REGULATIONS GOVERNING CROSS BORDER

MERGERS IN INDIA WITH SPECIAL REFERENCE TO

COMPANIES ACT 1956

By

Hemant Singh and Dhruva Rathore*

ABSTRACT
A cross border merger as the name suggests, refers to the combination of two or more
companies belonging to or registered in two different countries. For a cross border merger
two basic motives stand out; efficiency motive and strategic motive. Efficiency motive
basically means want of the two companies want to increase the synergy between them by use
of their economies of scale, scope, tax advantages etc. Strategic motive refers to the intention
of the two companies to change the market structure which results into the profit of the
merging companies. The mergers are governed by tight regulatory framework in India. A
merger has to comply with multiple regulations non compliance to which may lead to
penalties or may lead to civil prosecution under regulations. When it comes to regulations
governing cross border mergers the number of regulations also increase by two fold as such
transactions includes the laws and regulations of two different countries. The research
revolves around inbound and outbound forms of Cross border mergers.
In recent years India is regarded as very important market on globe for cross border
transactions. In view of their increasing importance, it is essential to analyze the legal
compliances required for carrying out a cross border merger. This paper attempts to look
into the provision of Companies Act, 1956 (interpretation of Section 394 (4) (b) which defines
the ambit of its applicability in case of cross border mergers) involving a cross border
merger/Acquisitions and also attempts to include the provisions provided in New Companies
Bill, 2011. The present paper also attempt to look into the other regulations which are to be
complied with in cross border Mergers in India and also analyze the role of RBI and CCI as
regulators to cross border mergers.. The last part of the paper includes two case studies of
Cross border merger in India.

*Hemant Singh & Dhruva Rathore, are candidates of LL.M. in Corporate Law
(Sem-IV) of National Law University, Jodhpur;

1|P a g e

Electronic copy available at: http://ssrn.com/abstract=2254314

INTRODUCTION
The mergers and acquisitions now a day are the necessity of any and every entity who wants
to flourish and develop its business. Mergers are no doubt regarded as an important tool for
the corporate restructuring of any company. The term merger has not been defined under
companies Act 1956. Black's Law Dictionary defines ‘merger’ as - The fusion or absorption
of one thing or right into another, generally spoken of a case where one of the subjects is of
less dignity or importance than the other. Here the less important ceases to have an
independent existence.

So in simple terms it can be defined as a combination where two companies which decide to
combine their operations. Both the companies involved in the merger cease to exist resulting
into a combined new company. There are generally three types stated of merger transactions
when viewed from the perspective of value chain:

TYPES OF MERGER:
Mergers may be of several types, depending on the requirements of the merging entities:

Horizontal Mergers:
Also referred to as a ‘horizontal integration’, this kind of merger takes place between entities
engaged in competing businesses which are at the same stage of the industrial process. A
horizontal merger takes a company a step closer towards monopoly by eliminating a
competitor and establishing a stronger presence in the market. The other benefits of this form
of merger are the advantages of economies of scale and economies of scope.

Vertical Mergers:
Vertical mergers refer to the combination of two entities at different stages of the industrial or
production process. For example, the merger of a company engaged in the construction
business with a company engaged in production of brick or steel would lead to vertical
integration. Companies stand to gain on account of lower transaction costs and
synchronization of demand and supply. Moreover, vertical integration helps a company move
towards greater independence and self-sufficiency. The downside of a vertical merger
involves large investments in technology in order to compete effectively.

Conglomerate Mergers:
A conglomerate merger is a merger between two entities in unrelated industries. The
principal reason for a conglomerate merger is utilization of financial resources, enlargement
of debt capacity, and increase in the value of outstanding shares by increased leverage and
earnings per share, and by lowering the average cost of capital. A merger with a diverse
business also helps the company to foray into varied businesses without having to incur large
start-up costs normally associated with a new business.

Out of the two renowned business strategies that include organic and inorganic strategy,
Mergers would provide immediate extension of company’s human resource, clientele, and
infrastructure thus catalyzing the growth. Though, various reasons for the rapid growth of

2|P a g e

Electronic copy available at: http://ssrn.com/abstract=2254314

M&As would be discussed later in this work, it is important to note that the most crucial of
all of them has been that due to increasing competition and advanced technology, it has
become difficult for companies and other businesses to go forward and it has compelled them
to join hands with other parties. In such circumstances, cross border transactions have
emerged as good strategy. Cross border Mergers are one of the fastest ways of investing
abroad and gaining access to companies that are acquired abroad by way of market share.

If one sees the market records of past 25 years, it is apparent that there have been two major
waves of cross border Merger transactions. The first wave was witnessed in the late 1980s,
while the second, a big cross border buying spree being in the latter half of the 1990s. 1 It is
pertinent to note that the global economy experienced relatively high economic growth and
widespread industrial restructuring, during both these waves of cross border M&As.

Experience shows that cross border Mergers can yield dividends, in terms of a company’s
performance and profits as well as benefits for home and host countries, when successful
industrial restructuring leads to greater efficiency without undue market concentration.

Coming to India, post independence, for about 10 years India was receptive towards foreign
investment due to various reasons. Thereafter due to change in policies, India became a
closed economy. Hence it became nearly impossible for an Indian business firm to think of
inviting foreign investment, leave alone investing abroad. The concept of Mergers gained
popularity in India, after the government introduced the new economic policy in 1991,
thereby paving the way for economic reforms and opening up a whole lot of challenges both
in the domestic and international spheres. 2

A cross border merger as the name suggests, refers to the combination of two or more
companies belonging to or registered in two different countries. For a cross border merger
two basic motives stand out; efficiency motive and strategic motive. Efficiency motive
basically means want of the two companies want to increase the synergy between them by
use of their economies of scale, scope, tax advantages etc. Strategic motive refers to the
intention of the two companies to change the market structure which results into the profit of
the merging companies.

. Under Indian law following regulations governs cross border mergers:-

 The companies Act, 1956

 Foreign Exchange Management Act, 1999 and regulations made there under

 Competition Act, 2002

1
Refer Platt Gordon, CROSS-BORDER MERGERS SHOW RISING TREND AS GLOBAL ECONOMY
EXPANDS available at http://findarticles.com/p/articles/mi_qa3715/is_200412/ai_n9466795/ (last
visiteded on 10 September 2012)
2
Refer Chaitanya K., INDIAN ECONOMY IN THE NEXT FIVE YEARS: KEY ISSUES AND CHALLENGES,
2005-2009, available at http://ideas.repec.org/a/eaa/aeinde/v4y2004i1_30.html (last accessed on
10 September 2012)

3|P a g e
  Securities and Exchange Board of Indian Act, and regulations made there under

 Income tax Act, 1961

 Stamp Duty Laws

The application or compliance of these regulations are subject to the category under which the
cross merger will fall. Generally they are categorized into two categories-

 Merger of a foreign company into Indian company

 Merger of a Indian company into foreign company

In 2007, the Indian market figured in the top ten markets on the international plane in terms of
merger and acquisition deals3 . By the end of Oct. 2011 M&A cross-border deals stood at USD 29
billion which is a great share in overall global market4 . In view of their increasing importance, it is
essential to analyze the legal compliances required for carrying out a cross border merger
They have become topics of interest mainly because they help a firm enter new international
markets and thereby enhance their ability to compete in global markets.5 Also, as seen with
transactions completed in single countries, synergies are sought through such cross-border
mergers and acquisitions for enhancing cost efficiencies of the new company which results
from the process. Although similar in nature, a cross-border merger differs from a cross-
border acquisition- a merger is a transaction in which two firms with their home operations
in different countries agree to an integration of the companies on a relatively equal basis.
Blending of such operations would make the two companies have capabilities that are
expected to create competitive advantage that will contribute to success in the global
marketplace.6

The present research aims in understanding the cross border transactions and regulations
provided under various Indian laws. This will included all provisions covering both inbound
and outbound mergers.

The present paper is divided into five chapters which includes all necessary aspects to
understand the technicality involved in a cross border merger. First chapter of the research
aims in understanding the meaning and types and mergers. Later part of the chapter will help
in understand the relevance of cross border mergers and its role in overall market.

Second chapter aims in understanding the regulations that governs the cross border mergers.

3
India breaks into top 10 M&A league, Economic Times, April 12, 2007
4
Cross-border M&A deals reaches $29 bn Economic Times, Dec 6, 2011
5
MIchaeL a. Hitt et al., Mergers and acquIsItIons- a guIde to
creatIng vaLue for stakehoLders 14 (2001).
6. See also Chandrima Das, Black and White Aspects of Cross Border Mergers, available at
http://www.caclubindia.com/articles/black-white-aspect-of-cross-border-merg- ers--3866.asp
(Last visited on Sept. 20, 2012).

4|P a g e
This includes SEBI, FEMA, Competition law, and Taxation law. This chapter includes all
important provisions of the above said regulations and their applicability with the help of
some of the land mark cases decided in various courts.

Third chapter includes only the provision of companies Act 1956 and specifically to section
394 of the Act. This will help in understanding how amalgamation or cross border mergers
are governed by the Act of 1956, with the help of some of the decided cases. The later part
of the chapter provides an understanding of the provisions which are included in New
Companies Bill 2011.

Fourth chapter aims in understanding the role of regulatory bodies, which is essential for
carrying out any business transaction in India and even in abroad. This chapter is divided in
to two part , where the first part explains the role of RBI in providing approval for cross
border mergers as provided under latest master circular of 2012 which is also known as
Master Circular on Direct Investment by Residents in Joint Venture (JV) / Wholly Owned
Subsidiary (WOS) Abroad dated July 2, 2012. The later part of the chapter explains the role
of CCI in cross border mergers. At the end this chapter also discusses the role of both RBI
and CCI in matter of any merger of Bank.

Fifth chapter includes two case studies one of which is on cross border merger of Bharti and
MTN which could not materialize because of Dual listing of the company. This chapter will
provide an insight as to what went wrong in that deal in simple and lucid manner. The later
part of the chapter includes the latest merger of all Indian subsidiaries of Vedanta group of
London, this is also known as Sesa- Sterlite deal. This chapter provides all the facts and
figures of the deal and also explains that how the company will transform after the merger.

REGULATIONS GOVERNING CROSS BORDER

MERGERS

2.1 FOREIGN EXCHANGE LAWS:

It is the intent and objective of the Government of India to attract and promote foreign direct
investment (FDI) in order to supplement domestic capital, technology and skills, for
accelerated economic growth.7

FDI means investment by non-resident entity/person resident outside India in the capital of an
Indian company under Schedule 1 of Foreign Exchange Management (Transfer or Issue of
Security by a Person Resident Outside India) Regulations 2000, popularly known as FEMA
20.8

7
Paragraph 1.1.1, Intent and Objective of Consolidated FDI Policy 2012
8
Paragraph 2.1.11 of Consolidated FDI Policy 2012

5|P a g e
Non-resident entity/person resident outside India means a person who is not a person resident
in India.9 Person resident in India10 .

According to the Indian Companies Act, 1956, only inbound cross border mergers and
acquisitions are allowed in India whereby a foreign company can only merge with an Indian
company but not the vice versa; although an Indian company can merge with an Indian
establishment of a foreign company.

When we talk about inbound cross border M&As in India, we essentially mean foreign
investment in India. As stated earlier, foreign investment in India, i.e. investment in India by
a “person resident outside India”, (hereinafter to be interchangeably used with “non resident
entity”) is governed by FEMA 20, RBI Master Circular on Foreign Investment in India
(hereinafter referred as RBI master circular), and after 2010 also by ‘Consolidated FDI
Policy’. RBI master circular and Consolidated FDI Policy are updated every year. Previously
FDI policy was being updated in every six months but in 2012 it was mentioned in the policy
itself that it will be updated every year.

There are two ways to make investments in India by a foreign investor:

i) Automatic Route- no prior permission is required

ii) Government/Approval Route- prior permission of Foreign Investment Promotion

Board (FIPB), Department of Economic Affairs (DEA), Ministry of Finance or
Department of Industrial Policy & Promotion, as the case may be, is required

Under FEMA 20, general permission has been granted to any non-resident entity to purchase
shares or convertible debentures of an Indian company under Foreign Direct Investment
Scheme, subject to the terms and conditions specified in Schedule 1 thereto.

A non-resident entity can invest in India, subject to the FDI Policy. A citizen of Bangladesh
or an entity incorporated in Bangladesh can invest only under the Government route. A
citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the
Government route, in sectors/activities other than defence, space and atomic energy. 11 Further,
persons resident outside India are permitted to purchase equity or preference shares or
convertible debentures offered on right basis by an Indian company which satisfies the
conditions restated herein below:12

(i) The offer on right basis does not result in increase in the percentage of foreign equity
already approved, or permissible under the Foreign Direct Investment Scheme in terms
of FEMA 20;

9
Paragraph 2.1.24 of Consolidated FDI Policy 2012
10
Paragraph 2.1.29 of Consolidated FDI Policy 2012
11
Paragraph 3.1.1 of Consolidated FDI Policy 2012, as amended by Press note no. 3 of 2012 series,
dated 1st August 2012
12
Regulation 6 of FEMA 20

6|P a g e
(ii) The existing non-resident shareholders may apply for issue of additional shares, and the
investee company may allot the same subject to the condition that the overall issue of
shares to non-residents in the total paid up capital does not exceed the sectoral cap;

(iii) The existing shares or debentures against which shares or debentures are issued by the
company on right basis were acquired and are held by the person resident outside India
in accordance with FEMA 20;

(iv) The offer on right basis to the persons resident outside India shall be

(a) In the case of shares of a company listed on a recognized stock exchange in India,
at a price as determined by the company;

(b) In the case of shares of a company not listed on a recognized stock exchange in
India, at a price which is not lower than that at which the offer on right basis is
made to resident shareholders;

The right shares or debentures so acquired shall be subject to the same conditions regarding
repatriation as applicable to original shares or debentures against which right shares or
debentures are issued. Further, under FEMA 20, an Indian company has been permitted to
issue shares to its employees or employees of its joint venture / subsidiary abroad, who are
non-resident, either directly or through a trust. 13

Under Regulation 7 of FEMA 20, once a scheme of merger, demerger or amalgamation has
been approved by the court, the transferee company (whether the survivor or a new company)
is permitted to issue shares to the shareholders of the transferor company resident outside
India, subject to the following conditions, namely:

(a) the percentage of shareholding of persons resident outside India in the transferee or new
company does not exceed the percentage specified in the approval granted by the Central
Government or the Reserve Bank, or specified in these Regulations.
Provided that where the percentage is likely to exceed the percentage specified in the
approval or the Regulations, the transferor company or the transferee or new company
may, after obtaining an approval from the Central Government, apply to the Reserve Bank
for its approval under these Regulations.

