of association issued after the copy has been filed.
• Any default in this regard is punishable with a fine up to Rs.100 for each copy where default occurs.
• Finally, the scheme needs to be approved by the requisite majorities and it becomes binding on all the
members of the company whether consented to by all or not.
• For ascertaining 3/4th majority, the members present at the meeting are counted and not the total
number of members.
• The court may reject the scheme if it feels that the scheme is fraudulent or is intended to cover the
misdeeds of the directors.
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SECTIONS (390-396)
• This section states that reconstruction or amalgamation
shall be void when it is prohibited under the following

Section 376 provisions: -

• The memorandum or articles of association
• Resolution passed in the general body meeting or by the BOD.
• An arrangement between the company and any other persons.

• This section deals with the acquisition of shares of the

shareholders expressing dissent over the scheme or

Sec 395 contract approved by the majority involving the

transfer of shares.

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SEBI (SUBSTANTIAL
ACQUISITION OF
SHARES AND
TAKEOVER)
REGULATIONS, 1997
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 SEBI TAKEOVER CODE
Contents of Public Creeping Acquisition
Trigger Point Offer Price Announcement
Disclosure

Any acquirer who No acquirer can The offer price to number of shared No acquirer can acquire
acquires holdings up to acquire holdings the public should be proposed to be acquired more than 5% of holdings in
5%, 10% and 14% of the which along with his atleast the highest minimum offer price any financial year without
total, should announce at existing holdings of the following: complying with open offer
each stage to the become equal to or object of acquisition requirements if his existing
• negotiated price
company and concerned more than 15% of the date by which offer holdings are between 15%
stock exchange about total holding • average price paid and 75% of the total
by acquirer letter will be posted
such holdings An acquirer can do so An acquirer can do creeping
• preferential offer dates of opening and
Stock exchanges shall put only if he makes a price (if made in closing of offer acquisition of up to 5% per
up such information on public announcement last 12 months) year without triggering off
public display to acquire shares An acquirer can do so the open offer requirements
• average of weekly only if he makes a public
through a public offer Any purchase/sale of
high and low for announcement to
to the extent of 20% holding amounting to 2% of
last 26 months acquire shares through a
public offer to the the total should be reported
extent of 20% within two days of the
transaction
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SEBI (DELISTING OF
SECURITIES)
GUIDELINES, 2003

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CONCEPT
▪ It is also known as reverse book building. It is a mechanism whereby the promoter or acquirer
offers to buyback shares from the shareholders through respective book running lead
managers (BRLMs). The shares so acquired through the buyback process are used by
companies for delisting their shares.

▪ Reverse book building is open, offers are collected from the shareholders at various prices
above or equal to the floor price. Once the offer closes, the buyback price gets determined.

▪ Compulsory delisting
▪ Voluntary delisting

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 VOLUNTARY DELISTING
➢Applicability of Voluntary delisting
➢The provisions of the Act apply to delisting of securities of companies under the
following scenarios:
➢The promoters seek voluntary delisting of the company.
➢The public shareholding falls below the minimum limit specified in the listing
conditions or Listing Agreement as a result of any acquisition of shares of the company
or scheme or arrangement.
➢Voluntary delisting of securities of listed company
➢The securities of the company have been listed on any stock exchange for a minimum
period of 3 years.
➢The investors have been given an exit opportunity before the shares are delisted from
the stock exchange. The exit price in such cases needs to be determined in accordance
with the book building process described in Clauses 7-10, 13 and 14 of the guidelines.
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 VOLUNTARY DELISTING
➢ Procedure for Voluntary delisting
➢ Pass a special resolution at the general meeting to obtain approval of shareholders of the company. The resolution shall
remain valid for a period of one year.
➢ The votes cast in favour of the delisting proposal must be at least twice the votes cast against the proposal by the public
shareholders.
➢ The company has to seek an in-principle approval from stock exchange from where it seeks to delist its shares by making an
application in the specified format along with a copy of the special resolution passed at the general meeting
➢ Once the in-principle approval from the stock exchange is obtained, the company has to come out with a public
announcement in the manner provided in the guidelines.
➢ The company has to comply with the other additional conditions as may be specified by the concerned stock exchanges
from where securities are to be delisted.
➢ The acquirer must buy back an adequate number of shares so that their shareholding increases to 90% or the level of
promoter shareholding post offer is the aggregate percentage of pre-offer promoters holding and half of the offer size,
whichever is higher.
➢ This means that if the promoters holding already have 90% shareholding at the time of seeking delisting, they shall propose
to buy back the remaining 10% of the public shareholding.
➢ The acquirer needs to provide the public shareholders an exit opportunity at a price determined by a book building process.
This price has to be higher than the floor price for the buyback, which has to be disclosed by the company in a public
announcement.
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 VOLUNTARY DELISTING
▪ Public announcement for voluntary delisting
▪ The SEBI guidelines stipulate that the promoters or acquire should make a public
announcement stating its intention of getting the securities delisted from the stock
exchange.
▪ Before making the public announcement, the promoter should appoint a merchant
banker registered with SEBI to facilitate the process of delisting.
▪ Delisting of One or All of securities
▪ A company may delist one or all classes of securities. The procedure however should be
carried out subject to adherence to the following provisions : -
▪ When equity shares of a company are delisted, the fixed income securities can continue to remain
listed on the stock exchange.
▪ An equity that has convertible instruments outstanding cannot delist its equity shares until conversion
option has been exercised.
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 COMPULSORY DELISTING OF COMPANIES BY
STOCK EXCHANGE
▪ A stock exchange is authorized to delist companies for non-compliance with the Listing agreement provided
the company has been suspended for a minimum period of six months.
▪ Stock exchange can also delist companies as per the norms provided in schedule III (pane no 203, Aurora,
Shetty)
▪ The stock exchange is required to give adequate and wide public notice through newspapers, including one
English national daily of wide circulation, and through display of the notice board/website/ trading systems of
the exchanges.
▪ The stock exchange has to provide a period of 15 days within which any person who may be aggrieved by the
proposed delisting can make a representation.
▪ Once the stock exchange finally decides to go ahead with its decision to delist a company, it should give
adequate and wide public notice to the fact of delisting.
▪ The stock exchange should also ensure that fair value of such securities is disclosed in all its public notices.
▪ In addition, the exchange is also required to display the name of such company(ies) on its website.
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RIGHTS OF SECURITIES HOLDERS IN CASE OF
COMPULSORY DELISTING

