Corporate Restructure Law

CORPORATE
RESTRUCTURE LAW
(FOR PRIVATE CIRCULATION ONLY)

2018
PROGRAMME COORDINATOR
Mr. Vishal B. Ranaware
COURSE DESIGN AND REVIEW COMMITTEE

Mrs. Medha Kolhatkar Adv. Vaishali Bhagwat
Dr. Shashikala Gurpur Ms. Ujjwala Sakhalkar
Ms. Shivanjali Bhoite Mrs. Sarika Mahajan
Ms. Carolin Dennis Ms. Amola Darekar
COURSE WRITERS
Mr. Atul Bohra Mr. Manoj Soni
Mr. Nitin Bhandare
EDITOR
Ms. Neha Mule
Published by Symbiosis Centre for Distance Learning (SCDL), Pune

July, 2011 (Revision 02, 2015)
Copyright © 2018 Symbiosis Open Education Society

All rights reserved. No part of this book may be reproduced, transmitted or utilised in any form or by any
means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval
system without written permission from the publisher.
Acknowledgement
Every attempt has been made to trace the copyright holders of materials reproduced in this book. Should any
infringement have occurred, SCDL apologises for the same and will be pleased to make necessary corrections
in future editions of this book.
PREFACE
We are glad to write this SLM on “Corporate Restructure Law” for the students of SCDL.
The Global industrial landscape has been completely redefined by the forces of globalization and
unprecedented technological development in the last two decades. Companies have responded to
the competitive pressures unleashed by these forces through extensive repositioning programmes
involving mergers, acquisition, alliances and demergers. Indian Companies stand on the threshold
of the next phase of the growth. In the process, Indian companies including public sector would be
increasingly called upon to pursue focused growth through corporate restructuring actions such as
mergers and acquisition on one hand and demerger on the other.
Corporate Restructuring may be a one-time exercise for an organisation but it has a lasting impact on
the business and other concerned agencies due to its numerous consideration and immense advantages
viz. improved corporate performance and better corporate Governance.
This SLM covers the basic fundamentals of Corporate Restructuring. We sincerely hope that this
book will be interesting and useful and will help students and readers to learn this subject in a more
meaningful and useful manner. We take this opportunity to sincerely extend our thanks to the SCDL
staff.
Atul Bohra
Manoj Soni
Nitin Bhandare
iii
ABOUT THE AUTHORS
Atul Bohra is a Bachelor of Commerce, Master of Business Administration (Finance). He is a Fellow

member of The Institute of Company Secretaries of India, and member of The Institute of Chartered
Accountants of India. He has worked for various medium and large Companies during his practice
as Company Secretary in Pune. Presently he is working with Magna Steyr India Private Limited
as Manager- Finance & Company Secretary. He is a Guest Faculty at various, Management and
Professional Institutes and also a key speaker at program and seminars. His experience lies in the
areas of Finance, Taxation, Corporate Restructuring, Accounts.
Manoj Soni is commerce graduate and Fellow Member of the Institute of Company Secretaries
of India (ICSI), New Delhi. He has experience of Corporate Law matters, and is a consultant for
companies, non banking financing companies, Intellectual Property Rights (IPR) and other related
segments of the Indian Legislature. He was the winner of M/s Sukhlal Modi memorial award from
Institute of Company Secretaries of India (ICSI), New Delhi and was also the Winner of M/s Naware
award honored by the Pune Institute of Company Secretaries of India. His areas of teaching include
Company Law, Intellectual Property Rights (IPR), Corporate Governance and Financial Management.
Nitin Bhandare has completed his LLM in Criminal Law and Business Law from Symbiosis
Law School. He has qualified UGC NET in Law. He has participated in number of Seminars and
conferences. He has also done Internship in Supreme Court of India with Honourable Justice C.
K. Thakker.
iv
CONTENTS
Unit No. TITLE Page No.

1 Corporate Restructuring 1-10
1.1 Introduction
1.2 Meaning of Corporate
1.3 Structure of Corporate
1.4 Meaning of Corporate Restructuring
1.5 Historical Background and Present Scenario
1.6 Why Restructuring
1.7 Kinds of Restructuring
1.8 Ways of Restructuring - Merger and Acquisitions
Summary
Key Words
Self-Assessment Questions
Answers to Check your Progress
Suggested Reading
2 Various Types of Corporate Restructuring 11-28
2.1 Introduction
2.2 Types of Corporate Restructuring
2.3 Types of Merger
2.4 Amalgamation
2.5 Compromise and Arrangement
2.6 Reverse Merger and Demerger
2.7 Acquisition or Takeover
2.8 Joint Venture
2.9 Strategic Alliances
Summary
Key Words
Answers to Check Your Progress
Suggested Reading
v
3 Mergers and Amalgamations 29-46
3.1 Introduction
3.2 Primary Steps in Mergers and Amalgamations and Pre-Merger
Activities
3.3 Procedural Requirements of Mergers and Amalgamations
3.4 Provisions of Companies Act, 2013 and its Procedures
3.5 Preparation of Scheme of Amalgamation/Memorandum of
Understanding
3.6 Transfer of Undertaking by Order of Tribunal
3.7 Approvals in Schemes of Amalgamation
3.8 Application to Tribunal and related Procedure
3.9 Power and Duty to acquire Shares of Shareholders dissenting from
Scheme
3.10 Amalgamation of Companies in National Interest
3.11 Reverse Merger
Summary
Key Words
Suggested Reading
4 Demerger 47-60
4.1 Introduction
4.2 Demerger: Meaning
4.3 Demerged Company and Resulting Company
4.3.1 Provisions of Companies Act relevant to Demerger
4.4 Demerger by Agreement
4.5 Demerged under Scheme of Arrangement
4.6 Types and Forms of Demergers
Summary
Key Words
Suggested Reading
vi
5 Takeover 61-76
5.1 Introduction
5.2 Meaning
5.3 Objectives of a Takeover
5.4 Provisions of Companies Act, 2013 & SEBI Takeover Code
5.5 SEBI (Substantial Acquisition of Share and Takeovers) Regulation,
2011/ Takeover Code
5.6 Public Announcement
5.7 Letter of Offer
5.8 Offer Price
5.9 Competitive Bid and Takeover Bid
5.10 Bail Out Takeovers
Summary
Key Words
Suggested Reading
6 Reorganise through Compromise or Arrangement 77-88
6.1 Introduction
6.2 Meaning of Compromise and Arrangement
6.3 Applicability of Companies Act
6.4 Procedure for Compromise or Arrangement
6.5 Scheme of Compromise or Arrangement
6.6 Calling of Meetings and Approval by Members or Creditors
6.7 Petition to Tribunal and related Procedures
6.8 Order of the Tribunal
6.9 Compromise or Arrangement in Case of Government Companies
Summary
Key Words
Suggested Reading
7 Joint Ventures (JV) and Reorganising Business 89-106
7.1 Introduction
7.2 Joint Venture: Meaning
7.3 Legal Form of Joint Venture
7.4 Types of Joint Venture
7.5 Joint Venture Agreement
7.6 Content of Joint Venture Agreement
7.7 Conversion of a Partnership Firm into a Company
7.8 Conversion of Private Limited Company into Public Company
Summary
Key Words
Suggested Reading
vii
8 Corporate Debt Restructuring 107-126
8.1 Introduction
8.2 Salient Features of CDR Scheme
8.3 Historical Background
8.4 Objectives and Structure
8.5 CDR Standing Forum
8.6 CDR Empowered Group
8.7 CDR Cell
8.8 Reference to CDR System
8.9 Legal Basis
8.10 Standstill Clause
8.11 Conversion Option
8.12 Implementation of the Revised Guidelines
Summary
Key Words
Self-Assessments Questions
Suggested Reading
9 Financial Restructuring 127-152
9.1 Introduction
9.2 Need for Financial Restructuring
9.3 Increase of Share Capital
9.4 Reduction of Share Capital
9.5 Reorganisation of Share Capital (Splitting/Reverse Splitting of Shares)
9.6 Buyback of Shares
9.7 Buyback for Listed Companies
9.8 Buyback for Private and Unlisted Public Limited Companies
Summary
Key Words
Suggested Reading
10 Due Diligence and Corporate Governance 153-166
10.1 Introduction
10.2 Need for Due Diligence
10.3 Due Diligence vs. Audit
10.4 Factors to be considered while conducting Due Diligence
10.5 Due Diligence in Case of Mergers and Acquisitions
10.6 Human Resource Due Diligence
10.7 Legal Due Diligence
10.8 Due Diligence of Tangible and Intangible Assets
Summary
Key Words
Suggested Reading
viii
11 Taxes and Stamp Duty Aspects of Mergers and Acquisitions 167-178
11.1 Introduction
11.2 Applicability of Income Tax Act, 1961
11.3 Tax on Capital Gains
11.4 Carry Forward of Losses and Unabsorbed Depreciation Allowances
11.5 Important Income Tax Provision related to Amalgamation
11.6 Excise Law Implications in case of Amalgamation
11.7 Applicability of Stamp Duty
11.8 Stamp Duty on Share Transfers
11.9 Amalgamation between Holding and Subsidiary Company
Summary
Key Words
Suggested Reading
12 FEMA, SEBI and Accounting Issues 179-196
12.1 Introduction
12.2 Foreign Exchange Management Act Provisions
12.3 SEBI Directions in Respect to Amalgamation and Mergers
12.4 Listing Agreement Requirements
12.5 Accounting Aspects of the Merger and Amalgamation Transactions
12.6 Purchase Consideration
12.7 Treatment of Goodwill
12.8 Valuation
Summary
Key Words
Suggested Reading
13 Mergers and Amalgamations under Sick Industrial Companies 197-208
(Special Provisions) Act, 1985 (SICA)
13.1 Introduction
13.2 Causes of Sickness of Industrial Companies
13.3 Definition of Sick Industrial Companies
13.4 Application to the Board
13.5 Power to enquire into the working of Sick Industrial Companies
13.6 Scheme of Rehabilitation
Summary
Key Words
Suggested Reading
ix
14 Cross-Border Restructuring 209-252
14.1 Introduction
14.2 Forms in which Business can be conducted by a Foreign Company
in India
14.3 Procedure for receiving Foreign Direct Investment in an Indian
Company
14.4 Guidelines for Transfer of existing Shares from Non-Residents to
Residents or Residents to Non-Residents
14.5 Significance of Overseas Investment for the Country and for the
Investor
14.6 Direct Investment outside India
14.7 Obligations of the Indian Party making Direct Investment outside
India
14.8 Foreign Exchange Management Compliance
14.9 The Need for Comparison
14.10 Historical Chronos of US Merger Laws
14.11 Brief History of Indian Merger Laws
14.12 Legal Framework in India
14.13 Legal Framework in US
14.14 Procedures for Mergers in India
14.15 Procedures for Mergers in US
14.16 Brief Overview of BRIC Countries
Summary
Key Words
Suggested Reading
15 Mergers and Acquisition Agreements, Schemes and Documentation 253-264
15.1 Introduction
15.2 Mergers and Acquisition Applicable Provisions
15.3 Major and Minor Activities in case of Merger and Acquisition
15.4 Specimen Scheme of Arrangement
15.5 Documentation for Merger and Acquisition, Arrangement
Summary
Key Words
Suggested Reading
References 265-270
x
Corporate Restructuring
UNIT
1
Structure:
1.1 Introduction
1.2 Meaning of Corporate
1.3 Structure of Corporate
1.4 Meaning of Corporate Restructuring
1.5 Historical Background and Present Scenario
1.6 Why Restructuring
1.7 Kinds of Restructuring
1.8 Ways of Restructuring - Merger and Acquisitions
Summary
Key Words
Suggested Reading
Corporate Restructuring 1
Notes
Objectives
----------------------
After going through this unit, you will be able to:
----------------------
• Explain the concept of corporate restructuring
----------------------
• Name the kinds of corporate restructuring
---------------------- • Describe various ways of corporate restructuring
---------------------- • Examine the importance of restructuring in modern economy
----------------------
1.1 INTRODUCTION
----------------------
---------------------- In today’s modern, global economy and competitive age, professionalism,

better management, sufficiency of fund and skill are the keys to the success of
---------------------- a business. For expansion and development of business, the entity should be
flexible enough so that business activities can be molded or diverted anywhere
---------------------- anytime. In today’s global environment where business is becoming more and
---------------------- more complex, companies may have to grow to survive. One of the best ways
to grow is by merging with another company or acquiring companies, takeover
---------------------- or joint venture.
---------------------- In globalised business environment, business can be expanded as much

as possible across the world and therefore, associations or joint ventures are
---------------------- more popular to fulfill the needs of modern business such as adopting better
technologies, availability of funding, better management and control, finding
---------------------- new markets, supply chain, business development, product mix, etc.
---------------------- Sometimes, business strategy often fails to take into consideration various
figures related to profitable merger and acquisition. It is often driven by the
---------------------- passion to convert a dream into reality. It often goes beyond the economical/
---------------------- financial models, cost-benefit analysis and is influenced by the desire to grow,
diversify and attain leadership in the market and gain competitive advantage.
----------------------
Corporate can be structured differently and the structure can be altered
---------------------- or restructured suited to the need of business. Corporate restructuring allows
companies to consolidate its business operations and strengthen its market
---------------------- position. Corporate restructuring is a multidimensional process, which includes
improvement in efficiency and management, reduction in cost, staff and wages,
----------------------
enhanced marketing efforts, etc. with the expectation of higher profitability and
---------------------- cash flow and more market share.
---------------------- 1.2 MEANING OF CORPORATE

---------------------- According to legal theory, anyone who is capable of having rights and
---------------------- liabilities is a person. A person may be natural or artificial or juristic person. A
natural person is a living human being, whereas an artificial person is an entity,
---------------------- which is created by law and has certain legal rights and responsibilities.
2 Corporate Restructure Law

Corporate is an artificial person, i.e., a legal entity created by law. Notes
Companies are artificial legal entities with perpetual succession and flexibility
to change or alter its structure. Company is a voluntary association of persons ----------------------
having distinct name and separate legal existence. Company is a person but it is
not a citizen. Company may have its separate structure and its existence to carry ----------------------
business activities; it can sue and can be sued as it is a separate legal entity. ----------------------
Corporate entity has various benefits. Some of them are:
----------------------
(i) It has a perpetual succession, i.e., the life of corporate is unlimited.
(ii) Limited liability so as the risk of owners can be limited to an extent. ----------------------
(iii) Flexibility in structure, e.g., transferability of shares, change in control or ----------------------
alteration of capital structure, etc.
Characteristics of Company ----------------------
A company registered under the Companies Act, 2013 has the following ----------------------
features:
----------------------
●● egal entity
L
●● Separate existence ----------------------
●● Incorporated body ----------------------
●● Perpetual succession
----------------------
●● Limited liability
●● Common seal, if any (The Companies (Amendment) Act, 2015 makes it ----------------------
optional)
----------------------
●● Right to sue
●● Separation of ownership and control ----------------------
●● Transferability of shares ----------------------
Check your Progress 1 ----------------------
Fill in the blanks. ----------------------

1. Anyone who is capable of having _________ and ______ is a person. ----------------------
2. Companies are artificial legal entities with __________ and flexibility ----------------------
to change its structure.
3. A company registered under the Companies Act, 2013 has separation ----------------------
of ___________________ and _______________. ----------------------
----------------------
1.3 STRUCTURE OF CORPORATE
----------------------
Companies Act, 2013 has provided various types of companies categorised
in accordance to size and nature of business. Based on activities, companies ----------------------
can be manufacturing companies, service companies, banking companies, non- ----------------------
profit companies, producer companies, etc. Based on liability, companies can be
limited companies, unlimited companies, companies limited by guarantee, etc. ----------------------
Notes On the basis of ownership and control, companies can be private limited, public
limited, holding companies, subsidiary companies, government companies, etc.
---------------------- Corporate can be structured differently and the structure can be altered or
---------------------- restructured suited to the need of business and time. Capital structure, financial
structure, legal structure, management structure, shareholding, ownership
---------------------- structure, capital restructuring, mergers, amalgamation, joint venture, takeover,
buyback etc. are the various ways of structuring the corporate differently. One
---------------------- of the features of corporate entity is separation of ownership and control.
---------------------- Corporate structure is flexible and different to each corporate in its respect.
It can be internal or external structure in which a corporate may divide as far as
---------------------- structuring is concerned. Internal structure is mainly on account of the financial,
---------------------- legal, management control. For example, capital structure, limited liability,
composition of board of directors, etc. External restructuring is a broader term
---------------------- such as holding or subsidiary relationship.
----------------------
1.4 MEANING OF CORPORATE RESTRUCTURING
----------------------
Corporate restructuring is a process to alter, modify or process the
---------------------- internal or external structure of a company or mold more than one company
for desired goal. Corporate restructuring is a comprehensive process by which
---------------------- the companies can consolidate its business operations and strengthen its market
position. It is a process by which companies reorganise or restructure its
----------------------
financial structure, operational structure, legal structure and achieve its goal.
---------------------- Corporate restructuring implies rearranging the business for better and increased
profitability and efficiency. Corporate restructuring refers to multidimensional
---------------------- process, which includes improvement in efficiency and management, reduction
in cost, staff and wages, enhanced marketing efforts, and so on with the
----------------------
expectation of higher profitability and cash flow and more market share.
---------------------- Corporate restructuring is the corporate management term for the act of
reorganising the legal, ownership, operational or other structures of a company
----------------------
for the purpose of making it more profitable or better organised for its present
---------------------- needs.
---------------------- 1.5 HISTORICAL BACKGROUND AND PRESENT

---------------------- SCENARIO
---------------------- In earlier years when the Indian economy was highly regulated and
controlled by the Government, the term corporate restructuring was not much
---------------------- popular. Very few restructuring took place and mostly with government
interventions and permissions.
----------------------
Consequently, when Government started to liberalise the economy and
---------------------- the market become open for domestic and foreign players, continuity with
---------------------- change was emphasised upon and policies were framed to give more relaxation
and less control over these activities. Various amendments were made in the
---------------------- MRTP, foreign investment policies, FERA was replaced with FEMA, etc.

Today business scenario all over the world has changed and the economy Notes
is now becoming a market-oriented global economy. Mergers, acquisitions,
takeovers are the terms that have become common to the corporate sector. The ----------------------
need and scope of corporate restructuring has widely increased and expanded
across the world. Not just domestic but cross-border mergers and acquisitions ----------------------
are also very widely accepted by the corporate sector. ----------------------
Indian corporate houses have shown tremendous growth over the last
----------------------
decade. The trend toward globalisation increased the intensity of merger and
acquisition to create companies, which are more focused, competitive and ----------------------
modern. Everyone wants to be a market leader. There were various corporate
restructurings in India during the last few years. This unit deals with corporate ----------------------
restructuring of Indian companies, which immensely enhanced the shareholders’
----------------------
market value and strengthened their competitive edge in recent times. In India,
deals of corporate restructuring has increased in numbers and also in value very ----------------------
significantly over last decade almost in every sector.
----------------------
State True or False. ----------------------

1. Corporate restructuring is a comprehensive process by which the ----------------------
companies cannot consolidate its business operations and strengthen
its market position. ----------------------
2. Corporate restructuring implies rearranging the business for better ----------------------
and increased profitability and efficiency.
----------------------
3. The trend toward globalisation decreased the intensity of merger and
acquisition to create companies that are more focused, competitive ----------------------
and modern.
----------------------
1.6 WHY RESTRUCTURING ----------------------
----------------------
In today’s economic and business environment of rising competition,
breakthrough technological and other changes, rising stock market volatility, ----------------------
major corporate accounting scandals have increased the responsibility of
managers to deliver superior performance and enhance market value of ----------------------
shareholders. The companies which fail to deal with the above successfully
----------------------
may lose their independence. The essence of corporate restructuring lies in
achieving the long-term goal of wealth maximisation. ----------------------
The basic nature of restructuring is a zero-sum game. Strategic restructuring
----------------------
reduces financial losses, simultaneously reducing tensions between debt and
equity holders to facilitate a prompt resolution of a distressed situation. The ----------------------
trend toward globalisation increased the intensity of corporate restructuring to
create companies more focused, competitive and modern. ----------------------
----------------------
Notes Restructuring a corporate entity is often a necessity when the company
has grown to such a level that the original or traditional structure can no longer
---------------------- efficiently manage the result or output and general interests of the company. For
example, a corporate restructuring may call for spinning off some departments
---------------------- into subsidiaries as a means of creating a more effective management model
---------------------- as well as taking advantage of tax breaks that would allow the corporation to
divert more revenue to the production process. In this scenario, the restructuring
---------------------- is seen as a positive sign of growth of the company and is often welcomed by
those who wish to see the corporation gain a larger market share.
----------------------
Corporate restructuring has enabled thousands of organisations around
---------------------- the world to respond more quickly and effectively to new opportunities and
unexpected pressures, thereby re-establishing their competitive advantage.
----------------------
Alternate reasons for restructuring include a change of ownership or ownership
---------------------- structure, demerger, or a response to a crisis or major change in the business such
as bankruptcy, repositioning or buyout. Restructuring may also be described as
---------------------- corporate restructuring, debt restructuring and financial restructuring
---------------------- In India, corporate houses have recently witnessed an increase in
restructuring in different organisations due various reasons, such as:
----------------------
●● Liberal government policies
---------------------- ●● Increased competition
---------------------- ●● ounting pressure on margins have necessitated higher volume of
M
business
----------------------
●● ll round resource optimisation in existing businesses to streamline
A
---------------------- operational profit and to stay fit in competition
●● Adoption of new technologies
----------------------
●● Tax benefits or exemptions
---------------------- ●● Operational, financial synergies
----------------------
1.7 KINDS OF RESTRUCTURING
----------------------
Corporate restructuring is not a specific term. It can be of the following kinds:
----------------------
●● rganisational restructuring: Organisational restructuring is a process
O
---------------------- of establishing internal structure and procedure of organisation to respond
to change and achieve the desired goals. This restructuring is mostly
---------------------- focused towards organisation as a whole and co-operation from all level
is expected for success of this restructuring.
----------------------
●● Financial restructuring: Financial restructuring deals with restructuring
---------------------- the capital structure of company either by altering it, reducing, buyback,
right issue, leverage buyouts.
----------------------
●● anagement restructuring: Management restructuring is done to take
M
---------------------- control of the decision-making ability of day-to-day operations. It can be
achieved by management buyouts, management takeover.
----------------------

●● arket restructuring: Market restructuring is strategic management
M Notes
which involves decisions with respect to product mix, market segmentation
and operates on the basis of core competencies. ----------------------
●● echnological restructuring: Technological restructuring involves
T ----------------------
alliances, joint venture and technology sharing agreements, etc. to exploit
technological expertise. ----------------------
1.8 WAYS OF RESTRUCTURING - MERGERS AND ----------------------

ACQUISITIONS ----------------------
Corporate restructuring can be done internally or externally. Internal ----------------------

reconstruction or restructuring is a process where the financial, legal,
management control is internally altered, reshuffled or reorganised with ----------------------
appropriate discloser and approvals, for example, buyback, alteration in capital, ----------------------
reduction or increase of capital, conversion of a private limited company into
public limited company, etc. External restructuring is a broader term. There are ----------------------
several ways or methods of corporate restructuring such as merger, acquisition,
amalgamation, absorption, takeover, outright sell-off, equity carve out, spinning ----------------------
off a unit to existing shareholders or issuing tracking stock, hive off, slump sale, ----------------------
etc.
Each has advantages and disadvantages for companies and investors. ----------------------
All of these deals are quite complex. Corporate restructuring is the process of ----------------------
redesigning one or more aspects of a company. The process of reorganising
a company may be implemented due to a number of different factors, such ----------------------
as to position the company as more competitive, survive a currently adverse
economic climate, or poise the corporation to move in an entirely new direction. ----------------------
However, some organisations have done their restructuring through ----------------------

acquisition and mergers and some through demergers. There is also corporate
----------------------
restructuring done through changes in corporate structure and optimisation of
resources including financial structuring. ----------------------
Corporate restructuring is an umbrella under which come the following:
----------------------
●● Mergers and amalgamation
----------------------
●● Acquisition and takeover
●● Change ownership and management control ----------------------
●● Demerger, divestitures and liquidations ----------------------
●● Joint ventures
----------------------
Mergers and amalgamations are methods by which distinct businesses
may combine. Mergers are consolidations, divestitures and liquidations having ----------------------
various types of battles for corporate control. Restructuring generates value
gains for shareholders. Creation, achievement and failure of these value gains ----------------------
depend upon various factors. ----------------------
----------------------
Notes Merger is combination or fusion of two or more than two companies
with each other by transferring their business. Amalgamation means merger
---------------------- of more than one company to form another company known as Amalgamating
Company.
----------------------
Corporate restructuring may take place because of the acquisition of
---------------------- the company by new owners. Acquisition is the purchase by one company of
controlling interest in capital or asset of other company either partially or fully.
----------------------
Acquisition is a process of taking over companies and merging with the entity in
---------------------- order to improve the margin. The acquisition may be in the form of a leveraged
buyout, a hostile takeover or a merger of some type that keeps the company
---------------------- intact as a subsidiary of the controlling corporation. When the restructuring is
due to a hostile takeover, corporate raiders often implement dismantling of the
----------------------
company, selling off properties and other assets in order to make a profit from
---------------------- the buyout. What remains after this restructuring may be a smaller entity that
can continue to function, albeit not at the level before the takeover took place.
----------------------
One of the major areas encompassing the term corporate restructuring
---------------------- is that of ownership and control. It is wrested from the current board; the new
management often embarks on a full or partial liquidating strategy involving
---------------------- the sale of assets. The leveraged buyout preserves the integrity of the firm as
legal entity but consolidates ownership in the hands of small groups. Whether
----------------------
a purchase is considered a merger or an acquisition really depends on whether
---------------------- the purchase is friendly or hostile and how it is announced. In other words, the
real difference lies in how the purchase is communicated to and received by the
---------------------- target company’s board of directors, employees and shareholders.
---------------------- Demerger is a process of corporate restructuring in which single or
multiple business units are spun off as a new entity. Demerger is just the opposite
---------------------- of merger. In a market of falling prices, mergers and initial public offers are less
popular and the merchant banks, who normally earn their fees from corporate
----------------------
activity, start to look at demerger possibilities of their clients.
---------------------- Joint venture is more of a contractual arrangement between the companies
---------------------- or two or more business to work together to achieve growth as a partner in
progress which may or may not be for limited durations.
----------------------
---------------------- Check your Progress 3
---------------------- Match the following.

i. Merger a. Contractual agreement
----------------------
ii. Amalgamation b. Spun off
---------------------- iii. Acquisition c. Combination or fusion
---------------------- iv. Joint venture d. Merger of more companies
v. Demerger e. Purchase of company
----------------------
----------------------

Notes
Activity 1
----------------------
Study the acquisition of Pantaloons Retail by A.V. Birla Group.
----------------------
----------------------
Summary
----------------------
●● ompanies are artificial legal entities that have the most important feature
C
of flexibility to change or alter its structure. ----------------------
●● orporate can be internally or externally restructured. For the expansion
C ----------------------
and development of business, the entity should be flexible enough so that
the business activities can be expanded or grown. ----------------------
●● he second-generation economic reform accelerated corporate
T ----------------------
restructuring in India and across the globe. The trend toward globalisation
increased the intensity of merger and acquisition to create more focused, ----------------------
competitive and modern companies.
----------------------
●● orporate restructuring is a process to alter, modify or process the internal
C
or external structure of a company. Restructuring includes financial ----------------------
restructuring, management restructuring, capital restructuring, mergers,
amalgamation, joint venture, takeover, buyback, etc. ----------------------
●● orporate restructuring has enabled thousands of organisations around
C ----------------------
the world to respond more quickly and effectively to new opportunities
and unexpected pressures, thereby re-establishing their competitive ----------------------
advantage.
----------------------
Keywords ----------------------
●● orporate restructuring: A process to alter, modify or process the