(b) the transferor company or the transferee or new company shall not engage in agriculture,
plantation or real estate business or trading in TDRs; and

(c) the transferee or the new company files a report within 30 days with the Reserve Bank
giving full details of the shares held by persons resident outside India in the transferor and
the transferee or the new company, before and after the
merger/amalgamation/reconstruction, and also furnishes a confirmation that all the terms
and conditions stipulated in the scheme approved by the Court have been complied with.

13
Regulation 7 of FEMA 20

7|P a g e
General permission has also been granted for transfer of shares / convertible debentures by a
non-resident14 as follows:

(i) Non-residents other than non-resident Indians (“NRIs”) or Overseas Corporate Bodies
(“OCBs”) may transfer shares / convertible debentures, by way of sale or gift, to any
non-resident, provided that the transferee should have obtained permission of the
Central Government, if he had any previous venture or tie-up in India through
investment in shares or debentures or a technical collaboration or trademark agreement
in the same or allied field in which the Indian company whose shares are being
transferred is engaged;

(ii) NRIs are permitted to transfer by way of sale or gift, any shares or convertible
debentures of Indian companies to other NRIs only;

(iii) Non-residents are permitted to transfer shares / debentures of any Indian company to a
resident by way of gift and can sell the same on a recognized stock exchange in India
through a registered broker.

FEMA 20 further stipulates that any transfer of security by a resident to a non-resident, not
being erstwhile OCBs, would require the prior approval of the RBI. 15 For the transfer of
existing shares/convertible debentures of an Indian company by a resident to a non resident
by way of sale, the transferor will have to obtain the approval of the Central Government
before applying to the RBI. In such cases, the RBI may permit the transfer subject to such
terms and conditions, including the price at which the sale may be made.

For the purpose of FEMA 20, investment in India by a non-resident has been divided into the
following 5 categories and the regulations applicable have been specified in respective
schedules as under:
i) Investment under the Foreign Direct Investment Scheme 16 (“the FDI Scheme”).
ii) Investment by Foreign Institutional Investors17 (“FIIs”) under the Portfolio Investment
Scheme (“the Portfolio Investment Scheme”).
iii) Investment by NRIs under the Portfolio Investment Scheme18 .
iv) Purchase and sale of shares by NRIs on non-repatriation basis19 .
v) Purchase and sale of securities other than shares or convertible debentures of an Indian
company by a Person resident outside India20 .

14
Regulation 9 of FEMA 20
15
Regulation 10 of FEMA 20
16
Schedule 1 of FEMA 20
17
Schedule 2 of FEMA 20
18
Schedule 3 of FEMA 20
19
Schedule 4 of FEMA 20
20
Schedule 5 of FEMA 20

8|P a g e
The following schemes are related to cross border merger and acquisition and the prominent
features of the schemes are as below:

I. FDI Scheme
Under the FDI Scheme, a non resident or a foreign entity, whether incorporated or not, may
purchase shares or convertible debentures, issued by an Indian company. If the non resident
to whom the shares are being issued proposes to be a collaborator or proposes to acquire the
entire shareholding of a new Indian company, he should have obtained the prior permission
of Central Government, subject to certain exceptions, if he had, as on January 12, 2005, an
existing joint venture or technology transfer/trademark agreement in India in the same field in
which the Indian company issuing the shares is engaged.

An Indian company which is not engaged in the activity/sector mentioned in Annexure A to

the FDI Scheme has been permitted to issue shares or convertible debentures to a non
resident up to the extent specified in Annexure B to the FDI Scheme, in accordance with the
entry routes specified therein and provisions of FDI policy, as notified by the Ministry of
Commerce and Industry, Government of India, from time to time.

Further, a small scale industrial unit can issue shares or debentures to non-resident entities up
to 24% of its paid up capital. An Indian company can also issue ADR/GDR to non-resident
subject to fulfilment of conditions specified in the schedule itself.

Provided that the shares or convertible debentures are not being issued by the Indian
Company with a view to acquire existing shares of another Indian company.

II. Portfolio Investment Scheme

A registered FII may purchase the shares and convertible debentures of an Indian company
under this scheme through registered broker on recognized stock exchange in India. A
registered FII is also permitted to purchase shares/convertible debentures of an Indian
company through offer/private placement, subject to the prescribed ceilings.

It also prescribes a ceiling of 10% of the total paid-up equity capital or 10% of the paid-up
value of each series of convertible debentures, and provides that the total holdings of all
FIIs/sub-accounts of FIIs put together shall not exceed 24% of paid-up equity capital or paid
up value of each series of convertible debentures.

Provided that the limit of 24% may be increased up to sectoral cap/statutory ceiling, as
applicable, by the Indian company concerned by passing a resolution by its board of directors
followed by passing a special resolution to that effect by its general body with the prior
approval of RBI.

RBI may also permit a domestic asset management company or a portfolio manager
registered with SEBI as FIIs for managing the sub-account to make investment under the
Portfolio Investment Scheme on behalf of non-residents who are foreign citizens and bodies

9|P a g e
corporate registered outside India, provided such investment is made out of funds raised or
collected or brought from outside India through normal banking channel.

Such investment is restricted to 5% of the equity capital or 5% of the paid-up value of each
series of convertible debentures within the overall ceiling of 24% as applicable for FIIs for
the purpose of the Portfolio Investment Scheme.

The designated branch of an authorised dealer is authorised to allow remittance of net sale
proceeds (after payment of taxes) or to credit the net amount of sale proceeds of shares /
convertible debentures to the foreign currency account or a non-resident rupee account of the
registered FII concerned.

III. Investment by NRIs under the Portfolio Scheme

Under Schedule 3, a NRI is permitted to purchase/sell shares and/or convertible debentures of
an Indian company, through a registered broker on a recognised stock exchange, subject to
the following conditions:

(i) The NRI may purchase and sell shares/convertible debentures under this scheme
through a branch designated by an authorised dealer for the purpose and duly approved
by RBI;

(ii) The paid-up value of shares of an Indian company, purchased by each NRI both on
repatriation and on non-repatriation basis, does not exceed 5% of the paid-up value of
shares issued by the company concerned;

(iii) The paid-up value of each series of convertible debentures purchased by each NRI both
on repatriation and non-repatriation basis does not exceed 5% of the paid-up value of
each series of convertible debentures issued by the company concerned;

(iv) The aggregate paid-up value of shares of any company purchased by all NRIs does not
exceed 10% of the paid up capital of the company and in the case of purchase of
convertible debentures the aggregate paid-up value of each series of debentures
purchased by all NRIs does not exceed 10% of the paid-up value of each series of
convertible debentures;

Provided that the aggregate ceiling of 10% may be raised to 24% if a special resolution
to that effect is passed by general body of the Indian company concerned.

(v) The NRI investor takes delivery of the shares purchased and gives delivery of shares
sold;

(vi) Payment for purchase of shares and/or debentures is made by inward remittance in
foreign exchange through normal banking channels or out of funds held in NRE/FCNR
account maintained in India if the shares are purchased on repatriation basis and by
inward remittance or out of funds held in NRE/FCNR/NRO/NRNR/NRSR account of

10 | P a g e
 the NRI concerned maintained in India where the shares/debentures are purchased on
non-repatriation basis;

Paragraph 2 of Schedule 3 further provides that the link office of the designated branch of an
authorised dealer is obliged to furnish daily report to the Chief General Manager, Reserve
Bank of India, ECD, Central Office, Mumbai in a format supplied by RBI

2.2 SECURITY LAWS:

If the issuing company is a listed company and makes a preferential allotment of shares to the
acquirer, such an allotment would generally be exempt from the Public Offer provision of the
SEBI (Substantial Acquisition and Takeovers) regulations, 2011(SEBI Takeover Code)
provide that the disclosure requirement as prescribed in Regulation 3(1) (c) of the SEBI
Takeover Regulations are fulfilled. The listing Agreement requires inter alia filing of the
scheme of arrangement with the Stock Exchange prior to filing application with the High
Court for seeking approval of the scheme of arrangement. Further upon completion of the
acquisition and within 21 days from the issuance of shares to the shareholders of the target
company, a detailed report in the prescribed format would have to be filed with SEBI. If the
Indian company that is issuing its shares to the shareholders of the foreign company as
consideration for acquiring shares of the foreign company is listed on the Stock exchange in
India, then it will be required to comply with the guidelines for preferential allotment under
the SEBI (Disclosure and Investment Protection) Guidelines, 2000. Securities Exchange
Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 deals with
the issue of specified securities and preferential allotment regulations.

After a global merger between Eaton Industries Inc.(EII) and Aeroquip Vickers(AVI) , EII
came to hold 51% shares in Vickers system international limited (VSIL), a publicly listed
companies incorporated in India. It was held in Eaton Industries case, that the SEBI Takeover
Code would not get triggered since there was ample proof to suggest that there had been a
merger of EII with AVI under the laws of the state of Ohio in the US and indirect acquisition
of controlling interest of VSIL was purely a fallout and incidental to the global restructuring
arrangement. SEBI has directed, vide Circular dated 15th April, 2010, the modification of the
listing agreement focusing on certain deviations from accounting standards commonly carried
out as part of scheme of mergers.

Japanese drug maker, Daiichi Sankyo Companies Limited, which owns India’s biggest drug
firm, Ranbaxy Laboratories Limited, has won the open offer price war with Hyderabad based
Zenotech Laboratories Limited in a Supreme Court. India’s Apex Court has struck down
ruling by the Securities Appellate Tribunal (SAT), thus allowing DAIICHI to launch an open
offer for a 20% stake in Zenotech at Rs. 113.62 per share. The Takeover Regulations
Advisory committee under the chairmanship of C. Achuthan, in its report to the SEBI, has
proposed sweeping changes on critical issues, including the open offer trigger, offer size,

11 | P a g e
indirect acquisition, exemption from open offer obligations, calculating the offer prize and
competing offers. The renewed Takeover Code would have certain changes such as
increasing the period for making a competing bid, prohibiting acquirers from being
represented in the board of Target Company, and permitting any competing acquirer to
negotiate and acquire the shares tendered to the other competing acquirer, at the same price
that was offered by him to the public. Vedanta’s Takeover offer for Cairn energy has raised
some questions because it comes in wake of impending changes to a SEBI Takeover
Regulations that may make it potentially difficult for the acquirers to structure transactions.

2.3 TAXATION:
The tax law consists of the body of rules of public law that affect the activities and reciprocal
interest of a political community and the members opposing it as distinguished from
relationships between individuals in the sphere of private law. The first step in any
reorganization activity is to explore leveraging local country operations for cash management
and repatriation advantages, the companies should also be looking at the availability of asset
basis set up structure for tax purposes and keeping a keen eye on valuable tax attributes in
M&A targets, including the net operating losses, foreign tax credits and tax holidays. As per
the provisions of the IT Act, capital gains tax would be levied on such transactions when
capital asset are transferred. From the definition of “transfer” it is clear that if merger,
amalgamation, demerger or any sort of restructuring results in transfer of capital asset, it
would lead to a taxable event.

Merger and Amalgamation:

Under the Income Tax Act, 1961 a non resident is taxed in India, inter alia, on income that is
“deemed to accrue or arise in India”. This deeming provision in Section 9(1) is intended to
tax income earned by a non resident through “business connection” in India or through any
asset or source of income in India of thorough the transfer of any capital asset situated in
India. The current legislation provides for taxation of gains arising out of transfer of the legal
ownership of the capital asset in the form of sale, exchange, relinquishment, extinguishment
of any right wherein or compulsory acquisition under any law. Section 9 deems gains arising
from transfer of capital assets situated in India to accrue or arise in India. In the cross border
transfer involving transfer of shares normally the situs of the capital asset provides the safe
guide to decide as to which of the contracting states has the power to tax such income subject
to the relevant tax treaty. India may have treaties with any of the country under Indian tax
laws. The DTAA provides for the chargeability based on receipt and accrual, residential
status. As there is no clear definition of income and taxability thereof which is accepted
internationally, an income may become liable to tax in two countries. If the two countries do
not have DTAA, domestic law of the country will apply. In case of India Section 91 of the IT
Act will apply The Income Tax officer has the power to determine the reasonable amount of
profit accruing or arising in India if it appeared to him that a resident has transferred his
Indian source income. Article XXIV of GATT specifically recognizes regional arrangements
as an exception to the multilateral system.

12 | P a g e
The concept of levy of tax on a transfer of beneficial ownership in a cross border transfer is
not provided for in the current tax legislation, but the revenue authorities are of the view that
in a cross border transaction the value of the transaction includes valuation for the Indian
entity as well and, accordingly, the overseas entity which has a business connection in India.
Amalgamation is merger of one or more companies with another or merger of two or more
companies to form a new company, in such a way that all assets and liabilities of the
amalgamating company becomes assets and liabilities of the amalgamated company and
shareholders not less than 75% in value of the shares in the amalgamating company or
companies become the shareholders of the amalgamated company.

In the case of Commissioner of Income tax v. Mrs. Grace Collis & Another 21 , the supreme
court has held that, “extinguishment of any right in any capital asset” under the definition of
“transfer” would include the extinguishment of the right of the holders of shares in an
amalgamating company, which would be distinct from and independent of the transfer of
capital assets itself. Hence, the right of the shareholders of the amalgamating company in the
capital asset i.e. the shares, stands extinguished upon the amalgamation of the amalgamating
company with the amalgamated company and this constitutes a transfer under section 2(47)
of the IT Act. Benefits of taxation in respect to cross border mergers and amalgamations
under Income Tax Act, 1961:

“No tax is to be charged on capital gain arising on scheme of amalgamation”.

Section 47(vi): Any transfer in a scheme of amalgamation, of a capital asset by the

amalgamating company to the amalgamated company is an Indian company.

Section 47(via): Any transfer in a scheme of amalgamation, of a capital asset being a share or
shares held in an Indian company, by the amalgamating foreign company to the amalgamated
foreign company if :
(i) At least 25% of shareholders of the amalgamating foreign company continue to remain
shareholders of the amalgamated foreign company.

(ii) Such transfer does not attract tax on capital gains in the country in which the
amalgamating company is incorporated.

Section 47(vii) : any transfer by a shareholder in a scheme of amalgamation, of a capital asset

being a share or shares held by him in the amalgamating company if :

(i) The transfer is made in contravention of the allotment to him of any share or shares in the
amalgamated company.