The promoter of the company should compensate the securities holders by paying fair
value of the securities held by them. The fair value of securities is determined by persons
appointed by the stock exchange out of panel of experts, which shall also be selected by
the stock exchange.

The stock exchange should ensure that adequate public notice is given through
newspapers and displayed on the notice/ trading systems of the stock.

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PROVISIONS OF INCOME
TAX ACT,
1961

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 INTRODUCTION
▪ Certain transactions pertaining to mergers are covered under The Income Tax Act, 1961. The
provisions relate to tax concession to the Indian companies that merge/demerge.
▪ These deals, of course, need to satisfy the conditions pertaining to Section 2(19AA) and section
2 (1B)of Indian Income Tax Act as per the applicable situation.

MERGER AS DEFINED UNDER INCOME TAX ACT,

1961
▪ Under section 2(1B) of the Income Tax Act, 1961, amalgamation is defined as mixing up or uniting together.
▪ It is a process where one company unites with another company and ensures that the following conditions
are met: -
▪ All properties are transferred to the amalgamated company.
▪ All liabilities are transferred to the amalgamated company.
▪ Shareholders holding at least three-fourths in the value of shares of the amalgamating company become
shareholders of the amalgamated company.
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IMPORTANT TAX PROVISIONS FOR M&A
Amortization of expenditure incurred for the purpose of amalgamation or
demerger
• Section 35DD provides that any expenditure incurred for the purpose of amalgamation or demerger,
deduction of an amount equal to one-fifth of such expenditure is allowed for each of the five previous
years beginning with the year in which the amalgamation or demerger takes place.

Capital gain
• Section 45 deals with the procedure for determination of the amount chargeable under capital gains
tax. Capital gain tax is levied as and when transfer of a capital asset results in profit termed herein as
capital gain.

Special provision for computing cost of acquisition of certain assets

• Section 43 states that when an asset which becomes the property of an amalgamated company is sold
by the amalgamated company as stock-in-trade, the cost is said asset for the purpose of computing
the profits or loss on sale of asset shall be computed as:
• Cost of acquisition of asset + cost incurred on among improvements on the said asset – cost
incurred
Compiled and edited in connection
by Dr. Dipti Saraf with facilitating the transfer of the asset by the amalgamating company.
 IMPORTANT TAX PROVISIONS FOR M&A
▪ Transfer under section 47
▪ This section states that any transfer of capital asset, being a share or shares held in an Indian company, by the
amalgamating foreign company shall not be treated as capital gains if: -
▪ At least 25 % shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign
company. The transfer does not attract tax on capital gains in the