C ----------------------
internal or external structure of a company or mold more than one
----------------------
company for desired goal.
●● erger: A combination or fusion of two or more than two companies
M ----------------------
with each other by transferring their business.
----------------------
●● malgamation: Merger of more than one company to form another
A
company called amalgamating company. ----------------------
●● Demerger: A process of corporate restructuring in which single or
multiple business units are spun off as a new entity. ----------------------
●● cquisition: Acquisition is the purchase by one company of controlling
A ----------------------
interest in capital or asset of other company either partially or fully.
----------------------
Self-Assessment Questions ----------------------
1. What are the characteristics of a company? ----------------------

2. Explain the meaning of corporate structure. ----------------------
Notes 3. Discuss the need for corporate restructuring.
4. Write short notes on:
----------------------
i. Merger
----------------------
ii. Takeover
----------------------
5. What do you mean by demerger?
---------------------- 6. Why is restructuring important in modern business?
---------------------- 7. Recently corporate in India witnessed an increase in restructuring in
different organisations. Give reasons for the same.
----------------------
---------------------- Answers to Check your Progress

Fill in the blanks.
----------------------
1. Anyone who is capable of having rights and liabilities is a person.
----------------------
2. Companies are artificial legal entities with perpetual succession and
---------------------- flexibility to change its structure.
---------------------- 3. A company registered under the Companies Act, 2013 has separation of
ownership and control.
----------------------
Check your Progress 2
---------------------- State True or False.
---------------------- 1. False
---------------------- 2. True
3. False
----------------------
----------------------
Match the following.
---------------------- i. – c.
---------------------- ii. – d.
---------------------- iii. – e.
iv. – a.
----------------------
v. – b.
----------------------
---------------------- Suggested Reading

---------------------- 1. Santhosh Kumar A.V. and Dinesh N. 2013. “Corporate Restructuring
in India with Special Reference to Reliance Industries Limited (RIL):
---------------------- Indian Journal of Research. Available at: http://theglobaljournals.com/
---------------------- paripex/file.php?val=MTIxMQ==

Various Types of Corporate Restructuring
UNIT
2
Structure:
2.1 Introduction
2.2 Types of Corporate Restructuring
2.3 Types of Merger
2.4 Amalgamation
2.5 Compromise and Arrangement
2.6 Reverse Merger and Demerger
2.7 Acquisition or Takeover
2.8 Joint Venture
2.9 Strategic Alliances
Summary
Key Words
Answers to Check Your Progress
Suggested Reading
Various Types of Corporate Restructuring 11

Notes
Objectives
----------------------
----------------------
• Define various terms of corporate restructure
----------------------
• Explain the meaning of mergers and acquisitions
---------------------- • Analyse why restructuring is important in modern economy
---------------------- • Determine how restructuring can be done
---------------------- • Evaluate the significance of various terms of restructuring
----------------------
---------------------- 2.1 INTRODUCTION

---------------------- Corporate restructuring is crucial for the survival of a company in the
competitive environment. Corporate restructuring takes place due to various
---------------------- reasons. Corporate restructuring could be broadly divided into capital
---------------------- restructuring and business restructuring. There is no single way of reorganising
and restructuring a company, e.g., business restructuring in the form of merger
---------------------- or amalgamation, takeover, joint venture, capital re-organisation, etc.
---------------------- It is important to understand in detail the methods and types of restructuring

to design the appropriate strategy to achieve the ultimate purpose of corporate
---------------------- restructuring. Also, legal compliance and procedural compliance is required to
be done in timely manner. The procedures may vary. It is essential to understand
---------------------- all types and methods in detail.
----------------------
2.2 TYPES OF CORPORATE RESTRUCTURING
----------------------
The ordinary meaning of the word restructure is “to organise differently;
---------------------- to categorise a company or a business or a system in a new way so that it may
---------------------- operate more efficiently and effectively, to organise some system or a company
in a new and different way; to provide a new configuration or organisation for
---------------------- a company or business”. The expression “corporate restructuring”, therefore,
implies reorganising a company or its financial structure or its business or
---------------------- management in such a way as to enable it to operate more efficiently and
---------------------- effectively.
Corporate restructuring is not a legal term and therefore it has no specific
---------------------- meaning nor can it be defined with precision. Corporate restructuring means to
---------------------- denote any process, method or a course of action to make changes and it is a
general business term and is used in certain respects or in the overall business
---------------------- or organisation of a company. In today’s fast changing competitive business
surroundings, corporate restructuring has become a widespread trend in the
---------------------- industry. To reorient business, a number of changes are taking place on a large
---------------------- scale with a view to making the business more competitive and focused.

Corporate restructuring means rearranging the company’s business for Notes
synergy and increasing its efficiency and profitability. It is the fundamental
change in a company’s business or financial structure with the motive of ----------------------
increasing the company’s value to shareholders or creditors. Corporate
restructuring is a widespread progression by which a company can strengthen ----------------------
its business operations and strengthen its position for achieving its short-term ----------------------
and long-term corporate objectives.
----------------------
Restructuring is a method of changing the organisational structure in order
to achieve the strategic goals of the organisation. Corporate restructuring is a ----------------------
wide expression and it includes various kinds of tools. Thus, it is the purpose
or objective of the organisation, which will determine the method to be used in ----------------------
corporate restructuring.
----------------------
Corporate restructuring can be broadly divided into capital restructuring
and business restructuring and subdivided into various types, such as: ----------------------
●● usiness restructuring in the form of merger or amalgamation.
B ----------------------
●● Business restructuring in the form of demerger.
----------------------
●● Acquisition or takeover of new business either partly or fully.
●● estructuring as part of capital restructuring or debt restructuring
R ----------------------
(financial restructuring). ----------------------
●● estructuring as part of compromise or rearrangement with members or
R
creditors. ----------------------
●● Entering into joint venture or technical collaboration. ----------------------
●● ell-offs or divestitures or slump sale, which involves the sale of a unit or
S
----------------------
segment to a third party.
●● pin-offs, meaning the shares of the company are distributed at subsidised
S ----------------------
rate to shareholders.
----------------------
●● plit-ups: This results in the formation of two or more companies from
S
the parent company. ----------------------
●● quity carve-outs: Shares of a subsidiary firm are sold in order to generate
E ----------------------
capital and thereby not losing ownership of parent company.
●● Franchising or licensing. ----------------------
All these types of corporate restructuring is just a tool or a medium to ----------------------
facilitate the corporate to restructure them for matching the business necessities
with internal capability, for having strategic balanced portfolio for sustaining ----------------------
the global competitiveness, for developing core competencies. ----------------------

----------------------
----------------------
----------------------
----------------------

Notes
----------------------
Multiple Choice Single Response.
----------------------
1. The shares of the company are distributed at subsidised rate to
---------------------- shareholders in:
i. Merger
----------------------
ii. Amalgamation
---------------------- iii. Split-up
---------------------- iv. Spin-off
2. Shares of subsidiary firm are sold in order to generate capital and
---------------------- thereby not losing ownership of parent company in:
---------------------- i. Franchising
ii. Licensing
---------------------- iii. Carve-out
---------------------- iv. Sell-off
3. The sale of a unit or segment to a third party means:
----------------------
i. Acquisition
---------------------- ii. Compromise
---------------------- iii. Split-up
iv. Sell-off
----------------------
4. The formation of two or more companies from the parent company is
---------------------- known as:
i. Business restructuring
----------------------
ii. Demerger
---------------------- iii. Split-up
iv. Joint venture
----------------------
----------------------
2.3 TYPES OF MERGER
----------------------
The term “Merger” is not defined in the Companies Act, 2013. A merger
---------------------- as such is the blend or absorption of one thing into another. A merger is an
arrangement whereby the assets as well as the liabilities of the merged company
----------------------
comes under the control of one company which may or may not be one of the
---------------------- original two companies. Merger is a combination of two or more companies
into one single company, where one survives and the others lose their corporate
---------------------- existence. All assets, liabilities of one company are transferred to a transferee
(may or may not be new) company. Such transfer takes place for a consideration
----------------------
in the form of equity, debt or cash or any combination of these.
---------------------- For purposes of Act, the terms “Merger” and “Amalgamation” are
synonymous since it is a part of an arrangement. Merger means the fusion or
----------------------
absorption of one company by another company, either an existing company or
a new company. The transferee company acquiring assets, liabilities, sometime Notes
retain its own name and the absorbed company or transferor company cease to
exist. In other words, merger is an arrangement where the assets and liabilities ----------------------
of two or more companies are brought under the control of one company and
shareholders get the vested rights proportionately as per the agreed terms or as ----------------------
per the scheme of the merger. ----------------------
Merger may be absorption or amalgamation of two or more than two
----------------------
companies. In the above instance, after merger, the transferor company will
cease to exist and the transferee company will take over and absorb the assets, ----------------------
liabilities and business of the transferor company within itself.
----------------------
In the process of merger, any one of the two or more than two existing
companies merges its identity into another existing company or one of more ----------------------
existing companies may form a new company and merge their identities into the
newly formed company by transferring all other assets and liabilities and also ----------------------
their business and undertakings to the new company. This company is called
----------------------
the merged company or transferee company. The shareholders of the company
whose identity has been merged, i.e., merging company or transferor company ----------------------
get substantial shareholding in the merged company.
----------------------
In the process of merger, the shareholders of transferor company or
merging company get allotted shares in the merged company in exchange ----------------------
according to the share exchange ratio decided in the scheme of merger as
approved by majority of the shareholders of both the companies in their general ----------------------
meetings and also sanctioned by the tribunal.
----------------------
A merger or amalgamation may be effected through various methods
like merger under a scheme of compromise or arrangement as per Companies ----------------------
Act, 2013, merger in public interest through orders of the Central Government, ----------------------
merger by purchase of shares of one company by another, merger for revival
and rehabilitation, reverse merger, etc. ----------------------
Merger is a means which can be used by companies for the purpose of ----------------------
expanding their operations and increase their long-term profitability. Mergers
can be of three types. ----------------------
a) Horizontal mergers: Horizontal mergers involve joining or combining ----------------------
together of two or more companies, which are producing fundamentally
the same products or similar services and directly competing with ----------------------
each other in the market. A horizontal merger is when, two companies
competing with each other to merge or join and reduce the competition in ----------------------
the market. ----------------------
Horizontal merger reduces the competition in the market and results in the
----------------------
diminution in the number of contending companies. It gives the benefits
of economy of scale. However, this may be a threat to the competitiveness ----------------------
and sometimes create monopolistic situation. Hence, in some countries
horizontal merger is closely watched and should go through approval ----------------------
process if required.
----------------------

Notes b) Vertical mergers: Vertical merger takes forward or backward integration.
Vertical mergers occur between firms, which match with each other. A
----------------------
merger between two companies producing different goods or services for
---------------------- one specific finished product, e.g., one of the companies is engaged in the
manufacture of a product and the other is expert and established in the
---------------------- marketing of the product, these businesses are at different level of value
chain and may complement each other. An example of a vertical merger
----------------------
is a car manufacturer purchasing a tyre company. Vertical mergers can be
---------------------- in the form of forward integration or backward integration of business.
c) Conglomerate merger: This type of merger involves mergers of
----------------------
corporate engaged in different industries and/or services of business
---------------------- activities, which are neither horizontally nor vertically related to each
other. Conglomerate merger achieves risk diversion, product extension,
---------------------- entry into unrelated yet profitable businesses, e.g., most big business
houses such as Reliance Group, Tata, Aditya Birla Group, etc. undertake
----------------------
such mergers to expand their business.
----------------------
----------------------
----------------------
i. Horizontal merger a. Forward or backward integration
---------------------- ii. Vertical merger b. Risk diversion
---------------------- iii. Conglomerate merger c. Same product or similar services
----------------------
2.4 AMALGAMATION
----------------------
The word “amalgamation” has no specific legal meaning. It is a part of
----------------------
merger under which two or more than two companies are joined together to form
---------------------- a third entity, or one company is absorbed into another company. Amalgamation
is a blending of two or more existing undertakings into one undertaking, the
---------------------- shareholders of each blending company becoming substantially the shareholders
in the company which is to carry on the blended undertakings.
----------------------
The term “amalgamation” has not been defined under the Companies
---------------------- Act. Amalgamation is an understanding by which two or more companies
through legal process join together to form a new company. In the process of
----------------------
amalgamation, a new company may come into existence or an old company
---------------------- may survive while amalgamated company may lose its existence.
---------------------- Two companies can amalgamate in either of the two ways. Suppose
there were previously two companies, X and Y. Company X can sell its assets,
---------------------- liabilities, business to Company Y and in consideration, Company X will receive
shares in Company Y. Company X then goes into liquidation and distributes the
---------------------- shares of Company Y amongst its shareholders. Company X has now merged
---------------------- in Y so, now one company is carrying the business of two companies and
shareholders are blended together into one company.
Another way is to form a new company rather than blending the business Notes
into old company. Suppose, there were previously two companies, X and Y. Now
a third company, a new company is formed, Company Z, and both the companies ----------------------
X and Y sell their assets and liabilities and also business and undertakings
to Company Z. In consideration for that, the shareholder of company X and ----------------------
Y get the shares in Company Z in proportion of agreed exchange ratio. The ----------------------
shares are then distributed amongst the shareholders by means of liquidation,
and Companies X and Y cease to exist and a new Company Z takes over the ----------------------
business of both the companies. Company X and Y have now merged in a new
Company, i.e., Z. ----------------------
In other words, in a scheme of amalgamation as per the Companies Act, ----------------------

the existence of the transferor company comes to an end and become a part of
----------------------
the transferee company. The shareholders of the transferor company are allotted
shares in the transferee company as per the agreed exchange ratio. ----------------------
In amalgamation, two or more existing companies merge or form a new
----------------------
company keeping in view their long-term business interest. The transferor
companies lose their existence and their shareholders become the shareholders ----------------------
of the new company. Thus, amalgamation is a legal process by which two
or more companies are joined together to form a new entity or one or more ----------------------
companies are joined together to form a new entity or one or more companies
----------------------
are absorbed or blended with another and as a consequence the amalgamating
company loses its existence and its shareholders become the shareholders of the ----------------------
new or amalgamated company.
----------------------
The term “amalgamation” has been defined under Section 2(lB) of the
Income Tax Act, 1961. It has stipulated the conditions that all the assets, property ----------------------
and liabilities of the amalgamating companies should become the property of
the amalgamated company; shareholders holding not less than 75% in value or ----------------------
voting power in the amalgamating company should become the shareholders of
----------------------
the amalgamated company. The above definition has been derived from Income
Tax Act, 1961 as amended by Finance Act No.2 of 2009. ----------------------
As per the Accounting Standard AS-14 notification as per Companies ----------------------
(Accounting Standards) Rules, 2006, the term amalgamation means an
amalgamation pursuant to the provisions of the Companies Act or any other ----------------------
statute which may be applicable to companies. In AS-14, two methods of
amalgamation are contemplated: (1) amalgamation in the nature of merger, and ----------------------
(2) amalgamation in the nature of purchase. ----------------------
1) Amalgamation in the nature of merger: Amalgamation in the nature of
merger is an amalgamation which satisfies all the following conditions: ----------------------
a) All the assets and liabilities of the transferor company become, after ----------------------
amalgamation, the assets and liabilities of the transferee company.
----------------------
b) Shareholders holding not less than 90% of the face value of the
equity shares of the transferor company (other than the equity ----------------------
shares already held therein, immediately before the amalgamation,
----------------------

Notes by the transferee company or its subsidiaries or their nominees)
become equity shareholders of the transferee company by virtue of
---------------------- the amalgamation.
---------------------- c) The consideration for the amalgamation receivable by those equity

shareholders of the transferor company who agree to become
---------------------- equity shareholders of the transferee company is discharged by
the transferee company wholly by the issue of equity shares in the
---------------------- transferee company, except that cash may be paid in respect of any
fractional shares.
----------------------
d) The business of the transferor company is intended to be carried on,
---------------------- after the amalgamation, by the transferee company.
---------------------- e) No adjustment is intended to be made to the book values of the
assets and liabilities of the transferor company when they are
---------------------- incorporated in the financial statements of the transferee company
except to ensure uniformity of accounting policies.
----------------------
2) Amalgamation in the nature of purchase: Amalgamation in the nature
---------------------- of purchase is an amalgamation which does not satisfy anyone or more of
the conditions specified in (l) above.
----------------------
---------------------- 2.5 COMPROMISE AND ARRANGEMENT

---------------------- The term “compromise” signifies a dispute between a company and its
creditors and others. Compromise presumes the existence of a dispute which it
---------------------- seeks to settle through the mechanism provided in the Companies Act, whereas,
---------------------- the term “arrangement” is of great importance and includes reorganisation of
share capital and may also mean modification of the rights. Section 230 of
---------------------- the Companies Act provides method by which a compromise agreed to by the
company may be placed before the Tribunal for sanction.
----------------------
Though the term “arrangement” has been defined in Section 230, the term
---------------------- “compromise” has not been defined in the Companies Act. Hence, we need to
look for the general meaning of this term. “Compromise” implies existence of a
---------------------- dispute which needs to be resolved through a give and take action by the parties
concerned.
----------------------
An arrangement could exist whether there is a dispute or not. Generally
---------------------- an arrangement would be there where there is no dispute, whereas compromise
takes place in case dispute exists between the parties. Compromise has been
----------------------
described as an agreement terminating a dispute between parties.
---------------------- Arrangement is defined to include reorganisation of the share capital of
the company. It may also mean modification of the rights.
----------------------
Sections 230 and 231 deal with consolidation of shares of different classes
---------------------- inter alia the rights of members holding different classes of shares. Since it is
dealing with arrangement or rearrangement of members’ rights, the Tribunal’s
----------------------
approval according to the provisions of Companies Act is required.
----------------------

Thus, the term “arrangement” will mean the reorganisation of the share Notes
capital by the consolidation of shares of different classes, or by the division
of shares into shares of different classes or by both these methods, but also ----------------------
any other arrangement between the members and/or creditors in relation to the
reorganisation of the company. ----------------------
----------------------
----------------------
1. ___________ is an understanding by which two or more companies
join together to form a new company through legal process. ----------------------
2. __________ presumes the existence of a dispute, which it seeks to ----------------------

settle through the mechanism provided in the Companies Act.
----------------------
3. Arrangement is defined to include reorganisation of the __________
of the company and also modification of the rights. ----------------------
----------------------
2.6 REVERSE MERGER AND DEMERGER
----------------------
When a healthy company or superior company amalgamates with an
----------------------
inferior company or financially weak company, it is called reverse merger. There
is no difference between regular merger and reverse merger in the context of the ----------------------
Companies Act. Sometimes, reverse merger takes place when a profit-making
company merges with a loss-making company or a listed company merges ----------------------
into an unlisted company, etc. Reverse merger takes place for the benefit of
----------------------
carry forward and set-off of loss and unabsorbed depreciation of the transferee
company. ----------------------
Disintegration or separation of two or more companies results into
----------------------
a demerged company. Demerger is an opposite of merger. Mostly demerger
takes place for the separation of a large company into two or more smaller ----------------------
companies. Demerger means separation of different undertakings of a business
functioning under a common umbrella of the corporate. Demerger is simply a ----------------------
corporate partition of a company’s undertakings, whereby the undertaking of
----------------------
the company separates into the resulting company. Then the resulting company
created out of such partition issues its own shares at the agreed exchange ratio to ----------------------
the shareholders of the existing company or demerged company. The demerger
of the Reliance Group is by far the biggest corporate restructure story in the ----------------------
private sector. In India, more often, demerger of company resulted because of
----------------------
partition of company or separation of business into different groups.
As per Section 2(l9AA) of the Income Tax Act, the term “demerger” ----------------------
means a process of reorganising a corporate structure whereby the capital stock
----------------------
of a division or subsidiary of a corporation or of a newly affiliated company is
transferred to the stockholders of the parent corporation without an exchange of ----------------------
any part of the stock of the latter.
----------------------

Notes The provisions under Chapter XV on compromise, arrangements and
amalgamations also define the term ‘demerger’. The definition of demerger
---------------------- has been retained to be synonymous with the definition under the Income-tax
provisions.
----------------------
There is a specific mention of “division” (i.e. demergers) in section 232 dealing
---------------------- with mergers/amalgamations.
---------------------- Demerger is used also to describe the process of “spin-off” or “hiving off” of a
unit or division. Sometimes demerger takes the shape of:
----------------------
●● ivestitures: Divestitures are the sale of a segment or a sector of a
D
---------------------- company for consideration in the form of cash or for securities to an
---------------------- outside party.
●● pin-off: Spin-off is a form of demerger where the holding company
S
---------------------- distributes all the shares it owns in a subsidiary company to its shareholders
---------------------- on a pro rata basis. Through spin-off, both the holding company as well as
the subsidiary company shall exist and carry their operation or business.
---------------------- So, in spin-off the distribution is made to shareholders of parent company
as a dividend in non-cash form.
----------------------
●● Equity carve-out: In the process of equity carve-out, the minority part
---------------------- of shareholding of subsidiary company is sold out to the public through
---------------------- the process of offer for sale and simultaneously the holding or parent
company continues to control over the subsidiary company through its
---------------------- controlling interest.
---------------------- ●● plit-off: In split-off, the shareholders of the holding company get the
S
shares in subsidiary company proportionate to their shares in the holding
---------------------- company.
---------------------- ●● plit-up: Split-up is a process of division of a company into two or more
S
parts through transfer. A process of reorganising a company’s arrangement
---------------------- whereby all the capital stock including assets are exchanged for those of
two or more newly established companies, resulting in the liquidation of
----------------------
the parent corporation.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
Multiple Choice Multiple Response.
----------------------
1. Which of the following can amalgamate to cause reverse merger?
i. Superior company ----------------------
ii. Inferior company ----------------------
iii. Transferor company
iv. Transferee company ----------------------
2. Which of the following can cause demerger? ----------------------
i. Disintegration
----------------------
ii. Separation
iii. Compromise ----------------------
iv. Arrangement ----------------------
3. Spin-off is:
i. A form of demerger ----------------------
ii. Distribution of all shares ----------------------
iii. Capital stock
----------------------
iv. A dividend in non-cash form
----------------------
2.7 ACQUISITION OR TAKEOVER ----------------------
In order to assume control of the target firm, acquisitions took place. ----------------------
Acquisition is a corporate action in which a company buys some or most or
----------------------
all stakes of the target company. Broadly, a takeover refers to acquisition of
one company by another company. Acquisitions are often made as part of a ----------------------
company’s growth strategy, whereby compared to expanding on its own, it is
more beneficial to take over or acquire an existing company’s operations or ----------------------
market share by acquiring the controlling stake.
----------------------
To invest into the shares of another company, such power is generally
governed by the company’s memorandum of association subject to certain ----------------------
provision of the Companies Act, 2013, which placed certain restrictions on ----------------------
inter-corporate investment. The Companies Act, 2013 provides the power of a
company to acquire or purchase the shares of other company under Section 186 ----------------------
referred to as inter-corporate investment. Section 186 of the Companies Act,
2013 deals with inter-corporate loan, investment, guarantee and securities in ----------------------
connection with loan. The target company could be either a public or a private ----------------------
limited company.
An acquisition is the buying of the target company by the acquirer. ----------------------
Generally, the purpose of acquisition is to get the control rather than simply the ----------------------
investment. An acquisition may be friendly or hostile.
----------------------

Notes When the target company cooperates in negotiations, it becomes friendly
takeover and where the target company is unwilling or is bought without
---------------------- prior information or knowledge to the target, it is an open market buyout to
consolidate and acquire large share from the open market.
----------------------
The Securities Exchange Board of India has issued a Takeover Code,
---------------------- which deals with the regulations and laws relating to takeover and substantial
acquisition of shares or control of a listed company or unlisted company, which
----------------------
is a subsidiary of a listed company.
---------------------- Types of Takeover
---------------------- a) Hostile takeover: Where the target company is unwilling or is bought
without prior information or knowledge, it is called hostile takeover. It
---------------------- is a takeover where one company unilaterally pursues the acquisition of
ownership of shares of another company without informing the other
----------------------
company. The most dominant purpose is to increase the market share
---------------------- through hostile takeover. The hostile takeover should follow the provisions
of SEBI (Substantial Acquisition of Shares and Takeover) Regulations,
---------------------- 2011.
---------------------- b) Friendly takeover: Through the process of negotiations, friendly
takeovers get affected. Takeover of one company, i.e., Target Company,
---------------------- happens after negotiations between the companies, which lead to change
---------------------- in its management and control in a friendly manner. It is also called
Negotiated Takeover. Friendly takeover takes place as per the provisions
---------------------- of Section 235 of the Companies Act, 2013. In a friendly takeover, it is
possible that the board of directors of the transferor company would seek
---------------------- the approval of the shareholders. In such cases, there could be certain
---------------------- shareholders who may disagree with the terms of offer by the transferee
company. Such shareholders are referred to as dissentient shareholders.
---------------------- c) Bailout takeover: Takeover of a financially sick company by a financially
---------------------- rich company takes place to bailout the sick company from ongoing
losses.
---------------------- An acquirer may also acquire a target by other contractual means without
---------------------- the acquisition of shares, such as agreements providing the acquirer the voting
rights or board rights. It is also possible for an acquirer to acquire a greater
---------------------- degree of control in the target than what would be associated with the acquirer’s
stake in the target, e.g., the acquirer may hold 26% of the shares of the target
---------------------- but may enjoy disproportionate voting rights, management rights or veto rights
---------------------- in the target.
---------------------- 2.8 JOINT VENTURE

---------------------- Joint venture is an arrangement to form an entity between two or more
---------------------- parties to undertake economic activity together with the limited or defined scope
and time to undertake economic activity together. The term joint venture has
---------------------- not been defined under the Companies Act, 2013, but the Accounting Standards
-27 explains the concept of a joint venture in a limited scope.
Joint venture is an arrangement of coming together with the intention to Notes
co-operate with each other to carry on a business on the agreed terms and scope.
The joint venture agreement could be an oral arrangement or written agreement. ----------------------
It doesn’t make any difference.
----------------------
Joint venture between the parties come into existence when two parties
agree to create a new entity whereby both contribute equity or assets or any ----------------------
form of contribution and share the revenues, expenses and control of the
----------------------
enterprise jointly. The joint venture can be defined or created for one specific
project, product, market, etc. or it may be a continuous business relationship ----------------------
as well, for example, ‘Sony Ericsson Joint Venture’. It is much more than a
strategic alliance, which involves no equity stake by both the participants in ----------------------
joint venture or all the parties contribute their part of share in any format and
share the revenue or profit together. ----------------------
Traditionally, joint venture envisages an agreement for the transfer of ----------------------

technology. But, nowadays, joint venture is a more popular way of restructuring
the business and involves all the benefits of merger and amalgamation without ----------------------
losing any control over management and ownership. ----------------------
Similarly, various reasons for joint venture are:
----------------------
●● o acquire modern technology, technical skill, knowledge, gain financial
T
strength. ----------------------
●● o gain access to intellectual property, such as knowhow, trademark, trade
T
----------------------
name, for product outsourcing or business process outsourcing without
losing profit, acquire management skills for marketing products from ----------------------
another entity that possess such skills but has no presence in the market,
etc. ----------------------
----------------------
2.9 STRATEGIC ALLIANCES
----------------------
Strategic alliance is less involved than a joint venture. Strategic alliance is
an arrangement between two companies who decided to share their resources in ----------------------
a specific project. A strategic alliance does not involve any equity stake by the
participants. ----------------------
Franchising ----------------------
Franchising is a system of marketing of goods or services based on ----------------------
collaboration between two independent entities, which are legally and financially
separate from each other. It works on management support systems of another ----------------------
person by charging a franchisee fee.
----------------------
When franchising finance, the growth of business through it allows the
shareholders to maintain more equity within the firm and going forward, they ----------------------
can run the business and capitalise on the opportunities when they arise.
----------------------
For exploiting the assets of the franchisor, the franchisee may be required
to pay various fees and commission to the franchisor such as an initial fee, ----------------------
ongoing management fees, fees or commission based on the percentage of the ----------------------
turnover of the business.

