Legal and Regulatory Frameworks for M&A in India

Domestic Mergers and Acquisitions

1. Companies Act (2013)

 Disclosures in connection to M&A: Disclosure should be provided if proposed

scheme involves Reduction of Share Capital or Corporate Debt restructuring. No
agreement will be signed by the tribunal unless the proposed agreement is in
accordance to the prescribed accounting standards. The notice of meeting to
consider Compromise or arrangement is to be given to Central Government, Income
Tax Authorities, Reserve Bank, Securities Exchange Board of India, Registrar of
Companies, respective Stock Exchange, Official Liquidator, Competition Commission
of India and other Authorities likely to be affected by the same.

 Cross Border Mergers & Amalgamation: Outbound Mergers weren’t allowed in

Companies Act 1956. The new Act made provision for Outbound Mergers and
widened the scope for Indian companies as now they had both options for
arrangement.

 Fast Track Merger: This is a new provision of Companies Act 2013. It is the merger
between two or more small companies, holding company and its wholly own
subsidiary and such other company as may be prescribed. Fast Track merger does
not involve Court or Tribunal, approval of National Company Law Tribunal is also not
required. Thus it is a speedy process and it also opens the scope for small
companies who wanted to merge and can propose the scheme of Merger or
Amalgamation through their Board of directors.

 Objection of Amalgamation: Amalgamation scheme can only be objected by

shareholders having not less than 10% holdings or if the creditors debt is not less
than 5% of total outstanding debt as per the last audited financial statement.

 Shareholders and creditors’ meeting: The scheme should be approved by voting

in person or by proxy by at least 75 percent of shareholders and creditors in separate
meetings. Provision for voting by postal ballot was made and e-Voting was also
introduced

2. The Securities and Exchange Board of India (SEBI)

SEBI’s main objectives are to protect the interest of the investors in securities market
and to provide for orderly development of the market. It introduced the SEBI
Takeover Code in 1994 and since then the code has been amended several times to
keep up with the business scenario in the country. The formal name given to the
code was Substantial Acquisition of Shares and Takeovers Regulations (2011).
 Below are some key takeaways of the code:

 Initial Threshold Limit: Regulation 3(1) provides that when an acquirer together with
PACs (persons acting in concert) intends to acquire shares or voting rights which
along with the existing shareholding would entitle him to exercise 25% or more of the
voting rights in the target company, in such a case the acquirer is required to make
public announcement to acquire at least additional 26% of the voting rights of Target
Company from the shareholders through an open offer.

 Creeping Acquisition Limit: Regulation 3(2) allows the persons either by

themselves or through PAC with them who are holding more than 25% but less than
75% shares or voting rights in the Target Company to acquire further up to 5%
shares or voting rights in the financial year ending 31st March. The allowable
acquisition of 5% is popularly known as ‘Creeping Acquisition.’

 Open Offer: Open offer is an offer made by a person or through a PAC, if any holds
25% or more shares or voting rights in the target company but less than the
maximum permissible non-public shareholding limit. The offer size by a person
holding less than 25% of the target company should be a minimum of 26%, while that
for a person holding more than 25% of the target company should be a minimum of
10%.

3. The Competition Act 2002

A combination under the Competition Act can be defined as the acquisition of one or
more enterprises by one or more persons or merger or amalgamation of enterprises.
There are multiple types of combinations. In India, any combination which causes or
is likely to cause adverse effect on the competition in that field is prohibited.

 Mandatory Notice: It is obligatory for any enterprises entering into any combination
to notify the competition commission about the merger if the value of the aggregate
assets and turnover exceeds the threshold limit provided within 30 days.

 210-Days Waiting Period: No combination will come into effect until 210 days have
elapsed since the date of receiving the notice pertaining to combination by the
commission or the date of passing of the order whichever is earlier.

 Extra-Territorial Jurisdiction: Section 32 of the Act confers an imperative power on

the commission to inquire into any act pertaining to any agreement, abuse of
dominant position or combination taking place outside India but adversely affecting
the competition in India.

