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THEME

PROCEDURE FOR
MERGER AND
AMALGAMATION
ICAI-ARF GROUP
sections 389 to 396-A deals with organisation’s goal and outlines the
the issue and related aspects cover- policy framework to achieve these
ing arbitration, compromises, objectives. The organisation’s goal
arrangements and reconstructions for business expansion could be
but at different times and under dif- accomplished, inter alia through
ferent circumstances in each case of business combinations assimilating
merger and amalgamation applica- a target corporate which can remove
tion of other provisions of the the present deficiencies in the orga-
Procedure for merger and Companies Act, 1956 and ruled nization and can contribute in the
amalgamation is different from made there-under may necessarily required direction to accomplish the
takeover. Mergers and amalga- be attracted. So, the procedure does goal of business expansion through
mations are regulated under the not remain simple or literally con- enhanced commercial activity i.e.
provisions of the Companies Act, fined to chapter V. supply of inputs and market for out-
1956 whereas takeovers are regu- The procedure is complex, put product diversification, adding
lated under the SEBI (Subst- involving not only the compromises up new products and improved tech-
antial Acquisition of Shares and or arrangements between the com- nological process, providing new
Takeovers) Regulations. pany and its creditors or any class of distribution channels and market

T
he beginning to amalgama- them or between the company and segments, making available techni-
tion may be made through its members or any class of them but cal personnel and experienced
common agreements between it involves, safeguard of public skilled manpower, research and
the transferor and the transferee but interest and adherence to public pol- development establishments etc.
mere agreement does not provide a icy. These aspects are looked after Depending upon the specific need
legal cover to the transaction unless it by the Central Government through and cost advantage with reference to
carries the sanction of company court official liquidator on Company Law creating a new set up or acquiring a
for which the procedure laid down Board, Department of Company well-established set-up firm.
under section 391 of the Companies Affairs and the court has to be satis-
Act should be followed for giving fied of the same. Search for a merger partner
effect to amalgamation through the
statutory instrument of the court’s Top management’s commitments The top management may use
sanction. towards merger and amalgamation their own contacts with competitors
Although chapter V of the in the same line of economic activity
Companies Act, 1956 comprising Top management defines the or in the other diversified field which

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could be identified as better merger schedule for planning merger cov- attached to loans/debentures/
partners or may use the contacts of ering different aspects like prelimi- bonds/other liabilities from
merchant bankers, financial consul- nary consultations with the per- bank /financial institution/
tants and other agencies in locating spective merger partner and seek- trustees and listing conditions
suitable merger partners. A number ing its willingness to cooperate in attached thereto.
of corporate candidates may be investigations. There are other 5. Effective date when the
shortlisted and identified. Such iden- aspects, too, in the activity schedule scheme will come into effect
tification should be based on the covering, quantification action
detailed information of the merger plan, purpose, shape, and date of 6. Conditions as to carrying on the
partners collected from published merger , profitability and valuation, business activities by trans-
and private sources. Such informa- taxation aspects legal aspects and feror between ‘appointed date’
tion should reveal the following development plan of the company and ‘effective date’.
aspects viz: after merger. 7. Description of happenings and
1) Organisational history of busi- consequences of the scheme
ness and promoters and capital coming into effect on effective
Steps for merger and amalga- date.
structure mation
2) Organisational goals Once the merger partner has 8. Share capital of transferor
been identified and terms of merger company specifying autho-
3) Product, market and competitors rized capital, issued capital and
are settled the procedure summa-
4) Organisational setup and man- rized in Appendix III can be fol- subscribed and paid up capital
agement pattern lowed. An explanation to the said 9. Share capital of transferee
5) Assets profile: Movable and steps is given below: company covering above
immovable assets, land and heads.
building 1) Scheme of amalgamation 10 Description of proposed share
6) Manpower – skilled, unskilled, The scheme of amalgamation exchange ratio, any conditions
technical personnels and should be prepared by the compa- attached thereto, any fractional
detailed particulars of manage- nies, which have arrived at a con- share certificates to be issued,
ment employees. sensus to merge. There is no spe- transferee company’s responsi-
cific form prescribed for scheme of bility to obtain consent of con-
amalgamation but scheme should cerned authorities for issue and
Negotiations allotment of shares and listing.
generally contain the following
information: 11 Surrender of shares by share-
Top management can negotiate holder of transferor company
1. Particulars about transferee
at a time with several identified for exchange into new share
and transferor companies
shortisted companies suited to be certificates.
merger partner for settling terms of 2. Appointed date
merger and pick up one of them 12 Conditions about payment of
3. Main terms of transfer of assets dividend, ranking of equity
which offers most favourable from transferor to transferee
terms. shares, pro rata dividend decla-
with power to execute on ration and distribution.
Negotiations can be had with behalf or for transferee the deed
target companies before making any or documents being given to 13 Status of employees of the
acquisitional attempt. Samedrill of transferee. transferor companies from
negotiations could be followed in the effective date and the status of
4. Main terms of transfer liabili- the provident fund, gratuity
cases of merger and amalgamation. ties from transferor to trans- fund, super annuity fund or any
Appendix II provides activity feree covering any conditions special scheme or funds cre-