Notes Franchise agreements usually set out how the franchised business should
be run, although they may allow some flexibility. Franchisers usually provide
---------------------- management help and training to franchisees.
---------------------- Slump sale
Slump sale means the transfer of one or more undertakings as a result
----------------------
of the sale for a lump sum consideration without values being assigned to the
---------------------- individual assets and liabilities in such sale.
Buyback of shares
----------------------
The buying back of outstanding shares (repurchase) by a company is done
---------------------- in order to reduce the number of shares in the market. Companies buy back
---------------------- shares either to increase the value of shares still available (reducing supply), or
to eliminate any threats by shareholders who may be looking for a controlling
---------------------- stake. A buyback is a method for a company to invest in itself since they can’t
own themselves. Thus, buybacks reduce the number of shares outstanding in
---------------------- the market which increases the proportion of shares the company owns.
----------------------
----------------------
State True or False.
----------------------
1. An acquisition is the buying of the target company by the acquirer.
----------------------
2. Franchising is not a system of marketing of goods or services, based
---------------------- on collaboration between two independent entities which are legally
and financially separate for each other.
----------------------
3. The buying back of outstanding shares by a company in order
---------------------- increases the number of shares in the market.
---------------------- 4. Joint venture between the parties comes into existence when two
parties agree to create a new entity.
----------------------
----------------------
Activity 1
----------------------
Give a recent example of horizontal and vertical merger in India.
----------------------
---------------------- Summary
----------------------
●● here is no single way of reorganising and restructuring a company.
T
---------------------- There are various types of corporate restructuring such as mergers or
amalgamation, takeover, joint venture, capital re-organisation, etc.
----------------------
●● orporate restructuring takes place due to various reasons as a part
C
---------------------- of growth plans, synergising operations, for more competitiveness,
diversification etc.
----------------------

●● orporate restructuring could be broadly divided into capital restructuring
C Notes
and business restructuring.
●● erger is a combination of two or more companies into one single
M ----------------------
company. Demerger means dividing a large company into two or more ----------------------
smaller companies.
●● akeover refers to acquisition of one company by another. Company
T ----------------------
acquisitions are often made as part of a company’s growth strategy ----------------------
whereby compared to expanding on its own, it is more beneficial to
takeover or acquire an existing company’s operations or market share by ----------------------
acquiring the controlling stake.
----------------------
●● J oint venture is an arrangement of coming together with the intention to
cooperates with each other to carry on a business on the agreed terms ----------------------
and scope. Various types of restructuring of corporate business ultimately
achieve the desired goals. ----------------------
----------------------
Keywords
----------------------
●● J oint venture: An arrangement of coming together with the intention to
co-operate with each other to carry on a business on the agreed terms and ----------------------
scope. ----------------------
●● pin-off: A form of demerger where the holding company distributes all
S
the shares it owns in a subsidiary company to its shareholders on a pro ----------------------
rata basis. ----------------------
●● lump sale: Transfer of one or more undertakings as a result of the
S
sale for a lump sum consideration without values being assigned to the ----------------------
individual assets and liabilities in such sale.
----------------------
1. Explain the various types of corporate restructuring. ----------------------
2. Restructuring is a method of changing the organisational structure. ----------------------

Explain.
----------------------
3. Explain friendly takeover and hostile takeover.
----------------------
4. Explain the term ‘joint venture’. Why is joint venture popular?
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes Answers to Check your Progress
---------------------- Multiple Choice Single Response.
---------------------- 1. The shares of the company are distributed at subsidised rate to shareholders
in:
---------------------- iv. Spin-off
---------------------- 2. Shares of subsidiary firm are sold in order to generate capital and thereby
not losing ownership of parent company in:
----------------------
iii. Carve-out
----------------------
3. The sale of a unit or segment to a third party means:
---------------------- iv. Sell-off
---------------------- 4. The formation of two or more companies from the parent company is
known as:
----------------------
iii. Split-up
----------------------
---------------------- i. − c.
---------------------- ii. − a.
iii. − b.
----------------------
----------------------
Fill in the blanks.
---------------------- 1. Amalgamation is an understanding by which two or more companies join
together to form a new company through legal process.
----------------------
2. Compromise presumes the existence of a dispute, which it seeks to settle
---------------------- through the mechanism provided in the Companies Act.
---------------------- 3. Arrangement is defined to include reorganisation of the share capital of
the company and also modification of the rights.
----------------------
----------------------
---------------------- 1. Which of the following can amalgamate to cause reverse merger?
---------------------- i. Superior company
---------------------- ii. Inferior company
----------------------
----------------------

2. Which of the following can cause demerger? Notes
i. Disintegration ----------------------
ii. Separation
----------------------
3. Spin-off is:
----------------------
i. A form of demerger
ii. Distribution of all shares ----------------------
1. True
----------------------
2. False
----------------------
3. False
4. True ----------------------
----------------------
Suggested Reading
----------------------
1. Kirti Diddi Pandey and Jalaj Goantiya. 2012. “Corporate Restructuring
----------------------
in India with Special Reference to Strategic Intervention.” International
Conference on Technology and Business Management. Available at: ----------------------
http://www.icmis.net/ictbm/ictbm12/ICTBM12CD/pdf/D2139-done.pdf
----------------------
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----------------------

Notes
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Mergers and Amalgamations
UNIT
3
Structure:
3.1 Introduction
3.2 Primary Steps in Mergers and Amalgamations and Pre-Merger Activities
3.3 Procedural Requirements of Mergers and Amalgamations
3.4 Provisions of Companies Act, 2013 and its Procedures
3.5 Preparation of Scheme of Amalgamation/Memorandum of Understanding
3.6 Transfer of Undertaking by Order of Tribunal
3.7 Approvals in Schemes of Amalgamation
3.8 Application to Tribunal and related Procedure
3.9 Power and Duty to acquire Shares of Shareholders dissenting from Scheme
3.10 Amalgamation of Companies in National Interest
3.11 Reverse Merger
Summary
Key Words
Suggested Reading
Mergers and Amalgamations 29

Notes
Objectives
----------------------
----------------------
• Explain the basic concept of merger and amalgamation
----------------------
• List the primary steps in mergers and amalgamations
---------------------- • Examine various legal and commercial aspects of mergers or
amalgamation
----------------------
• List the various approvals in schemes of amalgamation
----------------------
• Assess the role of the tribunal in the process of merger or amalgamation
----------------------
---------------------- 3.1 INTRODUCTION

---------------------- Restructuring is a method of changing the organisational structure in order
---------------------- to achieve the strategic goals of the organisation. With respect to the present
business environment, the potential companies are to be identified carefully
---------------------- and through merger and amalgamation such potential companies should be
strategically utilised for achieving growth of the organisation. Merger and
---------------------- Acquisition (M&A) is the marriage between the companies. The process of
---------------------- identification of the potential partner, negotiation, screening and valuation is
as important as the legal process of merger and acquisition. Once the merger
---------------------- partner has been identified and terms of merger are settled, the procedure of the
M&A starts specifically to comply with the laws, regulations and the provisions
---------------------- of the Act. Before that, the preliminary steps of screening and searching of
---------------------- partner is to be done very carefully. In merger and amalgamation, preliminary
working has potential implication as it is strategically important for the future
---------------------- growth and it has a long- term impact.
----------------------
3.2 PRIMARY STEPS IN MERGERS AND
---------------------- AMALGAMATIONS AND PRE-MERGER ACTIVITIES
---------------------- Merger: Meaning
---------------------- A merger is an arrangement whereby the assets as well as the liabilities
of the merged company comes under the control of one company which may or
---------------------- may not be one of the original two companies.
---------------------- Merger may be absorption or amalgamation of two or more than two
companies. In the above instance, after merger, the transferor company will
---------------------- cease to exist and the transferee company will takes over and absorb the assets,
liabilities and business of the transferor company within itself.
----------------------
The three important steps involved in the analysis of mergers and
---------------------- acquisitions are as follows:
----------------------

●● Planning and analysis of industry-specific and firm-specific information Notes
●● Search and screening of suitable partner
----------------------
●● inancial evaluation of a merger on the basis of financial parameters such
F
as the earnings and cash flows, areas of risk, maximisation of value ----------------------
Potential companies are carefully looked at with respect to the competitive
----------------------
environment in which they operate. The very important steps are screening
the right company for M &A. This should proceed in a very methodical way. ----------------------
Once the merger partner has been identified and terms of merger are settled,
the procedure of the merger and acquisition starts specifically to comply with ----------------------
the laws regulations and the provisions of the Act. The preliminary steps are as
----------------------
follows:
1. Searching for a merger partner: Merger and acquisition is the marriage ----------------------
between the companies. An essential factor for successful merger is finding
----------------------
or searching for an appropriate partner. To search for merger partner is
completely a strategic process. In this process, the top management may ----------------------
use their own contacts or sometimes the competitor itself is selected
as merger partner to take the benefits of expanding the market for the ----------------------
company in the same line of economic activity or in the other diversified
----------------------
field. In some cases, help of outside agency or consultant may be used.
The contacts of merchant bankers, financial consultants are helpful in ----------------------
locating suitable merger partners.
----------------------
In the process of screening, number of corporate may be shortlisted
and identified on the basis of due diligence process or through strategic ----------------------
choice. Various information may be needed to find an appropriate merger
partner, such as history of business, organisational setup and management ----------------------
pattern, details of the promoters, capital structure, product, market and
competitors’ analysis, asset details like tangible and intangible assets and ----------------------
manpower like skilled, unskilled, technical personnel. ----------------------
2. Identifying the potential of company or industry: The process of
screening and selecting the right companies for mergers and amalgamations ----------------------
should be more specific by identifying the general domains of potential ----------------------
industries. Potential companies are carefully looked at and screened. The
top management may use their own contacts with competitors in the same ----------------------
line of economic activity or in the other diversified field which could be
identified as better merger partners. ----------------------
3. Suitability: Once the proposal fits into the strategic motive, then suitability ----------------------
is to be judged. During this process, three criteria should be taken care
of, i.e., suitability of the business, financial strength and management ----------------------
competency. Look into the details like the competitive environment in ----------------------
which they function and operate.
4. Cost and returns: Comparative cost and returns with respect to their ----------------------
return on investments and expected future returns should be compared ----------------------
with object of minimisation of profit and maximisation of wealth of
shareholders. ----------------------

Notes 5. Gathering detailed information: A number of corporate may be
shortlisted and identified. The next step is gathering detailed information
---------------------- of the shortlisted and identified partner, such as organisational history,
promoters’ detail, capital structure, organisational setup, product, market
---------------------- and competitors, details of movable and immovable assets.
---------------------- 6. SWOT analysis: It is necessary to consider not only the benefits that can
be obtained but also the risks. The risks and uncertainties are incorporated
----------------------
to determine the possible variations in returns. SWOT analysis of both
---------------------- the companies is carried out. It is a structured planning method used to
evaluate the Strengths, Weaknesses, Opportunities and Threats involved
---------------------- in a project or in a business venture.
---------------------- A SWOT analysis can be carried out for a product, place, industry or
person. It involves specifying the objective of the business venture or
---------------------- project and identifying the internal and external factors that are favourable
and unfavourable to achieving that objective.
----------------------
7. Negotiation: Negotiation is the most important phase in M&A. The
---------------------- companies which are better in negotiation get more benefits of M&A. The
exchange ratio is an important factor in the process of M&A. Negotiations
----------------------
can be had with target companies before making any acquisition. Valuation
---------------------- should be carefully done by the experts to negotiate properly.
----------------------
----------------------
----------------------
i. Negotiation a. Financial and management
---------------------- competency
ii. SWOT analysis b. Organisational history
---------------------- iii. Gathering detailed information c. Object of minimisation of
profit
----------------------
iv. Cost and returns d. Important phase in M&A
---------------------- v. Suitability e. Determination of risk
----------------------
3.3 PROCEDURAL REQUIREMENTS OF MERGERS AND
----------------------
AMALGAMATIONS
----------------------
Procedure for merger and amalgamation is different from takeover.
---------------------- The Companies Act, 2013 regulates mergers and amalgamations while SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997 now with
---------------------- new amendments available in SEBI Regulations 2013 regulates the acquisitions
or takeovers. The Companies Act, 2013 has regulated a set of provisions for
----------------------
dealing with amalgamation of the companies. The legal requirements relating
---------------------- to merger and amalgamations are contained in Sections 230 to 240 of the
Companies Act, 2013.
----------------------

Mergers and amalgamations are not just a common agreement between Notes
the transferor and the transferee companies, but to make them legal transactions,
they should be complied with the legal provision. ----------------------
As per the provisions of the Companies Act, 2013, the scheme should be ----------------------
approved by the Board, the members, shareholders, creditors of the company and
the Tribunal for which procedures are prescribed under the Companies Act. ----------------------
In the process of amalgamation every company is required to obtain the ----------------------
following approvals:
----------------------
●● pproval of Board of Directors
A
●● Approval of shareholders/creditors ----------------------
●● Approval of stock exchanges in case of listed company ----------------------
●● Approval of financial institutions
●● Approval of Tribunal ----------------------
----------------------
Activity 1
----------------------
X & Y companies want their companies to be merged into one new company. ----------------------
What kind of approvals they need to do so.
----------------------
3.4 PROVISIONS OF COMPANIES ACT, 2013 AND ITS PROCEDURES ----------------------
----------------------
The provisions of the Companies Act, 2013 widely covers almost all types
and kinds of corporate restructuring which may possibly be undertaken such ----------------------
as arrangement between a company and its creditors, compromise, mergers,
amalgamations, demergers, etc. ----------------------
Chapter XV (Section 230 to 240) of Companies Act, 2013(the Act) ----------------------
contains provisions on ‘Compromises, Arrangements and Amalgamations’, that
covers compromise or arrangements, mergers and amalgamations, Corporate ----------------------
Debt Restructuring, demergers, fast track mergers for small companies/
----------------------
holding subsidiary companies, cross border mergers, takeovers, amalgamation
of companies in public interest etc.,. The procedural aspects involved such ----------------------
as format of application to be made to National Company Law Tribunal (the
Tribunal), form of notice and the procedural aspects involved with respect to ----------------------
the substantive law are covered under the Rules made under Chapter XV of the
----------------------
Act.
The scheme of Chapter XV is as follows: ----------------------
1. Section 230: Power to compromise or arrangements with creditors and ----------------------

members.
----------------------
2. Section 231: Power of Tribunal to enforce compromise or arrangements.
----------------------
3. Section 232: deals with mergers and amalgamation including demergers.
----------------------

Notes 4. Section 233: deals with amalgamation of small companies (also called
fast track mergers)
----------------------
5. Section 234: deals with amalgamation with foreign company (also called
---------------------- cross border mergers)
6. Section 235: deals acquisition of shares of dissenting shareholders.
----------------------
7. Section 236: deals with purchase of minority shareholding.
----------------------
8. Section 237: deals with power of central government to provide for
---------------------- amalgamation of companies in public interest.
---------------------- 9. Section 238: deals with registration of offer of schemes involving transfer
of shares.
---------------------- 10. Section 239: deals with preservation of books and papers of amalgamated
---------------------- companies.
11. Section 240: deals with liability of officers in respect of offences
----------------------
committed prior to merger, amalgamation etc.
---------------------- Memorandum of Association
---------------------- Memorandum of Association of the company is considered as charter of
the Company. Memorandum of Association of a company contains five clauses.
---------------------- In its objects clause, the powers of company is defined. The question is, whether
---------------------- the Memorandum of Association of the companies being amalgamated must
contain the power to amalgamate in its objects clause. The answer is yes. If
---------------------- the Memorandum of Association does not contain the power to amalgamate
in its objects clause then it is recommended to first amend the relevant clause.
---------------------- However, the Tribunal has wide power to sanction the scheme of amalgamation.
----------------------
3.5 PREPARATION OF SCHEME OF AMALGAMATION/
----------------------
MEMORANDUM OF UNDERSTANDING
----------------------
The provisions of law require that an applicant, i.e., company or members
---------------------- or creditors should forward an application to the National Company Law
Tribunal. Hence, the Company with the consent of the members or creditors and
---------------------- on the basis of suggestions from its advisors prepares a scheme of amalgamation
and presents to the tribunal concerned for its approval.
----------------------
Conventionally, wherever two or more companies are in agreement
---------------------- to merge with each other, they have to prepare a scheme of amalgamation,
---------------------- sometimes may be jointly with the help of advisors or consultants. The scheme
of amalgamation should be prepared by the companies. The basis of scheme
---------------------- should be explained briefly on the recommendation of valuation report, which
shows the consensus to merge.
----------------------
Companies, which are proposed to be amalgamated should prepare a
---------------------- scheme of amalgamation in consultation with the legal advisors, top management
or Board of Directors, companies’ auditors or any expert. Conventionally,
----------------------

certain standard or usual clauses are included in a scheme of amalgamation. A Notes
scheme of amalgamation should contain following:
----------------------
●● Particulars about transferee and transferor companies
●● Capital structure of the transferor and transferee companies ----------------------
●● ppointed date of amalgamation in the scheme of amalgamation.
A ----------------------
Appointed date is the date when transfer of transferor’s undertaking and
liabilities to transferee takes place. ----------------------
●● asis of scheme should be explained briefly on the recommendation of
B ----------------------
valuation report, covering application to financial institutions as lead
institution for permission, etc. ----------------------
●● hare exchange ratio means the number of shares, which the transferee
S ----------------------
company will give or exchange for every share of the transferor company.
Allotment of transferee company’s shares to the transferor company’s ----------------------
shareholders in exchange as per the share exchange ratio.
----------------------
●● ransferor company to carry on business on behalf of transferee company
T
between appointed date and effective date. ----------------------
●● Continuation of legal proceedings of Transferor Company by Transferee
----------------------
●● Company after the effective date.
----------------------
●● ffect of amalgamation on contracts of Transferor Company after the
E
effective date. ----------------------
●● Details of all expenses of amalgamation.
----------------------
●● anagement structure of the transferee company and the transferor
M
company. ----------------------
●● tatus of employees of the transferor company, their service conditions,
S ----------------------
effect of amalgamation thereon, retirement benefits, etc.
●● reatment on or after the effective date for any debit balance of transferor
T ----------------------
company balance sheet. ----------------------
●● ualification attached to the scheme, which require approval of different
Q
agencies if requires. ----------------------
●● Valuation of shares. ----------------------
3.6 TRANSFER OF UNDERTAKING BY ORDER OF ----------------------

TRIBUNAL ----------------------
As per Section 232(1) states that when an application is made to the ----------------------
Tribunal under section 230 for the sanctioning of a compromise or an arrangement
proposed between a company and any such persons as are mentioned in that ----------------------
section, and it is shown to the Tribunal—
----------------------
(a) that the compromise or arrangement has been proposed for the purposes
of, or in connection with, a scheme for the reconstruction of the company ----------------------
or companies involving merger or the amalgamation of any two or more ----------------------
companies; and

Notes (b) that under the scheme, the whole or any part of the undertaking, property
or liabilities of any company (hereinafter referred to as the transferor
---------------------- company) is required to be transferred to another company (hereinafter
referred to as the transferee company), or is proposed to be divided among
---------------------- and transferred to two or more companies, the Tribunal may on such
---------------------- application, order a meeting of the creditors or class of creditors or the
members or class of members, as the case may be, to be called, held and
---------------------- conducted in such manner as the Tribunal may direct and the provisions
of sub-sections (3) to (6) of section 230 shall apply mutatis mutandis.
----------------------
●● Circulation of documents for members/creditors meeting
---------------------- Section 232(2) states that when an order has been made by the Tribunal
---------------------- under sub-section (1), merging companies or the companies in respect
of which a division is proposed, shall also be required to circulate the
---------------------- following for the meeting so ordered by the Tribunal, namely: —
---------------------- a) the draft of the proposed terms of the scheme drawn up and adopted by
the directors of the merging company;
----------------------
b) confirmation that a copy of the draft scheme has been filed with the
---------------------- Registrar;
c) a report adopted by the directors of the merging companies explaining
----------------------
effect of compromise on each class of shareholders, key managerial
---------------------- personnel, promotors and non promoter, shareholders laying out in
particular the share exchange ratio, specifying any special valuation
---------------------- difficulties;
---------------------- d) the report of the expert with regard to valuation, if any;
---------------------- e) a supplementary accounting statement if the last annual accounts of

any of the merging company relate to a financial year ending more than
---------------------- six months before the first meeting of the company summoned for the
purposes of approving the scheme.
----------------------
●● Sanctioning of scheme by tribunal
---------------------- Section 232(3) states that the Tribunal, after satisfying itself that the
---------------------- procedure specified in sub-sections (1) and (2) has been complied with,
may, by order, sanction the compromise or arrangement or by a subsequent
---------------------- order, make provision for the following matters, namely:—
---------------------- a. the transfer to the transferee company of the whole or any part of the
undertaking, property or liabilities of the transferor company from a date
---------------------- to be determined by the parties unless the Tribunal, for reasons to be
recorded by it in writing, decides otherwise;
----------------------
b. the allotment or appropriation by the transferee company of any shares,
---------------------- debentures, policies or other like instruments in the company which,
under the compromise or arrangement,are to be allotted or appropriated
----------------------
by that company to or for any person:
---------------------- - No transferee company can hold shares in its own name or under any trust

A transferee company shall not, as a result of the compromise or Notes
arrangement, hold any shares in its own name or in thename of any trust
whether on its behalf or on behalf of any ofits subsidiary or associate ----------------------
companies and any such shares shallbe cancelled or extinguished;
----------------------
c. the continuation by or against the transferee company of any legal
proceedings pending by or against any transferor company on the date of ----------------------
transfer;
----------------------
d. dissolution, without winding-up, of any transferor company;
----------------------
e. the provision to be made for any persons who, within such time and
in such manner as the Tribunal directs, dissent fromthe compromise or ----------------------
arrangement;
----------------------
f. where share capital is held by any non-resident shareholder under the
foreign direct investment norms or guidelines specifiedby the Central ----------------------
Government or in accordance with any law forthe time being in force, the
allotment of shares of the transferee company to such shareholder shall be ----------------------
in the manner specifiedin the order; ----------------------
g. the transfer of the employees of the transferor company to the transferee
company; ----------------------
h. when the transferor company is a listed company and the transferee ----------------------
company is an unlisted company,—
----------------------
(a) the transferee company shall remain an unlisted company until it
becomes a listed company; ----------------------
(b) if shareholders of the transferor company decide to opt out of the ----------------------
transferee company, provision shall be made for payment of the
value of shares held by them and other benefits in accordance with ----------------------
a pre-determined price formula or after a valuation is made, and the
----------------------
arrangements under this provision may be made by the Tribunal:
The amount of payment or valuation under this clause forany share ----------------------
shall not be less than what has been specified by the Securities and ----------------------
Exchange Board under any regulations framed by it;
i. where the transferor company is dissolved, the fee, if any, paidby the ----------------------
transferor company on its authorised capital shall be set-off against any ----------------------
fees payable by the transferee company onits authorised capital subsequent
to the amalgamation; and ----------------------
j. such incidental, consequential and supplemental matters asare deemed ----------------------
necessary to secure that the merger or amalgamation is fully and effectively
carried out: ----------------------
●● Auditor’s certificate as to conformity with accounting standard ----------------------
No compromise or arrangement shall be sanctioned by the Tribunalun
less a certificate by the company’s auditor has been filed with theTribunal ----------------------
to the effect that the accounting treatment, if any, proposed in the scheme ----------------------

Notes of compromise or arrangement is in conformity with the accounting
standards prescribed under section 133.
----------------------
●● Transfer of property or liabilities
---------------------- Sub-section (4) stares that an order under this section provides forthe
transfer of any property or liabilities, then, by virtue of the order,that
---------------------- property shall be transferred to the transferee company and the liabilities
---------------------- shall be transferred to and become the liabilities of the transferee company
and any property may, if the order so directs, be freed from any charge
---------------------- which shall by virtue of the compromise or arrangement, cease to have
effect.
----------------------
●● Certified copy of the order to be filed with the registrar
----------------------
Section 232(5) states that every company in relation to whichthe order is
---------------------- made shall cause a certified copy of the order to be filed with the Registrar
for registration within thirty days of the receipt of certified copy of the
---------------------- order.
---------------------- ●● Effective date of the scheme
Section 232(6) states that the scheme under this section shall clearly
----------------------
indicate an appointed date from which it shall be effective andthe scheme
---------------------- shall be deemed to be effective from such date and not at a date subsequent
to the appointed date.
----------------------
●● Annual statement certified by CA/CS/CWA to be filed with registrar
---------------------- every year until the completion of the scheme
Section 232 (7) states that every company in relation to whichthe order
----------------------
is made shall, until the completion of the scheme, file a statement in such
---------------------- form and within such time as may be prescribed with the Registrar every
year duly certified by a chartered accountant or a cost accountant or a
---------------------- company secretary in practice indicating whether the scheme is being
complied with in accordance with the orders of the Tribunal or not.
----------------------
●● Punishment
----------------------
Section 232(8) states that if a transferor company or a transferee company
---------------------- contravenes the provisions of this section, the transferor company or the
transferee company, as the case may be, shall be punishable with fine
---------------------- which shall not be less than one lakh rupees but which may extend to
twenty-five lakh rupees and every officer of such transferor or transferee
----------------------
company who is in default, shall be punishable with imprisonment for a
---------------------- term which may extend to one year or with fine which shall not be less
than one lakh rupees butwhich may extend to three lakh rupees, or with
---------------------- both.
----------------------
----------------------
----------------------

3.7 APPROVALS IN SCHEMES OF AMALGAMATION Notes
The scheme should be approved or intimated at various places as under: ----------------------
1. Approval of Board of Directors: The first step in carrying out ----------------------
amalgamation is approval of scheme of amalgamation by the boards
of both the companies. Board resolution should, besides approving the ----------------------
scheme, authorise a Director/Company Secretary/other officer to make
application to court, to sign it and other documents and to do such other ----------------------
things, acts and deeds as may be necessary or expedient in connection ----------------------
therewith, including changes in the scheme. Board of Directors of
transferor and transferee companies are required to approve the scheme ----------------------
of amalgamation and recommend for the further approvals of members or
creditors and finally by court. ----------------------
It is necessary to arrange a Board of Directors’ Meeting of both the transferor ----------------------

and transferee companies for approving the Scheme of Amalgamation.
Within 15 minutes after the Board Meeting, all stock exchanges should ----------------------
be intimated of the decision of the Board as well as the swap ratio. The ----------------------
scheme of amalgamation propose for the allotment of equity shares by
the transferee company to the shareholders of the transferor company ----------------------
and it should be approved by the Boards of the respective companies if
valuation is done by experts. ----------------------
2. Approval of the scheme by financial institutions/banks: The scheme ----------------------

is required to be approved and cleared by the financial institutions/banks
----------------------
which have arranged loans or advances to the companies.
3. Intimation to stock exchanges about proposed scheme: Notice has to ----------------------
be given to the stock exchanges where shares of the company are listed
----------------------
under the listing requirements at least two days before the Board Meeting
is proposed to be held for the purpose of approving the amalgamation. ----------------------
As per clause 24(f) of the Listing Agreement, all listed companies involved
----------------------
in the Scheme of Amalgamation are required to send copy of the scheme
of merger or amalgamation to all the stock exchanges where they are ----------------------
listed and obtain No Objection Certificate (NOC) from concerned stock
exchange. ----------------------
4. Approval of shareholders/creditors: Upon the hearing on the application ----------------------
the Tribunal shall give directions fixing the date, time and venue for the
meeting of the members. Members’ and creditors’ approval to the scheme ----------------------
of amalgamation is necessary to obtain Tribunal’s sanction. Without ----------------------
the approval of the scheme by the members/creditors, the court cannot
continue as per Section 230. This approval can be obtained at by calling ----------------------
members’ meetings as per the Tribunal’s directions. Similar directions
are issued by the Tribunal for calling the meeting of creditors if in the ----------------------
application a request has been made for the same. ----------------------
----------------------