(ii) The amalgamated company is an Indian company. Section 79: carry forward and set off
of losses in case of a company not being the company in which the public are substantially

21
[2001] 248 ITR 323 (SC)

13 | P a g e
interested, no loss incurred in a any year prior to the previous year shall be carried forward
and off against the income of previous year unless –

(a) on the last day of the previous year the shares of the company carrying not less than
51% shares of the voting power were beneficially held by persons who beneficially
held shares of the company carrying not less than 51% of the voting power on the last
day of the year or years in which the loss was incurred.

Section 72A (2): provisions relating to carry forward and set off accumulated loss and
unabsorbed depreciation allowances in amalgamation or demergers. No tax exemption is
provided under the IT Act, 1961, in case of amalgamation of an Indian co. into a foreign
company wherein the resultant amalgamated company is a foreign company. The test of
residence is based on either place of effective management or place of central control and
management. It is therefore argued that a company incorporated outside India will be treated
as resident in India if its “place of effective management” is situated in India. With the
Ruling in the case of CIT v. Visakhapatnam Port trust 22 , the Judiciary reemphasized the
importance of international tax jurisprudence aligned with OECD standard modules, while
interpreting tax matters in Indian courts. In Deputy Commissioner of Income Tax v. ITC 23 , it
was held that interpretation of a DTAA must be in consonance with the principle of
international law.

2.3.1 DIRECT TAX CODE:

The Finance Act 2007 and 2008 have brought amendments to provisions of income tax with
retrospective effects in order to increase tax revenues from cross border M&A transactions.
The growing international transaction has led to numerous tax disputes in the world. So
International tax jurisprudence requires legitimate tax planning. In 1935, the House of Lord’s
famously observed in IRC v. Duke of Westminster, that “every man is entitled to order his
affairs” in order to minimize his liability to tax. It was ruled that while tax avoidance is legal,
tax evasion is not. Traditionally, India followed Westminster rule that tax avoidance is legal
and that a citizen is entitled to the benefit of the letter of the law, even if result is manifestly
contrary to its spirit. This seems rather well established, until Justice Chinappa “concurring”
opinion in Mc Dowell v. CTO 24 that the “ghost” of the duke of Westminster must be
“exorcised” and that any device intended to avoid tax liability is illegal.

The revenue authorities are exploring the possibility of generating tax from cross border
reorganization resulting in the transfer of beneficial interest of the Indian company. This is on
the basis of substance theory that the country has a right to claim tax on the profit generated
from the business carried out in India. By introducing DTC, Government widens scope of
anti abuse provisions in IT Act. Under 1961 Act, foreign Companies were regarded as
“Resident of India” only if their control and management was wholly situated India. The
DTC has modified this and now a foreign company will be treated as “Resident of India” if

22
1983 144 ITR 146 AP
23
(2002) 76 TTJ Cal 323
24
AIR 1986 SC 649, (1985)

14 | P a g e
its control and management is wholly or partly situated in India. Treating a foreign company
as “Resident of India” would have serious tax implications as its world income would be
taxable in India. Moreover it would be subject to Dividend Distribution Tax etc.

It is provided that even income arising from Indirect Transfer of capital asset in India, would
be deemed to accrue or arise in India. The DTC continues present position regarding
Business Reorganization that they should be tax neutral. One important beneficial provision
is that the successor will be allowed the benefit of accumulated losses of the predecessor of
business provided stipulated conditions are satisfied. The DTC also would abolish distinction
between long and short term capital gains, as well as security transaction tax (a tax levied on
stock exchange transactions).

The CBDT – Circular No. 333 dated 2nd April, 1982 that in case of conflict in the provisions
of the agreement for tax avoidance of double taxation and the Income Tax Act, the provisions
contained in the Agreement for DTAA will prevail. Neither the treaty nor the Code shall have
a preferential status by reason of it being treaty or law; and (b) the provision which later in
time shall prevail. In effect, the accepted principle under International Taxation and current
law that treaty provisions will override the Income Tax act has been altered. As the DTC
would be later in time than most of treaties, it will override such treaties. This will cause
great hardship to many Indian and foreign companies having cross border transactions and
result in considerable tax litigations. Controlled Foreign corporations (CFCs)
recommendation of the Kelkar working Committee report on Tax reforms in India brought an
international tax concept in India. A provision including taxation of CFC income is proposed
for the first time in DTC. Under these provisions, passive income earned by a foreign
company controlled directly or indirectly by a resident in India, if such income is not
distributed to shareholders, will be deemed to have been distributed and be taxable in India in
the hands of resident shareholders as dividend received from the foreign company.

The DTC would introduce a GAAR to deal with specific instances where a taxpayer enters
into an arrangement, the main purpose of which is to obtain a tax benefit and the arrangement
is entered into or carried on in a manner not normally employed for bona fide business
purposes, is not at arm’s length, abuses the provisions of the DTC or lacks economic
substance. The proposed GAAR does not distinguish between tax mitigation and tax
avoidance, with the result that any arrangement to obtain a tax benefit could be deemed to be
an impermissible avoidance agreement. Central Board of Direct Taxes issue guidelines are to
provide for the circumstances and thresholds under which GAAR could be invoked. Further
the Dispute Resolution Panel would be made available when the GAAR is invoked against a
taxpayer. A general treaty override would render India’s tax treaties redundant and would
violate the spirit and intent of Vienna conventions; the revised discussion paper indicates that
DTC would be amended to provide for a limited tax treaty override; i.e. it would apply only
when the GAAR or CFC provisions are invoked or when branch profits tax is levied.

2.4 COMPETITION LAW:

The Competition Act, 2002 embodies the principles laid down under Article 38 and Article
39 of the Constitution of India, which state that the motive behind all economic activities

15 | P a g e
must be to honour the common good, and prevent concentration of wealth. Anti-competitive
agreements can either be in vertical or in horizontal combinations. Vertical restraints include
cartels, bid-rigging etc. Horizontal restraints can be in the form of tie-in arrangements, refusal
to deal and maintenance of resale price. The Competition Act, 2002 has overridden the
Monopolies and restrictive Trade Practices Act, 1969 in India, which provides for regulations
to curb restraints and promote fair competition in the market. Section 3 of the Competition
Act, 2002 governs anti-competitive agreements and prohibits: “agreements involving
production, supply, distribution, storage, acquisition or control of goods or provision of
services, which cause or are likely to cause an ‘appreciable adverse effect on competition’ in
India.“

The Act prohibits the abuse of dominant position by an enterprise. It defines ‘combination’
by providing threshold limits in terms assets and turnover, rendering it a little restrictive in
scope. The Competition Act prohibits enterprises from entering into agreements that cause or
are likely to cause an “appreciable adverse effect on competition within the relevant market
in India”. Section 32 of the Competition Act explicitly allows the Competition Commission
to examine a combination already in effect outside India and pass orders against it, provided
that it has an ‘appreciable adverse effect’ on competition in India. This power is extremely
wide and allows the Competition Commission to extend its jurisdiction beyond the Indian
shores and declare any qualifying foreign merger or acquisition as void. Globalization and the
growth in such cross border mergers have thrown up major challenges to competition
authorities around the world. Commission of India is still finding its feet in so far as trade
regulation in the country is concerned. The control of mergers is one such aspect which the
Commission shall encounter in the near future. The powers of merger review of CCI thus
impacts the feasibility of certain deals. The Competition Act, 2002 has been inspired by the
UNCITRAL Model Law and the US Anti-Trust Laws. But since the market conditions are
very different in India, the US anti-trust law and European community merger control
regulation concepts may not be interpreted or applied in the same way.

PROVISIONS PROVIDED UNDER COMPANIES ACT

1956 AND NEW COMPANIES BILL 2011

3.1 COMPANY LAW:

Cross border M&A, both the amalgamating company or companies and the amalgamated (i.e.
Survivor) company are required to comply with the requirements specified in Section 391-
394 of the Companies Act, which, inter alia, require the approval of a High court and of the
Central Government. Section 394 and 394A of the Act set forth the powers of the High Court
and provide for the court to give notice to the Central Government in connection with
amalgamation of companies.

Basically Section 394 (4)(b) of the company act 1956 applies to cross border merger and
acquisition. Section 394(4)(b) states that a „transferee company‟ under the section can only
be a „company within the meaning of this Act‟ while a „transferor company‟ can be

16 | P a g e
„anybody corporate, whether within the meaning of the Act or not‟. The expression „body
corporate‟ includes a foreign company under Section 2(7). Thus, under the purview of
Section 394, a foreign company can amalgamate/merge into an Indian company with the
sanction of the court25 .

The permissibility of such cross border mergers is also evident from the provisions of the
Income Tax Act, 1961. Under the Income Tax Act, an amalgamation means the merger of
one or more companies with another company or the merger of two or more companies to
form one company26 subject to fulfilment of the conditions specified there under. Section
2(17) defines a company to include a foreign company as well. Section 47(vi) specifies that a
transfer in the scheme of amalgamation is not to be regarded as transfer for the purposes of
charge of capital gains tax where the amalgamated company (i.e. the resulting company) is an
Indian company. Furthermore, section 47(vii) exempts a transfer of shares by shareholders of
shares in the amalgamating company (foreign company in our case) if the transfer is made in
consideration of the allotment to him of any share or shares in the amalgamated company
which is required to be an Indian company. Thus, merger of a foreign company into an Indian
company is expressly allowed and receives tax benefits.

The problem arises in the reverse case whereby an Indian company seeks to
merge/amalgamate into a foreign company. To find an answer to the aforesaid problem, let us
explore the underpinnings of the expression „within the meaning of this Act‟. Section 2(10)
defines a company to mean a company as defined in Section 3. The latter section defines the
expression „company‟ as a company formed and registered under this Act or an existing
company. Clearly, the expression as defined under the Act excludes a foreign company.
However, the determinative question is whether the expression „company as defined under
this Act‟ distinct and different from „company within the meaning of this Act‟. Prima facie,
there does not appear to be a distinction between the two expressions. Thus, on an apparent
consideration of Section 394(4)(b), it seems that a transferee company has to be a company
registered under the Act.

However, judicial dicta in Andhra Bank Housing Finance Ltd. v. Andhra Bank27 and In Re
Vibank Housing Finance Ltd.28 have taken an expansive interpretation of the expression in
view of Section 4. Both cases involved consideration of schemes of amalgamation between a
company formed under the Companies Act, 1956 and a body corporate formed under
different legislations (viz. Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1980). Clearly, a body corporate can only be a transferor under Section 394 and not a
transferee. However, the transferor companies were subsidiaries of the transferee body
corporate. For the purposes of Section 4, “company” includes, anybody corporate‟ and thus,
a body corporate is regarded as “holding company” under the Act. The Court, in both cases,
came to the conclusion that there is an apparent conflict between Section 394(4) (b) and
Section 4(5). Thus, applying the principle of harmonious construction, it has been held that a

25
Bombay Gas Co. Pvt. Ltd. v. Union of India [1997] 89 Comp Cas 195 (Bom); Andhra Bank Housing
Finance Ltd. v. Andhra Bank [2003] 47 SCL 513 (AP).
26
Section 2(1B).
27
[2003] 47 SCL 513 (AP).
28
[2006] 130 Comp Cas705 (Kar).

17 | P a g e
transferee company which includes a body corporate is a company for the purpose of the Act.
Hence, it was held that a transferor company can amalgamate with a transferee parent
company which might be a body corporate. The essence of the reasoning seems to be that the
expression „within the meaning of the Act‟ looks beyond the definitional section of the Act
and applies even in case where a specific definition is provided under another section viz.
section 4 in this case.

A caveat needs to be inserted to the reasoning presented above. In view of their peculiar facts
and reference to Section 4, the cases seem to be authorities only for schemes of amalgamation
between a subsidiary company and a holding company where the latter is a body corporate.
However, the definition of „body corporate‟ under Section 2(7) expressly includes a foreign
company within its ambit. Thus, in cases where the Indian subsidiary seeks to merge with
foreign holding company, the cases would be good precedents. To negate the aforesaid
reasoning, the following arguments can be advanced: (a) The Report of the Expert Committee
on Company Law, 2005 (Irani Committee Report), argues that under the current framework
of law as provided under Section 394, an Indian company cannot merge into a foreign
company. The Report states the position in the following words: A forward looking law on
mergers and amalgamations needs to also recognize that an Indian company ought to be
permitted with a foreign company to merger. Both contract based mergers between an Indian
company and a foreign company and court based mergers between such entities where the
foreign company is the transferee, needs to be recognized in Indian Law. The Committee
recognizes that this would require some pioneering work between various jurisdictions in
which such mergers and acquisitions are being executed /created.

(b) Secondly, in the case of Bombay Gas Co. Pvt. Ltd. v. Union of India29 , the court has
categorically laid down that: It is quite clear from the special provisions of law contained in
section 394(4)(b) of the Act that the transferor company could be a body corporate
incorporated outside India but the transferee company could not be a foreign company.

(c) Thirdly, it is settled principle of interpretation that a construction resulting in absurdity or

anomaly should be rejected. 30 The aforesaid decisions lead to an absurd conclusion that while
the legislature allowed Indian subsidiaries to merge with foreign holding companies, it denied
the freedom to other unrelated enterprises without any reasonable ground to do so.

Thus, an interpretation of section 394(4)(b) does not yield any satisfactory result in respect of
such cross border mergers whereby an Indian company merges with a foreign company.

Some cases have held that the transfer of shares in accordance with a scheme under section
391-6 of the act does not constitute a transfer for the purpose of the act. In the case of
Moschip Semiconductor technology Limited, the High Court of the state of Andhra Pradesh,
dealing with the amalgamation of an Indian company (as the transferee) and a foreign
company governed by the laws of California (as the transferor), held that, under Section 1108

29
[1997] 89 Comp Cas 195 (Bom).
30
Bhatia International v. Bulk Trading SA, AIR 2002 SC 1432, Paragraph 15 ; Thirath Singh v. Bachittar
Singh, AIR 1955 SC 830, at p.833.

18 | P a g e
 of the California Corporation Code and in contrast to the provisions of Indian law, the
surviving company could be either a domestic company or a foreign company. In the above
matter, the court observed that “in these days of liberal globalization, a liberal view is
expected to be taken enabling such a scheme of arrangement for amalgamation between a
domestic company and a foreign company and there is every need for suitable modification of
the law in that direction.”