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ated or existing for the benefit (2) Approval of Board of when released to press and other
of the employees. Directors for the scheme electronic media on conclusion of
14 Treatment on effective date of Respective Board of Directors Board meeting according approval
any debit balance of transferor for transferor and transferee com- to the scheme.
company balance sheet. panies are required to approve the (5) Application to Court for
15 Miscellaneous provisions cov- scheme of amalgamation. directions
ering income-tax dues, contin- (3) Approval of the scheme by
gencies and other accounting specialised financial institu-
entries deserving attention or tions/banks/trustees for
treatment. debenture holders
16. Commitment of transferor and The Board of Directors should
transferee companies towards in fact approve the scheme only
making applications/petitions after it has been cleared by the
under section 391 and 394 and financial institutions/banks, which
other applicable provisions of have granted loans to these compa-
the con Companies Act, 1956 nies or the debenture trustees to
to their respective High Courts. avoid any major change in the The next step is to make an
meeting of creditors to be convened application under section 39(1) to
17. Enhancement of borrowing limits the High Court having jurisdiction
of the transferee company upon at the instance of the Company
Court’s under section 391 of the over the Registered Office of the
the scheme coming into effect. company, and the transferee com-
Companies Act, 1956.
18. Transferor and transferee com- pany should make separate applica-
panies give assent to change in Approval of Reserve Bank of tions to the High Court. The appli-
the scheme by the court or other India is also needed where the cation shall be made by a Judge’s
authorities under the law and scheme of amalgamation contem- summons in Form No. 33 sup-
exercising the powers on plates issue of share/payment of ported by an affidavit in Form No.
behalf of the companies by cash to non-resident Indians or for- 34 (see rule 82 of the Companies
their respective Boards. eign national under the provisions (Court) rules, 1959). The following
of Foreign Exchange Management documents should be submitted
19. Description of powers of dele- (Transfer or Issue of Security by a with the Judge’s summons:
gatee of transferee to give Person Resident Outside India)
effect to the scheme. Regulations, 2000. (a) A true copy of the Company’s
Memorandum and Articles
20. Qualification attached to the In particular, regulation 7 of the
scheme, which require approval above regulations provide for com- (b) A true copy of the Company’s
of different agencies, etc. pliance of certain conditions in the latest audited balance sheet
21. Description of revocation/can- case of scheme of merger or amal- (c) A copy of the Board resolution,
cellation of the scheme in the gamation as approved by the court. which authorises the Director
absence of approvals qualified (4) Intimation to Stock to make the application to the
in clause 20 above not granted Exchange about proposed High Court.
by concerned authorities. amalgamation (6) High Court directions for
22. Statement to bear costs etc. in Listing agreements entered members’ meeting
connection with the scheme by into between company and stock
the transferee company. Upon the hearing of the sum-
exchange require the company to mons, the High Court shall give
A specimen of the scheme is communicate price-sensitive infor- directions fixing the date, time and
appended at the end of this chapter mation to the stock exchange venue and quorum for the members’
as Annexure 1. immediately and simultaneously