Notes A notice for calling the members’ or creditors’ meeting is required to
be served and dispatched to the members or creditors as the case may
---------------------- be under certificate of posting at least 21 clear days before the date of
meeting. The general meeting should be held on the appointed date. The
---------------------- scheme of amalgamation should be approved by the members, present in
---------------------- person or proxy or by postal ballot and voting favouring the resolution
at least 3/4th in value of the shares held by the members who vote in the
---------------------- poll.
---------------------- 5. Approval of Reserve Bank of India: If the scheme of amalgamation
prescribes or offers to issue shares or cash to Non-resident Indians, then
---------------------- it is required to obtain the permission of the Reserve Bank of India by the
amalgamated company.
----------------------
6. Approval of National Company Law Tribunal:
----------------------
Power to sanction compromises and arrangements has been transfered
---------------------- from high court to tribunal.
---------------------- Tribunal on application may fix a date for the hearing. The tribunal shall
advertise the same in the newspapers in which the notice of the meeting
---------------------- was advertised or in such other papers as the tribunal may direct for not
less than 10 days before the date fixed for hearing.
----------------------
Once the members and creditors approve and sanction the scheme, then
---------------------- the Tribunal may consider the scheme of amalgamation for approval. After
the hearing is over, the Tribunal will pass an order sanctioning the scheme
---------------------- of amalgamation subject to such directions or with such modifications if
---------------------- required in the scheme as may think fit to make for the proper working of
the scheme.
---------------------- The Tribunal has absolute discretion for sanctioning the scheme of
---------------------- amalgamation. The Tribunal while sanctioning the scheme must look at the
scheme that it is a reasonable one and it is essential that the scheme must
---------------------- be fair and just. The Tribunal has to ensure that all the requisite statutory
procedure for supporting a scheme has been complied with and that the
---------------------- requisite meetings have been held.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
Fill in the blanks.
----------------------
1. Companies which are proposed to be amalgamated should prepare a
scheme of amalgamation in consultation with the legal _______, top ----------------------
management or ___________, companies’ ________________or any
expert. ----------------------
2. The first step in carrying out amalgamation is approval of ----------------------

____________________ by the Boards of both the companies.
----------------------
3. The scheme is required to be approved and cleared by the
____________________ which have arranged loans or advances to ----------------------
the companies.
----------------------
4. The Tribunal has its absolute __________________ for sanctioning
the scheme of amalgamation. ----------------------
----------------------
3.8 APPLICATION TO TRIBUNAL AND RELATED
----------------------
PROCEDURE
----------------------
After getting clear approval from the Board of Directors, financial
institutions and banks, etc. the next step is to forward an application under ----------------------
Section 230(1) to Tribunal having jurisdiction over the registered office of the
----------------------
company, and the transferee company should make separate application to the
Tribunal. ----------------------
An application seeking directions to call, hold and conduct meeting is
----------------------
required to be made to the Tribunal. Such an application is required to be made
in the manner prescribed. ----------------------
The application is required to make in a prescribed format. The application
----------------------
should be supported by an affidavit.
The company or any other person, by whom an application is made under ----------------------
section 230 (1), shall disclose to the Tribunal by affidavit— ----------------------
(a) all material facts relating to the company, such as the latest financial
position of the company, the latest auditor’s report on the accounts of the ----------------------
company and the pendency of any investigation or proceedings against ----------------------
the company;
(b)
reduction of share capital of the company, if any, included in the ----------------------
compromise or arrangement; ----------------------
(c) any scheme of corporate debt restructuring consented to by not less than
----------------------
seventy-five per cent. of the secured creditors in value, including—
(i) a creditor’s responsibility statement in the prescribed form; ----------------------
(ii)
safeguards for the protection of other secured and unsecured ----------------------
creditors;
Notes (iii) report by the auditor that the fund requirements of the company after the
corporate debt restructuring as approved shall conform to the liquidity
---------------------- test based upon the estimates provided to them by the Board;
---------------------- (iv) where the company proposes to adopt the corporate debt restructuring
guidelines specified by the Reserve Bank of India, a statement to that
---------------------- effect; and
---------------------- (v) a valuation report in respect of the shares and the property and all
assets,tangible and intangible, movable and immovable, of the company
---------------------- by a registered valuer.
---------------------- The following documents should be submitted along with the application:
---------------------- ●● certified true copy of the Company’s Memorandum of Association and

A
Articles of Association.
---------------------- ●● certified true copy of the Board Resolution, which authorises the
A
Director to make the application to the Tribunal.
----------------------
●● A true copy of the Company’s latest audited balance sheet.
----------------------
Upon hearing on the application, the tribunal may give the following directions:
---------------------- ●● To fix the date, time, venue for the meeting of the members of the company
---------------------- ●● o determine the class of members and whose meetings have to be held
T
for considering the proposed scheme
----------------------
●● To appoint the chairman for the meetings
---------------------- ●● To fix quorum and procedure of the meeting
---------------------- ●● To fix the manner to serve, sign and dispatch the notice of the meeting
●● o fix the time within which the chairman should file a report of the
T
---------------------- meeting
---------------------- The Chairman so appointed for the members’ or creditors’ meeting or
the company or any other person directed by the tribunal to send notice of the
---------------------- meeting and issue advertisement must file an affidavit regarding compliance
---------------------- with the tribunal’s directions regarding individual and public notices.
After the scheme is approved by all concerned, a petition is presented
---------------------- to the tribunal for sanctioning of the scheme of arrangement. If the tribunal is
---------------------- satisfied that the scheme is just and fair and not prejudicial to the interest of the
members or creditors, then the tribunal may sanction it.
----------------------
A notice of the meeting along with all the documents in such form as
---------------------- may be prescribed shall also be sent to the Central Government, the income-
tax authorities, the Reserve Bank of India, the Securities and Exchange Board,
---------------------- the Registrar, the respective stock exchanges,the Official Liquidator, the
Competition Commission of India established under sub-section (1) of section
----------------------
7 of the Competition Act, 2002, if necessary, and such other sectoral regulators
---------------------- or authorities which are likely to be affected by the compromise or arrangement
and shall require that representations, if any, to be made by them shall be made
---------------------- within a period of thirty days from the date of receipt of such notice, failing

which, it shall be presumed that they have no representations to make on the Notes
proposals.
----------------------
3.9 POWER AND DUTY TO ACQUIRE SHARES OF ----------------------
SHAREHOLDERS DISSENTING FROM SCHEME
----------------------
As per Sec. 235(1) of the Companies Act, it is provided that where a
scheme involving the transfer of shares or any class of shares of the transferor ----------------------
company to the transferee company has within four months after making an
----------------------
offer in that behalf by the transferee company, been approved by the holders
of not less than 9/10th in the value of the shares, the transferee company may, ----------------------
at any time, within two months after the expiry of the said four months, give
notice in the prescribed manner to any dissenting shareholder, that it desires to ----------------------
acquire his shares. When such a notice is given, the transferee company, shall,
----------------------
unless on an application made by the dissenting shareholder within one month
from the date on which the notice was given, the Tribunal thinks fit to order ----------------------
otherwise, be entitled and bound to acquire those shares on the terms on which,
under the scheme or contract, the shares of the approving shareholders are to be ----------------------
transferred to the transferee company.
----------------------
Multiple Choice Multiple Response. ----------------------

1. An application to Tribunal under Section 230 should be made: ----------------------
i. In prescribed format
----------------------
ii. Supported by affidavit
iii. By a lawyer ----------------------
iv. On the legal paper ----------------------
2. The Central Government is required to go through following of the
proposal for: ----------------------
i. Compromise ----------------------
ii. Arrangement
----------------------
iii. Affidavit
iv. Notice ----------------------
----------------------
3.10 AMALGAMATION OF COMPANIES IN NATIONAL
INTEREST ----------------------
----------------------
Companies Act provides special power to the Central Government to
amalgamate the companies in the national interest. Section 237 deals with the ----------------------
special power of the Central Government to order amalgamation of two or
more companies into a single company, if the Government is satisfied that it is ----------------------
essential in the public interest. However, in the case of amalgamation of banking
----------------------
companies, the Central Government should consult with Reserve Bank of India

Notes before passing any such order. It is a suo moto power to Central Government
under Section 237 and such order passed by the Government must be published
---------------------- in the Official Gazette.
----------------------
3.11 REVERSE MERGER
----------------------
When a strong company or superior company amalgamates with an inferior
---------------------- company or financially weak company it is called reverse merger. There is no
difference between regular merger and reverse merger as far as the Companies
---------------------- Act is concerned. Reverse merger may also be considered as an alternative
---------------------- method for private companies to become public, without going through the long
process of public issue. Reverse mergers allow a private company which is an
---------------------- existing company to become public without raising capital through the process
of public issue.
----------------------
Sometimes reverse merger takes place when a profit-making company
---------------------- merges with a loss-making company or a listed company gets merged into
an unlisted company, etc. Reverse merger takes place for the benefit of carry
---------------------- forward and set-off of loss and unabsorbed depreciation of the transferee
---------------------- company.
---------------------- Summary
---------------------- ●● erger and amalgamation is not just a common agreement between the
M
---------------------- transferor and the transferee companies, but a legal transaction, which
complies with the legal provision.
---------------------- ●● he three important steps involved in the analysis of mergers and
T
---------------------- acquisitions are: planning and analysis of industry-specific and firm-
specific information, searching and screening of suitable partner and
---------------------- financial evaluation.
●● nce the merger partner has been identified and terms of merger are
O
----------------------
settled, the procedure of the M&A starts specifically to comply with
---------------------- the laws, regulations and the provisions of Sections 230 to 240 of the
----------------------
●● merger or an amalgamation is complete only after the Court sanctions
A
---------------------- it. Companies Act provides special power to the Central Government for
to amalgamate companies in the national interest.
----------------------
●● everse merger is when a strong company or superior company
R
---------------------- amalgamates with an inferior company or financially weak company.
There is no difference between regular merger and reverse merger.
----------------------
----------------------
----------------------
----------------------

Keywords Notes
----------------------
●● everse merger: A strong company or superior company amalgamates
R
with an inferior company or financially weak company. ----------------------
●● cheme of amalgamation: Companies which are proposed to be
S
amalgamated should prepare a scheme of amalgamation in consultation ----------------------
with the members, legal advisors, top management or Board of Directors, ----------------------
companies’ auditors or any expert, etc. There is no prescribed format
for scheme of amalgamation. Conventionally certain standard or usual ----------------------
clauses are included in a scheme of amalgamation.
----------------------
1. Explain the primary steps in pre-merger activities. ----------------------

2. What is the requirement related to the intimation to stock exchange about ----------------------
proposed Scheme?
----------------------
3. Explain various approvals required in the scheme of amalgamation.
4. Discuss the provisions of the Companies Act, 2013 in relation to Merger. ----------------------
5. What are the contents of a Scheme of Amalgamation? Discuss. ----------------------
----------------------
----------------------
----------------------
i. − d. ----------------------
ii. − e. ----------------------
iii. − b. ----------------------
iv. − c.
----------------------
v. − a.
----------------------
1. Companies which are proposed to be amalgamated should prepare a ----------------------
scheme of amalgamation in consultation with the legal advisors, top
management or Board of Directors, companies’ auditors or any expert. ----------------------
2. The first step in carrying out amalgamation is approval of scheme of ----------------------
amalgamation by the Boards of both the companies.
----------------------
3. The scheme is required to be approved and cleared by the financial
institutions/banks which have arranged loans or advances to the ----------------------
companies.
----------------------

Notes 4. The tribunal has its absolute discretion for sanctioning the scheme of
amalgamation.
----------------------
---------------------- Multiple Choice Multiple Response.
---------------------- 1. An application to Tribunal under section 230 should be made with:
---------------------- i. In prescribed format

ii. Supported by affidavit
----------------------
2. The Central Government is required to go through following of the
---------------------- proposal for:
---------------------- i. Compromise
ii. Arrangement
----------------------

---------------------- 1. Mattoo, P.K. 2000. Corporate Restructuring – An Indian Perspective.
---------------------- New Delhi: Macmillan Publishers India.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Demerger
UNIT
4
Structure:
4.1 Introduction
4.2 Demerger: Meaning
4.3 Demerged Company and Resulting Company
4.3.1 Provisions of Companies Act relevant to Demerger
4.4 Demerger by Agreement
4.5 Demerged under Scheme of Arrangement
4.6 Types and Forms of Demergers
Summary
Key Words
Suggested Reading
Demerger 47
Notes
Objectives
----------------------
----------------------
• Discuss the basic concept of demerger
----------------------
• Classify various types and forms of demerger
---------------------- • List the primary steps in demerger
---------------------- • Describe various legal and commercial aspects of demergers
---------------------- • Summarise the role of the members, creditors and tribunal in the
process of demerger
----------------------
---------------------- 4.1 INTRODUCTION
---------------------- In past decades, particularly in India, the corporate sector was

very controlled and not free in respect of consolidations and much more
---------------------- restructuring. The intention of restructuring through demerger sometimes is
separation or partitions of companies rather than consolidation and redefining
----------------------
core competencies. In the era of globalisation all over the world, corporate are
---------------------- moving towards redefining their core competencies and in present scenario the
Indian corporate sector has become more open and flexible toward consolidation
---------------------- and restructuring to survive and achieve its objectives.
---------------------- The corporate sector in India is also resorting to various mechanism of
corporate restructuring to improve efficiency. Over the last few years, different
---------------------- modes of corporate restructuring such as stock splits, capital restructuring,
mergers and acquisitions, etc., have been adopted by companies in India.
----------------------
Demerger is corporate restructuring as opposed to merger. It refers to separation
---------------------- of one or more than one undertaking.
---------------------- 4.2 DEMERGER: MEANING

----------------------
Demerger is a corporate strategic decision and not a part of tax planning
---------------------- or tax avoidance, which is taken in day-to-day manner. Demerger is an activity,
which is performed very rarely as it deals with separation of undertaking of
---------------------- company. So, rather than consolidation it talks about separation. The obvious
question, which one may raise is how separation of company will be a strategic
----------------------
business decision to achieve its objective. Demerger is corporate restructuring
---------------------- as opposed to merger.
The Companies Act, 2013 does not contain a definition of the term even
----------------------
if it has relevance to corporate law. In its general meaning, the term demerger
---------------------- is a separation or hiving-off or spin-off of existing companies to one or more
undertakings and flagging into a separate company. Demerger may either
---------------------- dispose such newly formed company or dispose-off one or more undertaking in
question to the transferee company. The resulting company is born or created
----------------------

out of corporate partition by issuing resulting company’s shares at the agreed Notes
exchange ratio to the shareholders of the existing company.
----------------------
The term demerger is not expressly defined in the Companies Act, 2013,
However, it is covered under Section 232 of the Companies Act, 2013. Demerger ----------------------
is corporate restructuring as opposed to merger. Typically, demerger invokes
for the separation of a large company or group of companies into two or more ----------------------
smaller companies where a small undertaking of the company is disposed into a
----------------------
new company or resulting company. Demerger is simply a corporate partition.
Demerger a method of corporate restructure has an unspoken importance ----------------------
in India because some time this is used as a tool for dividing or partitioning
----------------------
a company into family or under flagship of different groups. Under certain
circumstances when a division of a company is performing badly or ----------------------
underperforming or sometimes it is no longer suitable to the company’s plans,
then also demerger may take place. ----------------------
The term demerger has been defined in the Income Tax Act, 1961. To ----------------------
avoid the disabilities as under the Income Tax Act, it is necessary that a demerger
should be within the meaning as defined under Section 2(19AA) of the Income ----------------------
Tax Act.
----------------------
Demerger means transfer pursuant to scheme of arrangement under the
Companies Act, 2013 by demerged company to resulting company in such a ----------------------
manner that − ----------------------
●● ll the property of the undertaking, being transferred by the demerged
A
company, becomes the property of the resulting company by virtue of the ----------------------
demerger; ----------------------
●● ll the liabilities relevant to the undertaking, being transferred by the
A
demerged company, become the liabilities of the resulting company by ----------------------
virtue of the demerger; ----------------------
●● he property and the liabilities of the undertaking being transferred by
T
the demerged company are transferred at values appearing in its books of ----------------------
account immediately before the demerger; ----------------------
●● he resulting company issues in consideration of the demerger, its shares
T
to the shareholders of the demerged company on a proportionate basis; ----------------------
●● he shareholders holding not less than 3/4th in value of the shares in the
T ----------------------
demerged company become the shareholders of the resulting company by
virtue of the demerger; and ----------------------
●● The transfer of the undertaking is on a going-concern basis; ----------------------
----------------------
----------------------
----------------------
----------------------
Demerger 49
Notes
----------------------
Fill in the blanks.
----------------------
1. Demerger is a corporate _____________ and not a part of a tax
---------------------- planning or tax avoidance, which is taken in day-to-day manner.
---------------------- 2. All the property of the undertaking, being transferred by the demerged
company, becomes the property of the__________________ by
---------------------- virtue of the demerger.
---------------------- 3. All ______________relevant to the undertaking, being transferred
by the demerged company, become the liabilities of the resulting
---------------------- company by virtue of the demerger.
---------------------- 4. The resulting company issues in consideration of the demerger,
its shares to the shareholders of the demerged company on a
---------------------- _________________basis.
---------------------- 5. The shareholders holding not less than __________in value of the
shares in the demerged company become the shareholders of the
---------------------- resulting company by virtue of the demerger.
----------------------
---------------------- Activity 1
----------------------
Go through the corporate restructuring scheme and plan of Hindalco
---------------------- and Indo Gulf to create non-ferrous metal powerhouse and an Indian
corporate giant available at: http://www.hindalco.com/media/press_
---------------------- releases/200207july/20020721_Hindalco_IndoGulf_restructuring.pdf
----------------------
---------------------- 4.3 DEMERGED COMPANY AND RESULTING COMPANY

---------------------- At the time of demerger, two companies get affected and the shareholders’
of both these companies get involved or the shareholders of the demerged
---------------------- company gets the shares in the resulting company in proportion to agreed
---------------------- exchange ratio.
Meaning of demerged company: Section 2 (19AAA) defines demerged
---------------------- company and it means the company whose undertaking is transferred or
---------------------- proposed to be transferred pursuant to a demerger to a resulting company. The
shareholders of demerged company will be entitled for the shares in resulting
---------------------- company at an agreed exchange ratio.
---------------------- Definition of Resulting Company: As per Section 2(41A), resulting company
means one or more companies (including a wholly owned subsidiary thereof)
---------------------- to which the undertaking of the demerged company is transferred or proposed
to be transferred in a demerger and the resulting company in consideration of
----------------------

such transfer of undertaking, issues shares as per the agreed exchange ratio to Notes
the shareholders of the demerged company
----------------------
4.3.1 Provisions of Companies Act Relevant to Demerger
The Companies Act does not provide the model of demerger directly as ----------------------
such but it recognises it indirectly. In the light of the provisions of the Companies
----------------------
Act, 2013 demerger could be achieved either:
●● s provided under Section 180(1)(a) of the Companies Act by sale of the
A ----------------------
whole or substantially whole of an undertaking; or ----------------------
●● I n terms of Sections 230 to 234 of the Companies Act, 2013 as a part of a
scheme of compromise or an arrangement. ----------------------
----------------------
4.4 DEMERGER BY AGREEMENT
----------------------
The demerger may take place by sale of the whole or substantially whole
of an undertaking as provided under Section 180(1)(a) of the Companies ----------------------
Act, which requires that the Board of Directors of a company must obtain the
----------------------
consent of the company in a general meeting, if the Board decides to sell, lease
or dispose of in any manner the whole or substantially whole of the undertaking ----------------------
of the company. The provision is applicable to all companies.
----------------------
Section 180 has prescribed restrictions on the Board. Section 180 (1)
(a) provides that (1) The Board of Directors of a company shall not, except ----------------------
with the consent of such a company in general meeting − (a) sell, lease or
otherwise dispose of the whole or substantially the whole of the undertaking ----------------------
of the company, or where the company owns more than one undertaking of the
----------------------
whole or substantially the whole, of any such undertaking.
Sec.180 (3) provides that nothing contained in 180 (1) (a) shall affect − ----------------------
●● he title of a buyer or other person who buys or takes a lease of any such
T ----------------------
undertaking as is referred to in that clause, in good faith;or
----------------------
●● he sale or lease of any property of the company, where the ordinary
T
business of the company consists of, or comprises, such selling or leasing. ----------------------
According to Sec. 180 (4), any special resolution passed by the company
----------------------
permitting any transaction such as is referred to in clause (a) of sub-section
(1) may attach such conditions to the permission as may be specified in the ----------------------
resolution, including conditions regarding the use, disposal or investment of the
sale proceeds which may result from the transaction. ----------------------
However, it is provided that this sub-section shall not be deemed to ----------------------
authorise the company to effect any reduction in its capital except in accordance
with the provisions contained in that behalf in this Act. ----------------------
----------------------
----------------------
----------------------
Demerger 51
Notes
----------------------
----------------------
1. A resulting company means one or more companies to which the
---------------------- undertaking of the demerged company is transferred or proposed to
be transferred in a demerger.
----------------------
2. The Companies Act provides the model of demerger directly.
----------------------
---------------------- 4.5 DEMERGED UNDER SCHEME OF ARRANGEMENT

---------------------- Sections 230−234 of Companies Act, 2013 is a complete code in its
respect and is a single window clearance system for all arrangements including
---------------------- demerger. The provisions with respect to scheme of amalgamation, arrangements
---------------------- or compromise are same to that of scheme of demerger as demerger is also
an arrangement within the preview of Sec. 230 to Sec. 234, i.e., arrangement
---------------------- between the company and its members or shareholders.
---------------------- Sec. 230 provides power to compromise or make arrangements with
creditors and members. Sec. 230(1) states where a compromise or arrangement
---------------------- is proposed –
---------------------- ●● Between a company and its creditors or any class of them; or
●● Between a company and its members or any class of them;
----------------------
the Tribunal may, on the application of the company or of any creditor or
---------------------- member of the company, or, in the case of a company which is being wound
up, of the liquidator, order a meeting of the creditors or class of creditors, or
----------------------
of the members or class of members, as the case may be, to be called, held and
---------------------- conducted in such manner as the tribunal directs.
Sec. 230 (6) If a majority in number representing three-fourths in value of
----------------------
the creditors, or class of creditors, or members, or class of members, as the case
---------------------- may be, present and voting either in person or by proxy or by postal ballot agree
to any compromise or arrangement, the compromise or arrangement shall, if
---------------------- sanctioned by the tribunal, be binding on all the creditors, all the creditors of the
class, all the members, or all the members of the class, as the case may be, and
----------------------
also on the company, or in the case of a company which is being wound up, on
---------------------- the liquidator and contributories of the company.
However, no order sanctioning any compromise or arrangement shall
----------------------
be made by the tribunal unless the tribunal is satisfied that the company or
---------------------- any other person by whom an application has been made under subsection
(1) has disclosed to the tribunal, by affidavit or otherwise, all material facts
---------------------- relating to the company, such as the latest financial position of the company,
the latest auditor’s report on the accounts of the company, the pendency of any
----------------------
investigation proceedings in relation to the company, etc.
----------------------

Sec. 230(3) Notes
Where a meeting is proposed to be called in pursuance of an order of the
----------------------
Tribunal under sub-section (1), a notice of such meeting shall be sent to all the
creditors or class ofcreditors and to all the members or class of members and ----------------------
the debenture-holders of the company, individually at the address registered
with the company which shall be accompanied by a statement disclosing the ----------------------
details of the compromise or arrangement, acopy of the valuation report, if any,
----------------------
and explaining their effect on creditors, key managerial personnel, promoters
and non-promoter members, and the debenture-holders and theeffect of the ----------------------
compromise or arrangement on any material interests of the directors of the
company or the debenture trustees, and such other matters as may be prescribed: ----------------------
Provided that such notice and other documents shall also be placed on the ----------------------
website of thecompany, if any, and in case of a listed company, these documents
shall be sent to the Securities and Exchange Board and stock exchange where ----------------------
the securities of the companies are listed, forplacing on their website and shall
----------------------
also be published in newspapers in such manner as may be prescribed:
Provided further that where the notice for the meeting is also issued by way of an ----------------------
advertisement, it shall indicate the time within which copies of the compromise
----------------------
or arrangement shall be made available to the concerned persons free of charge
from the registered office of the company. ----------------------
Sec. 230(8) ----------------------
The order of the Tribunal shall be filed with the Registrar by the company within
a period of thirty days of the receipt of the order. ----------------------
Sec. 230(9) ----------------------

The Tribunal may dispense with calling of a meeting of creditor or class of ----------------------
creditors where such creditors or class of creditors, having at least ninety per
cent. value, agree and confirm, by way of affidavit, to the scheme of compromise ----------------------
or arrangement.
----------------------
Sec. 232(1)
----------------------
Where an application is made to the Tribunal under section 230 for the
sanctioning of a compromise or an arrangement proposed between a company ----------------------
and any such persons as are mentioned in that section, and it is shown to the
Tribunal— ----------------------
(a) that the compromise or arrangement has been proposed for the purposes ----------------------
of, or in connection with, a scheme for the reconstruction of the company
or companies involving merger or the amalgamation of any two or more ----------------------
companies; and ----------------------
(b) that under the scheme, the whole or any part of the undertaking, propertyor
liabilities of any company (hereinafter referred to as the transferor ----------------------
company) is required to be transferred to another company (hereinafter ----------------------
referred to as the transferee company), or is proposed to be divided among
and transferred to two or more companies,the Tribunal may on such ----------------------
Demerger 53
Notes application, order a meeting of the creditors or class of creditorsor the
members or class of members, as the case may be, to be called, held and
---------------------- conductedin such manner as the Tribunal may direct and the provisions of
sub-sections (3) to (6) ofsection 230 shall apply mutatis mutandis.
----------------------
In the said process, following steps are required to be followed:
----------------------
●● Prepare a scheme of demerger in consultation with all interested parties.
---------------------- ●● Approval from the Board of Directors of the company at a meeting.
---------------------- ●● ppoint an expert for valuing the shares to determine the share exchange
A
ratio.
---------------------- ●● ngage an advocate for the preparation of scheme and for appearing
E
---------------------- subsequently before the tribunal.
●● I n case of listed companies, the stock exchanges where the shares are
---------------------- listed should be intimated.
---------------------- ●● pplication to tribunal for direction to hold meetings of members/
A
creditors.
----------------------
●● pon the hearing on the application the Tribunal shall give directions
U
---------------------- fixing the date, time and venue for the meeting of the members. Member’s
and creditor’s approval to the scheme of demerger is required to be
---------------------- obtained for Tribunal’s sanction.
---------------------- ●● hen the scheme of demerger gets approval from the required majority
W
of shareholders or creditors as the case may be, a petition is presented to
---------------------- the Tribunal for sanctioning of the scheme of arrangement for demerger
to the concerned Tribunal, along with the following documents:
----------------------
●●
Company petitions
----------------------
●●
Scheme of demerger
---------------------- ●●
Memorandum of Association and Article of Association
---------------------- ●●
An affidavit verifying the petition
●●
Audited accounts
----------------------
●●
Valuation report
---------------------- ●●
Copy of chairman’s report
---------------------- ●● ribunal shall fix up a date for hearing the petition and notice of hearing
T
shall be advertised.
----------------------
●● I f the tribunal is satisfied that the scheme is just and fair and not prejudicial
---------------------- to the interest of the members or creditors, then the tribunal may sanction
it.
----------------------
●● Get the order from the tribunal and file it to Registrar of companies.
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
1. It provides power to compromise or make arrangements with creditors
and members. ----------------------
i. Section 230
----------------------
ii. Corporate restructuring
iii. Creditors ----------------------
iv. Company ----------------------
2. A compromise or arrangement is proposed between:
i. A bank and company ----------------------
ii. School and college ----------------------
iii. Company and its creditors
----------------------
iv. Creditors and members
3. If the tribunal is not satisfied then it can make an order under Section ----------------------
231 for:
----------------------
i. Opening of company
ii. Merger ----------------------
iii. Amalgamation ----------------------
iv. Winding up
----------------------
4.6 TYPES AND FORMS OF DEMERGERS ----------------------
The demerger may be either a partial demerger or complete demerger. ----------------------