1) Scheme of amalgamation:
The scheme of amalgamation should be prepared by the companies, which have arrived at a
consensus to merge. There is no specific form prescribed for scheme of amalgamation but
scheme should generally contain the following information:

1. Particulars about transferee and transferor companies

2. Appointed date
3. Main terms of transfer of assets from transferor to transferee with power to execute on
behalf or for transferee the deed or documents being given to transferee.
4. Main terms of transfer of liabilities from transferor to transferee covering any conditions
attached to loans/debentures/ bonds/other liabilities from bank /financial institution/ trustees
and listing conditions attached thereto.
5. Effective date when the scheme will come into effect
6. Conditions as to carrying on the business activities by transferor between ‘appointed date’
and ‘effective date’.
7. Description of happenings and consequences of the scheme coming into effect on effective
date.
8. Share capital of Transferor Company specifying authorized capital, issued capital and
subscribed and paid up capital
9. Share capital of Transferee Company covering above heads
10 Description of proposed share exchange ratio, any conditions attached thereto, any
fractional share certificates to be issued, transferee company’s responsibility to obtain
consent of concerned authorities for issue and allotment of shares and listing
11 Surrender of shares by shareholder of transferor company for exchange into new share
certificates.
12 Conditions about payment of dividend, ranking of equity shares, pro rata dividend
declaration and distribution
13 Status of employees of the transferor companies from effective date and the status of the
provident fund, gratuity fund, super annuity fund or any special scheme or funds created or
existing for the benefit of the employees
14 Treatment on effective date of any debit balance of transferor company balance sheet
15 Miscellaneous provisions covering income-tax dues, contingencies and other accounting
entries deserving attention or treatment
16. Commitment of transferor and transferee companies towards making
applications/petitions under section 391 and 394 and other applicable provisions of the
Companies Act, 1956 to their respective High Courts.
17. Enhancement of borrowing limits of the transferee company upon the scheme coming
into effect

19 | P a g e
 18. Transferor and transferee companies give assent to change in the scheme by the court or
other authorities under the law and exercising the powers on behalf of the companies by their
respective Boards.
19. Description of powers of delegatee of transferee to give effect to the scheme.
20. Qualification attached to the scheme, which requires approval of different agencies, etc.
21. Description of revocation/cancellation of the scheme in the absence of approvals qualified
in clause 20 above not granted by concerned authorities.
22. Statement to bear costs etc. in connection with the scheme by the transferee company.

2) Approval of Board of Directors for the scheme:

Respective Board of Directors for transferor and transferee companies is required to approve
the scheme of amalgamation.

3) Approval of the scheme by specialised financial institutions/banks/trustees for

debenture holders:
The Board of Directors should in fact approve the scheme only after it has been cleared by
the financial institutions/banks, which have granted loans to these companies or the debenture
trustees to avoid any major change in the meeting of creditors to be convened at the instance
of the Company Court under section 391 of the Companies Act, 1956. Approval of Reserve
Bank of India is also needed where the scheme of amalgamation contemplates issue of
share/payment of cash to non-resident Indians or foreign national under the provisions of
Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside
India) Regulations, 2000. In particular, regulation 7 of the above regulations provide for
compliance of certain conditions in the case of scheme of merger or amalgamation as
approved by the court.

4) Intimation to Stock Exchange about proposed amalgamation:

Listing agreements entered into between company and stock exchange require the company
to communicate price-sensitive information to the stock exchange immediately and
simultaneously when released to press and other electronic media on conclusion of Board
meeting according approval to the scheme.

5) Application to Court for directions:

The next step is to make an application under section 391 to the High Court having
jurisdiction over the Registered Office of the transferor company, and the transferee company
should make separate applications to the High Court. The application shall be made by a
Judge’s summons in Form No. 33 supported by an affidavit in Form No. 34 (see rule 82 of
the Companies (Court) rules, 1959). The following documents should be submitted with the
Judge’s summons:
(a) A true copy of the Company’s Memorandum and Articles
(b) A true copy of the Company’s latest audited balance sheet
(c) A copy of the Board resolution, which authorises the Director to make the application to
the High Court.

20 | P a g e
 6) High Court directions for members’ meeting:
Upon the hearing of the summons, the High Court shall give directions for fixing the date,
time and venue and quorum for the members’ meeting and appoint an Advocate Chairman to
preside over the meeting and submit a report to the Court. Similar directions are issued by the
court for calling the meeting of creditors in case such a request has been made in the
application.

7) Approval of Registrar of High Court to notice for calling the meeting of

members/creditors:
Pursuant to the directions of the Court, the transferor as well as the transferee companies shall
submit for approval to the Registrar of the respective High Courts the draft notices calling the
meetings of the members in Form No. 36 together with a scheme of arrangements and
explanations, statement under section 393 of the Companies Act and form of proxy in Form
No. 37 of the Companies (Court) Rules to be sent to members along with the said notice.
Once Registrar has accorded approval to the notice, it should be got signed by the Chairman
appointed for meeting by the High Court who shall preside over the proposed meeting of
members.

8) Despatch of notices to members/shareholders:

Once the notice has been signed by the chairman of the forthcoming meeting as aforesaid it
could be despatched to the members under certificate of posting at least 21 days before the
date of meeting (Rule 73 of Companies (Court) Rules, 1959).

9) Advertisement of the notice of members’ meetings:

The Court may direct the issuance of notice of the meeting of these shareholders by
advertisement. In such case rule 74 of the Companies (Court) Rules provides that the notice
of the meeting should be advertised in such newspaper and in such manner as the Court might
direct not less than 21 clear days before the date fixed for the meeting. The advertisement
shall be in Form No. 38 appended to the Companies (Court) Rules.
The companies should submit the draft for the notice to be published in Form No. 38 in an
English daily newspaper together with a translation thereof in the regional language to the
Registrar of High Court for his approval. The advertisement should be released in the
newspapers after the Registrar approves the draft.

10) Confirmation about service of the notice:

Ensure that at least one week before the date of the meeting, the Chairman appointed for the
meeting files an Affidavit to the Court about the service of notices to the shareholders that the
directions regarding the issue of notices and advertisement have been duly complied with.

11) Holding the shareholders’ general meeting and passing the resolutions:
The general meeting should be held on the appointed date. Rule 77 of the Companies (Court)
Rules prescribes that the decisions of the meeting held pursuant to the court order should be
ascertained only by taking a poll. The amalgamation scheme should be approved by the
members, by a majority in number of members present in person or on proxy and voting on

21 | P a g e
 the resolution and this majority must represent at least three fourth in value of the shares held
by the members who vote in the poll.

12) Filing of resolutions of general meeting with Registrar of Companies:

Once the shareholders general meeting approves the amalgamation scheme by a majority in
number of members holding not less than 3/4 in value of the equity shares, the scheme is
binding on all the members of the company. A copy of the resolution passed by the
shareholders approving the scheme of amalgamation should be filed with the Registrar of
Companies in Form No. 23 appended to the Companies (Central Government’s) General
Rules and Forms, 1956 within 30 days from the date of passing the resolution.

13) Submission of report of the chairman of the general meeting to Court:

The chairman of the general meeting of the shareholders is required to submit to the Court
within seven days from the date of the meeting a report in Form No. 39, Companies (Court)
Rules, 1959 setting out there in the number of persons who attend either personally or by
proxy, and the percentage of shareholders who voted in favour of the scheme as well as the
resolution passed by the meeting.

14) Submission of Joint petition to court for sanctioning the scheme:

Within seven days from the date on which the Chairman has submitted his report about the
result of the meeting to the Court, both the companies should make a joint petition to the
High Court for approving the scheme of amalgamation. This petition is to be made in Form
No. 40 of Companies (Court) Rules. The Court will fix a date of hearing of the petition. The
notice of the hearing should be advertised in the same papers in which the notice of the
meeting was advertised or in such other newspapers as the Court may direct, not less than 10
days before the date fixed for the hearing (Rule 80 of Companies (Court) Rules].

15) Issue of notice to Regional Director, Company Law Board under section 394 – A:
On receipt of the petition for amalgamation under section 391 of Companies Act, 1956 the
Court will give notice of the petition to the Regional Director, Company Law Board and will
take into consideration the representations, if any, made by him.

16) Hearing of petition and confirmation of scheme:

Having taken up the petition by the Court for hearing it will hear the objections first and if
there is no objection to the amalgamation scheme from Regional Director or from any other
person who is entitled to oppose the scheme, the Court may pass an order approving the
scheme of amalgamation in; Form No. 41 or Form No. 42 of Companies (Court) Rules. The
court may also pass order directing that all the property, rights and powers of the transferor
company specified in the schedules annexed to the order be transferred without further act or
deed to the transferee company and that all the liabilities and duties of the transferor company
be transferred without further act or deed.

17) Filing of Court order with ROC by both the companies:

Both the transferor and transferee companies should obtain the Court’s order sanctioning the
scheme of amalgamation and file the same with ROC with their respective jurisdiction as

22 | P a g e
 required vide section 394(3) of the Companies Act, 1956 within 30 days after the date of the
Court’s order in Form No. 21 prescribed under the (Central Government’s) General Rules
and Forms, 1956. The amalgamation will be given effect to from the date on which the High
Court’s order is filed with the Registrar.

18) Transfer of the assets and liabilities:

Section 394(2) vests power in the High Court to order for the transfer of any property or
liabilities from transferor company to transferee company. In pursuance of and by virtue of
such order such properties and liabilities of the transferor shall automatically stand
transferred to transferee company without any further act or deed from the date the Court’s
order is filed with ROC.

19) Allotment of shares to shareholders of transferor company:

Pursuant to the sanctioned scheme of amalgamation, the shareholders of the transferor
company are entitled to get shares in the transferee company in the exchange ratio provided
under the said scheme. There are three different situations in which allotment could be given
effect:

1. Where transferor company is not a listed company, the formalities prescribed under listing
agreement do not exist and the allotment could take place without setting the record date or
giving any advance notice to shareholders except asking them to surrender their old share
certificates for exchange by the new ones.

2. The second situation will emerge different where transferor company is a listed company. In
this case, the stock exchange is to be intimated of the record date by giving at least 42 days
notice or such notice as provided in the listing agreement.

3. The third situation is where allotment to Non-Resident Indians is involved and permission of
Reserve Bank of India is necessary.

The allotment will take place only on receipt of RBI permission. In this connection refer to
regulations 7, 9 and 10B of Foreign Exchange Management (Transfer or Issue of Security by
a Person Resident Outside India) Regulations, 2000 as and where applicable. Having made
the allotment, the tranferee company is required to file with ROC with return of allotment in
Form No. 2 appended to the Companies (Central Government’s) General Rules and Forms
within 30 days from the date of allotment in terms of section 75 of the Act. Transferee
company shall having issued the new share certificates in lieu of and in exchange of old ones,
surrendered by transferor’s shareholders should make necessary entries in the register of
members and index of members for the shares so allotted in terms of sections 150 and 151
respectively of the Companies Act, 1956.

20) Listing of the shares at stock exchange:

After the amalgamation is effected, the company which takes over the assets and liabilities of
the transferor company should apply to the Stock Exchanges where its securities are listed,
for listing the new shares allotted to the shareholders of the transferor company.

23 | P a g e
21) Court order to be annexed to memorandum of transferee company:
It is the mandatory requirement vide section 391(4) of the Companies Act, 1956 that after the
certified copy of the Court’s order sanctioning the scheme of amalgamation is filed with
Registrar, it should be annexed to every copy of the Memorandum issued by the transferee
company. Failure to comply with requirement renders the company and its officers liable to
punishment.

22) Preservation of books and papers of amalgamated Company:

Section 396A of the Act requires that the books and papers of the amalgamated company
should be preserved and not be disposed of without prior permission of the Central
Government.

3.2 COMPANY BILL 2011 AND CROSS BORDER MERGER

Companies Act, 1956: Cross-border mergers are permitted only if the transferee is an Indian
company, and not vice-versa

Companies Bill, 2011: The Bill has opened doors for cross- border mergers by allowing
them both ways subject to certain conditions. Permission of Reserve Bank of India shall also
be a pre-requisite in cross-border M&As. The consideration to shareholders of the
amalgamating company may be discharged by payment of cash, or issuance of Indian
Depository Receipts, or a combination of both. In case the Indian Company is the
amalgamating company, The Central Government will notify the jurisdictions of the foreign
Company which are allowed for such cross-border mergers.

Prior Approval
Another potentially unwished-for-change is the requirement of seeking prior RBI approval
for any and all cross-border M&A activity. The inherent paperwork and lengthy timelines
surrounding regulatory approval could prove practically onerous for Indian corporate, should
such a process be required for each and every cross-border transaction.

Clarity on foreign company definition

One point in the pros column in favor of the new Bill’s provisions is the decision to qualify
the newly defined ‘foreign company’. While the general definition of a ‘foreign company’
seemed to require a company to have a place of business in India, the draft cross-border
provisions specifically provides for a separate definition that includes as a ‘foreign company’,
any company not incorporated in India, whether or not it has a place of business in India.
While providing clarity on one hand, the definition of ‘foreign company’ also gives rise to
uncertainty as to its scope, on the other. This is because the definition of a ‘company’ in the
new Bill includes a company only, while the definition of a ‘body corporate’ includes a
corporation, a company not incorporated in India, and co-operative societies. Specific
provisions that intended to include any type of firm or partnership within the ambit of the
definition of a ‘company’, contained specific provisos to extend the mandate of the definition
for the relevant sections. The cross-border provisions contain no such provisos making it

24 | P a g e
uncertain as to whether Indian Limited Liability Partnerships (LLPs) will be given the ability
to engage in cross-border mergers and amalgamations as part of their future commercial
strategy.

Removal of court approval:

At present, all mergers – including those between group companies or between a parent and a
subsidiary – must follow the procedure prescribed under the act, which necessarily involves
intervention of the high court. However, the bill provides that a scheme of merger or
amalgamation may be entered into between two or more small companies, 31 between a
holding company and its wholly owned subsidiary or such other classes of companies as may
be prescribed by the central government, without the approval of the high court or National
Company Law Tribunal (NCLT)32 . For such mergers or amalgamations, certain necessary
conditions must be fulfilled. As a first step, a scheme must be prepared by the companies, and
the transferor and transferee must notify the registrar of companies and official liquidator of
the proposed scheme. The registrar and liquidator are expected to give their objections or
suggestions within 30 days of the date on which they receive notification of the scheme.