▪ Carry forward and set-off of Loss and unabsorbed depreciation

▪ Amalgamating company: -
▪ The company should be engaged in the business in which the accumulated loss occurred or depreciation allowance remains
unabsorbed for three or more years.
▪ The company has held three-fourths of the book value of the fixed assets on the date of amalgamation and the same have been
held by it two years prior to the date of amalgamation.
▪ Amalgamated company: -
▪ The company holds three-fourths of the book value of the fixed assets of the amalgamating company for a period of five years
from the date of amalgamation.
▪ The company continues the business of the amalgamating company for a minimum period of five years from the date of
amalgamation.
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 IMPORTANT TAX PROVISIONS FOR M&A
▪ If the company fails to fulfill the conditions stated, the setoff of loss or allowance of depreciation made in
any previous year shall be treated as income of the amalgamated company and becomes chargeable to tax
for the year in which the conditions are violated.
▪ In case of demerger, the following conditions shall apply:
▪ The loss or unabsorbed depreciation is allowed to be carried forward and set off in the hands of the resulting company
provided the same is directly related to the entity transferred.
▪ In case the assets are not directly related to the undertaking transferred, the loss or unabsorbed depreciation gets
apportioned between the demerged entity and the resulting company in the same proportion in which the assets of
the company have been re
▪ Cost of reference to certain modes of acquisition
▪ Section 49(2) of the Income tax act, 1961 deals with the cost of acquisition of shares in an amalgamated company. The cost of
acquisition shall be the value at which the shares have been acquired.
▪ In case of demerger, the cost of acquisition shall be the proportion as the net book value of the assets transferred in a
demerger bears to the net worth of the demerged company immediately before the demerger

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 COMPETITION ACT, 2002
▪ India has for very long period adopted policies of ‘Control’. In the earlier days, the competition law of India was the Monopolies
and Restrictive Trade Practices Act, 1969 (MRTP Act).
▪ The need for amending the Act was felt in 1991 when economic reforms were undertaken.
▪ The Competition Act, 2002 is essentially divided into four compartments.
▪ Anti-competition agreements.
▪ Abuse of dominance
▪ Combinations regulation
▪ Competition advocacy

▪ Competition Act, 2002 enacted with the following objectives: -

▪ Preventing practices that have an adverse effect on competition

▪ Promoting and sustaining competition in markets
▪ Protecting the interests of consumers
▪ Ensuring freedom of trade carried on by other markets participants in India

▪ The Act states that no person or enterprise shall enter into a combination, in the form of an acquisition, merger, or amalgamation
that causes or is likely to adversely impact competition in the market.
▪ In case it is ascertained that the arrangement has an adverse effect, then the combination is treated as void under the Act.
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 Amalgamation
and Demerger

Reduction of
Capital

Buy- Back of
Securities

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PROVISIONS RELATED TO MERGERS AND
DEMERGER
▪ Law governing M&A is in the section 390to 394A and 396-396A of the
companies act 1956

▪ Under sec 391, a court has wide power to approve/disapprove

▪ Sec 394 deals with the transfer of the whole or any part of the undertaking
property or liability

▪ SEBI does not have any right to approve or disapprove any M&A

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CONDITION PRECEDENT TO APPROVAL BY
HIGH COURT (CONTD……)

✓Approval by Creditors and shareholders

✓Disclosure of all the Facts to the high court
✓Disclosure of all the materials to all the creditors and members
✓Report of the official liquidator
✓The high court is require to satisfy itself
✓ The requirements under ‘a’ to ‘d’ above have been satisfied
✓ The proposal contained in the scheme have been made in good faith
✓ The scheme is not violative of any law or not contrary to public policy

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PROVISIONS RELATED TO MERGERS AND
DEMERGER (CONTD……)
▪ The order passed by high court under sec 391 & 394 approving the Mergers or Demerger does not
become effective unless field every company with the ROC

▪ Under sec 394 (3) says every company should file the same to ROC within 30days of approval by
high court

▪ While formulating the scheme one should also specify the appointed date from which all the
assets and liabilities will be transfer

▪ Under sec 394 one can not amalgamate or demerger an Indian company to foreign company but
can de vise versa

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 PROVISION RELATED TO REDUCTION OF
CAPITAL
▪ Under Sec 100 company can reduce its capital subject to the confirmation by high court

• Authorized by its articles

Preconditions • Approval by its share holders

• Redemption of preference share Capital

• Forfeiture of shares
Exception • Diminution of capital
• Purchase of share under sec 402
• Buy back of capital under Sec 77A, 77AA, 77B

• By reducing the liability in respect of

Manner of share capital
reduction • By writing off or cancelling the capital
which is lost
Compiled and edited by Dr. Dipti Saraf • By Returning excess capital
 PROVISIONS FOR BUY-BACK OF SECURITIES
Condition of BB Re Issue
Sec 77A for BB Manners of BB
• Authorized by Articles • The company
• Its Free • Pass special resolution cannot issue • Existing
Reserves share public security
• In a FY a BB cannot holders on a
exceed 25% of Paid up issue, right issue,
• Security preferential proportionate
capital basis
Premium Acc. allotment for the
• Post BB D/E ration shall period of 6
not exceed 2:1 months after
• The process of • Open Market
• Shares to be bought must completion of BB
any share or be fully paid up
other • Follow BB resolution • Odd Lots
Specified Sec • Except:
passed by SEBI
• Issue of bonus • Employees, by
• Follow guidelines of BB share
rules ,1999 purchasing
• BB should be completed ESOPs or
within 12 months of • Issue of shares Sweat Equity
passing Special in discharge of
Resolution warrants,
Preferences
• Sec bought back must be share or
destroyed within 7 days debenture or
of Completion ESOPS, Sweat
Equity
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