Partial Demerger ----------------------
When one of the undertakings or a part of the undertaking or a division ----------------------
of an existing Company is separated and transferred to a resulting company,
then it is called partial demerger. Partial demerger is just a reshuffling of ----------------------
the structure of the corporate where the existing company also remains and
continues its operation and an undertaking is separated through a new company ----------------------
or a resulting company. Hence, it is a spun off business or undertaking of the ----------------------
existing company.
Complete Demerger ----------------------
A complete demerger is a wider term and the existing company separates ----------------------
various undertakings or divisions to one or more new resulting companies
whereas the existing company stands dissolved or voluntarily wound up with ----------------------
the prerequisite approvals. ----------------------
The shareholders of the demerged company or dissolved company gets
----------------------
the shares in the new company or resulting company on the basis of the share
exchange ratio as determined in the scheme of demerger. ----------------------
Demerger 55
Notes The other forms of demerger are:
●● Divestitures: Divestitures are the sale of a segment or a sector of a
----------------------
company for consideration in the form of cash or for securities to an
---------------------- outsider party.
●● pin-off: Spin-off is a form of demerger where the holding company
S
---------------------- distributes all the shares it owns in a subsidiary company to its shareholders
---------------------- on a pro rata basis. Through spin-off, both the holding company as well as
the subsidiary company shall exist and carry their operation or business.
---------------------- So, in spin-off, the distribution is made to shareholders of parent company
as a dividend in non-cash form.
----------------------
●● Equity carve-out: In the process of equity carve-out, the minority part
---------------------- of shareholding of subsidiary company is sold out to the public through
the process of offer for sale and simultaneously the holding or parent
---------------------- company continues to control over the subsidiary company through its
---------------------- controlling interest.
●● Split-off: In split-off the shareholders of the holding company gets the
---------------------- shares in subsidiary company proportionate to their shares in the holding
---------------------- company.
●● Split-up: Split-up is a process of division of a company into two or
---------------------- more parts through transfer. It is a process of re-organising a company’s
---------------------- arrangement whereby all the capital stock including assets are exchanged
for those of two or more newly established companies, resulting in the
---------------------- liquidation of the parent corporation.
----------------------
----------------------
----------------------
i. Divestitures a. Proportionate shares in subsidiary company
---------------------- ii. Spin-off b. Division through transfer
---------------------- iii. Equity carved-out c. Sale of a segment
---------------------- iv. Split-off d. Minority part is sold out
v. Split-up e. Distribution of all shares
----------------------
----------------------
---------------------- Activity 2
----------------------
Find the reasons behind the L&T demerger which took place in the year
---------------------- 2003−2004.
----------------------
----------------------

Summary Notes
●● ver the last few years, different modes of corporate restructuring such
O ----------------------
as stock splits, capital restructuring, mergers and acquisitions, etc. have
----------------------
been adopted by companies in India.
●● emerger is corporate restructuring as opposed to merger. It refers to
D ----------------------
separation of one or more than one undertaking.
----------------------
●● he term demerger has been defined in the Income Tax Act, 1961 but the
T
term is not defined in Companies Act. Demerger may be partial demerger ----------------------
or complete demerger.
----------------------
●● he demerger may take place by sale of the whole or substantially whole
T
of an undertaking as provided under Section 180(1)(a) of the Companies ----------------------
Act which requires that the Board of Directors of a company must obtain
----------------------
the consent of the company in a general meeting.
●● he provisions with respect to scheme of amalgamation, arrangements or
T ----------------------
compromise are same to that of scheme of demerger as demerger is also
an arrangement within the preview of Sec. 230 to Sec. 240. ----------------------
----------------------
Keywords
----------------------
●● emerged company: The company whose undertaking is transferred or
D
----------------------
proposed to be transferred pursuant to a demerger to a resulting company.
The shareholders of demerged company will be entitled for the shares in ----------------------
resulting company at an agreed exchange ratio.
●● Resulting company: Resulting company means one or more companies ----------------------
(including a wholly owned subsidiary thereof) to which the undertaking ----------------------
of the demerged company is transferred or proposed to be transferred in
a demerger and the resulting company in consideration of such transfer ----------------------
of undertaking, issues shares as per the agreed exchange ratio to the
shareholders of the demerged company. ----------------------
●● ivestitures: The sale of a segment or a sector of a company for

D ----------------------
consideration in the form of cash or for securities to an outsider party.
----------------------
●● plit-off: In split-off the shareholders of holding company get the shares
S
in subsidiary company proportionate to their shares in holding company. ----------------------
----------------------
----------------------
1. Explain the terms ‘Demerged Company and Resulting Company’.
----------------------
2. Define the term demerger in the light of Income Tax Act, 1961.
3. Explain the types of demerger. ----------------------
4. Explain ‘demerged under scheme of arrangement’. ----------------------
5. Explain ‘demerged under agreement’. ----------------------
Demerger 57
Notes Answers to Check your Progress
---------------------- Fill in the blanks.

1. Demerger is a corporate strategic decision and not a part of a tax planning
---------------------- or tax avoidance, which is taken in day-to-day manner.
---------------------- 2. All the property of the undertaking, being transferred by the demerged
company, becomes the property of the resulting company by virtue of the
----------------------
demerger.
---------------------- 3. All liabilities relevant to the undertaking, being transferred by the
demerged company, become the liabilities of the resulting company by
----------------------
virtue of the demerger.
---------------------- 4. The resulting company issues in consideration of the demerger, its shares
to the shareholders of the demerged company on a proportionate basis.
----------------------
5. The shareholders holding not less than 3/4th in value of the shares in the
---------------------- demerged company become the shareholders of the resulting company by
---------------------- virtue of the demerger.
----------------------
----------------------
1. True
---------------------- 2. False
---------------------- 3. True

----------------------
1. It provides power to compromise or make arrangements with creditors
---------------------- and members.
---------------------- i. Section 230
2. A compromise or arrangement is proposed between:
----------------------
iii. Company and its creditors
----------------------
3. If the tribunal is not satisfied then it can make an order under Section 231
---------------------- for:
---------------------- iv. Winding up
----------------------
----------------------
----------------------
----------------------

Check your Progress 4 Notes
----------------------
i. − c.
----------------------
ii. − e.
iii. − d. ----------------------
iv. − a. ----------------------
v. − b. ----------------------
----------------------
Suggested Reading
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1. http://www.freepatentsonline.com/article/Advances-in-Competitiveness-
Research/204480539.html ----------------------
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Demerger 59
Notes
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Takeover
UNIT
5
Structure:
5.1 Introduction
5.2 Meaning
5.3 Objectives of a Takeover
5.4 Provisions of Companies Act, 2013 & SEBI Takeover Code
5.5 SEBI (Substantial Acquisition of Share and Takeovers) Regulation, 2011/
Takeover Code
5.6 Public Announcement
5.7 Letter of Offer
5.8 Offer Price
5.9 Competitive Bid and Takeover Bid
5.10 Bail Out Takeovers
Summary
Key Words
Suggested Reading
Takeover 61
Notes
Objectives
----------------------
----------------------
• Describe the basic concept of acquisition and takeover
----------------------
• Enumerate the primary steps in acquisition and takeover
---------------------- • Identify the various legal and commercial aspects of acquisition
and takeover
----------------------
• Explain the various procedural requirements for takeover
----------------------
• Discuss the SEBI Takeover Code
----------------------
---------------------- 5.1 INTRODUCTION
---------------------- Restructuring is a method of changing the organisational structure,

management control in order to achieve the strategic goals of the organisation.
---------------------- Corporate restructuring is a wide expression and it includes various kinds of
tools. Quite often, the non-organic restructuring takes step in the beginning and
----------------------
then moves forward towards organic restructuring. In order to assume control of
---------------------- the target firm, acquisitions take place. Broadly, a takeover refers to acquisition
of one company by another company. Takeover may be friendly or hostile. The
---------------------- Securities Exchange Board of India has issued a Takeover Code which deals
with the regulations and laws relating to takeover and substantial acquisition of
----------------------
shares or control of a listed company or unlisted company which is subsidiary
---------------------- of a listed company.
---------------------- 5.2 MEANING

---------------------- Acquisition or takeover is a corporate action in which a company buys
---------------------- some or most, or all stakes of the target company. Takeover refers to acquisition
of one company by another company. An acquisition is the buying of the target
---------------------- company by the acquirer. Generally, the purpose of acquisition is to get the
control rather than simply the investment. An acquisition may be friendly or
---------------------- hostile.
---------------------- An acquirer may also acquire a target by other contractual means without
the acquisition of shares, such as agreements providing the acquirer with
----------------------
voting rights or board rights. It is also possible for an acquirer to acquire a
---------------------- greater degree of control in the target company. The acquisition may be partial
acquisition, substantial control acquisition or majority control acquisition.
---------------------- Through acquisition or takeover, company may enjoy disproportionate voting
rights, management rights or veto rights in the target company without going
----------------------
through organic restructuring and with less formalities and hassles. Sometimes
---------------------- acquisition or takeover steps in the beginning and then it moves forward towards
organic restructuring like merger or amalgamations, etc.
----------------------

Takeovers usually take place when shares are purchased or acquired from Notes
the shareholders of a target company at a specified price or at open market
price to gain control of that company either fully or partly. Takeover is a ----------------------
corporate device whereby one company acquires control over target company
by purchasing or controlling all or a majority of its shares. ----------------------
An acquirer may also acquire a target by other contractual means without ----------------------
the acquisition of shares, such as agreements providing the acquirer with voting
----------------------
rights or board rights.
Transferor Company or Target Company: The Company whose shares are ----------------------
proposed to be acquired is called the Transferor Company or Target Company.
----------------------
Transferee Company or Acquirer Company: The Company who proposed
to acquire the shares is called the Transferee Company or Acquirer Company. ----------------------
Types of Takeover ----------------------
Takeover may be of the following three types, broadly classified based on ----------------------
the way it acquires the target.
----------------------
a) Hostile takeover: Where the target company is unwilling or a company
buys the target company’s business or control without prior information, ----------------------
it is called hostile takeover.
----------------------
b) Friendly takeover: It means takeover of Target Company with negotiations
between the companies and thereby change in its management & control ----------------------
in a friendly manner. It is also called Negotiated Takeover.
----------------------
c) Bail-out Takeover: Takeover of a financially sick company by a
financially rich company takes place with the motive to bailout the sick ----------------------
company from ongoing losses.
----------------------

1. Acquisition or __________ is a corporate action in which a company ----------------------
buys some or most, or all stakes of the target company.
----------------------
2. The company whose shares are proposed to be acquired is called the
________ company or __________company. ----------------------
3. The company who proposed to acquire the shares is called the ----------------------
_____________ company or ___________company.
4. Where the target company is unwilling or bought the target ----------------------
company’s business or control without prior information, it is called ----------------------
______________.
----------------------
5. Friendly takeover is also called _______________.
----------------------
----------------------
Takeover 63
Notes 5.3 OBJECTIVES OF A TAKEOVER
---------------------- Takeover is a corporate device to acquire or control the target company to
achieve the corporate objectives:
----------------------
1) By the joint effort to improve productivity and profitability.
----------------------
2) To save in overhead cost and other working expenses.
---------------------- 3) To eliminate competition by acquiring the business of competitors.
---------------------- 4) To diversify through acquiring companies with new product lines.
---------------------- 5) To achieve economies of scale.
6) To achieve product development and product mix.
----------------------
7) To get new market avenue or to increase market share.
----------------------
---------------------- 5.4 PROVISIONS OF COMPANIES ACT, 2013 AND SEBI

TAKEOVER CODE
----------------------
The provisions relating to takeover is prescribed in the Companies Act,
---------------------- 2013 and the Securities Exchange Board of India (Substantial Acquisition of
---------------------- Shares and Takeovers) Regulations, 2011 also called SEBI Takeover Code.
The Companies Act, 2013 provides the power of a company to acquire
---------------------- or purchase the shares of other company under Section 186 referred to as inter-
---------------------- corporate investment.
A company may acquire shares of an unlisted company as per Section 235
----------------------
of the Companies Act, 2013, where a takeover may be affected by agreement
---------------------- with the shareholders those shares of the company which are closely held by a
small number of persons.
----------------------
The Securities Exchange Board of India has issued a Takeover Code
---------------------- through The Securities Exchange Board of India (Substantial Acquisition of
Shares and Takeovers) Regulations, 2011, which deals with the regulations and
---------------------- laws relating to takeover and substantial acquisition of shares or control of a
listed company or unlisted company which is a subsidiary of a listed company,
----------------------
i.e., in case the shares of a company are widely held or held by and large by the
---------------------- public, then the process is set out in the SEBI (Substantial Acquisition of Shares
and Takeovers) Regulations, 2011.
----------------------
Every company has Power Invest in the shares of another company called
---------------------- Inter-corporate Investment in accordance with Sec. 186 of the Companies Act,
2013 and subject to certain restrictions such as:
----------------------
1) No company shall, directly or indirectly, give any loan to any person
---------------------- or other body corporate, give any guarantee, or provide security, in connection
with a loan made by any other person or body corporate and acquire, by way of
---------------------- subscription, purchase or otherwise the securities of any other body corporate
---------------------- exceeding sixty per cent of its paid-up share capital, securities premium account

and free reserves, or hundred per cent of its free reserves and securities premium Notes
account, whichever is more.
In other words, the power of board to make inter-corporate investment ----------------------
is restricted up to sixty per cent of its paid-up share capital and free reserves, ----------------------
or hundred per cent of its free reserves, whichever is more. If inter-corporate
investment exceeds the aforesaid limit then the power to approve the same is ----------------------
with the members in general meeting with a special majority. The section covers
all direct and indirect inter-corporate loans and investment. So, the scope of ----------------------
Sec. 186 is wider. However, Sec. 186 is not applicable to any loan made, any ----------------------
guarantee given, or any security provided by:
(a) to a loan made, guarantee given or security provided by a banking ----------------------
companyor an insurance company or a housing finance company in the ----------------------
ordinary course of its business or a company engaged in the business of
financing of companies or of providing infrastructural facilities; ----------------------
(b) to any acquisition— ----------------------
(i) made by a non-banking financial company registered under Chapter
III B of the Reserve Bank of India Act, 1934 and whose principal ----------------------
businessis acquisition of securities: ----------------------
Provided that exemption to non-banking financial company shall be
inrespect of its investment and lending activities; ----------------------
(ii) made by a company whose principal business is the acquisition of ----------------------

securities;
----------------------
(iii) of shares allotted in pursuance of clause (a) of sub-section (1) of
section 62. ----------------------
As per Sec. 235 (l) of the Companies Act, it is provided that where a ----------------------
scheme involving the transfer of shares or any class of shares of the transferor
company to the transferee company has within four months after making an ----------------------
offer in that behalf by the transferee company been approved by the holders of
not less than nine-tenths in value of the shares, the transferee company may at ----------------------
anytime within two months after expiry of the said four months give notice in ----------------------
the prescribed manner to any dissenting shareholder, that it desires to acquire
his shares and when such a notice is given, the transferee company shall unless ----------------------
on an application made by the dissenting shareholder within one month from
the date on which the notice was given, the tribunal thinks fit to order otherwise, ----------------------
be entitled and bound to acquire those shares on the terms on which, under ----------------------
the scheme or contract, the shares of the approving shareholders are to be
transferred to the transferee company. ----------------------
The advantage of going through the route provided in Sec. 235 of the ----------------------
Companies Act is the facility for acquisition of minority stake.
----------------------
----------------------
----------------------
Takeover 65
Notes 5.5 SEBI (SUBSTANTIAL ACQUISITION OF SHARES AND
TAKEOVERS) REGULATIONS, 2011/TAKEOVER CODE
----------------------
The Securities and Exchange Board of India (Substantial Acquisition
---------------------- of Shares and Takeovers) Regulations, 2011 shall apply to direct and indirect
---------------------- acquisition of shares or voting rights in, or control over target company.
Substantial acquisition of shares or voting rights.
----------------------
Regulation 3
----------------------
1. No acquirer shall acquire shares or voting rights in a target company
---------------------- which taken together with shares or voting rights, if any, held by him and
by persons acting inconcert with him in such target company, entitle them
---------------------- to exercise twenty-five percent or more of the voting rights in such target
---------------------- company unless the acquirer makes a public announcement of an open
offer for acquiring shares of suchtarget company in accordance with these
---------------------- regulations.
---------------------- 2. No acquirer, who together with persons acting in concert with him, has
acquiredand holds in accordance with these regulations shares or voting
---------------------- rights in a targetcompany entitling them to exercise twenty-five per cent or
more of the voting rights in the target company but less than the maximum
---------------------- permissible non-public shareholding, shall acquire within any financial
---------------------- year additional shares or voting rights in such target company entitling
them to exercise more than five per cent of the voting rights, unless the
---------------------- acquirer makes a public announcement of an openoffer for acquiring
shares of such target company in accordance with these regulations:
----------------------
Provided that such acquirer shall not be entitled to acquire or enter into
---------------------- any agreement to acquire shares or voting rights exceeding such number
of shares as would take the aggregate shareholding pursuant to the
---------------------- acquisition above the maximum permissible non-public shareholding.
---------------------- Explanation.— For purposes of determining the quantum of acquisition of
additional voting rights under this sub-regulation,—
----------------------
(i) gross acquisitions alone shall be taken into account regardless of any
---------------------- intermittent fall in shareholding or voting rights whether owing to disposal
of shares held or dilution of voting rights owing to fresh issue of shares by
----------------------
the target company.
---------------------- (ii) in the case of acquisition of shares by way of issue of new shares by
the target company or where the target company has made an issue
----------------------
of newshares in any given financial year, the difference between the
---------------------- preallotment and the post-allotment percentage voting rights shall be
regarded as the quantum of additional acquisition.
----------------------
3. For the purposes of sub-regulation (1) and sub-regulation (2), acquisition
---------------------- ofshares by any person, such that the individual shareholding of such person
acquiring shares exceeds the stipulated thresholds, shall also be attracting the
---------------------- obligation to make an open offer for acquiring shares of the target company

irrespective of whether there is a change in the aggregate shareholding with Notes
persons acting in concert.
----------------------
Indirect acquisition of shares or control.
Regulation 5 ----------------------
1. For the purposes of regulation 3 and regulation 4, acquisition of shares or ----------------------
voting rights in, or control over, any company or other entity, that would
enable any person and persons acting in concert with him to exercise or ----------------------
direct the exercise of such percentage of voting rights in, or control over,
----------------------
a target company, the acquisition of which would otherwise attract the
obligation to make a public announcement of an open offer for acquiring ----------------------
shares under these regulations,shall be considered as an indirect acquisition
of shares or voting rights in, or control over the target company. ----------------------
2. Notwithstanding anything contained in these regulations, in the case of an ----------------------
indirect acquisition attracting the provisions of sub-regulation (1) where,—
----------------------
a.
the proportionate net asset value of the target company as a
percentage of the consolidated net asset value of the entity or ----------------------
business being acquired;
----------------------
b. the proportionate sales turnover of the target company as a percentage
of the consolidated sales turnover of the entity or business being ----------------------
acquired; or
----------------------
c. the proportionate market capitalisation of the target company as
apercentage of the enterprise value for the entity or business being ----------------------
acquired;
----------------------
is in excess of eighty per cent, on the basis of the most recent audited annual
financial statements, such indirect acquisition shall be regarded as a direct ----------------------
acquisition of the target company for all purposes of these regulations including
----------------------
without limitation, the obligations relating to timing, pricing and other
compliance requirements for the open offer. ----------------------
Explanation.— For the purposes of computing the percentage referred to in ----------------------
clause (c) of this sub-regulation, the market capitalisation of the target company
shall be taken into account on the basis of the volume-weighted average market ----------------------
price of such shares on the stock exchange for a period of sixty trading days
preceding the earlier of, the date on which the primary acquisition is contracted, ----------------------
and the date on which the intention or the decision to make the primary ----------------------
acquisition is announced in the public domain, as traded on the stock exchange
where the maximum volume of trading in the shares of the target company are ----------------------
recorded during such period.
----------------------
Disclosures of Shareholding and Control
Disclosure-related provisions [Regulation 28]: ----------------------
1.
The disclosures under this Chapter V shall be of the aggregated ----------------------
shareholding andvoting rights of the acquirer or promoter of the target
----------------------
company or every person acting in concert with him.
Takeover 67
Notes 2. For the purposes of this Chapter, the acquisition and holding of any
convertible security shall also be regarded as shares, and disclosures of
---------------------- such acquisitions and holdings shall be made accordingly.
---------------------- 3. For the purposes of this Chapter, the term “encumbrance” shall include a
pledge, lien or any such transaction, by whatever name called.
----------------------
4. Upon receipt of the disclosures required under this Chapter, the stock
---------------------- exchange shall forth with disseminate the information so received.
Disclosure of acquisition and disposal [Regulation 29]:
----------------------
1. Any acquirer who acquires shares or voting rights in a target company
---------------------- which taken together with shares or voting rights, if any, held by him and
---------------------- by persons acting in concert with him in such target company, aggregating
to five per cent or more of the shares of such target company, shall disclose
---------------------- their aggregate shareholding and voting rights in such target company in
such form as may be specified.
----------------------
2. Any acquirer, who together with persons acting in concert with him, holds
---------------------- shares or voting rights entitling them to five per cent or more of the shares
or voting rights in a target company, shall disclose every acquisition or
---------------------- disposal of shares of such target company representing two per cent or
---------------------- more of the shares or voting rights in such target company in such form
as may be specified.
---------------------- 3. The disclosures required under sub-regulation (1) and sub-regulation (2)
---------------------- shall bemade within two working days of the receipt of intimation of
allotment of shares,or the acquisition of shares or voting rights in the
---------------------- target company to,—
---------------------- a. every stock exchange where the shares of the target company are
listed; and
----------------------
b. the target company at its registered office.
---------------------- 4. For the purposes of this regulation, shares taken by way of encumbrance
---------------------- shall betreated as an acquisition, shares given upon release of encumbrance
shall be treatedas a disposal, and disclosures shall be made by such person
---------------------- accordingly in suchform as may be specified:
---------------------- Provided that such requirement shall not apply to a scheduled commercial
bank or public financial institution as pledgee in connection with a pledge
---------------------- of shares for securing indebtedness in the ordinary course of business.
---------------------- Continual disclosures [Regulation 30]:

1. Every person, who together with persons acting in concert with him,
----------------------
holds shares or voting rights entitling him to exercise twenty-five per
---------------------- cent or more of the voting rights in a target company, shall disclose their
aggregate shareholding and voting rights as of the thirty-first day of
---------------------- March, in such target company in such form as may be specified.
----------------------

2. The promoter of every target company shall together with persons acting Notes
in concertwith him, disclose their aggregate shareholding and voting
rights as of the thirty-first day of March, in such target company in such ----------------------
form as may be specified.
----------------------
3. The disclosures required under sub-regulation (1) and sub-regulation (2)
shall be made within seven working days from the end of each financial ----------------------
year to,—
----------------------
a. every stock exchange where the shares of the target company are
listed; and ----------------------
b. the target company at its registered office. ----------------------
Disclosure of encumbered shares [Regulation 31]: ----------------------
1. The promoter of every target company shall disclose details of shares in
such target company encumbered by him or by persons acting in concert ----------------------
with him in such form as may be specified. ----------------------
2. The promoter of every target company shall disclose details of any
invocation of such encumbrance or release of such encumbrance of shares ----------------------
in such form as may be specified. ----------------------
3. The disclosures required under sub-regulation (1) and sub-regulation (2)
----------------------
shall bemade within seven working days from the creation or invocation
or release ofencumbrance, as the case may be to,— ----------------------
a. every stock exchange where the shares of the target company are
----------------------
listed; and
b. the target company at its registered office. ----------------------
Appointment of a Merchant Banker ----------------------
As per Regulation 12(1) prior to making a public announcement, the acquirer ----------------------
shall appoint a merchant banker registered with the Board, who is not an
associate of the acquirer, as themanager to the open offer. ----------------------
For the purposes of this regulation the term “associate” has the same meaning as ----------------------
in the Securities and Exchange Board of India (Merchant Bankers) Regulations,
1992. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
Takeover 69
Notes
----------------------
----------------------
1. The Securities Exchange Board of India has issued a Takeover Code
---------------------- through:
i. The Companies Act, 2013
----------------------
ii. The Indian Contract Act
---------------------- iii. SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 2011
----------------------
iv. Acquisition
---------------------- 2. The power of board to make inter-corporate investment is restricted
up to 60% of its paid-up share capital and free reserves, or ______ of
----------------------
free reserves, whichever is more.
---------------------- i. 10%
ii. 50%
----------------------
iii. 60%
---------------------- iv. 100%
----------------------
---------------------- Activity 1
---------------------- Find about the recent top 10 global takeovers.

----------------------
5.6 PUBLIC ANNOUNCEMENT
----------------------
---------------------- Irrespective of acquisition or holding of shares or voting rights in a target

company, no acquirer shall acquire, directly or indirectly, control over such
---------------------- target company unless the acquirer makes a public announcement of an open
offer for acquiring shares of such target company in accordance with these
----------------------
regulations.
---------------------- As per Regulation 15 the public announcement shall contain such
information as may be specified, including the following,—
----------------------
●● name and identity of the acquirer and persons acting in concert with him;
----------------------
●● name and identity of the sellers, if any;
---------------------- ●● nature of the proposed acquisition such as purchase of shares or allotment
of shares, or any other means of acquisition of shares or voting rights in,
----------------------
or control over the target company;
---------------------- ●● the consideration for the proposed acquisition that attracted the obligation
to make an open offer for acquiring shares, and the price per share, if any;
----------------------
●● the offer price, and mode of payment of consideration; and
---------------------- ●● offer size, and conditions as to minimum level of acceptances, if any.