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meeting and appoint an Advocate these shareholders by advertise- general meeting and passing
Chairman to preside over the meet- ment. In such case rule 74 of the the resolutions
ing and submit a report to the Court. Companies (Court) Rules provides
The general meeting should be
that the notice of the meeting should
Similar directions are issued by held on the appointed date. Rule 77
be advertised in; such newspaper
the court for calling the meeting of of the Companies (Court) Rules pre-
and in such manner as the Court
creditors in case such a request has scribes that the decisions of the meet-
might direct not less than 21 clear
been made in the application. ing held pursuant to the court order
days before the date fixed for the
should be ascertained only by taking
(7) Approval of Registrar of meeting. The advertisement shall be
a poll. The amalgamation scheme
High Court to notice for call- in Form No. 38 appended to the
should be approved by the members,
ing the meeting of mem- Companies (Court)Rules. The com-
by a majority in number of members
bers/creditors panies should submit the draft for
present in person or on proxy and
Pursuant to the directions of the the notice to be published in Form
voting on the resolution and this
Court, the transferor as well as the No. 38 in an English daily together
majority must represent at least 3/4
transferee companies shall submit with a translation thereof in the
ths in value of the shares held by the
for approval to the Registrar of the regional language to the Registrar
members who vote in the poll.
respective High Courts the draft of High Court for his approval. The
advertisement should be released in (12) Filing of resolutions of gen-
notices calling the meetings of the
the newspapers after the Registrar eral meeting with Registrar
members in Form No. 36 together
approves the draft. of Companies
with a scheme of arrangements and
explanations, statement under sec- (10) Confirmation about service Once the shareholders general
tion 393 of the Companies Act and of the notice meeting approves the amalgamation
form of proxy in Form No. 37 of the scheme by a majority in number of
Ensure that at least one week
Companies (Court) Rules to be sent members holding not less
members alongwith the said notice. than 3/4 in value of the
Once Registrar has accorded equity shares, the scheme
approval to the notice, it should be is binding on all the mem-
got signed by the Chairman bers of the company. A
appointed for meeting by the High copy of the resolution
Court who shall preside over the passed by the sharehold-
proposed meeting of members. ers approving the scheme
of amalgamation should
(8) Despatch of notices to mem-
be filed with the Registrar
bers/shareholders
of Companies in Form
Once the notice has been No. 23 appended to the
signed by the chairman of the Companies (Central
forthcoming meeting as aforesaid Government’s) General
it could be despatched to the mem- Rules and Forms, 1956
bers under certificate of posting at within 30 days from the
least 21 days before the date of before the date of the meeting, the
date of passing the resolution.
meeting (Rule 73 of Companies Chairman appointed for the meeting
files an Affidavit to the Court about (13) Submission of report of the
(Court) Rules, 1959).
the service of notices to the share- chairman of the general
(9) Advertisement of the notice of holders that the directions regarding meeting to Court
members’ meetings the issue of notices and advertise- The chairman of the general
The Court may direct the ment have been duly complied with. meeting of the shareholders is
issuance of notice of the meeting of (11) Holding the shareholders’ required to submit to the Court