The merging entities must then consider the concerns of the registrar and liquidator and
approve the scheme in their respective general meetings. Next, both transferor and transferee
companies must file a declaration of solvency with the registrar that has jurisdiction. The
merging entities must also seek approval from their respective creditors.

The bill stipulates that any objection to the proposed scheme must be made only by persons
that hold at least a 10% shareholding or with outstanding debt amounting to at least 5% of the
total outstanding debt, as detailed in the last audited financial statement. On receipt of
approval from the shareholders and creditors, the scheme must be filed with the NCLT and
the registrar and liquidator that have jurisdiction.

The bill also describes the process addressing situations where objections may again be raised
by the relevant authorities. If no objections are raised, the NCLT will confirm, approve and
register the scheme and thereafter notify the registrar. Registration of the scheme will have
the effect of liquidating the Transferor Company or companies. The process appears to be
detailed, but several questions have arisen and more are expected during testing. For
example, it is unclear whether the shareholders and creditors must approve the scheme in the
same or in two separate general meetings. As the proposed provision requires no approval

31
A 'small company' is defined under Section 2(85) of the bill as a company, other than
a public company: l whose paid-up share capital does not exceed approximately $101,000 (or
such higher amount as may be prescribed, which shall not exceed approximately $1,014,000); or l
whose turnover in the last profit and loss account does not exceed approximately $405,000 (or
such higher amount as may be prescribed, which shall not exceed approximately $4 million).
This is subject to the provision that nothing in this clause shall apply to: l a holding company or a
subsidiary company; l a company registered for charitable purposes; or l company or body
corporate governed by any special act.
32
The NCLT is a proposed body that is expected to become a comprehensive forum
for various matters under the bill.

25 | P a g e
from the high court or NCLT, it is therefore aimed at providing substantial relief to small
companies, as well as to their holdings and subsidiaries, when deciding on consolidation and
mergers – particularly those that have so far desisted due to the cumbersome process
involved.

New regulators
The bill provides that no civil court shall have jurisdiction over any suit or proceeding in
respect of any matter that the NCLT is empowered to determine under the bill. The only
exception is in out-of-court approvals, where the objections or suggestions of the registrar of
companies and official liquidator prevail – if they object, the matter will proceed to the
NCLT. The bill proposes the establishment of both the NCLT and the National Company
Law Appellate Tribunal (NCLAT), which will replace several existing forums, including the
Company Law Board, the Board for Industrial and Financial Restructuring and the Appellate
Authority for Industrial and Financial Reconstruction.

The NCLT will consist of a president and other judicial and technical members, as
prescribed. The president will be appointed by the central government but, following
consultation with the chief justice of India and the members, will be appointed by the central
government on the recommendation of a selection committee. The NCLT is expected to take
over the role of the high court in approving schemes for amalgamations and liquidation and
dealing with petitions for oppression and mismanagement and other roles performed by the
Company Law Board and the Board for Industrial and Financial Restructuring. However, the
creation of the NCLT has been controversial right from the start. 33 Although the act was
amended as early as 2002 to pave the way for the establishment of the NCLT, the body is yet
to be established and the relevant provisions of the Amendment Act 2002 are yet to be
notified, as several aspects of its constitution and functioning have been the subject of
litigation. In a recent development, a constitution bench of the Supreme Court has upheld the
creation of the NCLT as constitutional. 34

Once the proposed provision has been notified, it will also quash the Company Law Board.
The purpose of the provision is to reduce the burden of the high courts by creating a high-
power tribunal that will hear all company law matters. Keeping this in view, the expectation
is that the formation of the NCLT should help to expedite the M&A process. Under the
existing regime, a decision of the high court can be challenged before the Supreme Court.
The bill provides that appeals from the NCLT will now go to the NCLAT, and thereafter
directly to the Supreme Court. This should ensure that uniform decisions are received on a
particular subject by the NCLAT instead of different decisions on the same or similar matters
by different high courts, leading to confusion in relation to jurisprudence.

33
In R Gandhi v Union of India, ([2004] 120 Com Cases (Mad)), the constitutional validity of the NCLT
and NCLAT was challenged.
34
Union of India v R Gandhi/Madras Bar Association, [2010] 100 SLC 142.

26 | P a g e
ROLE OF REGULATORY BODIES IN CROSS BORDER
MERGERS

The Authorities in India which are responsible for grant of approval include, Reserve Bank of
India and Competition commission of India. This chapter will determine how role of
competition commission is very vital for any cross border merger transaction. And the later
part will include the role of RBI in granting the approval for Cross border mergers that
includes provisions of Companies Act 1956 and provision under new Companies Bill 2011

4.1 Reserve bank of India( RBI):

The latest Master Circular on Direct Investment by Residents in Joint Venture (JV) / Wholly
Owned Subsidiary (WOS) Abroad dated July 2, 2012, is the latest circular which talks about
the mandatory approval of RBI in case of any investment by any Indian company in foreign
entity who is engaged in the business of Real Estate and Banking

RBI Guidelines on Mergers & Acquisitions of Banks With a view to facilitating

consolidation and emergence of strong entities and providing an avenue for non-disruptive
exit of weak/unviable entities in the banking sector, it has been decided to frame guidelines to
encourage merger/amalgamation in the sector. Although the Banking Regulation Act, 1949
(AACS) does not empower Reserve Bank to formulate a scheme with regard to merger and
amalgamation of banks, the State Governments have incorporated in their respective Acts a
provision for obtaining prior sanction in writing, of RBI for an order, inter alia, for
sanctioning a scheme of amalgamation or reconstruction.

The request for merger can emanate from banks registered under the same State Act or from
banks registered under the Multi State Cooperative Societies Act (Central Act) for takeover
of a bank/s registered under State Act. While the State Acts specifically provide for merger
of co- operative societies registered under them, the position with regard to take over of a co-
operative bank registered under the State Act by a co-operative bank registered under the
Central Act .

There are no specific provisions in the State Acts or the Central Act for the merger of a co-
operative society under the State Acts. With that under the Central Act, it is felt that, if all
concerned including administrators of the concerned Acts are agreeable to order merger/
amalgamation, RBI may consider proposals on merits leaving the question of compliance
with relevant statutes to the administrators of the Acts. In other words, Reserve Bank will
confine its examination only to financial aspects and to the interests of depositors as well as
the stability of the financial system while considering such proposals. In the post reform
period almost all the public sector banks have improved their performance in terms
profitability, low NPAs and raised fresh equity from the capital markets at a good premium.

27 | P a g e
Forced mergers may be detrimental to the further growth of these banks. Dilution of
Government ownership may be a prerequisite to improve operational freedom and to devise
performance-linked incentives for public sector employees, which are essential to tackle the
post- merger problems arising out of forced mergers. Another issue, which is completely
ignored, is impact of consolidation on customers, especially small borrowers who are
dependent on the banking channel. The other consolidation model, which is simultaneously in
progress, is operational consolidation among banks. The largest public sector bank State
Bank of India is being operationally integrated with its subsidiaries in providing various
banking services. Above all we firmly believe that certain corporate governance issues are to
be solved on a priority basis before implementation of merger agenda.

4.2 Competition Commission of India (CCI):

The various aspects & provisions of the power of Competition Commission of India in
relation to cross border mergers are provided in Section 5 of the Competition Act 2002 and
the change proposed in it by the notification taken out by the MCA on 4 th march 2011 and
how it affected cross border transactions. Section 32 of the competition act 2002 throws light
on extraterritorial jurisdictions.

Expectations regarding the enforcement ambitions of the Competition Commission of

India(hereinafter CCI) along with risks of hefty financial penalties for firms as well as
imprisonment for individuals means that it is vital for all companies that deal with India to
factor antitrust law into decisions affecting their Indian businesses. Antitrust impacts on
firms’ longer-term as well as day-to-day operational issues. Additionally, antitrust must be
factored into the due diligence and contractual negotiation processes of mergers and
acquisitions to ensure that any risks arising from antitrust compliance are addressed properly.

The powers of merger review of CCI thus impacts the feasibility of certain deals. 35 The
Competition Act, 2002(hereinafter CA) introduces three enforcement areas usually found in
modern competition law regimes: prohibition of anticompetitive agreements 36 , prohibition of
abuse of dominance37 and merger regulation.38 Many concepts of the new law are similar to
those found in other jurisdictions, such as European Union or US competition law. But since
the market conditions are very different in India, these concepts may not be interpreted or
applied in the same way.39 The first confession that needs to be made and accepted without
any reservations is that in an interdependent world economy everything affects everything
else. Economic and industrial globalization has increased international competition and given

35
The Competition Act, 2002 represents a clean break with the former competition law regime: a
modern competition law inspired by the laws on restrictive agreements and dominant firm
conduct, as well as merger regulation, in jurisdictions with long-standing enforcement records,
most notably the European Union.
36
Section 3, Competition Act, 2002
37
Section 4, Competition Act, 2002
38
Section 5 and Section 6, Competition Act, 2002
39
See ‘Indian Starts Antitrust Enforcement: The Legal Framework Explained’. A concept note by
Linklaters available online at www.linklaters.uk. Retrieved on 1 March 2010.

28 | P a g e
rise to the need for an increasingly integrated and evolving legal system. A number of trends
have contributed to the accelerated globalization of industry and the integration of
international economies. For instance, the growing similarity in available infrastructure,
distribution channels, and marketing approaches has enabled companies to introduce products
and brands to a universal marketplace.40

However this is not to suggest that the Competition Act, 2002(hereinafter CA) should govern
all the international economic conduct. There is a need to identify ways of distinguishing
those international matters affecting Indian commerce sufficiently to warrant sufficient
attention from our law.41 It needs to be kept in mind that many ordinary difficulties of
applying antitrust principles are compounded by the different mores and economic
circumstances of international markets.42 These issues would have been at the background
with a much lesser significance if the basis of jurisdiction was territorial and focused on the
question as to where the relevant conduct occurred. However, with the judicially created
“effects” test having come to the fore and the rise of its dominance these issues have acquired
tremendous prominence.

1. Commission’s Extra-Territorial Powers:

Section 32 of the Competition Act explicitly allows the Competition Commission to examine
a combination already in effect outside India and pass orders against it provided that it has an
'appreciable adverse effect' on competition in India. This power is extremely wide and allows
the Competition Commission to extend its jurisdiction beyond the Indian shores and declare
any qualifying foreign merger or acquisition as void. An 'appreciable adverse effect on
competition means anything that reduces or diminishes competition in the market. Section 32
states that:

The Commission shall, notwithstanding that,- (a) an agreement referred to in section 3 has
been entered into outside India; or (b) any party to such agreement is outside India; or (c) any
enterprise abusing the dominant position is outside India; or (d) a combination has taken
place outside India; or (e) any party to combination is outside India; or (f) any other matter or
practice or action arising out of such agreement or dominant position or combination is
outside India, have power to inquire into such agreement or abuse of dominant position or

40
Kenneth J. Hammer, ‘The Globalization of Law: International Merger Control and Competition Law
in
the United States, The European Union, Latin America and China’, 11 Journal of Transnational Law
and
Policy, pp. 385-406 at p. 385.
41
With the enforcement of antitrust law beginning on 20 May 2009, India joins the circle of global
economic powers with effective tools to combat anti-competitive agreements and abuses of
dominant
positions and powers to review mergers and acquisitions.
42
See generally Kahn-Freund, ‘Some Reflections on Company Law Reform’, The Modern Law Review,
Vol. 7, No. ½, Apr. 1944, pp54-66 on the changing function of the company law as far its economic
and
social functions are concerned.

29 | P a g e
combination if such agreement or dominant position or combination has, or is likely to have,
an appreciable adverse effect on competition in the relevant market in India.

The wording of Section 32 succinctly lays down the scope of the applicability of the
provision as far as the subject matter is concerned. It shall apply to:
• Anti-competitive agreements
• Abuse of dominant position
• Combinations43

Combinations in the terminology of CA or cross border mergers have thus been included
within the domain of the regulatory and investigative powers of the Commission. This
provision needs to be read along with Section 18 of CA. Section 18 specifies in rather generic
terms the duties of the Commission and the steps it can take to perform its functions under
CA. It states that:
Subject to the provisions of this Act, it shall be the duty of the Commission to eliminate
practices having adverse effect on competition, promote and sustain competition, protect the
interests of consumers and ensure freedom of trade carried on by other participants, in
markets in India: Provided that the Commission may, for the purpose of discharging its duties
or performing its functions under this Act, enter into any memorandum or arrangement with
the prior approval of the Central Government, with any agency of any foreign country.44

This provision is a vindication of the purpose of the Act stated in rather broad terms in the
preamble of the Act.45 This enabling provision actually provides teeth to the power conferred
to the Commission under Section 32.

It was in the case of US v. Aluminium Company46 of America et al; famously known as the
Alcoa case‘ that Court of Appeal for the Second Circuit held that any State may impose
liabilities, even upon persons not within its allegiance, for conduct outside its borders that has
consequences within its borders‘. This doctrine was given statutory recognition in US in 1994
by the International Antitrust Enforcement Assistance Act. Similarly, European Union also
recognizes this concept, though with minor theoretical differences.

43
Anti-competitive agreements and abuse of dominance are to be prohibited by the orders of the
Commission whereas the mergers are to be regulated by the orders of the Commission. This
difference in law is of immense significance. Whereas the former two prevent enhancement of
consumer welfare the latter drives economic growth.
44
This provision is in fact an implicit recognition and incorporation of the limits to the ‘effects’ test
as incorporated under Section 32.
45
Preamble of the Act in verbatim states that: An Act to provide, keeping in vie w of the economic
development of the country, for the establishment of a Commission to prevent practices having
adverse affect on competition, to promote and sustain competition in markets, to protect the
interests of consumers and to ensure to freedom of trade carried on by other participants in
markets, in India, and for matters connected therewith or incidental thereto.
46
United States v. Aluminum Co. of America et al., 148 F.2d 416 (2d. Cir. 1945)

30 | P a g e
Hon‘ble Supreme Court of India recognised this doctrine in the famous ANSAC case 47 but
held that under the MRTP Act, 1969, MRTP Commission could take action only against the
Indian legislation of the restrictive trade practice 48 . This restriction has been done away with
under the new Competition Act, 2002. Therefore, CCI would have complete power to take
action against a foreign entity in a similar situation

Section 18 of the Competition Act entrusts the Commission with an overarching duty of
sustaining competition in the market. The magnitude of this duty, as a corollary, entails that
the Commission is vested with a comprehensive, overall perspective on the economy. Unlike
sector specific regulatory authorities, the Commission combines the twin powers of private
enforcement and the ability to pursue claims for damages.