The detailed public statement pursuant to the public announcement shall contain Notes
such information as may be specified in order to enable shareholders to make an
informed decision with reference to the open offer. ----------------------
The public announcement of the open offer, the detailed public statement, and any ----------------------
other statement, advertisement, circular, brochure, publicity material or letter of
offer issued in relation to the acquisition of shares under these regulations shall ----------------------
not omit any relevant information, or contain any misleading information.
----------------------
5.7 LETTER OF OFFER ----------------------
As per Regulation 16 within five working days from the date of the ----------------------
detailed public statement made under sub-regulation (4) of regulation 13, the
acquirer shall, through the manager to the open offer, file with the Board, a draft ----------------------
of the letter of offer containing such information as may be specified along with ----------------------
a non-refundable fee, as per the following scale, by way of a banker’s cheque or
demand draft payable in Mumbai in favour of the Board,— ----------------------
Sr. Consideration payable Fee (Rs.) ----------------------
No. under the Open Offer
a. Upto ten crore rupees. One lakh twenty five thousand rupees ----------------------
(1,25,000/-)
b. More than ten crore One lakh twenty five thousand rupees ----------------------
rupees, but less than or (1,25,000/-) plus 0.025 per cent of the portion ----------------------
equal to one thousand of the offer size in excess of ten crore rupees
crore rupees. (10,00,00,000/-) ----------------------
c. More than one thousand One crore twenty five lakh rupees (1,25,00,000/-
crore rupees, but less ) plus 0.03125 per cent of the portion of the ----------------------
than or equal to five offer size in excess of one thousand crore
----------------------
thousand crore rupees. rupees (1000,00,00,000/-)
d. More than five thousand Two crore fifty lakh rupees (2,50,00,000/-) ----------------------
crore rupees. plus 0.01 per cent of the portion of the offer
size in excess of five thousand crore rupees ----------------------
(5000,00,00,000/-), subject to a maximum of
three crore rupees (3,00,00,000/-) ----------------------
The consideration payable under the open offer shall be calculated at the ----------------------
offer price, assuming full acceptance of the open offer, and in the event the open
offer is subject to differential pricing, shall be computed at the highest offer ----------------------
price, irrespective of manner of payment of the consideration:
----------------------
Provided that in the event of consideration payable under the open offer
being enhanced owing to a revision to the offer price or offer size the fees ----------------------
payable shall stand revised accordingly, and shall be paid within five working ----------------------
days from the date of such revision.
The manager to the open offer shall provide soft copies of the public ----------------------
announcement, the detailed public statement and the draft letter of offer in ----------------------
accordance with such specifications as may be specified, and the Board shall
upload the same on its website. ----------------------
Takeover 71
Notes The Board shall give its comments on the draft letter of offer as
expeditiously as possible but not later than fifteen working days of the receipt
---------------------- of the draft letter of offer and in the event of no comments being issued by
the Board within such period, it shall be deemed that the Board does not have
---------------------- comments to offer:
---------------------- Provided that in the event the Board has sought clarifications or additional
information from the manager to the open offer, the period for issuance of
----------------------
comments shall be extended to the fifth working day from the date of receipt of
---------------------- satisfactory reply to the clarification or additional information sought.
Provided further that in the event the Board specifies any changes, the
----------------------
manager to the open offer and the acquirer shall carry out such changes in the
---------------------- letter of offer before it is dispatched to the shareholders.
In the case of competing offers, the Board shall provide its comments on
----------------------
the draft letter of offer in respect of each competing offer on the same day.
---------------------- In the event the disclosures in the draft letter of offer are inadequate the
---------------------- Board may call for a revised letter of offer and shall deal with the revised letter
of offer in accordance with sub-regulation (4).
---------------------- Provision of escrow.
---------------------- As per Regulation 17, not later than two working days prior to the date of the
detailed public statement of the open offer for acquiring shares, the acquirer shall
---------------------- create an escrow account towards security for performance of his obligations
---------------------- under these regulations, and deposit in escrow account such aggregate amount
as per these regulations.
----------------------
----------------------
5.8 OFFER PRICE
---------------------- Regulation 8
1. The open offer for acquiring shares under regulation 3, regulation 4,
---------------------- regulation 5 or regulation 6 shall be made at a price not lower than the
---------------------- price determined in accordance with sub-regulation (2) or sub-regulation
(3), as the case may be.
----------------------
2. In the case of direct acquisition of shares or voting rights in, or control
---------------------- over the target company, and indirect acquisition of shares or voting rights
in, or controlover the target company where the parameters referred to in
---------------------- sub-regulation (2) of regulation 5 are met, the offer price shall be the
highest of,—
----------------------
a. the highest negotiated price per share of the target company for any
---------------------- acquisition under the agreement attracting the obligation to make a
public announcement of an open offer;
----------------------
b.
the volume-weighted average price paid or payable for
---------------------- acquisitions,whether by the acquirer or by any person acting in
---------------------- concert with him,during the fifty-two weeks immediately preceding
the date of the public announcement;
c. the highest price paid or payable for any acquisition, whether by Notes
the acquirer or by any person acting in concert with him, during
the twenty six weeks immediately preceding the date of the public ----------------------
announcement;
----------------------
d. the volume-weighted average market price of such shares for a
period of sixty trading days immediately preceding the date of the ----------------------
public announcement as traded on the stock exchange where the
----------------------
maximum volume of trading in the shares of the target company are
recorded duringsuch period, provided such shares are frequently ----------------------
traded;
----------------------
e. where the shares are not frequently traded, the price determined by
the acquirer and the manager to the open offer taking into account ----------------------
valuation parameters including, book value, comparable trading
multiples, and such other parameters as are customary for valuation ----------------------
of shares of such companies; and
----------------------
f. the per share value computed under sub-regulation (5), if applicable.
----------------------
3. In the case of an indirect acquisition of shares or voting rights in, or control
overthe target company, where the parameter referred to in sub-regulation ----------------------
(2) of regulation 5 are not met, the offer price shall be the highest of,—
----------------------
a. the highest negotiated price per share, if any, of the target company
for any acquisition under the agreement attracting the obligation to ----------------------
make a public announcement of an open offer;
----------------------
b.
the volume-weighted average price paid or payable for any
acquisition, whether by the acquirer or by any person acting ----------------------
in concert with him, during the fifty-two weeks immediately
preceding the earlier of, the date on which the primary acquisition ----------------------
is contracted, and the date on which the intention or the decision to ----------------------
make the primary acquisition is announced in the public domain;
----------------------
c. the highest price paid or payable for any acquisition, whether by
the acquirer or by any person acting in concert with him, during the ----------------------
twenty-six weeks immediately preceding the earlier of, the date on
which the primary acquisition is contracted, and the date on which ----------------------
the intention or the decision to make the primary acquisition is
----------------------
announced in the public domain;
d. the highest price paid or payable for any acquisition, whether by the ----------------------
acquirer or by any person acting in concert with him, between the
----------------------
earlier of, the date on which the primary acquisition is contracted,
and the date on which the intention or the decision to make the ----------------------
primary acquisition is announced in the public domain, and the date
of the public announcement of the open offer for shares of the target ----------------------
company made under these regulations;
----------------------
e. the volume-weighted average market price of the shares for a period
of sixty trading days immediately preceding the earlier of, the date ----------------------
Takeover 73
Notes on which the primary acquisition is contracted, and the date on
which the intention or the decision to make the primary acquisition
---------------------- is announced in the public domain, as traded on the stock exchange
where the maximum volume of trading in the shares of the target
---------------------- company are recorded during such period, provided such shares are
---------------------- frequently traded; and
f. the per share value computed under sub-regulation (5).
----------------------
4. In the event the offer price is incapable of being determined under any
---------------------- of the parameters specified in sub-regulation (3), without prejudice to
the requirements of sub-regulation (5), the offer price shall be the fair
----------------------
price of shares of the targetcompany to be determined by the acquirer and
---------------------- the manager to the open offer taking into account valuation parameters
including, book value, comparable trading multiples, and such other
---------------------- parameters as are customary for valuation of shares of such companies.
----------------------
5.9 COMPETITIVE BID AND TAKEOVER BID
----------------------
When a bid is announced by a potential acquirer and other than the
---------------------- potential acquirer if any other person has interest in acquiring the shares of
Target Company then such other acquirer should offer a competitive bid.
----------------------
Competitive bid is an offer made by other interested acquirer other than a
---------------------- potential acquirer.
---------------------- Takeover Bid
Takeover bid is addressed to the shareholders of the target company to
----------------------
buy their shares in the company at the offered price within the stipulated period
---------------------- of time with a view to acquiring sufficient number of shares to give the offer or
company voting control of the target company.
---------------------- A takeover bid is a technique, which is adopted by a company to get
---------------------- control over the management and affairs of another company by acquiring
its controlling shares. As discussed earlier, a takeover bid may be a friendly
---------------------- takeover or a hostile takeover.
----------------------
5.10 BAILOUT TAKEOVERS
----------------------
Takeover of a financially sick company by a profit earning company to bail
---------------------- out the former is known as bail out takeover. There are several advantages for
a profit making company to takeover a sick company. The price would be very
---------------------- attractive as creditors, mostly banks and financial institutions having a charge
---------------------- on the industrial assets, would like to recover to the extent possible. Banks and
other lending financial institutions would evaluate various options and if there
---------------------- is no other go except to sell the property, they will invite bids. Such a sale could
take place by transfer of shares. While identifying a party(acquirer), lenders do
---------------------- evaluate the bids received, the purchase price, the track record of the acquirer,
---------------------- and the overall financial position of the acquirer. Thus a bail out takeover takes
place with the approval of the banks and financial institutions.
Notes
Activity 2
----------------------
Go through the SEBI (Substantial Acquisition of Shares and Takeovers)
----------------------
Regulations, 2011
----------------------
Summary ----------------------
●● Takeover refers to acquisition of one company by another company. ----------------------

●● n acquisition is the buying of the target company by the acquirer.
A ----------------------
Takeover may be friendly or hostile.
----------------------
●● ompanies Act, 2013 provides the power of a company to acquire or
C
purchase the shares of another company under Section 186 referred as ----------------------
inter-corporate investment.
----------------------
●● he Securities Exchange Board of India has issued a Takeover Code, which
T
deals with the regulations and laws relating to takeover and substantial ----------------------
acquisition of shares or control of a listed company and stipulate certain
disclosures from time to time to be made by the acquirer, shares or voting ----------------------
rights of a listed company and also discloser by the promoters or those
----------------------
who have control over the management of a listed company.
●● nless acquirer makes a public announcement to acquire shares of the
U ----------------------
target company in accordance with the prescribed regulation, no acquirer
shall acquire 25 per cent or more shares or voting rights. ----------------------
●● here is requirement for submitting draft letter of offer to the Board after
T ----------------------
the public announcement is made.
----------------------
●● There has to be appointed of a merchant banker registered with the Board,
by the acquirer prior to making a public announcement. ----------------------
----------------------
Keywords
----------------------
●● ompetitive bid: When a bid is announced by a potential acquirer
C
and other than the potential acquirer if any other person has interest in ----------------------
acquiring the shares of the target company then such other acquirer should
offer a competitive bid. ----------------------
●● ostile takeover: Where the target company is unwilling or bought the
H ----------------------
target company’s business or control without prior information, it is called
hostile takeover. ----------------------
●● Friendly takeover: Takeover of the target company with negotiations ----------------------
between the companies and thereby change in its management and control
in a friendly manner.
----------------------
●● Target company: The company whose shares are proposed to be acquired.
----------------------
●● Takeover: Acquisition of one company by another company.
----------------------
Takeover 75
Notes
----------------------
1. Explain the types of takeover.
---------------------- 2. What are the objectives of takeover?
---------------------- 3. Why is takeover a popular way for corporate growth?
---------------------- 4. Explain the term “bail out takeover”.

5. Explain the power of a company to acquire or purchase the shares of
---------------------- another company under Section 186 of the Companies Act.
---------------------- 6. What is meant by public announcement? Explain what should a public
announcement contain.
----------------------

1. Acquisition or takeover is a corporate action in which a company buys
----------------------
some or most, or all stakes of the target company.
---------------------- 2. The company whose shares are proposed to be acquired is called the
---------------------- transferor company or the target company.
3. The company who proposed to acquire the shares is called the transferee
---------------------- company or acquirer company.
---------------------- 4. Where the target company is unwilling or bought the target company’s
business or control without prior information, it is called hostile takeover.
----------------------
5. Friendly takeover is also called negotiated takeover.
----------------------
---------------------- 1. The Securities Exchange Board of India has issued a Takeover Code
through:
----------------------
iii. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,
---------------------- 2011
---------------------- 2. The power of board to make inter corporate investment is restricted up to
60% of its paid-up share capital and free reserves, or ______percent of
---------------------- free reserves, whichever is more
---------------------- iv. 100%
----------------------
Suggested Reading
----------------------
1. http://www.deloitte.com/assets/DcomIndia/Local%20Assets/Documents/
---------------------- SEBI_Takeover_Regulation_2011.pdf

Reorganise through Compromise or Arrangement
UNIT
6
Structure:
6.1 Introduction
6.2 Meaning of Compromise and Arrangement
6.3 Applicability of Companies Act
6.4 Procedure for Compromise or Arrangement
6.5 Scheme of Compromise or Arrangement
6.6 Calling of Meetings and Approval by Members or Creditors
6.7 Petition to Tribunal and related Procedures
6.8 Order of the Tribunal
6.9 Compromise or Arrangement in Case of Government Companies
Summary
Key Words
Suggested Reading
Reorganise through Compromise or Arrangement 77

Notes
Objectives
----------------------
----------------------
• Describe the basic concept of compromise or arrangement
----------------------
• Enumerate the primary steps in compromise or arrangement
---------------------- • State the various legal aspects of compromise or arrangement
---------------------- • Name various approvals in schemes of compromise or arrangement
---------------------- • Analyse the role of the tribunal in the process of compromise or

arrangement
----------------------
---------------------- 6.1 INTRODUCTION
---------------------- According to Section 230 of the Companies Act, 2013 a company may
make an application to the Tribunal for its sanction of the scheme, proposing
---------------------- to enter into a compromise or an arrangement with its members or creditors.
Corporate restructuring may be resorted to with a view to reso1ve a dispute
----------------------
between the company and its members or creditors. Notwithstanding the
---------------------- absence of dispute, for other reasons to achieve non-organic restructuring
such as reorganisation of share capital, alteration of rights, etc. can be achieve
---------------------- through compromise or arrangements.
----------------------
6.2 MEANING OF COMPROMISE AND ARRANGEMENT
----------------------
The term “compromise” has not been defined in the Companies Act, 2013
---------------------- but the term “arrangement” has been defined in Section 230 of the Companies
Act, 2013. Largely these terms may be regarded as describing any form of
---------------------- internal reorganisation of the company or its affairs, as well as schemes for the
---------------------- merger of two or more companies or for the division of one company into two
or more companies.
----------------------
The term “arrangement” means the reorganisation of the share capital by
---------------------- the consolidation of shares of different classes, or by the division of shares into
shares of different classes, but also any other arrangement between the members
---------------------- or creditors in relation to the reorganisation of the company. Arrangement
denotes a final settlement; adjustment by agreement, an agreement by adjustment
----------------------
of conflicting or opposing claims by reciprocal modification of demands.
---------------------- Section 230 provides that the term arrangement means and includes a
reorganisation of the share capital of the company by the division of shares into
----------------------
shares of different classes or by the consolidation of shares of different classes,
---------------------- or by both. A scheme of arrangement modifying the rights of shareholders can
also be covered under this provision.
----------------------
The term compromise is not defined under Companies Act, 2013. Hence,
---------------------- we need to look for the general meaning of this term. Compromise implies

existence of a dispute which needs to be resolved through a give and take action Notes
by the parties to avoid the dispute.
----------------------
Compromise means a settlement of differences by mutual understanding
and with approval from both sides these expressions are invariably used in the ----------------------
phrase Scheme of Compromise or Arrangement.
----------------------
Arrangement is having a wider meaning as compared to the word
compromise, although it must mean something comparable to compromise. ----------------------
There cannot be a compromise unless there is an existing dispute but an
arrangement within Section 230 may come into existence even if there is no ----------------------
dispute among the parties. So arrangement is wider as compared to compromise.
----------------------
Amalgamation is an arrangement. Amalgamation is a legal arrangement
by which two or more companies are joined together to form a new entity or one ----------------------
or more companies are to be absorbed. According to Sec. 232 of the Companies
----------------------
Act, 2013, any compromise or arrangement may be with reference to a scheme
for the reconstruction of any company or companies, or the amalgamation of ----------------------
any two or more companies.
----------------------
Meaning of Member/Creditors
The term “member” is used very often in compromise and arrangement. ----------------------
The term member is defined u/s 2(55) of the Companies Act, 2013. ----------------------
“Member”, in relation to a company, means—
----------------------
(i) the subscriber to the memorandum of the company who shall be deemed
to have agreed to become member of the company, and on its registration, ----------------------
shall be entered as member in its register of members;
----------------------
(ii) every other person who agrees in writing to become a member of the
company and whose name is entered in the register of members of the ----------------------
company;
----------------------
(iii) every person holding shares of the company and whose name is entered as
a beneficial owner in the records of a depository; ----------------------
The term “creditor” is not defined under Companies Act, 2013. A creditor ----------------------
is a person to whom the company owes a debt and also includes a person who
may have contingent claim against the company. ----------------------
Some examples of compromise or arrangement are: ----------------------

●● Preference shareholders give up or ready to give up their rights to arrears ----------------------
of dividends
●● Preference shareholders accept or agree to a reduced rate of dividend ----------------------
●● Shareholders of the company agree to transfer their shares to another ----------------------

company
----------------------
●● Modifying any rights of shareholders or class of shareholders
●● The creditors accepting payment of their claims partially or partially in ----------------------
shares or debentures of the company, etc. ----------------------

Notes 6.3 APPLICABILITY OF COMPANIES ACT
---------------------- Sections 230 to 240 of Companies Act, 2013 are already discussed in Unit 4.
---------------------- The Tribunal may direct such compromise or arrangement if a majority in

number representing three fourths in value of the creditors, or class of creditors,
---------------------- or members either in person or through proxies or by postal ballot voted in
favor. Any such order made by the court under sub-sec (6) of sec. 230 shall have
---------------------- no effect until a certified copy of the order has been filed with the Registrar.
---------------------- Sec. 230 of the companies act not only provides the procedural mechanism
for a scheme of compromise or arrangement to be sanctioned and approved by
---------------------- the tribunal but also it makes scheme binding on the members and creditors of
---------------------- the company and all other concerned parties. Under the relevant provision any
company may enter into a compromise or arrangement with its creditors or its
---------------------- members without going into liquidation.
----------------------
6.4 PROCEDURE FOR COMPROMISE OR ARRANGEMENT
----------------------
In the scheme of a compromise or arrangement between it members and
---------------------- creditors, the company or the creditor or member may make an application
to the tribunal. On such application the tribunal may order a meeting of the
---------------------- creditors or members or any class of them, as the case may be, and such meeting
---------------------- shall be called, held and conducted in such manner as the tribunal may direct.
In the case of a company which is being wound up, any such application should
---------------------- be made by the liquidator.
----------------------
----------------------
Fill in the blanks.
----------------------
1. The term ___________________ means the reorganisation of the
---------------------- share capital by the consolidation of shares of different classes, or
by the division of shares into shares of different classes, and also any
----------------------
other arrangement between the members or creditors in relation to the
---------------------- reorganisation of the company.
2. Compromise means a settlement of differences by ________________
----------------------
and with ____________ from both sides.
---------------------- 3. The only difference between compromise and arrangement is in
---------------------- respect to existence of ___________.
4. The term ‘member’ is defined u/s ____ of the Companies Act, 2013.
----------------------
5. The ‘creditor’ is a person to whom the company ___________ and
---------------------- also includes a person who may have contingent claim against the
company.
----------------------
----------------------

6.5 SCHEME OF COMPROMISE OR ARRANGEMENT Notes
The provisions of law require that an applicant, i.e., company or members ----------------------
or creditors should forward an application to the national company law tribunal.
----------------------
Hence, the company, with the consent of the members or creditors and based on
suggestions from its advisors, prepares a scheme of compromise or arrangement ----------------------
and presents it to the tribunal for its approval.
----------------------
A scheme of compromise or arrangement includes a reorganisation
of the share capital of the company by the division of shares into shares of ----------------------
different classes or by the consolidation of shares of different classes, or by
both. A scheme of arrangement modifying the rights of shareholders can also ----------------------
be covered under this provision. ----------------------
The Companies Act does not prescribe any form for a scheme of
compromise or a scheme of arrangement. Conventionally, certain standard or ----------------------
usual clauses are included in a scheme as discussed in earlier unit. Once the ----------------------
scheme is ready then there is requirement for calling of meeting and getting
approvals in the meeting. The board of directors holds the meeting and approves ----------------------
the scheme in the meeting.
----------------------
Companies Act, 2013 provides that when the concerned Tribunal directs
for conducting a meeting of members or creditors at a specified time and venue, ----------------------
such meeting must be called by giving adequate notice. Then the meeting may
be called for approval of a scheme with a particular majority of the members or ----------------------
creditors. The majority required is the majority in number representing 3/4th in ----------------------
value of the members or creditors as the case may be.
----------------------
Once the said meeting agrees with such special majority as required in
the law and if the said scheme is further sanctioned by the tribunal, it shall be ----------------------
binding upon the members or creditors or any concerned parties as the case may
be. The order passed by the tribunal as per the relevant provisions of the Act ----------------------
should be filed with the Registrar of Companies within the prescribed period. If
----------------------
the order is not filed with the Registrar, it will not have any effect.
----------------------
6.6 CALLING OF MEETINGS AND APPROVAL BY
MEMBERS OR CREDITORS ----------------------
----------------------
Board of Directors of companies is required to approve the scheme of
compromise or arrangement and recommend for further approval of members ----------------------
or creditors and finally the tribunal.
----------------------
Approval by Members or Creditors
Upon hearing the application, the Tribunal shall give directions fixing the ----------------------
date, time and venue for the meeting of the members or creditors or both as the ----------------------
case may be. Members’ and creditors’ approval to the scheme of amalgamation
is required to be obtained for the Tribunal’s sanction. ----------------------
----------------------

Notes When the scheme of compromise or arrangement is proposed between a
company and its members or creditors or any class of them, the tribunal may
---------------------- on application made by the company or of any member or creditor, etc. order a
meeting of the members or class of members or creditors or class of creditors
---------------------- and such meeting will be held and conducted in the manner prescribed by the
---------------------- tribunal.
---------------------- 6.7 PETITION TO TRIBUNAL AND RELATED

---------------------- PROCEDURES
---------------------- Every scheme of arrangement or compromise requires sanction of the

Tribunal. An application seeking directions to call, hold and conduct meeting is
---------------------- required to be made to the Tribunal.
---------------------- The company or any other person, by whom an application is made under
section 230(1), shall disclose to the Tribunal by affidavit—
----------------------
(a) all material facts relating to the company, such as the latest financial
---------------------- position of the company, the latest auditor’s report on the accounts of the
company and the pendency of any investigation or proceedings against
---------------------- the company;
---------------------- (b)
reduction of share capital of the company, if any, included in the
compromise or arrangement;
----------------------
(c) any scheme of corporate debt restructuring consented to by not less than
---------------------- seventy-five per cent of the secured creditors in value, including—
---------------------- (i) a creditor’s responsibility statement in the prescribed form;
(ii)
safeguards for the protection of other secured and unsecured
----------------------
creditors;
---------------------- (iii) report by the auditor that the fund requirements of the company
after the corporate debt restructuring as approved shall conform to
----------------------
the liquidity test based upon the estimates provided to them by the
---------------------- Board;
---------------------- (iv) where the company proposes to adopt the corporate debt restructuring
guidelines specified by the Reserve Bank of India, a statement to
---------------------- that effect; and
---------------------- (v) a valuation report in respect of the shares and the property and all
assets, tangible and intangible, movable and immovable, of the
---------------------- company by a registered valuer.
---------------------- Notice:
Where a meeting is proposed to be called in pursuance of an order of the
----------------------
Tribunal under section 230 (1), a notice of such meeting shall be sent to all the
---------------------- creditors or class of creditors and to all the members or class of members and
the debenture-holders of the company, individually at the address registered
---------------------- with the company which shall be accompanied by a statement disclosing the

details of the compromise or arrangement, a copy of the valuation report, if any, Notes
and explaining their effect on creditors, key managerial personnel, promoters
and non-promoter members, and the debenture-holders and the effect of the ----------------------
compromise or arrangement on any material interests of the directors of the
company or the debenture trustees, and such other matters as may be prescribed. ----------------------
The notice and other documents shall also be placed on the website of the ----------------------
company, if any, and in case of a listed company, these documents shall be sent
----------------------
to the Securities and Exchange Board and stock exchange where the securities
of the companies are listed, for placing on their website and shall also be ----------------------
published in newspapers in such manner as may be prescribed:
----------------------
Where the notice for the meeting is also issued by way of an advertisement, it
shall indicate the time within which copies of the compromise or arrangement ----------------------
shall be made available to the concerned persons free of charge from the
registered office of the company. ----------------------
A notice under section 230(3) shall provide that the persons to whom the notice ----------------------
is sent may vote in the meeting either themselves or through proxies or by
postal ballot to the adoption of the compromise or arrangement within one ----------------------
month from the date of receipt of such notice:
----------------------
Provided that any objection to the compromise or arrangement shall be made
only by persons holding not less than ten per cent. of the shareholding or having ----------------------
outstanding debt amounting to not less than five per cent. of the total outstanding ----------------------
debt as per the latest audited financial statement.
Notice to be sent to various statutory authorities ----------------------
A notice under section 230(3) along with all the documents in such form as ----------------------
may be prescribed shall also be sent to the Central Government, the income-
tax authorities, the Reserve Bank of India, the Securities and Exchange Board, ----------------------
the Registrar, the respective stock exchanges, the Official Liquidator, the ----------------------
Competition Commission of India established under sub-section (1) of section
7 of the Competition Act, 2002, if necessary, and such other sectoral regulators ----------------------
or authorities which are likely to be affected by the compromise or arrangement
and shall require that representations, if any, to be made by them shall be made ----------------------
within a period of thirty days from the date of receipt of such notice, failing ----------------------
which, it shall be presumed that they have no representations to make on the
proposals. ----------------------
Approval of Scheme ----------------------
Where, at a meeting held in pursuance of section 230(1), majority of persons
----------------------
representing three-fourths in value of the creditors, or class of creditors or
members or class of members, as the case may be, voting in person or by ----------------------
proxy or by postal ballot, agree to any compromise or arrangement and if such
compromise or arrangement is sanctioned by the Tribunal by an order, the ----------------------
same shall be binding on the company, all the creditors, or class of creditors
----------------------
or members or class of members, as the case may be, or, in case of a company
being wound up, on the liquidator and the contributories of the company. ----------------------

Notes
----------------------
State True or False
----------------------
1. A notice under section 230(3) along with all the documents should
---------------------- also be sent to the Central Government, the income-tax authorities,
the Reserve Bank of India, the Securities and Exchange Board, the
---------------------- Registrar, the respective stock exchanges, the Official Liquidator, the
---------------------- Competition Commission of India, etc.
2. The order of the Tribunal under section 230(6) shall be filed with the
----------------------
Registrar by the company within a period of 21 days of the receipt of
---------------------- the order.
----------------------
Activity 1
----------------------
Go through the judgment of Re: Apex Investments Pvt. Ltd. (1992) CLA 20
----------------------
(Del).
----------------------
---------------------- 6.8 ORDER OF THE TRIBUNAL