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within seven days from the date of the Court for hearing it will hear the transferee company without any fur-
the meeting a report in Form No. objections first and if there is no ther act or deed from the date the
39, Companies (Court) Rules, 1959 objection to the amalgamation Court’s order is filed with ROC.
setting out therein the number of scheme from Regional Director or
(19) Allotment of shares to share-
persons who attend either person- from any other person who is enti-
holders of transferor company
ally or by proxy, and the percentage tled to oppose the scheme, the Court
of shareholders who voted in may pass an order approving the Pursuant to the sanctioned
favour of the scheme as well as the scheme of amalgamation in; Form scheme of amalgamation, the share-
resolution passed by the meeting. No. 41 or Form No. 42 of holders of the transferor company are
Companies (Court) Rules. The court entitled to get shares in the transferee
(14) Submission of Joint petition
may also pass order directing that all company in the exchange ratio pro-
to court for sanctioning the
the property, rights and powers of vided under the said scheme. There
scheme
the transferor company specified in are three different situations in which
Within seven days from the the schedules annexed to the order allotment could be given effect:
date on which the Chairman has be transferred without further act or 1. Where transferor company is
submitted his report about the result deed to the transferee company and not a listed company, the for-
of the meeting to the Court, both the that all the liabilities and duties of malities prescribed under list-
companies should make a joint the transferor company be trans- ing agreement do not exist and
petition to the High Court for ferred without further act or deed. the allotment could take place
approving the scheme of amalga-
(17) Filing of Court order with without setting the record date
mation. This petition is to be made
ROC by both the companies or giving any advance notice to
in Form No. 40 of Companies
shareholders except asking
(Court) Rules. The Court will fix a Both the transferor and trans-
them to surrender their old
date of hearing of the petition. The feree companies should obtain the
share certificates for exchange
notice of the hearing should be Court’s order sanctioning the
by the new ones.
advertised in the same papers in scheme of amalgamation and file the
which the notice of the meeting was same with ROC with their respec- 2. The second situation will emerge
advertised or in such other newspa- tive jurisdiction as required vide sec- different where transferor com-
pers as the Court may direct, not tion 394(3) of the Companies Act, pany is a listed company. In this
less than 10 days before the date 1956 within 30 days after the date of case, the stock exchange is to be
fixed for the hearing (Rule 80 of the Court’s order in Form No. 21 intimated of the record date by
Companies (Court) Rules]. prescribed under the (Central giving at least 42 days notice or
Government’s) General Rules and such notice as provided in the
(15) Issue of notice to Regional
Forms, 1956. The amalgamation listing agreement.
Director, Company Law
will be given effect to from the date 3. The third situation is where allot-
Board under section 394 – A
on which the High Court’s order is ment to Non-Resident Indians is
On receipt of the petition for filed with the Registrar. involved and permission of
amalgamation under section 391 of
(18) Transfer of the assets and lia- Reserve Bank of India is neces-
Companies Act, 1956 the Court
bilities sary. The allotment will take
will give notice of the petition to the
place only on receipt of RBI per-
Regional Director, Company Law Section 394(2) vests power in
mission. In this connection refer
Board and will take into considera- the High Court to order for the trans-
to regulations 7, 9 and 10B of
tion the representations, if any, fer of any property or liabilities from
Foreign Exchange Management
made by him. transferor company to transferee
(Transfer or Issue of Security by
company. In pursuance of and by
(16) Hearing of petition and con- a Person Resident Outside India)
virtue of such order such properties
firmation of scheme Regulations, 2000 as and where
and liabilities of the transferor shall
applicable.
Having taken up the petition by automatically stand transferred to

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Having made the allotment, the Section 396A of the Act the Act, the property of the company
tranferee company is required to file requires that the books and papers is applied in satisfaction of its liabili-
with ROC with return of allotment in of the amalgamated company ties pari passu. Pari passu distribu-
Form No. 2 appended to the should be preserved and not be dis- tion is to be made in satisfaction of its
Companies (Central Government’s) posed of without prior permission liabilities as they exist at the com-
General Rules and Forms within 30 of the Central Government. mencement of the winding-up.
days from the date of allotment in
(23) The Post merger secretarial So long as the scheme is in oper-
terms of section 75 of the Act.
obligations ation and is bind on the company and
Transferee company shall hav- its creditors, the rights and obligations
There are various formalities to
ing issued the new share certificates of those on whom it is binding are
be complied with after amalgamation
in lieu of and in exchange of old undoubtedly governed by its provi-
of the companies is given effect to and
ones, surrendered by transferor’s sions. But once the scheme is can-
allotment of shares to the sharehold-
shareholders should make neces- celled under section 392(2) on the
ers of the transferor company is over.
sary entries in the register of mem- ground that it cannot be satisfactorily
These formalities include filing of
bers and index of members for the worked and a winding-up order
returns with Registrar of Companies,
shares so allotted in terms of sec- passed such an order is deemed to be
transfer of investments of transferor
tions 150 and 151 respectively of for all purposes to be one made under
company in; the name of the trans-
the Companies Act, 1956. section 433. It is not because as if the
feree, intimating banks and financial
scheme has been sanctioned under
(20) Listing of the shares at stock institutions, creditors and debtors
section 391 that a winding-up order
exchange about the transfer of the transferor
under section 392 (2) cannot be made.
company’s assets and liabilities in the
After the amalgamation is
name of the transferee company, etc. The Specialised formalities to
effected, the company which takes
All these aspects along with restruc- cover up amalgamation
over the assets and liabilities of the
turing of organization and manage-
transferor company should apply to The steps for merger or amal-
ment and capital are discussed in
the Stock Exchanges where its gamation discussed above are not
chapter relating to post-merger reor-
securities are listed, for listing the the only considerations effecting
ganization of transferee company.
new shares allotted to the share- merger but in addition to the above
holders of the transferor company. (24) Withdrawal of the Scheme and in relation thereto a number of
not permissible special formalities are also com-
(21) Court order to be annexed to
plied with which have been covered
memorandum of transferee Once the scheme for merger
in detail in specific chapters like
company has been approved by requisite
share valuation and exchange ratio,
majority of shareholders and credi-
It is the mandatory requirement accounting aspects of funding of
tors, the scheme cannot be with-
vide section 391(4) of the Companies reorganization plans, etc. These
drawn by subsequent meeting of
Act, 1956 that after the certified copy aspects have been given treatment
shareholders by passing Resolution
of the Court’s order sanctioning the under different chapters. Readers
for withdrawal of the petition sub-
scheme of amalgamation is filed with may refer to relevant chapters in the
mitted to the court under section
Registrar, it should be annexed to matter of drafting the scheme of
391 for sanctioning the scheme.
every copy of the Memorandum amalgamation, carrying out valua-
issued by the transferee company. (25) Cancellation of the scheme tion of the assets of the companies,
Failure to comply with requirement and order of winding-up calculating share exchange ratio,
renders the company and its officers etc. wherever felt necessary. Case
It was held by the Supreme Court
liable to punishment. studies provided in the book are
in J.K (Bombay) (P) Ltd. Vs. New
(22) Preservation of books and Kaiser-I-Hind that the effect of wind- based on real happenings and pro-
papers of amalgamated Co. ing up order is that except for certain vide practical insight into the pro-
preferential payments provided in cedural aspects. ■