Hence, the Commission is uniquely situated to ensure a robust level of consumer welfare. 49
The Commission for the purpose of exercising its extra territorial powers would most
certainly need the cooperation and help of the regulatory authorities of other countries.
Section 18 enables the Commission to smoothen and accelerate the exercise of its power
under Section 32 by way of entering into arrangements and memorandum of understandings
with the regulatory bodies of other countries in order to facilitate the entire process.

2. Appreciable Adverse Effect

The Commission has been granted wide powers under Section 32 read with Section 18 of
CA. However, the caveat is that such agreement or abuse of dominant position or
combination if such agreement or dominant position or combination has, or is likely to have,
an appreciable adverse effect on competition in the relevant market in India. Section 20(4) is
indicative of the factors or the circumstances when ‘appreciable adverse effect on
competition’ can be inferred.

The exercise of the powers of the Commission over cross border mergers is crucially hinged
on the meaning that the phrase ‘appreciable adverse effect on competition’ is given and how
the jurisprudence surrounding the phrase develops. In fact, the inclusion of the word ‘effect’
in the phrase is indicative of the intention of legislators to lean towards the US jurisprudence
on the point. In fact it would not be inappropriate to state that the legislators intended to
incorporate the judicially created ‘effects test’ in the legislation itself from the very outset.

Such a broad, sweeping vantage point is unavailable to any sector-specific regulator. The test
thus laid down under the Act is that the Commission can investigate into a cross border
merger taking place outside India if the (i) agreement or (ii ) abuse of dominant position or

47
“Sec 32 – An albatross around CCI’s neck?”, http://www.competitionlawindia.com/
October 10,2012
48
ibid
49
See generally Rahul Singh, ‘The Teeter-Totter of Regulation and Competition: Balancing the Indian
Competition Commission with the Sectoral Regulators’. A Paper presented to the Advisory
Committee on Market Studies, Competition Commission of India. Available online at law.wustl.edu
and at www.cci.gov.in

31 | P a g e
(iii) combination has or is likely to have an appreciable adverse affect on competition in the
relevant market in India. Cross border merger regulation in India has only been partly taken
care under the regulatory landscape of Securities and Exchange Board of India (SEBI). With
the emergence of the new Competition Law regime in India a host of issues need to be looked
into as far as cross border merger regulation is concerned and recognize the need to find a
purposive solution to the possible conflicts and grey areas.

In March 2011 the role of CCI in relation to banking mergers got limited by finance ministry
and RBI was appointed as the chief regulatory body for the Banking mergers. The reason
provided for this was that the RBI has CCI does not have the expertise to regulate Mergers in
the banking sector, and that RBI has such expertise
.
Recent experience shows that CCI has been efficient, and has also cleared a takeover by
HSBC of RBS’s retail business in India, a deal worth $1.8 billion. It did not refer the matter
to RBI since there was no need and later even RBI may clear the merger with come
conditionality’s in line with our international rights and obligations. In some other cases, CCI
has consulted sector regulators like in telecom and electricity because it felt that their opinion
was germane to merger cases.

RBI is a prudential regulator of banks, while CCI is a competition regulator for the whole
economy, including the financial sector. Prudential regulation requires laying out and
enforcing rules that limit risk-taking of banks, ensuring safety of depositors’ funds, stability
of the financial sector and other public policy requirements. Thus, regulation of Mergers by
RBI would be determined by such benchmarks. Competition regulation of Mergers in the
banking sector, on the other hand, is a different matter. The review will take into account
whether such a merger can lead to an “appreciable adverse effect” on competition. For
illustration, it will seek to ensure that banks compete among themselves for customers by
offering the best terms and interest rates for both deposits and borrowings. While CCI is not a
prudential regulator, RBI is not a competition regulator, though both are required to promote
competition and consumer interest.

In the case of failing banks, unquestionably, the mergers are allowed swiftly as in the case of
Global Trust Bank in India that was taken over by the Oriental Bank of Commerce in 2004.
There can also be a one-time exception from competition rules allowed in specific cases like
in the UK in 2009 when Halifax Bank of Scotland was merged with Lloyds TSB after the
earlier turned turtle following the financial crisis

There is room, therefore, for both CCI and RBI in the banking sector, and the economy
stands to benefit if both are allowed to exercise their powers. Genuine concerns such as the
effects of delays from CCI in making decisions, especially in case of forced mergers, should
not be used as justification for total but rather conditional exemptions. Just like in other
countries, CCI can handle Mergers in the sector with no delays only if there is cooperation
between RBI and CCI. The sooner the two regulators sit down and work out a cooperation
agreement the better for the whole economy, and one hopes that this call for exemptions will
not be a basis for an adverse relationship between the two.

32 | P a g e
CASES RELATING TO CROSS BORDER MERGERS

5.1THE BHARTI-MTN DEAL:

In general, cross-border mergers and acquisitions are a quick pathway to enter a new market,
permit the acquiring firm to achieve critical mass presence in a market rapidly and result in
more control as compared to other market entry modes. Some of the main reasons for
firms to complete cross border mergers and acquisitions are gaining increased market
power, overcoming entry barriers to enter a new market more rapidly, reducing the cost of
new product development, increased speed to market and increased diversification.

Having explained one side of the coin, one also needs to look into the other, i.e. resource
mobilization for carrying out these cross-border transactions. Indian companies are involved
in more and more merger/ acquisition activities, hence raising the importance of the issue.
Earlier Indian capital markets were quite thin and merger and access to capital was quite
restricted. The growing needs of the economy, have however, changed the face of the Indian
financial system drastically and the capital markets have become important in the resource
allocation process of the economy50

Keeping that in mind, the article looks into the dynamics of such cross-border transactions
involving Indian companies and focuses on one particular example of an Indian telecom
company, Bharti Enterprises’51 recent attempts to enter into a complex merger deal with a
South African company, MTN Ltd52 . In recent years, mobile services have achieved a
significant mile- stone in India, with the country having nearly 50 per cent telecom density. 53

50 Narendra Jadhav, Development of Securities Market: An Indian Experience, available at

www.drnarendrajadhav.info/ (Last visited on August 29, 2012).
51 Bharti Airtel is the flagship company of Bharti enterprises. It is India’s largest and first private
telecom service provider Bharti Airtel since its inception has been at the forefront of technology
and has steered the course of the telecom sector in the country with its world class products and
services. The businesses at Bharti Airtel have been structured into three individual strategic
business units - Mobile Services, Airtel Telemedia Services & Enterprise Services. The mobile
business provides mobile & fixed wireles services using GSM technology across 23 telecom circles
while the Airtel Telemedia Services business offers broadband & telephone services in 95 cities
and has recently launched India’s best Direct-to-Home service, Airtel digital TV. The Enterprise
services provide end-to-end telecom solutions to corporate customers and national &
international long distance services to carriers. All these services are provided under the Airtel
brand. See Bharti MTN Deal, available at http://www.oppapers.com/essays/ bharti-Mtn-
Deal/244774 (Last visited on september 15, 2012); The Likely Bharti Airtel & MTN Merger,
available at http://www.oppapers.com/essays/The-Likely-bharti-Airtel-Mtn/238156 (Last visited
on September 15, 2012).
52 MTN Group Ltd, together with its subsidiaries, provides communication services. The com-
pany principally offers cellular network access and business solutions. It also offers conveni- ence
services, including ATM TopUp, voicemail, voicemail lite, WASP, and wakeup call; messaging
services comprising SMS, MMS, Email2SMS, and SMS2Email; mobile banking services; and
broadband services. MTN Group serves approximately 40 million subscrib- ers in 21
countries, principally Botswana, Cameroon, Cote d’Ivoire, Nigeria, the Republic of Congo,

33 | P a g e
Increasing competition, decreasing call rates and fluctuating net profit growth, however,
made Bharti Airtel, the telecom arm of the company to enter into negotiations with MTN, so
as to make new customers in African continent which is also regarded as immensely growing
market, with tremendous potential for growth, unlike India where telcos’ growth is projected
to reach a flat terrain in five years. After a failed attempt, the two companies again tried to tie
up a complex cross-border merger in 2009 which required Bharti to acquire about 36 per cent
of MTN’s equity and MTN to buy 25 per cent of Bharti; however the deal fell through
mainly because of South African company’s demand for dual listing of the shares of the
company, which in turn required radical changes in foreign exchange, company, and takeover
norms in India.

This particular case has been taken specifically because of the novelty and complexity in the
process of carrying of the cross-border merger as well as unheard of hurdles arising out of it,
which raises important question about the arrangement of capital controls and other policies
of the country. The article gives a detailed outline of the reasons which resulted in the failure
of the deal and the paper have tried to link up the reasons to the likely amendments and
changes which Indian laws require for facilitating such cross-border mergers of Indian
companies with their foreign counterparts.

A. HIST ORY OF THE BHARTI-MTN DEAL

Talks of a mutual acquisition between the telecom giants of India and South Africa, Bharti
Airtel and MTN, respectively was called off for a second time in two years. The history of
the deal is provided below:

(i) In 2008, talks ended because of a last-minute demand by MTN that Bharti Airtel
become its subsidiary.54
(ii) In 2009, Bharti Airtel and MTN were again close to a merger agreement as part of a
$24-billion deal which would have created the world’s third largest telecom
company. The deal, however, could not go through due to some regulatory hurdles
from the South African Government.

WHAT DEAL II ENTAILED AND WHY IT DID NOT SUCCEED:

1. Details of Deal II

Rwanda, South Africa, Swaziland, Uganda, Zambia, Iran, Afghanistan, Benin, Cyprus, Ghana,
Guinea Bissau, etc. See id., 6 for more details
53. Telecom density in India is already at 47.89 per cent and is projected to touch 80 per cent by
2015; See M. Rajendran, The Big Buy, available at, www.businessworld.in/bw/2010_02_20_
The Big Buy.html (Last visited on September 16, 2012).
54 This was followed by an unsuccessful attempt by Reliance Communication headed by Anil Ambani
to pull off a similar acquisition. See No deal: Bharti, MTN hang up available at http://
www.indianexpress.com/news/no-deal-Bharti-mtn-hang-up/523666/0 (Last visited on September
17, 2012).

34 | P a g e
The mutual acquisition was to be achieved through a scheme of arrangement 55 with the
following principal elements: MTN was to approximately acquire a 25 per cent economic
interest in Bharti for an effective consid- eration of approximately $2.9 billion in cash and
newly issued shares of MTN to the tune of approximately 25 per cent of the currently issued
share capital of MTN. Bharti would have acquired approximately 36 per cent of the currently
issued share capital of MTN from MTN shareholders for a consideration of ZAR 86.00 in
cash and 0.5 newly issued Bharti shares in the form of Global Depository Receipts (‘GDRs’)
for every MTN share acquired which finally would take Bharti’s stake to 49 per cent of the
enlarged capital of MTN. Each GDR would be equivalent to one share in Bharti and would
be listed on the Johannesburg Stock Exchange.

2. Reasons for failure

The basic hurdle in the deal came in the form of requirement of dual listing by the South
African government, which triggered off the requirement for other changes, like the open
offer obligations under the Substantial Acquisition of Shares and Takeovers Regulations,
1997 (‘SEBI takeover regulations’), and proposed issuance of American Depository Receipts,
(‘ADRs’) and GDRs with voting rights to MTN, to name the important ones.

3. Dual Listing and its implications

To define a dual listed structure, it involves “a company linking with a foreign company in a
way that allows each to retain its individual identity, but with the shareholders of the two
separate companies receiving a claim on the combined earnings as though they had
undertaken a conventional merger.”

A dual listed company (‘DLC’) structure (also referred to as a ‘Siamese twin’) engages two
companies incorporated in different countries contractually agreeing to operate their
businesses as if they were a single enterprise, while retaining their separate legal identity and
existing stock exchange listings.56 DLCs are the result of a merger between two firms
incorporated in different countries in which the firms agree to combine their activities and
cash flows. At the same time, the corporations keep separate shareholder registries and
identities and distribute the cash flows to their shareholders using a ratio laid out in the
‘equalization agreement’57 . The equalization agreements are set up in such a way that equal
treatment of both companies’ shareholders in voting and cash flow rights is ensured under all
circumstances. The contracts cover issues that determine the distribution of these legal and
economic rights between the twin parents, including issues related to dividends, liquidation,
and corporate governance.

55 for details -Media Statement from Bharti Airtel, May 25, 2009, available at
http://www.bharti.com/media- centre/media-releases/release-detail/article/media-statement-
from-bharti-airtel-limited-2. html (Last visited on September 17, 2012).
56. Abe De Jong, The Risk and Return of Arbitrage in Dual Listed Companies, available at http://
gates.comm.virginia.edu/uvafinanceseminar/2005-van%20DijkPaper.pdf (Last visited on
September 18, 2012).
57 Economic Times, Dual Listing: its Implications, available at http://economictimes.indiatimes.
com/markets/analysis/Dual-listing-Its-implications/articleshow/5015937.cms (Last visited on
September 18, 2012)

35 | P a g e
Usually the two companies will share a single board of directors and have an integrated
management structure. “A DLC is somewhat like a Joint Venture. But the parties share
everything they own, not just a single project.” DLCs have special corporate governance
requirements. The interest that the shareholders in each of the listed companies have in the
business is the same. This is usually addressed by guaranteeing equal rights in all respects
(most importantly voting rights and dividends) and by an appropriate management structure
(such a unified board).

Often, management of the two companies believes that the merged company will have better
access to capital if it maintains listings in each market, as local investors are already familiar
with their respective companies58 . When two companies in two countries enter into an equity
alliance without an outright merger, dual listing means continued listing of the firms in both
the countries. The key point to note here is that shareholders can buy and sell shares of both
the companies on bourses in the two countries. In other words, if the Bharti-MTN deal would
have happened with a dual listing rider, a Bharti share could be sold on the Johannesburg
Stock Exchange (‘JSE’) and vice-versa. Global experience suggests that companies at times
choose the dual listing structure to avoid capital gains tax that results from a conventional
merger. Many a time, complicated cross-border mergers require various forms of official
approvals, and dual listing can preserve the existence of each company.

The South African government wanted MTN to continue to be listed at the JSE, but Indian
corporate laws do not allow dual listing, and it will need major amendments to key corporate
laws of the country59 . Currently, the scene in India is such that it allows only foreign firms to
issue Indian Depository Receipts (‘IDRs’), while Indian companies can issue ADRs and
GDRs, which are consequential changes, which occur after deciding on the optimality of
dual listing.