4. Insolvency and Bankruptcy Code

 Mergers and Acquisitions cases in India experienced a rise after the implantation of
IBC in 2016. Total M&A deals in distressed assets amounted to $14.3 billion.
 With more distressed assets coming on the block due to IBC, and banks unwilling to
take more losses, this arises an opportunity for investors to acquire quality assets at
attractive prices.
 The largest industry which has seen increased M&A deals due to IBC is the steel
sector, with data from the Insolvency and Bankruptcy Board estimating that more
than $26 billion worth distressed steel assets will be on the market in the coming
years.

5. Income Tax Act

 The tax treatment of M&A transactions in India is governed by the Income Tax Act of
1961. It also has double tax avoidation treaties signed between India and the
jurisdictional country of the non-resident individual, if any, who is involved in the
transaction.

 Section 45 of the Act levies capital tax on the capital gains arising from the transfer of
capital in the transaction.

 The Act provides for exemption from capital tax if in the case of transfer of capital,
the acquirer is an Indian company.

Inbound Mergers & Acquisitions

Until the Companies Act of 2013, India did not allow foreign companies to merge with
Indian companies in India. This was done because Indian authorities wanted that the
new company formed should be under Indian regulations in order to exercise control.
Inbound Merger is the cross border merger in which the resultant company is an
Indian company whereas Outbound Merger is one in which the resultant company is
a foreign company.

Foreign Exchange Management Act 1999

 Conditions for issue of security by the Resultant Company: The Indian company
would have to issue or transfer securities to the foreign company’s shareholders
which may include both people residing in India or outside India. Any such issue of
securities to persons residing outside India, should comply with the pricing
guidelines, entry routes, sectoral caps, attendant conditions and reporting
requirements for foreign investment laid down in the FEMA Regulations

 Merger of JV/WOS with Indian parent company: In such a case the parent
company would have to comply with the conditions prescribed for transfer of shares
of such Joint Venture/Wholly Owned Subsidiary as laid down in the FEMA.
Additionally, if the JV/WOS has further step-down subsidiaries outside India, the
merger of the JV/WOS with the Indian parent company will result in the Indian parent
company acquiring shares of the foreign step-down subsidiaries of the JV/WOS.
 Guarantees and Outstanding borrowings of transferor company:

o Guarantees and borrowings of the transferor foreign company from overseas

sources, which become guarantees and borrowings of the resultant Indian
company to comply with the relevant FEMA regulations.
o Timeline of two years prescribed for above compliance. No remittance for
repayment can be made within these two years.
o Conditions with respect to end-use would not apply.

 Bank account in country of transferor entity:

o Resultant Company permitted to open a bank account in foreign currency in
the overseas jurisdiction for putting through transactions incidental to the
merger.
o This bank account can be maintained for a maximum period of two years from
the date of sanction by the NCLT.

 Acquisition/ holding of any other asset of transferor entity:

o Resultant Company permitted to acquire and hold asset outside India to the
extent permitted under FEMA guidelines.
o Asset or security not permitted to be acquired or held under FEMA guidelines
should be sold within two years from the date of sanction by the NCLT.
o Proceeds to be repatriated to India immediately on sale. Proceeds could be
utilised for payment of an overseas liability not permitted to be held under
FEMA guidelines within the two-year period.

 Valuation: In terms of the FEMA Regulations, valuation of the Indian company and
the foreign company is required to be carried out in accordance with Rule 25A of the
Companies Merger Rules.

 Reporting of Transactions: The FEMA Regulations provide that the resultant

company and/or the companies involved in the cross-border merger shall be required
to furnish reports as may be prescribed by the RBI.

 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. Other reporting guidelines to be prescribed
by the RBI in consultation with the Government of India
 Sources:

1. Foreign Exchange Management (Cross Border Merger) Regulations, 2018- PWC

2. Legalbonanza.com
3. Taxguru.in
4. IPleaders Blog
5. SEBI FAQ
6. Global Legal Insights