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A CHECKLIST FOR MERGERS & AMALGAMATION


Even as the wave of takeovers and mergers continues, any detailed studies and alaysis are yet to
arrive. However, some quick lessons can be drawn from the recent acquisitions:
Willing Co-operation of the Employees and their Unions:
The rough weather faced by the TOMCO-HLL merger has emphasised the need to take the employees
and their unions into confidence. If the employees do not willingly support the merger/takeover, it may lead
to legal battles.
Role of financial institutions and banks:
In countries such as Japan and Germany, the managements enter into alliances with their financial insti-
tutions and banks so as to gain control of companies.
The banks in India have been increasing investment banking activity and the relaxations by the RBI
have facilitated this process. Besides this, the mutual funds and venture capital funds have also become
major stakeholders in the public limited companies. By supporting competent management and removing
inefficient ones, these institutions and banks can safeguard their investments and ensure proper returns.
Changing role of FIs – Need to be proactive
FIs cannot afford to remain silent in the current wave of takeovers. A more proactive approach
is called for on their part. And considering that both FIs and banks held in building the saving sys-
tem and that FIs own huge chunks of equity in most Indian companies, their role ought to become
even more dynamic. A new kind of commercial prowess in required on their part and profit motive
should become their goal.
The UTI, LIC and FIs represent small savers, policy-holders and shareholders respectively. The
question as to whom they should support in the eventuality of a takeover should no longer be a diffi-
cult one. It should be guided by the principle of maximizing shareholder returns rather than paying
the devil its due.
Increasing scope for merchant banking activity
Mergers and takeovers have also become a lucrative source of business for the merchant bankers.
They are guiding their clients in various areas such as identification of industrial units which are suf-
fering due to managerial deficiencies, paucity of funds etc. providing expertise in working out take
over or merger schemes deciding the share exchange ratio, seeking various clearances, proper imple-
ments of merger or takeover schemes etc.
M&A although considered desirable to bring about competitive efficiency in the Indian economy,
may prove counter productive if encouraged beyond a certain point. Managements apprehensive of
corporate raiders may try to maximize short-term profits and pay higher dividends so as to keep the
shareholders happy. This may happen at the cost of the long-term interests of the companies.
Choosing to modernize your factory instead of increasing your dividend might make shrewd
business sense, but it is also a luring way to draw raiders. The moral is that because of all the bad
mergers, good mergers are becoming impossible. Companies are paranoid today and you can’t
blame them. Chief executive officers are trying to plan ahead while looking over their shoulders.

THE CHARTERED ACCOUNTANT 1240 MAY 2004