4. Issuance of GDRs-another tussle with the existing law

The deal entailed the entire equity expansion of Bharti Airtel to be in the form of GDRs60
issued to MTN and its shareholders. Accordingly, MTN was to buy a 25 per cent stake in
Bharti, while another 11 per cent was to be held directly by MTN shareholders.61

58. Financial Express, Two Countries, One Company, available at http://www.financialexpress.

com/news/fe-editorial-two-countries-one-company/517866/2 (Last visited on September 18,
2012).
59. Bharti MTN deal failure- why it happened, available at http://www.sathyamurthy.
com/finance/2009/10/mtn-bharti-airtel-deal-failure-why-it-happened/ (Last visited on September
19, 2012) .
60. A Global Depositary Receipt is a negotiable certificate held in the bank of one country rep-
resenting a specific number of shares of a stock traded on an exchange of another country.
61. This has been allowed by the new foreign holding norms which give enough headroom for Bharti
to route MTN’s entire holdings in it through GDRs on an expanded equity base. This is because,
new FDI norms, notified under Press Notes 2, 3 and 4 by the previous UPA government, considers
a company Indian-owned if Indian promoters hold a majority stake in it, and the inve stments made
by such companies in any JV or downstream venture are also treated as Indian. See Joji Thomas
Philip, MTN may take GDR route for 25% stake in Bharti Airtel, Economic Times, June 15, 2009,
available at http://economictimes.indiatimes.com/news/ news-by-industry/telecom/MTN-may-

36 | P a g e
The main question involved was whether the acquisition of 36% GDRs in Bharti Airtel
by MTN and its shareholders as part of the combination transaction would trigger various
obligations under the SEBI Takeovers Regulations.62 With reference to this negotiation,
Chapter III of the SEBI Takeover Regulations requires the acquirer to make an open public
offer to buy an additional 20 per cent equity in case of acquiring more than 15 per cent of
the economic interest in an entity as a measure to regulate substantial acquisition of
shares. Further, Regulation 3(2) of the Takeover Regulations prior to amendment provided,

“nothing contained in Chapter III of the regulations shall apply to the acquisition of Global
Depository Receipts or American Depository Receipts so long as they are not converted
into shares carrying voting rights”. Also as mentioned earlier, MTN was to acquire an
‘economic interest’ in bharti Airtel Bharti Airtel; the concept of economic interest was
instrumental in the entire deal since it helped in triggering the exception under Regulation 3(1) (
j) of the Takeover Code, which stated that “any acquisition of shares or voting rights made
pursuant to a scheme of arrangement (Scheme) is exempt from the application of Regulations 10,
11 and 12 which deal with open offer requirements.”

MTN was supposed to be a board controlled subsidiary of Bharti. The term economic interest
helped the company in complying with section 42 of the Indian Companies Act wherein a
subsidiary cannot hold voting equity in its parent; hence while MTN was holding 25 per cent
equity in Bharti from an economic rights point of view, that equity was non-voting because the
scheme under which it was issued was to comply with section 42. Hence the combination of
shares plus the issuance of GDRs gave the shareholders an economic interest, as well as a sort of
control, but not the control which would have triggered an open offer under the Takeover Code.
Hence, the acquisition of economic interest of Bharti by MTN made it possible for it to take the
benefit of exemption. To help the matter further, SEBI issued an informal guidance63 on July
7, 2009 pertaining to Bharti-MTN exempting MTN from making an open offer unless the
GDRs were converted into shares with voting rights in consonance with the Takeover
Regulations.64

The problem arose with the proposed changes in the Takeover Regulations, called the
Proposed Changes to the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 199765 . As it has been mentioned above, Bharti had planned to issue GDRs to
the extent of 25 per cent stake to MTN and 11 per cent to the shareholders of MTN. SEBI
had announced that mandatory public offer to acquire the shares would not be required to

take-GDR-route-for-25-stake-in-bharti-Airtel/article- show/4656410.cms (Last visited on

September 19, 2012).
62.Depository Receipts and the Takeover Regulations, July 7, 2009, available at
plaw.blogspot.com/search?q=bharti+mtn+GDR (Last visited on September 19, 2012).

63.SEBI (Informal Guidance) Scheme, 2003 regarding the proposed transaction between Bharti Airtel
Ltd. and MTN Group Ltd, June 22, 2009, available at http://www.sebi.gov.in/informal-
guide/bharatiinformal.pdf (last visited on September 19, 2012).
64. See Regulation 3(2) and 14(2); Depository Receipts and the Takeover Regulations
65. Amendment to the Takeover Regulation by SEBI, available at http:// www.sebi.gov.in /
press/2009/2009300.html (Last visited on September 19, 2012).

37 | P a g e
be made by MTN on crossing the 15 per cent threshold, until the GDRs were converted
into shares of the company. However, SEBI revised its Takeover norms on September
22, 2009 by bringing ADRs/GDRs with voting rights at par with domestic shares, thereby
triggering the open offer requirement even in case of issuance of GDRs if the 15 per cent
limit under Chapter III of the Takeover Regulations is crossed.66

This led to the detriment of the interests of the players in the deal as MTN now was getting
no voting rights upon acquiring GDRs and with the additional open offer requirement MTN
was seeking to totally acquire a majority 56 per cent share in Bharti which was not
envisaged by the deal. The options which MTN had was to issued GDRs worth less than 15
per cent stake in Bharti to avoid an open offer, or MTN and its shareholders to be issued the
originally agreed 36 per cent stake, but in the form of GDRs without voting rights. The
entire valuation of the deal was, however, affected since even if MTN would have agreed to
buy GDRs without voting rights, demand of higher cash payment from Bharti had to be
made.
Hence, among others, the refusal to grant dual listing and the variety of complications
arising out of the SEBI deal being scrapped.

III. EXTENT OF OVERHAUL IN INDIAN LAWS NEEDED

The previous section dealt with the reasons as to why the deal was unsuccessful. The various
regulatory hurdles that were faced during such a complex merger have thrown light on the
various lacunae in Indian laws. This being a one off incident does not take away the fact that
subsequent deals like this would again bring the matter into light. The above example shows
the continuing collision between the growing Indian economy and the existing frame- work
of capital controls in the country. Even though this merger has been in the limelight, it raises
deeper questions about the old arrangements for capital control; the incremental reforms like
SEBI’s guidelines of June, 2009 to help the deal is an excessive response to the political
pressures that went along this deal and removes the emphasis from the deeper economic and
monetary policy problems.

This part try to look into the various changes which are required in various company and
foreign exchange laws to accommodate such cross-border deals as well as the feasibility of
such an overhaul.

The major changes would start with the amendments which would usher in the system of
dual listing. Dual Listing, which is currently not allowed in India, would need major
amendments to key corporate laws of the country. For example, the existing Companies Act
and its proposed successor would both need to be amended; apart from that, Securities
Contracts (Regulation) Act, takeover regulations and the listing agreement need to be
amended to enable dual listings. The listing agreement and the takeover code of the capital

66.Takeover Code revision to impact Bharti-MTN deal: Analysis, available at http://www.money-

control.com/news/cnbc-tv18comments/takeover-code-revision-to-impact-bharti-mtn-deala-
nalysis_416446.html (last visited on March 5, 2010

38 | P a g e
market regulator, Securities and Exchange Board of India, would need to be redefined to
protect the rights of shareholders.67 In the case of a dual listed company, an investor can buy
shares in one country and sell it in an overseas market.
Also, permission shall be needed for trading of shares denominated or expressed in a foreign
currency (if shares are expressed in Rupee and shares of foreign company are expressed in
local currency, the equalization will be disturbed). That would need the Indian rupee to be
fully convertible, something that the central bank is yet to allow. It would require India to
change its system to full capital account convertibility (at the moment, it is regulated).68 A
Capital Account Transaction has been defined as meaning a transaction “which alters the
assets or liabilities including contingent liabilities, outside India of persons resident in India
or assets or liabilities in India or persons outside India, and includes transactions referred to
in sub-section (3) of section 6 [of the Foreign Exchange Management Act, 1999] 69 .” The
dual listing arrangements would simultaneously require capital account convertibility since a
shareholder should be able to acquire the shares on one stock exchange and sell them on
another70 . The current convertibility rules do not allow an Indian citizen to hold shares in
foreign currency, which is different from the cash that such an individual would hold in
foreign currency. As seen, “shares are a common currency for acquisition and Indian
companies would be shut out of overseas buyout opportunities if they are not allowed to
issue them.”71

It is not that Indian laws have not started to change according to the changing situation. The
change in FDI guidelines, substantially through Press Notes 2, 3 and 4 in 2009, was brought
in response to the needs of the industry. 72 It also helped to bring the deal back on the tables

67 Mint, Lack of dual listing law may bog down deal, available at http://www.livemint.
com/2009/09/16232432/Lack-of-dual-listing-law-may-b.html, (Last visited on September 19,
2012).
68. Foreign Exchange Management Act, 1999, section 6 [regarding restrictions on capital account
trans- actions by the Reserve Bank of India (the “RBI”)] read with Rule 4 of the Foreign Exchange
Management (Permissible Capital Account Transactions) Regulations, 2000, [regarding the
prohibitions on the capital account transactions]. Rule 3 [regarding restriction on issue or
transfer of Security by a person resident outside India] and Rule 4 [Restriction on an Indian
entity to issue security to a person resident outside India or to record a transfer of security from
or to such a person in its books] of the Foreign Exchange Management (Transfer or Issue of
Security by a Person Resident Outside India) Regulations, 2000, prevent the dual - listed company
arrangement. Furthermore, the restrictions specified in Foreign Exchange Management
(Transfer or Issue of any Foreign Security) Regulations, 2004 would also apply.
69. Foreign Exchange Management Act, 1999, section 2 (e). section 6(3)(a) includes within its scope:
(i) transfer or issue of any foreign security by a person resident in India; and ( ii) transfer or issue
of any security by a person resident outside India
70. Since, an arrangement as mentioned above, would result in the government losing control over
the transfer of money across the border, therefore, it was not permitted.
71. Bharti Airtel MTN Deal Called off, available at http://www.cainindia.org/news/10_2009/
bharti_airtelmtn_deal_called_off.html (Last visited on September 19, 2012).
72. Press Note 5 of 2005 (“Press Note 5”), Press Note 3 of 2007 (“Press Note 3”) and Press Note
2 of 2009 (“Press Note 2 of 2009”) have provided for the regulatory framework for FDI in
telecom sector and ascertain the trend and degree of regulation on FDI attendant downstream
investments in the telecom sector. As regards computation of FDI, Press Note 5 provided that 74%
FDI limit shall apply to FDI infused into the telecom services company both directly (that is, by

39 | P a g e
after the failure in 2008. The changes brought earlier, however, have only impacted the flow
of foreign investment into the country. But as this deal shows, the demand now, is to change
rules for outward investments, and it hence refers to change in rules to relax the way the
Indian currency flows out of India, bringing back the same concern change in capital account
convertibility rules. It would help to “conduct transactions of local financial assets (like
shares) into foreign financial assets, freely and at prices determined by the markets.” Even
though the schedule for the change according to the Tarapore Committee report has been set
out to be in 2012, however, the frequency of such deals begs the decision to be taken before
that.
Another change is required in the Foreign Exchange Management Act (FEMA). Also,
domestic trading in shares denominated in foreign currency cannot happen without the
permission of the Reserve Bank of India. The above mentioned changes would primarily
mean that a foreign company would be listed on the Indian bourses, which is currently
disallowed. Foreign companies can be listed in India, but only in the form of Indian
Depository Receipts (IDRs) and not their underlying shares. Although the legal regime
relating to IDRs has been in place for the last few years, no company is yet to avail of it.
The regime for IDRs can work as an alternative for the major changes. The listing obstacle,
where lack of capital account convertibility in the erstwhile deal meant that neither MTN nor
Bharti shareholders could access each other bourses while dealing with shares, can maybe
solved for the time being, through depository receipts. 73 If seen in terms of the Bharti MTN
deal, trading in South Africa could be done in the home currency for both the sets of shares
with Bharti Airtel being traded in the form of a depository receipt.

In the same manner, in the Indian bourses, MTN could be listed through India Depository
Receipts (IDRs) which then would have facilitated quotation for MTN’s shares in rupees.
“In short, absence of capital account convertibility need not be a stumbling block to the
informal Siamese twin’s agreement between the two companies. Perhaps, this would
incidentally kick-start the comatose market for IDRs in India

5.2 SESA GOA- STERLITE DEAL:

investing directly into the company engaged in the business of telecom) or indirectly (that is, by
investing into the holding company, of which the company engaged in the business of telecom is a
subsidiary). Press Note 5 clarified that in the instances of indirect holding in the operating
company, the extent of FDI would be calculated on a proportionate basis. Press Note 2 of 2009
clarifies the manner and mechanism for calculating indirect foreign investments in Indian
companies. See Bharti MTN Deal Dissected, available at www.nishithdesai.com/ma- lab.html (Last
visited on September 21, 2012).
73. Hindu Business Line, Dual Listing truths, available at
http://www.thehindubusinessline.com/2009/09/19/stories/2009091950080900.htm (Last visited
on September 20, 2012).

40 | P a g e
This deal can be regarded as the best example of corporate restructuring, in which the UK-
based Vedanta Resources Plc will merge its Indian firms — Sesa Goa and Sterlite Industries
into a single entity Sesa Sterlite and also offload debt of $9 billion (Rs 45,000 crore 74 ) on it.

Investment banking firm, JP Morgan has initiated coverage of Sesa Goa with an "overweight
“rating and a September 2013 target price of Rs 240.The investment bank has cited the
earnings prospect of Sesa Goa following its merger with Sterlite Industries , with "high
quality" assets in zinc and earnings growth driven by oil.

"In our view post merger, the combined SESA STERLITE entity would offer investors best
in class resource diversification with top quality assets in zinc and oil," JP Morgan said 75

JP Morgan adds heavy capital spending is coming to an end, although a re-rating of the stock
depends on the performance of its aluminium and power businesses, while coal "remains the
missing part in the diversified portfolio."

About Sesa Goa

Sesa Goa Limited is India's largest producer and exporter of iron ore in the private sector. For
more than five decades, Sesa is engaged in the business of exploration, mining and
processing of iron ore. In 2007, it became a majority-owned subsidiary76 of Vedanta
Resources Plc, listed on the London Stock Exchange, when Vedanta acquired 51%
controlling stake from Mitsui & Co.