---------------------- The tribunal has to ensure that, the provisions of the statute have been
complied with, all the requisite statutory procedure for supporting a scheme has
----------------------
been complied with and that the requisite meetings have been held adequately.
---------------------- It is essential that the scheme must be a fair and just. The tribunal while
sanctioning the scheme must see that the scheme is a reasonable one and if the
---------------------- tribunal is satisfied in all respect after hearing all the parties concern, it may
order the scheme to be approved.
----------------------
After the hearing is over and after all the concern parties are being heard,
---------------------- then the tribunal will pass an order sanctioning the Scheme of compromise
or arrangement. The order will be passed with such directions or with such
----------------------
modifications in the Scheme as the tribunal may think fit to make for the Scheme
---------------------- proper functioning.
---------------------- An order made by the Tribunal under section 230(6) shall provide for all or any
of the following matters, namely:—
---------------------- (a)
where the compromise or arrangement provides for conversion of
---------------------- preference shares into equity shares, such preference shareholders shall
be given an option to either obtain arrears of dividend in cash or accept
---------------------- equity shares equal to the value of the dividend payable;
---------------------- (b) the protection of any class of creditors;
(c)
if the compromise or arrangement results in the variation of the
----------------------
shareholders’ rights, it shall be given effect to under the provisions of
---------------------- section 48;

(d) if the compromise or arrangement is agreed to by the creditors under Notes
sub-section (6), any proceedings pending before the Board for Industrial
and Financial Reconstruction established under section 4 of the Sick ----------------------
Industrial Companies (Special Provisions) Act, 1985 shall abate; ----------------------
(e) such other matters including exit offer to dissenting shareholders, if any,
as are in the opinion of the Tribunal necessary to effectively implement ----------------------
the terms of the compromise or arrangement: ----------------------
No compromise or arrangement shall be sanctioned by the Tribunal unless a
----------------------
certificate by the company’s auditor has been filed with the Tribunal to the effect
that the accounting treatment, if any, proposed in the scheme of compromise or ----------------------
arrangement is in conformity with the accounting standards prescribed under
section 133. ----------------------
The order of the Tribunal shall be filed with the Registrar by the company within ----------------------
a period of thirty days of the receipt of the order.
----------------------
Futher, according to Section 231, where the Tribunal makes an order under
section 230 sanctioning a compromise or an arrangement in respect of a ----------------------
company, it—
----------------------
(a) shall have power to supervise the implementation of the compromise or
arrangement; and ----------------------
(b) may, at the time of making such order or at any time thereafter, give ----------------------
such directions in regard to any matter or make such modifications in the
compromise or arrangement as it may consider necessary for the proper ----------------------
implementation of the compromise or arrangement.
----------------------
If the Tribunal is satisfied that the compromise or arrangement sanctioned under
section 230 cannot be implemented satisfactorily with or without modifications, ----------------------
and the company is unable to pay its debts as per the scheme, it may make an
order for winding up the company and such an order shall be deemed to be an ----------------------
order made under section 273. ----------------------
6.9 COMPROMISE OR ARRANGEMENT IN CASE OF ----------------------

GOVERNMENT COMPANIES ----------------------
Government Company as defined in Section 2(45) of the Companies Act, ----------------------
2013. means any company in which not less than fifty one per cent of the paid-
up share capital is held by the Central Government, or by any State Government ----------------------
or Governments, or partly by the Central Government and partly by one or
----------------------
more State Governments, and includes a company which is a subsidiary of a
Government company. In case of any scheme of compromise or arrangement ----------------------
by a Government company, an application is required to be made to the Central
Government for its sanction by a Government company. ----------------------
----------------------
----------------------

Notes Summary
---------------------- ●● he terms compromise or arrangement may be regarded as describing
T
any form of internal reorganisation of the company or its affair.
----------------------
●● rrangement means the reorganisation or arrangement between the
A
---------------------- members or creditors in relation to the reorganisation of the company,
whereas compromise implies existence of a dispute which needs to be
----------------------
resolved through a give and take action by the parties to avoid the dispute.
---------------------- ●● ribunal has wide power to approve or sanction compromise or
T
arrangement if approved by the members or creditors as the case may
----------------------
be. After the petition is submitted to the tribunal. The tribunal will fix up
---------------------- a date for the hearing of the petition and finally it will be sanctioned by
the members or creditors or any such class as the case may be by special
---------------------- majority to invoke the scheme.
----------------------
Keywords
----------------------
●● rrangement: Section 390 (b) of the Companies Act provides that the
A
---------------------- term arrangement means and includes a reorganisation of the share capital
of the company by the division of shares into shares of different classes or
----------------------
by the consolidation of shares of different classes, or by both.
---------------------- ●● ompromise: Resolving a dispute through a give and take action by the
C
parties to avoid the dispute.
----------------------
●● Member: Member means and includes every person who agrees to
---------------------- become member of the company and whose name is entered in the register
of members maintained by the company.
---------------------- ●● reditor: A person to whom the company owes a debt and also includes
C
a person who may have contingent claim against the company.
----------------------
---------------------- Self-Assessment Questions

---------------------- 1. Elaborate on some examples of compromise or arrangement.
---------------------- 2. Explain briefly the compromise or arrangement in case of Government
companies.
----------------------
3. Explain the legal procedure for compromise or arrangement.
---------------------- 4. Explain the term scheme of compromise or arrangement.
----------------------
----------------------
----------------------
----------------------
----------------------

Answers to Check your Progress Notes
1. The term arrangement means the reorganisation of the share capital by the
consolidation of shares of different classes, or by the division of shares ----------------------
into shares of different classes, and also any other arrangement between ----------------------
the members or creditors in relation to the reorganisation of the company.
----------------------
2. Compromise means a settlement of differences by mutual understanding
and with approval from both sides. ----------------------
3. The only difference between compromise and arrangement is in respect to
----------------------
existence of dispute.
4. The term ‘member’ is defined u/s 2(55) of the Companies Act, 2013. ----------------------
5. The ‘creditor’ is a person to whom the company owes a debt and also ----------------------
includes a person who may have contingent claim against the company.
----------------------
1. True ----------------------
2. False ----------------------
----------------------
Suggested Reading
----------------------
1. Chandratre, K.R. 2010. Corporate Restructuring. Bharat Law House.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Joint Ventures (JV) and Reorganising Business
UNIT
7
Structure:
7.1 Introduction
7.2 Joint Venture: Meaning
7.3 Legal Form of Joint Venture
7.4 Types of Joint Venture
7.5 Joint Venture Agreement
7.6 Content of Joint Venture Agreement
7.7 Conversion of a Partnership Firm into a Company
7.8 Conversion of Private Limited Company into Public Company
Summary
Key Words
Suggested Reading
Joint Ventures (JV) and Reorganising Business 89

Notes
Objectives
----------------------
----------------------
• State the concept of joint venture
----------------------
• Examine why joint venture is an alternative to merger
---------------------- • Outline the various types of joint venture
---------------------- • Define conversion
----------------------
7.1 INTRODUCTION
----------------------
Business reorganisation is done for achieving growth and strengths in all
----------------------
respects. In the present age of global economy, where every corporate should
---------------------- be more dynamic, focused and achieve the object of growth, joint venture plays
an important role to bring the corporate together for wellness and it join hands
---------------------- together for a specific purpose or for limited time. In comparison to mergers or
acquisitions, joint venture is a safer and simpler way in which corporate may
----------------------
join hands without losing control over their existing structure to synergise the
---------------------- operation. Even foreign investment in India for business expansion has become
a matter of need.
----------------------
In earlier times or say before liberalisation, more often the joint venture
---------------------- was envisaged as an agreement for transfer of technology, know-how, etc.
However, as the corporate became more and more modern and open, they felt
---------------------- the necessity of a partner without losing any control over management and
ownership and still get all the benefits of merger and amalgamation. Hence,
----------------------
nowadays, the joint venture is a more popular way of restructuring business.
----------------------
7.2 JOINT VENTURE: MEANING
----------------------
A joint venture may be technical or financial or may be any other
----------------------
form of collaboration in the form alliances, co-operation. Joint venture is an
---------------------- understanding between two or more companies to undertake economic and
business activity together with a defined or parse limited scope or for limited
---------------------- time.
---------------------- In the Companies Act, 2013, the term “joint venture” is not been defined,
but as per Accounting Standards-27, the term “joint venture” is an arrangement
---------------------- of coming together with the intention to co-operate with each other to carry on
a business on the agreed terms and scope.
----------------------
In a joint venture, two parties agree to create a new venture with agreed
---------------------- terms and conditions between the parties whereby both the parties will be
contributing in assets or equity or contribution in any other form and thereby
----------------------
share the revenues, expenses and control of the enterprise jointly together.
----------------------

The joint venture may be created for a specific programme or for a specific Notes
project or for a product, or relating to particular market or it may be a continuing
business relationship or a strategic alliance, which involves no equity stake by ----------------------
the participants in joint venture both or all the parties contribute their part of
share in any format and share the revenue or profit together. ----------------------
Whether or not it is in the prescribed format, it doesn’t make any ----------------------

difference. Joint venture agreement could be a written agreement or may be
----------------------
an oral arrangement, it doesn’t make any difference. However, the written
agreements for joint venture are more preferred to maintain it stronger and ----------------------
longer.
----------------------
The term joint venture means a contractual arrangement by or between
two or more companies or parties to undertake common business or economical ----------------------
activities, subject to their own preemptive rights, supplementary agreements
relating to intellectual properties rights, disclosures and warrantees, defaults ----------------------
and termination, jurisdiction of courts, etc.
----------------------
In other words, the term “joint venture” means a legal association which
can take the form of short-term partnership, with the purpose to undertake ----------------------
transactions jointly for mutual profit.
----------------------
Joint venture provides various benefits of merger and acquisitions without
losing control so it becomes a win-win situation for both the parties as they can ----------------------
concentrate on their business as well get the new opportunities to be captured. ----------------------
Various reasons for joint venture are as follows:
----------------------
●● Business process outsourcing or product outsourcing
●● To attain modern technologies, know-how, etc. ----------------------
●● To make financial stability by joining hands and contributing capital ----------------------

●● To reduce the risk in the business by better products and more resources ----------------------
●● To access better market positions
----------------------
●● or getting the intellectual property such as patents, know-how, trade-
F
mark for better management skills ----------------------
●● To reach to newer markets
----------------------
Joint ventures are created for a specific purpose or specific programme or
for a specific project or for a product, or relating to particular market by mutual ----------------------
understanding between the parties, hence the characteristics which are common
----------------------
to all joint ventures are as follows:
●● wo or more parties: In joint venture two or more parties or companies
T ----------------------
are involved to form a joint venture for a common purpose or ventures.
----------------------
●● ontractual arrangement: Common venture between the parties in joint
C
venture are by a contractual arrangement. Such contractual arrangement ----------------------
need not be a written agreement only; it may also be an oral agreement. The
----------------------
purpose of contractual agreement is to distinguish the interest of parties
to joint venture which has joint control. As per Accounting Standard, ----------------------

Notes holding of 20% or more of equity of the investor has significant influence
and treated as joint control and so joint venture. Activities or associations
---------------------- which do not have joint control as per contractual agreement are not joint
venture for the purpose of Accounting Standard.
----------------------
●● J oint control: The contractual arrangement establishes joint control.
---------------------- Accounting Standard provides that holding of 20% or more of equity by
the investor has significant influence and treated as joint control.
----------------------
●● imited scope of activity: Joint venture has a limited scope for specific
L
---------------------- purpose or specific programme or for a specific project, etc. as defined
under the contractual agreement.
----------------------
●● imited period: Joint venture is for limited period and it is not a perpetual
L
---------------------- succession. The parties after fulfillment of their scope of activities may
terminate the joint venture and both in their individual capacity continue
---------------------- the business afterwards. Hence, without losing the control, joint venture
---------------------- gives all the benefits of merger and amalgamations.

---------------------- 1. A joint venture may be technical or financial or may be any other
form of _______________in the form of alliances, cooperation.
----------------------
2. The reason for joint venture which can be arranged is ___________
---------------------- outsourcing or _________ outsourcing.
---------------------- 3. In joint venture, ______________ or companies involve to form a
joint venture for a common purpose or ventures.
----------------------
4. Joint venture has limited scope for specific purpose or specific
---------------------- programme or for a specific project, etc. as defined under the
_________________.
----------------------
5. Activities or associations which do not have joint control as per
---------------------- contractual agreement are not joint venture for the purpose of
____________________.
----------------------
----------------------
7.3 LEGAL FORM OF JOINT VENTURE
----------------------
There are no specific forms of joint venture provided in the Companies
---------------------- Act or any other Act. However, joint venture is mutual understanding with
limited scope or for limited period so it depends on the parties as how they want
---------------------- to join or come together for a new venture. It is the mutual consent which forms
---------------------- the joint venture. Joint venture is an agreement or an understanding between
two or more companies to undertake economic and business activity together
---------------------- with a defined or par se limited scope or for limited time so it has to be framed
by the parties only.
----------------------

As per Companies Act, there is no specific legal form of joint venture. Notes
However, as per Accounting Standard -27, there are certain forms of joint
venture which is prescribed and identified depending on how the control is ----------------------
divided in joint venture.
----------------------
Accounting Standard-27 has identified three broad forms of joint venture:
----------------------
●● Joint venture with jointly controlled operations
●● Joint venture with jointly controlled assets ----------------------
●● Joint venture with jointly controlled entities ----------------------
Joint venture could take any of the following forms. All these forms are
commonly described as joint ventures in broader sense. ----------------------
●● J oint venture company: The parties to joint venture could establish a ----------------------
private company with joint control of both the parties, sometime called as
----------------------
Special Purpose Vehicle (SPV) and design its articles of association for
joint control. ----------------------
Associate Company: According to section 2(6) of the Companies Act,

2013 “associate company”, in relation to another company, means a ----------------------
company inwhich that other company has a significant influence, but ----------------------
which is not a subsidiarycompany of the company having such influence
and includes a joint venture company. ----------------------
Explanation.—For the purposes of this clause, “significant influence” ----------------------
meanscontrol of at least twenty per cent. of total share capital, or of
business decisionsunder an agreement; ----------------------
●● Registered partnership firm: Joint venture may be in the form of ----------------------
registered partnership firm, may be with or without limited liability.
----------------------
7.4 TYPES OF JOINT VENTURE ----------------------
Joint venture is entity based on mutual belief and mutual trust. Both the parties ----------------------
who join hands together want to create win-win situation for both the parties by
various ways and achieve the target or goal of mutual benefit. Joint venture is ----------------------
not defined in way or type depending upon the need and time it gets changing
from business to business. ----------------------
Following are various types of joint venture: ----------------------

A. Public-private joint venture: In India, many public-private joint ventures ----------------------
are for the purpose of infrastructure development or maintenance. It
is a very general understating that public-private joint venture are for ----------------------
infrastructure project such as roads, highway, port, airports, bridges, dam
----------------------
etc. The projects are constructed, built, maintained, operated by or through
public-private joint venture. But apart from infrastructure, nowadays, ----------------------
various other sectors are operated through public-private joint venture
such as banking & public financial institutions, high-end technology like ----------------------
space activities, oil exploration, etc.
----------------------

Notes Many a projects run on the mechanism of Built-Operate-Transfer (BOT)
basis in which Government provides requisite facilities such as land for
---------------------- the project and private party develop the project as per the requirement,
and get return on capital. At the end of specific period the project is handed
---------------------- over to the Government.
---------------------- There are many other ways like BOT mechanism, such as Built-Operate-
Own (BOO), Built-Own-Operate-Transfer (BOOT), Built-Transfer-Lease
----------------------
(BTL), Built-Operate-Lease-Transfer (BOLT), etc.
---------------------- B. Joint venture with or without technology transfer: It is a traditional
way of joint venture. In earlier age most of the joint ventures were
----------------------
entered into with the purpose of technology transfer. The Indian market
---------------------- is considered as one of the most important consumer market in the world,
where all the market players want to establish themselves and find the
---------------------- ways to enter into the Indian market with technology or brand names etc.
and preferably through an Indian partner who knows the market well.
----------------------
In Indian market, joint ventures are being extensively used by various
---------------------- foreign companies to gain entrance or opening into the Indian market.
Those entities which own the modern technology, technical skill,
----------------------
knowledge are the ones who can have an upper-hand as the market is a
---------------------- technology-driven market. In modern times, various joint ventures are
formed for getting the technology.
----------------------
However, the technology is not simply available in the market. The
---------------------- technology companies rather than selling their technology want to be the
partner of such businesses where their technologies are used. However,
---------------------- technology itself is not the important thing; it needs the strengths of
---------------------- finance and market to sell the technology at bulk. Therefore, joint venture
try to bring these elements business together.
---------------------- A company having technology, technical skill, knowledge and financial
---------------------- strengths join hands with an entity which has intellectual properties such
as trademark, know-how, patents and the marketing skills and gets its
---------------------- product manufactured by one more entity who has only manufacturing
capacity.
----------------------
C. Joint venture for business outsourcing: When one entity or company
---------------------- which has the market and established name in the market and ready
customers but has constrain of supplying the services or products on time,
---------------------- then it needs to get these product or services to be more economically
---------------------- from another Company or Companies which has no access or limited
access to such market or have no ready customer but has capacity and
---------------------- ability to provide these services more economically such type of ventures
are known very popularly as Business Process Outsourcing or (BPOs),
---------------------- which is one of the rapidly growing industry over last few years.
---------------------- D. Franchising arrangement: The most important and the true success for
any product lies in its marketing and reach up to the consumer. An entity
----------------------
which has the management skills for supply and marketing of the products,

it provides such specialty to another entity that does not possess but has Notes
its presence in the market concerned, such an arrangement is known as
franchising. Various top brands believe that franchising is the better and ----------------------
affordable way to reach to consumers directly with their brands.
----------------------
By franchising the brand equity and technology of one established
company or brand owner could be combined with another company who ----------------------
provide the finance, building or equipment and follow the minimum
----------------------
standards and formula set by the franchisor.
E. Overseas joint venture: When opportunities are outside India, then ----------------------
overseas joint venture is required to be established with a foreign entity
----------------------
and investment is required to move outside India. India has strict foreign
exchange policy and it is regulated and monitored through the Foreign ----------------------
Exchange Management Act (FEMA).
----------------------
Investment outside India are subject to FEMA regulations and permissions
as prescribed, e.g., as per Regulation 6 an Indian party is permitted to ----------------------
make investment to the extent not exceeding 400% of the net worth
of the investing Indian company as on the date of last audited balance ----------------------
sheet. There is the permitted route where the permission is required to be
----------------------
obtained from the prescribed authorities such as Reserve Bank of India
(RBI), etc. ----------------------
----------------------
----------------------
i. Public Private Joint venture a. Outside India
ii. Joint venture with or without b. Constrain of supplying of ----------------------
technology transfer services
iii. Joint venture for business c. Better and affordable way ----------------------
to reach outsourcing to
consumers. ----------------------
iv. Franchising arrangement d. Infrastructure development/ ----------------------
project
v. Overseas joint venture e. Traditional way ----------------------
----------------------
7.5 JOINT VENTURE AGREEMENT
----------------------
There are no specific forms of joint venture as per any Act. Joint venture
is a mutual understanding between the parties with limited scope or for limited ----------------------
period. It is a mutual consent which establishes the joint venture. Joint venture ----------------------
is an understanding between two or more companies to undertake economic and
business activity together with a defined or parse limited scope or for limited ----------------------
time so it has to be framed by the parties only. Selection of an appropriate local
partner for joint venture is important for the success of any joint venture. In ----------------------
order to retain healthy joint venture and to avoid litigation, it is always better to ----------------------
have written joint venture agreement.

Notes Once a partner is identified and selected, then there should be contractual
agreement between the parties. Joint venture between the parties is by a
---------------------- contractual arrangement, it need not be a written agreement only; it may also
be an oral agreement. The purpose of contractual agreement is to distinguish
---------------------- between the interest of parties to joint venture which has joint control. Activities
---------------------- or associations which do not have joint control as per contractual agreement are
not joint venture for the purpose of Accounting Standard.
----------------------
At the time of entering into contractual agreement for joint venture,
---------------------- the terms and conditions for joint venture should be carefully discussed by
both the parties and negotiated. The ability to access technology, finance and
---------------------- resources should be properly accommodated into joint venture agreement. All
joint ventures are initiated through an agreement between the parties. Such an
----------------------
agreement for joint venture should specify mutual responsibilities and duties of
---------------------- the concern parties all together in a contractual agreement called joint venture
agreement. All the present and expected issues must be properly addressed
---------------------- while drafting the joint venture agreement.
----------------------
7.6 CONTENT OF JOINT VENTURE AGREEMENT
----------------------
As discussed earlier, joint venture agreement is not specific to all joint
---------------------- venture. It should be flexible and molded as per the required joint venture.
Every joint venture may be different from another, so the content also. Some of
---------------------- the suggested content for joint venture agreements are as follows:
---------------------- ●● Objective of joint venture
---------------------- ●● Applicable law
●● Form or structure of joint venture
----------------------
●● Capital structure and holding of shares
---------------------- ●● Transfer of shares during the joint venture period or after the period is over
---------------------- ●● Financing option
●● Management structure
----------------------
●● Board of Directors and its appointments
----------------------
Various Management Committees
---------------------- ●● Dividend policy
---------------------- ●● Confidentiality and Indemnity
●● Dispute resolution mechanism
----------------------
●● Deadlock
---------------------- ●● Intellectual property rights
---------------------- ●● Discloser and warrantees
---------------------- ●● Events of default
●● Mode of communication
----------------------
●● Termination
Notes
----------------------
----------------------
1. Every joint-venture may be different from another so the content also.
----------------------
2. Form or structure of joint venture capital structure and holding of
shares is not a content of joint venture agreement. ----------------------
3. Dispute resolution mechanism and deadlock are the contents of joint
----------------------
venture.
4. Intellectual property rights discloser and warrantees cannot be content ----------------------
of joint venture.
----------------------
----------------------
7.7 CONVERSION OF A PARTNERSHIP FIRM INTO A
COMPANY ----------------------
In the course of growing and profitable phase of business, the existing ----------------------
structure may be a barrier for further expansion, e.g., a partnership firm may
----------------------
be inappropriate when the growth is hampered due to status of entity and
unlimited liability or a private limited company has limitation for raising the ----------------------
capital required for the growth of an organisation on time etc. Under such
circumstances business needs to reorganise by conversion from one type of ----------------------
entity to another.
----------------------
As per Companies Act, 2013, a firm may be converted into a company by
following the provision of Part I of Chapter XXI of the Companies Act, 2013. ----------------------
Also private limited company may be converted into public limited company or
----------------------
vis-à-vis a public limited company may convert into private limited company.
Partnership is a form of enterprise carried on by two or more person and ----------------------
to share profit or loss of the business. Partnership firm is not recognised as legal
----------------------
person, i.e., it has no legal existence under the general law. But under Income
Tax Act, it is under the definition of person liable for tax. The property of ----------------------
partnership is always held in the name of partners. The liability of partnership
firm is unlimited. Also there is limit on number of partners in partnership firm. ----------------------
The business of partnership firm could be restructured into business of a limited ----------------------
company in the following ways:
----------------------
1. By forming a company with its main object being taking over of business
of partnership firm as going concern. ----------------------
2. By registering the firm as Company under Part I of Chapter XXI of the ----------------------
Companies Act, 2013 in the following procedure:
----------------------
●● There must be at least 7 partners in a partnership firm.
●● he firm subject to conversion must be a registered firm with registrar of
T ----------------------
firms.
----------------------

Notes ●● aid-up capital of at least one lac rupees, in case of private company and
P
five lac rupees in case of a public company.
---------------------- ●● At the time of conversion, there must be a written agreement to convert
the partnership to a company by the partners.
----------------------
●● An agreement is also to be entered with debtors and creditors to transfer
---------------------- the debt and liabilities to the company.
---------------------- ●● Form a new company as per the Companies Act.
●● The partners of the firm subject to conversion may be the subscribers to
---------------------- the Memorandum.
---------------------- ●● A list showing the name, address and occupation of all partners who on
a day named in the list, not being more than 6 clear days before the date
---------------------- of registration were members of the Company, with the addition of the
shares or stock held by them respectively.
----------------------
●● On compliance with the provision of Part I of Chapter XXI and on
---------------------- payment of the prescribed fees, the ROC shall certify that the company
has been incorporated as a company.
----------------------
●● Hold a board meeting to pass following resolution:
---------------------- – Adopt the agreement entered into by the company and the partners
of the firm for acquisition of business.
----------------------
– Allotment of shares to other partners of the firm as consideration of
---------------------- such acquisition.
●● File a Return of Allotment with ROC.
----------------------
The Effect of Conversion of partnership firm and Registration of the
---------------------- Company under Part I of Chapter XXI is that all provisions of the Companies
Act, 2013 relating to the company, its members, contributories and creditors
---------------------- shall apply in the same manner as if the company was formed under the
---------------------- Companies Act, 2013.
Obligations of companies registering under Part I of Chapter XXI
----------------------
Every company which is seeking registration under this Part shall,—
----------------------
(a) ensure that secured creditors of the company, prior to its registration
---------------------- under this Part, have either consented to or have given their no objection
to company’s registration under this Part;
----------------------
(b) publish in a newspaper, advertisement one in English and one in vernacular
---------------------- language in such form as may be prescribed giving notice about registration
under this Part, seeking objections and address them suitably;
----------------------
(c) file an affidavit, duly notarised, from all the members or partners to provide
---------------------- that in the event of registration under this Part, necessary documents or
papers shall be submitted to the registering or other authority with which
---------------------- the company was earlier registered, for its dissolution as partnership firm,
---------------------- limited liability partnership, cooperative society, society or any other
business entity, as the case may be.
---------------------- (d) comply with such other conditions as may be prescribed.