In fiscal 2011, it produced 18.8 million tonnes and 18.1 million tonnes (DMT) respectively of
iron ore. In the same year, its turnover was above US$ 2 billion77 . Sesa is among the low-cost
producers of iron ore in the World and is well placed to serve the growing demand of Asian
countries. Sesa's iron ore markets/customers are primarily in China, India, Japan, Korea,
Europe and other Asian countries. Sesa has mining operations in Goa and Karnataka in India.
While iron ore from its Goa mines is shipped through the Mormugoa port, the ore from
Karnataka mines is exported through the ports of Goa, Mangalore and Krishnapatnam.

As of 31 March 2011, Sesa owns or has rights to reserves and resources of 306 million tonnes
of iron ore; which has been independently reviewed and certified as per Joint Ore Reserves
Committee (JORC) standards. In August 2011, Sesa acquired 51% stake in Western Cluster
Limited, Liberia ('WCL"). WCL, which has mining interests / rights in the Western Cluster
iron ore project in Liberia with a potential reserves and resources of over 1 billion tonnes.

74
Refer http://www.thehindubusinessline.com/companies/article2931666.ece last visited on 10th
October 2012
75
Refer The Economic Times dated 30 AUG. 2012, cited as Sesa Goa-Sterlite merger 'best in class',
says JP Morgan. available at http://economictimes.indiatimes.com/news/news-by-
industry/indl-goods/svs/metals-mining/sesa-goa-sterlite-merger-best-in-class-says-jp-
morgan/articleshow/15995291.cms last visited on 10 oct 2012
76
Refer http://www.thehindubusinessline.com/companies/article2931666.ece last visited on 2 oct
2012
77
Refer http://www.sesagoa.com/index.php?option=com_content&view=article&id=46&Itemid=53
lastvisited on 10 oct. 2012

41 | P a g e
Over the last two decades, Sesa has diversified into manufacturing of pig iron and
metllurgical coke. In Goa, Sesa operates a metallurgical coke plant with an installed capacity
of 280,000 tpa78 ; and a pig iron plant with an installe capacity of 250,000 tpa and an
environmental clearance of 292,000 mtpa of pig iron and 60,000 tpa of slag. Sesa has also
developed and provides proprietary technology in metallurgical coke production and has
entered into technology licensing agreements with different licenses for marketing
technology for setting up non-recovery coke oven plants across the globe.

About Sterlite :
Sterlite Industries India Limited (SIIL) is the principal subsidiary of Vedanta Resources plc, a
diversified and integrated FTSE 100 metals and mining company, with principal operations
located in Australia and India.

Sterlite’s principal operating companies comprise Hindustan Zinc Limited (HZL) for its fully
integrated zinc and lead operations; Sterlite Industries India Limited (Sterlite) and Copper
Mines of Tasmania Pty Limited (CMT) for its copper operations in India/Australia; and
Bharat Aluminium Company (BALCO), for its aluminium and alumina operations and
Sterlite Energy for its commercial power generation business.

Sterlite is India's largest non-ferrous metals and mining company and is one of the fastest
growing private sector companies. Sterlite is listed on BSE, NSE and NYSE. It was the first
Indian Metals & Mining Company to list on the New York Stock Exchange.

Sterlite has continually demonstrated its ability to deliver major value creating projects,
offering unparalleled growth at lowest costs and generating superior financial returns for its
shareholders. At the same time, it ensures that its expansion projects meet high conservative
financial norms and do not place an unwarranted burden on its balance sheet and financial
resources.

In addition, Sterlite Industries produces various chemical products, such as sulfuric acids,
phosphoric acids, phospho gypsum, hydro fluo silicic acids, and granulated slag. Further, the
company involves in trading gold, as well as in paper business

The Deal:
The reconstruction which is done in this particular deal was although initiated previously in
2008 also where in the parent company intended to do the same but had failed due to
objections raised by some minority shareholders over valuation of a group firm, Konkola
Copper Mines.

78
Ibid

42 | P a g e
In Feb.2012 it again initiated the proceeding for restructuring of all its Indian subsidiaries
into a single unit to cut costs, and planned to issue American Depositary Shares in the
combined firm to be named Sesa Sterlite. It was also said that it will result in a cost cut of Rs
1000 cr.

The present situation of the Vedanta, the parent group, has three major holdings companies
Sterlite (54.6 per cent), Sesa Goa (55.1 per cent) and Cairn India (38.5 per cent). Sesa Goa
also holds 20 per cent stake in Cairn India. Both the stakes, after the restructuring plan goes
through, will transfer to Sterlite that will hold 58.8 per cent in Cairn India.

Need of the reconstruction

The reconstruction was always in question as to what was the requirement of such
reconstruction. There are many reasons provided by various market experts after the
company got listed in London Stock Exchange. According to the management, they want to
align, simplify and restructure its different businesses under one roof. However, we believe
there is no synergy between Sesa Goa and Sterlite as both are into different businesses. Sesa
Goa is into iron ore (ferrous) mining whereas Sterlite is into non ferrous metal. Therefore the
merger can also be one of the ways to repay some of the debt obligations looming large on
the balance-sheet of the parent company i.e. the Vedanta Group. The Vedanta Group as of
September 2011 had debts of USD 10 billion which includes the debt used to finance the
Cairn India acquisition.

Sterlite has a strong balance-sheet and therefore one can expect a major portion of the
earnings to be used to service the debt. By merging Sesa Goa and Cairn India the group
company will get cash and bank balance of these companies which will give them more
leverage to raise further funds. Further, the company can collect dividend payouts from these
subsidiaries which can be used to service their interest obligations. Vedanta’s debt covenants
are all-restrictive which means the debt has been given on some conditions and if those
conditions or covenants get triggered, there could be an impact on the ratings.

43 | P a g e
Moreover, this restructuring is to de-leverage its balance-sheet for a further fund-raising
programme. The Vedanta Group was recently in the news to acquire the remaining stake of
its subsidiaries Bharat Aluminum and Hindustan Zinc. For that it will need a huge sum of
money. Also, it has its own huge capex programmes. This will in turn result into additional
debt burden and the gross debt could rise by 70-80 per cent of the current debts in the books.
That will definitely not be sustainable

After Deal:
The deal will reach to its finality after all necessary approval from share holder and NOD
from regulatory body which are required for the finalization of the deal. it is most likely end
by the last week of December 2012. It collapses all the assets of Vedanta's listed and unlisted
companies in India-Sesa Goa, Sterlite, Vedanta Aluminium (VAL), Malco, Balco and
Hindustan Zinc-into Sesa Sterlite. The new company will also own the group's majority stake
in Cairn India, the oil & gas company whose acquisition was finally completed in December
2011.

The following figure aims in explain the scenario after merger.

44 | P a g e
Post merger will include the following things:-

1. Vedanta Resources, which is listed in London, will merge all of its Indian holdings,
particularly Sterlite Industries and Sesa Goa, into a single entity.

2. Vedanta will hold 58.3 per cent in the new company

3. The merge will entail a share swap in the 3:5 ratio, wherein five shares of Sterlite will
fetch three shares of Sesa Goa.

4. The new entity, to be named Sesa-Sterlite, will have a market capitalization of about
$22 billion, four billion more than the sum of the individual firms’ market cap.

5. The merged company will have consolidated net profit of $2.5 billion.

6. Unlisted Vedanta Aluminium, Madras Aluminium and Vedanta's 38.8 per cent
holding in oil and gas producer Cairn India will also be transferred to Sesa Sterlite,
whose stake in the company will go up to 58.9 per cent. Cairn India’s debt of $5.9
billion will also be transferred to Sesa-Sterlite.

7. Vedanta Resources will also issue American Depository Shares (ADS) in the new
company that will be listed on the New York Stock Exchange.

8. The restructuring does not include Vedanta’s African business – it holds a 79.4 per
cent stake in Konkola Copper Mines Plc in Zambia.

9. Sesa Goa is India’s largest privately-held producer and exporter of iron ore, Sterlite
Industries is India’s largest non-ferrous metals and mining company.

10. The restructuring will come into effect only after some minority shareholders and
regulators in India and the UK give it their stamp of approval

So by looking at all these points we can say that This merger makes Sesa Sterlite a natural
resources conglomerate with global size and scale, not too different from some of the world's
top listed resources monoliths like the Melbourne headquartered BHP Billiton, Vale in Rio de
Janeiro and London's Rio Tinto. Only Konkola Copper Mines in Zambia, in which Vedanta
Resources holds a 79 per cent stake, will be controlled by the holding company.

CONCLUSION:
The mergers in India have to comply with very tight and stringent regulatory framework. The
non compliance to such may lead to penalties or may lead to civil prosecution under
regulations. If we consider the regulations governing cross border mergers the number of
regulations also increase by two fold as such transactions includes the laws and regulations of
two different countries.

45 | P a g e
The basic problem in this regard is that only inbound cross border mergers are allowed under
companies Act 1956. And the Act is silent over outbound mergers. So this has raised a big
issue with regard to overall development of Indian market economy. Where, Company Act
allows only inbound cross border mergers and not outbound cross border mergers. It means
our company law somewhere is giving opportunity to foreign company to come and utilize
my market. But it is unfavourable for the Indian company which are not allowed to merge
with foreign company. It means Indian company cannot expand its horizon to earn greater
profit by utilizing the market of foreign market. It means the company law by not allowing
outbound cross borer merger is creating obstacles in the development of India.

Another problem which is being faced by the companies which wants to merge in each-other
is of tax treatment. Firstly cross border mergers in most of the case results in the capital gains
because in it, assets are transferred to one company to other company. Indian tax laws
provide that capital gain tax shall be imposed if due to transfer of assets capital gains accrue.
So companies are not willing to pay so much high capital gain tax. Another problem is that
such cross border merger transaction is in most of the case, is taxable in both the countries
which are involved in this transaction. Such tax treatment is also a reason for discouraging
such cross border mergers. The provisions provided under FEMA are also not encouraging
the foreign investors to invest in Indian market directly, because they have to undergo a very
rigorous and time consuming process which ultimately results in lost of interest to invest in
India.

If outbound Cross border merger will be allowed (As allowed in New Companies Bill 2011)
then those will certainly help the Indian market as this will allow a foreign company to merge
an Indian company. For instance where there is a merger between two foreign companies
with one company having a subsidiary in India then this provision will allow the transferee
company to take control over all its Indian operations and also realize maximum tax benefits
by offsetting losses of the subsidiary against its profits.

If we consider Bharti MTN deal it should act as an eye opener for the Indian policy makers
because the current state of globalization makes it imperative that this deal would not remain
a one-off incident. Companies prefer such complex merger schemes to better cater to their
business interests. Hence, the need of the hour is to make necessary changes in the law and
regulatory procedures, which are inter connected, and does not result in a situation where one
change in a law is going against the other. A holistic approach is needed to prevent such a
situation to rise again, and prevent companies, from trying back door entries, when a legally
regulated front door entry is possible.

Cross border mergers can be effective tool available to Indian Companies to globalize their
business is still a tedious task due to existing regulatory framework. Keeping in pace with the
globalization there is a strong need of deregulating the cross border mergers or providing a
single window clearance to make Cross Border Mergers more effective and attractive. There
is a immediate need of implementation of New Companies Bill, 2011 which will certainly
provide a boost to the Cross Border Mergers.

46 | P a g e
BIBLIOGRAPHY AND REFERENCES

PRIMARY SOURCES:

 The Companies Act 1956

 The Competition Act 2002

 Foreign exchange management act 1999

 SEBI (Substantial Acquisition and Takeovers) regulations, 2011

 Income tax Act 1961

 Company bill 2011

SECONDARY SOURCES

BOOKS:

 S. Ramanujam, Mergers et al, 3rd edition, (Lexis Nexis,

2011)

 Sampath K R, Law and Procedure for Mergers,

Amalgamations, Takeovers and Corporate Restructuring, 2nd
edition, (snow white, 1996)

 Seth Dua & Associates, Joint Ventures & Mergers and

Acquisitions in India: Legal and Tax Aspects ; (Lexis Nexis
Butterworths ; India,2006)

 Sridharan and Pandian , Guide to Takeovers and Mergers,

3rd edition, (Lexis Nexis Butterworths Wadhwa, Nagpur, 2008)

 T. Ramappa, competition Law In India : Policy , Issues and

Development, 2nd edition ( Oxford university Press, New
Delhi,2009)

47 | P a g e
ARTICLES:

 Beena saraswathy, “Cross-Border Mergers and Acquisitions

in India: Extent, Nature and Structure” , Available at –
cds.edu/download_files/wp434.pdf

 Esha Shekhar and Vasudha Sharma, “Cross-Border

Mergers In Light Of The Fallout Of The Bharti-MTN Deal”
Available at –
http://www.nujslawreview.org/articles2011vol4no1/esha-
shekhar.pdf

 Mr Himanshu Srivastava and Mr Nitin Arora “Cross

Border Merger & Acquisition” Available at –
http://www.cci.in/upload%5CArticle%5Cfile%5CFileLXTIVVIC
ross-Boder-Merger-Acquisition.pdf

 Rav Pratap Singh, “Implications Of Cross border Mergers

Under Indian Competition Law –A Comparative Analysis with
US & EC Jurisdictions” Available at- -
www.cci.gov.in/images/media/ResearchReports/RavPratapSin
gh.pdf

 Aniket Singhania, “Cross Border Business Reorganization-

The Indian Perspective” Available at-
www.itatonline.org/articles_new/?dl_id=13

 Bhagwati Dan Charan, “Implication Of The Competition

Act, 2002 On Cross Border Merger: An Indian Perspective”
Available at
cci.gov.in/images/media/.../CrossBorderMergerAnIndianPer
spective.pdf

48 | P a g e
WEBSITES:

o www.manupatra.com

o http://www.sebi.gov.in

o www.rbi.org.in

o www.cci.gov.in

o www.taxmann.com

o www.kpmg.com

CASES:

 Commissioner of Income tax v. Mrs. Grace Collis & Another,

[2001] 248 ITR 323 (SC)
 Mc Dowell v. CTO, AIR 1986 SC 649, (1985;
 Andhra Bank Housing Finance Ltd. v. Andhra Bank, 2003 47
SCL 513 (AP).
 Re Vibank Housing Finance Ltd., [2006] 130 Comp Cas705
(Kar).
 Bombay Gas Co. Pvt. Ltd. v. Union of India, [1997] 89 Comp
Cas 195 (Bom).
 US v. Aluminium Company, 148 F.2d 416 (2d. Cir. 1945)

49 | P a g e