7.8 CONVERSION OF PRIVATE LIMITED COMPANY Notes
INTO PUBLIC COMPANY
----------------------
Provisions relating to conversion of Private Company into Public
----------------------
Company are given in Section 14 read with section 18 of the Companies Act,
2013 read with Rule 33 of Companies (Incorporation) Rules, 2014. E-Form ----------------------
INC-27 is required to be filed for this conversion pursuant to section 14 and rule
33. ----------------------
Rule 33: Alteration of Articles ----------------------
1. For effecting the conversion of a private company into a public company
----------------------
or vice versa, the application shall be filed in Form No.INC-27 with fee.
2. A copy of order of the competent authority approving the alteration, shall ----------------------
be filed with the Registrar in Form No. INC-27 with fee together with the ----------------------
printed copy of the altered articles within fifteen days of the receipt of the
order from the Central Government. ----------------------
Explanation - For the purposes of this sub-rule, the term “competent ----------------------
authority” means, the CentralGovernment.
Conversion of Companies already registered [Section-18] ----------------------
Section 18 of the Companies Act, 2013 allows an existing Company to convert ----------------------
itself as a Company of other class by altering its memorandum and articles of
----------------------
association in the manner prescribed in Chapter II of the Companies Act 2013.
Section 13 provides for alteration of Memorandum of Association whereas ----------------------
Section 14 provides for alteration of Articles of Association.
----------------------
Adoption of New Set of Articles for Public Company
----------------------
Articles of a Private Company usually contains certain restrictions so during
conversion process it is advisable to adopt a new set of articles for resulting ----------------------
public company in order to avoid any future administrative inconvenience.
You may find various clauses like quorum for General Meeting, Number of ----------------------
Directors etc which needs to be redrafted again as per Public company. So, it is, ----------------------
advisable to adopt a new set of Articles applicable to a public company.
Procedure for Conversion of a Private Limited Company into a Public ----------------------
Limited ----------------------
Section 14 of Companies Act, 2013 plays an important role during conversion
----------------------
of a Private company into a Public company. Conversion of a Private company
into a Public company involves alteration of article of association of Private ----------------------
Company u/s 14 which cannot be done without passing special resolution of
Shareholders in the General Meeting. ----------------------
Find below detailed Secretarial procedure for Conversion of a Private Limited ----------------------
Company into a Public Limited
----------------------
1. Calling of Board Meeting: Issue notice in accordance with the provisions
of section 173(3) of theCompanies Act, 2013, for convening a meeting of ----------------------

Notes the Board of Directors. Main agenda for this Boardmeeting would be:
a. Pass a board resolution to get in-principal approval of Directors for
----------------------
conversion of a Private companyinto a public company by altering
---------------------- the AOA.
b. Fix date, time and place for holding Extra-ordinary General meeting
----------------------
(EGM) to get approval ofshareholders, by way of Special Resolution,
---------------------- for conversion of a Private company into a Publiccompany.
c. To approve notice of EGM along with Agenda and Explanatory
----------------------
Statement to be annexed to the noticeof General Meeting as per
---------------------- section 102(1) of the Companies Act, 2013;
---------------------- d. To authorise the Director or Company Secretary to issue Notice

of the Extra-ordinary Generalmeeting (EGM) as approved by the
---------------------- board under clause 1(c) mentioned above.
---------------------- 2.
Issue of EGM Notice: Issue Notice of the Extra-ordinary General meeting
(EGM) to all Members,Directors and the Auditors of the company in
---------------------- accordance with the provisions of Section 101 of theCompanies Act,
2013;
----------------------
3.
Holding of Extra Ordinary General Meeting: Hold the Extra-ordinary
---------------------- General meeting (EGM) ondue date and pass the necessary Special
Resolution, to get shareholders’ approval for Conversion ofPrivate
---------------------- company into a Public company along with alteration in articles of
---------------------- association under section 14for such conversion.
4.
ROC Form filing: For alteration in Article of Association for conversion
----------------------
of Private company into aPublic company under section 14, few E-forms
---------------------- will be filed with concerned Registrar of Companies atdifferent stages as
per the details given below:
----------------------
A. E-form MGT.14 – For filing special resolution with ROC, passed
---------------------- for conversion of Privatecompany into a Public company
---------------------- In case of alteration in Article of Association for conversion of

Private Company into a Public CompanySpecial resolution is
---------------------- required to be passed under section 14. Accordingly as desired by
section 117(3)(a), copy of this special resolution is required to be
---------------------- filed with concerned ROC through filing of formMGT.14 within
---------------------- 30 days of passing special resolution in the EGM. It is relevant to
note that First youhave to file form MGT.14 as SRN No. of form
---------------------- MGT.14 will be used in form INC.27.
---------------------- Attachments of E-form MGT.14:

i. Notice of EGM along with copy of explanatory statement under
---------------------- section 102;
---------------------- ii. Certified True copy of Special Resolution;
---------------------- iii. Altered memorandum of association;

iv. Altered Articles of association Notes
v. Certified True copy of Board Resolution may be attached as an
----------------------
optional attachment.
B. E-form INC.27 – Application for conversion of a private company ----------------------
into a public company
----------------------
As per Rule 33 of Companies (Incorporation) Rules, 2014, for
effecting the conversion of a privatecompany into a public company ----------------------
or vice versa, the application shall be filed in Form No.INC-27
----------------------
withfee. Accordingly an Application for conversion of a Private
company into a Public company is requiredto be filed in e-Form ----------------------
INC.27 to the ROC concerned, with all the necessary annexures and
withprescribed fee. ----------------------
Attachments of E-form INC.27: ----------------------
i. It is mandatory to attach Minutes of the member’s meeting where ----------------------
approval was given for conversionand altered articles of association.
----------------------
ii. Altered Articles of Association;
iii. Certified True copy of Board Resolution may be attached as an ----------------------
optional attachment.
----------------------
iv. Other information if any can be provided as an optional attachment(s)
----------------------
Scrutiny of Documents by ROC
As per Section 18, after receiving the documents for conversion of a Private ----------------------
Company into a PublicCompany, ROC shall satisfy itself that the Company ----------------------
has complied with the requisite provisions forregistration of company. If so
satisfied, ROC shall close the former registration and issue fresh certificate of ----------------------
incorporation, after registering the documents submitted for change in class of
company. ----------------------
It is further clarified in section 18(3) that conversion of company does ----------------------

not affect any debts, liability, obligations or contracts incurred or entered into,
by the company or on behalf of the company before conversion. Such debts, ----------------------
liability, obligations or contracts shall be enforceable in the same manner as if ----------------------
such conversion has not been done.
----------------------
Post conversion formalities
After conversion of Private Company into a Public Company kindly take care ----------------------
of the following points:
----------------------
1. Intimate all the concerned authorities like Excise and sales tax etc about
the status change. ----------------------
2. Arrange new PAN No. of the company. Update company bank account ----------------------
details.
----------------------
3. Arrange new stationary with new name of the Company.
----------------------

Notes 4. Analyse your newly adopted AOA and MOA and remove all things which
are in contradiction with the conditions of AOA.
----------------------
5. Raise the paid-up capital to minimum Rs. 5 lakhs, if the same is less than
---------------------- Rs. 5 lakhs.
6. Increase Number of Director to minimum 3 Directors.
----------------------

---------------------- 1. What is the solution for growth hampered due to status of entity and
unlimited liability or a private limited company has limitation for
---------------------- raising the capital required for the growth on time.
---------------------- i. Partnership firm
ii. Conversion
---------------------- iii. Application to court
---------------------- iv. Amalgamation
2. A partnership firm is not recognised as legal person under the general
----------------------
law but under ________law it is liable to tax.
---------------------- i. Income Tax
ii. Criminal law
----------------------
iii. Land laws
---------------------- iv. Company law
---------------------- 3. Conversion of private limited company into public limited company
is provided under Section ______ of the Companies Act,2013.
----------------------
i. 33
---------------------- ii. 14 and 18
---------------------- iii. 43(1)
---------------------- iv. 44(3)
----------------------
Activity 1
----------------------
Give an example of joint venture in India.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Summary Notes
●● J oint venture plays an important role to bring the corporate together for ----------------------
wellness.
----------------------
●● J oint venture may be technical or financial or may be any other form of
collaboration. ----------------------
●● he joint venture may be created for a specific programme or for a specific
T ----------------------
project. It has limitation of time and scope.
----------------------
●● There can be various reasons for joint venture such as product outsourcing,
technology transfer, contributing capital, access better market positions etc. ----------------------
●● ccounting Standard-27 has identified three broad forms of joint venture.
A
Joint venture with jointly controlled operations, joint venture with jointly ----------------------
controlled assets and joint venture with jointly controlled entities. ----------------------
●● J oint venture could of various types such as public-private joint venture,
joint venture with or without technology transfer, joint venture for ----------------------
outsourcing business operations, franchising arrangement, overseas joint ----------------------
venture etc.
●● J oint venture is a mutual understating between the parties with limited ----------------------
scope or for limited period but there should be contractual arrangement ----------------------
between parties either in writing or oral. In order to retain healthy joint
venture and to avoid litigation, it is always better to have written joint ----------------------
venture agreement.
----------------------
Keywords ----------------------
●● Joint venture: A contractual arrangement by or between two or more ----------------------

companies or parties to undertake common business or economical
activities, subject to their own preemptive rights ----------------------
●● usiness outsourcing: Companies which have no access or limited
B ----------------------
access to such market or have no ready customer but has capacity and
ability to provide these services more economically for another company ----------------------
who has better access of market such type of ventures are known very
popularly as Business Process Outsourcing or (BPOs). ----------------------
●● ranchising: An entity which has the management skills for supply and
F ----------------------
marketing of the products, and such specialty is provided to another entity
that does not possess but has its presence in the market concerned such ----------------------
arrangement is known as franchising.
----------------------
●● ontractual arrangement: An agreement to distinguish the interest of
C
parties to joint venture which has joint control. ----------------------
----------------------
----------------------
----------------------

Notes
----------------------
1. Explain the meaning of joint venture. How do joint ventures play an
---------------------- important role for corporate growth in a growing economy?
2. Explain the characteristics which are common to all joint ventures.
----------------------
3. What is public-private joint venture? Why it is important In India?
----------------------
4. What is overseas joint venture?
---------------------- 5. Explain how a partnership firm gets converted into a company.
---------------------- 6. Briefly discuss the procedure for conversion of private limited company
into a public company.
----------------------


1. A joint venture may be technical or financial or may be any other form of
---------------------- collaboration in the form of alliances, cooperation.
---------------------- 2. The reason for joint venture which can be arranged is business process
outsourcing or product outsourcing.
----------------------
3. In joint venture, two or more parties or companies involve to form a joint
---------------------- venture for a common purpose or ventures.
4. Joint venture has limited scope for specific purpose or specific programme
----------------------
or for a specific project, etc. as defined under the contractual agreement.
---------------------- 5. Activities or associations which do not have joint control as per contractual
agreement are not joint venture for the purpose of Accounting Standard.
----------------------
----------------------
---------------------- i. – d.
---------------------- ii. – e.
---------------------- iii. – b.
iv. – c.
----------------------
v. – a.
----------------------
----------------------
----------------------
----------------------
----------------------

----------------------
1. True
----------------------
2. False
3. True ----------------------
4. False ----------------------
----------------------
1. What is the solution for growth hampered due to status of entity and
unlimited liability or a private limited company has limitation for raising ----------------------
the capital required for the growth on time.
----------------------
ii. Conversion
----------------------
2. Partnership firm is not recognized as legal person under the general law
but under _______law it is liable to tax. ----------------------
i. Income Tax ----------------------
3. Conversion of private limited company into public limited company is
----------------------
provided under Section _______ of the Companies Act, 2013.
ii. 14 and 18 ----------------------
----------------------
Suggested Reading
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1. http://cci.gov.in/images/media/ResearchReports/SrijanReportdec2011.pdf
----------------------
2. http://www.aplihsnarayan.com/pdf/JOINT%20VENTURE%20IN%20
INDIA%20-A%20GUIDE%20FOR%20INVESTORS.pdf ----------------------
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Notes
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Corporate Debt Restructuring
UNIT
8
Structure:
8.1 Introduction
8.2 Salient Features of CDR Scheme
8.3 Historical Background
8.4 Objectives and Structure
8.5 CDR Standing Forum
8.6 CDR Empowered Group
8.7 CDR Cell
8.8 Reference to CDR System
8.9 Legal Basis
8.10 Standstill Clause
8.11 Conversion Option
8.12 Implementation of the Revised Guidelines
Summary
Key Words
Self-Assessments Questions
Suggested Reading
Corporate Debt Restructuring 107

Notes
Objectives
----------------------
----------------------
• Define the concept of corporate debt restructuring
----------------------
• Identify the objectives of corporate debt restructuring ·
---------------------- • Discuss the legal basis of CDR
----------------------
8.1 INTRODUCTION
----------------------
The objective of Corporate Debt Restructuring (CDR) is to ensure a timely
---------------------- and transparent mechanism for restructuring of the debts of viable corporate
entities affected by internal and external factors, outside the purview of BIFR,
----------------------
DRT or other legal proceedings. The legal basis for the mechanism is provided
---------------------- by the Inter-Creditor Agreement (ICA). All participants in the CDR mechanism
must enter the ICA with necessary enforcement and penal clauses. The scheme
---------------------- applies to accounts having multiple banking/syndication/consortium accounts
with outstanding exposure of Rs.10 crore and above. The CDR system is
----------------------
applicable to standard and sub-standard accounts with potential cases of NPAs
---------------------- getting a priority. Packages given to borrowers are modified time and again.
The goal of debt restructuring is to not write off a company’s debt, but
----------------------
rather lower the interest payments and extend the terms of the loan in order to get
---------------------- through a rough patch. Companies attempting to go through a debt restructuring
must first prove that their current market environment will ultimately change
---------------------- and the company will be able to resume profitability. This is what makes debt
restructuring deals challenging, because companies have to convince their
----------------------
creditors, bankers, and distributors that the company will be able to make good
---------------------- with the new finance arrangements within a specified period of time.
---------------------- 8.2 SALIENT FEATURES OF CDR SCHEME

----------------------
CDR is a non-statutory voluntary mechanism based on Debtor-Creditor
---------------------- Agreement (DCA) and Inter-Creditor Agreement (ICA) and covers only multiple
accounts/syndication/consortium of accounts with outstanding exposure of
---------------------- Rs.100 million and above by banks/institutions. The system is applicable only
to standard and sub-standard accounts. However, potentially viable cases of
----------------------
NPAs get priority. In no case, the request of any corporate indulging in willful
---------------------- default or misfeasance will be considered under CDR.
The system was envisaged to have a three-tier structure comprising
----------------------
the CDR Standing Forum, CDR Empowered Group and the CDR Cell. The
---------------------- Forum would be a representative general body of all FIs and banks and would
comprise CEOs of the members. A Core Group of eight members comprising
---------------------- Chief Executives of IDBI, ICICI, SBI, IBA, Punjab National Bank, Bank of
India and Bank of Baroda and Executive Director, RBI was also provided to be
----------------------
carved out of the Forum to act on its behalf for operational convenience.
The CDR Empowered Group will consist of Executive Director (ED) level Notes
representatives of IDBI, ICICI and SBI as standing members, in addition to ED
level representatives of financial institutions and banks, who have an exposure ----------------------
to the company concerned. The Group is mandated to approve restructuring
within a specified time-frame of 90 days. The CDR Cell will assist the CDR ----------------------
Standing Forum and the CDR Empowered Group and extend all secretarial ----------------------
assistance for their smooth operations.
----------------------
Legal basis for the mechanism will be provided by ICA. All participants
in the CDR mechanism shall have to enter into a legally binding ICA with ----------------------
necessary enforcement and penal clauses.
----------------------
CDR Forum has started functioning since year 2001. CDR Cell has been
formed with officers deputed from IDBI. The first meeting of the CDR Standing ----------------------
Forum was held on November 13, 2001 when the CDR Standing Forum, CDR
Core Group and CDR Empowered Group were formally constituted by the ----------------------
members present. Shri P.P. Vora, CMD, IDBI was elected the Chairman of the
----------------------
Forum and the CDR Core Group. The Core Group met on December 6, 2001
and on January 31, 2002. The CDR Empowered Group also met twice in the first ----------------------
year. While the first meeting mainly discussed the procedural matters/formats
for obtaining information, the second meeting considered the flash reports from ----------------------
four companies.
----------------------
CDR mechanism is used by companies with outstanding debt obligations
to alter the terms of the debt agreements in order to achieve some advantage. ----------------------
Companies use debt restructuring to avoid default on existing debt or to take
----------------------
advantage of a lower interest rate. The methodology of CDR is replacing
the existing debt with new debt at a lower interest rate. Companies can also ----------------------
restructure their debt by altering the terms and provisions.
----------------------
1. CDR is a non-statutory voluntary mechanism based on Debtor- ----------------------
Creditor Agreement (DCA) and ______________________.
----------------------
2. The CDR system was envisaged to have a three-tier structure
comprising the ___________________, CDR Empowered Group ----------------------
and the _________.
----------------------
3. The CDR Empowered Group will consist of
_______________________ level representatives of IDBI, ICICI ----------------------
and SBI as standing members.
----------------------
4. The Group is mandated to approve restructuring within a specified
time frame of __________. ----------------------
5. CDR mechanism is used by companies with outstanding debt ----------------------
obligations to alter the terms of the __________________________
in order to achieve some advantage. ----------------------

Notes 8.3 HISTORICAL BACKGROUND
---------------------- In spite of their best efforts and intentions, sometimes corporate find
themselves in financial difficulty because of factors beyond their control and
----------------------
also due to certain internal reasons. For the revival of the corporates as well as
---------------------- for the safety of the money lent by the banks and Financial Institutions, timely
support through restructuring in genuine cases is called for. However, delay
---------------------- in agreement amongst different lending institutions often comes in the way of
such endeavors.
----------------------
Based on the experience in other countries like the UK, Thailand, Korea,
---------------------- etc. of putting in place institutional mechanism for restructuring of corporate
debt and need for a similar mechanism in India, a Corporate Debt Restructuring
----------------------
System was evolved, and detailed guidelines were issued vide circular DBOD
---------------------- No. BP.BC. 15/21.04.114/ 2000-01 dated August 23, 2001 for implementation
by banks. Based on the recommendations made by the Working Group to
---------------------- make the operations of the CDR mechanism more efficient (Chairman: Shri
Vepa Kamesam, Deputy Governor, RBI), which was constituted pursuant to
----------------------
the announcement made by the Finance Minister in the Union Budget 2002-
---------------------- 2003, and consultations with the Government, the guidelines of Corporate
Debt Restructuring System have since been revised and detailed hereunder for
---------------------- implementation by banks/financial institutions. The revised guidelines are in
supersession of the extant guidelines outlined in the aforesaid circular dated
----------------------
August 23, 2001.
---------------------- One of the main features of the revised guidelines is the provision of
two categories of debt restructuring under the CDR system. Accounts, which
----------------------
are classified as standard and sub-standard in the books of the lenders, will be
---------------------- restructured under the first category
---------------------- (Category1). Accounts which are classified as doubtful in the books of the
lenders would be restructured under the second category (Category 2).
----------------------
8.4 OBJECTIVES AND STRUCTURE
----------------------
The objective of the Corporate Debt Restructuring (CDR) framework is to
----------------------
ensure timely and transparent mechanism for restructuring the corporate debts
---------------------- of viable entities facing problems, outside the purview of BIFR, DRT and other
legal proceedings, for the benefit of all concerned. In particular, the framework
---------------------- will aim at preserving viable corporates that are affected by certain internal and
external factors and minimise the losses to the creditors and other stakeholders
----------------------
through an orderly and coordinated restructuring programme.
---------------------- CDR system in the country will have a three-tier structure:
---------------------- ●● CDR Standing Forum and its Core Group
---------------------- ●● CDR Empowered Group
●● CDR Cell
----------------------

8.5 CDR STANDING FORUM Notes
The CDR Standing Forum would be the representative general body of ----------------------
all financial institutions and banks participating in CDR system. All financial
----------------------
institutions and banks should participate in the system in their own interest. CDR
Standing Forum will be a self-empowered body, which will lay down policies ----------------------
and guidelines, and monitor the progress of corporate debt restructuring.
----------------------
The Forum will also provide an official platform for both the creditors
and borrowers (by consultation) to amicably and collectively evolve policies ----------------------
and guidelines for working out debt restructuring plans in the interests of all
concerned. The CDR Standing Forum shall comprise Chairman & Managing ----------------------
Director, Industrial Development Bank of India; Chairman, State Bank of ----------------------
India; Chairman, ICICI Bank Limited; Chairman, Indian Banks’ Association
and Executive Director, Reserve Bank of India as well as Chairmen and ----------------------
Managing Directors of all banks and financial institutions participating as
permanent members in the system. Since institutions like Unit Trust of India, ----------------------
General Insurance Corporation, Life Insurance Corporation may have assumed ----------------------
exposures on certain borrowers, these institutions may participate in the CDR
system. The Forum will elect its Chairman for a period of one year and the ----------------------
principle of rotation will be followed in the subsequent years. However, the
Forum may decide to have a Working Chairman as a whole-time officer to ----------------------
guide and carry out the decisions of the CDR Standing Forum. ----------------------
The CDR Standing Forum shall meet at least once every six months and
would review and monitor the progress of corporate debt restructuring system. ----------------------
The Forum would also lay down the policies and guidelines to be followed ----------------------
by the CDR Empowered Group and CDR Cell for debt restructuring and
would ensure their smooth functioning and adherence to the prescribed time ----------------------
schedules for debt restructuring. It can also review any individual decisions of
the CDR Empowered Group and CDR Cell. The CDR Standing Forum may ----------------------
also formulate guidelines for dispensing special treatment to those cases, which ----------------------
are complicated and are likely to be delayed beyond the time frame prescribed
for processing. ----------------------
The CDR Core Group would lay down the policies and guidelines to be ----------------------
followed by the CDR Empowered Group and CDR Cell for debt restructuring.
These guidelines shall also suitably address the operational difficulties ----------------------
experienced in the functioning of the CDR Empowered Group. The CDR Core
Group shall also prescribe the PERT chart for processing of cases referred to ----------------------
the CDR system and decides on the modalities for enforcement of the time ----------------------
frame. The CDR Core Group shall also lay down guidelines to ensure that over-
optimistic projections are not assumed while preparing/approving restructuring ----------------------
proposals especially with regard to capacity utilisation, price of products, profit
margin, demand, and availability of raw materials, input-output ratio and likely ----------------------
impact of imports/ international cost competitiveness. ----------------------
----------------------

Notes 8.6 CDR EMPOWERED GROUP
---------------------- The individual cases of corporate debt restructuring shall be decided
by the CDR Empowered Group, consisting of ED level representatives of
----------------------
IDBI, ICICI Bank Ltd. and SBI as standing members, in addition to ED level
---------------------- representatives of financial institutions and banks who have an exposure to the
concerned company. While the standing members will facilitate the conduct
---------------------- of the Groups meetings, voting will be in proportion to the exposure of the
lenders only. In order to make the CDR Empowered Group effective and broad
----------------------
based and operate efficiently and smoothly, it would have to be ensured that
---------------------- participating institutions/banks approve a panel of senior officers to represent
them in the CDR Empowered Group and ensure that they depute officials only
---------------------- from among the panel to attend the meetings of CDR Empowered Group.
Further, nominees who attend the meeting pertaining to one account should
----------------------
invariably attend all the meetings pertaining to that account instead of deputing
---------------------- their representatives.
---------------------- The level of representation of banks/financial institutions on the CDR

Empowered Group should be at a sufficiently senior level to ensure that
---------------------- concerned bank/FI abides by the necessary commitments including sacrifices
made towards debt restructuring. There should be a general authorisation by
---------------------- the respective Boards of the participating institutions/banks in favour of their
---------------------- representatives on the CDR Empowered Group, authorising them to take
decisions on behalf of their organisation, regarding restructuring of debts of
---------------------- individual corporates.
---------------------- The CDR Empowered Group will consider the preliminary report of all
cases of requests of restructuring, submitted to it by the CDR Cell. After the
---------------------- Empowered Group decides that restructuring of the company is prima-facie
feasible and the enterprise is potentially viable in terms of the policies and
---------------------- guidelines evolved by the Standing Forum, the detailed restructuring package
---------------------- will be worked out by the CDR Cell in conjunction with the Lead Institution.
However, if the lead institution faces difficulties in working out the detailed
---------------------- restructuring package, the participating banks/financial institutions should
decide upon the alternate institution/bank which would work out the detailed
---------------------- restructuring package at the first meeting of the Empowered Group when the
---------------------- preliminary report of the CDR Cell comes up for consideration.
The CDR Empowered Group would be mandated to look into each case
---------------------- of debt restructuring, examine the viability and rehabilitation potential of the
---------------------- Company and approve the restructuring package within a specified time frame
of 90 days, or at best within 180 days of reference to the Empowered Group.
---------------------- The CDR Empowered Group shall decide on the acceptable viability benchmark
levels on the following parameters, which may be applied on a case-by-case
---------------------- basis, based on the merits of each case:
---------------------- ●● Return on Capital Employed (ROCE)
---------------------- ●● Debt Service Coverage Ratio (DSCR)

●● ap between the Internal Rate of Return (IRR) and the Cost of Fund
G Notes
(CoF)
●● Extent of sacrifice ----------------------
The Boards of each bank /FI should authorise its Chief Executive Officer ----------------------
(CEO) and/or Executive Director (ED) to decide on the restructuring package
in respect of cases referred to the CDR system, with the requisite requirements ----------------------
to meet the control needs. CDR Empowered Group will meet on two or three ----------------------
occasions in respect of each borrower account. This will provide an opportunity
to the participating members to seek proper authorisations from their CEO/ ----------------------
ED, in case of need, in respect of those cases where the critical parameters of
restructuring are beyond the authority delegated to him/her. ----------------------
The decisions of the CDR Empowered Group shall be final. If restructuring ----------------------
of debt is found to be viable and feasible and approved by the Empowered
Group, the company would be put on the restructuring mode. If restructuring ----------------------
is not found viable, the creditors would then be free to take necessary steps for ----------------------
immediate recovery of dues and/or liquidation or winding up of the company,
collectively or individually. ----------------------
----------------------
8.7 CDR CELL
----------------------
The CDR Standing Forum and the CDR Empowered Group will be
assisted by a CDR Cell in all their functions. The CDR Cell will make the ----------------------
initial scrutiny of the proposals received from borrowers/lenders, by calling for
proposed rehabilitation plan and other information and put up the matter before ----------------------
the CDR Empowered Group within one month to decide whether rehabilitation ----------------------
is prima facie feasible. If found feasible, the CDR Cell will proceed to prepare
detailed rehabilitation plan with the help of lenders and, if necessary, experts ----------------------
will be engaged from outside. If not found prima facie feasible, the lenders may
start action for recovery of their dues. ----------------------
All references for corporate debt restructuring by lenders or borrowers ----------------------

will be made to the CDR Cell. It shall be the responsibility of the lead institution/
major stakeholder to the corporate, to work out a preliminary restructuring plan ----------------------
in consultation with other stakeholders and submit to the CDR Cell within ----------------------
one month. The CDR Cell will prepare the restructuring plan in terms of the
general policies and guidelines approved by the CDR Standing Forum and ----------------------
place for consideration of the Empowered Group within 30 days for decision.
The Empowered Group can approve or suggest modifications but ensure that a ----------------------
final decision is taken within a total period of 90 days. However, for sufficient ----------------------
reasons the period can be extended up to a maximum of 180 days from the date
of reference to the CDR Cell. ----------------------
The CDR Standing Forum, the CDR Empowered Group and CDR Cell ----------------------
shall be initially housed in IDBI and thereafter at a place as may be decided by
the Standing Forum. The administrative and other costs shall be shared by all ----------------------
financial institutions and banks. The sharing pattern shall be as determined by
----------------------
the Standing Forum.

Notes CDR Cell will have adequate members of staff deputed from banks and
financial institutions. The CDR Cell may also take outside professional help.
---------------------- The initial cost in operating the CDR mechanism including CDR Cell will be
met by IDBI initially for one year and then from contribution from the financial
---------------------- institutions and banks in the Core Group at the rate of Rs.50 lakh each and
---------------------- contribution from other institutions and banks at the rate of Rs. 5 lakh each.
Other features
----------------------
Eligibility criteria
----------------------
The scheme will not apply to accounts involving only one financial
---------------------- institution or one bank. The CDR mechanism will cover only multiple banking
accounts/ syndication/consortium accounts with outstanding exposure of Rs. 20
---------------------- crore and above by banks and institutions.
---------------------- The Category 1 CDR system will be applicable only to accounts classified
as ‘standard’ and ‘sub-standard’. There may be a situation where a small portion
---------------------- of debt by a bank might be classified as doubtful. In that situation, if the account
---------------------- has been classified as standard/sub-standard in the books of at least 90% of
lenders (by value), the same would be treated as standard/substandard, only
---------------------- for the purpose of judging the account as eligible for CDR, in the books of
the remaining 10% of lenders. There would be no requirement of the account/
---------------------- company being sick, NPA or being in default for a specified period before
---------------------- reference to the CDR system. However, potentially viable cases of NPAs will
get priority. This approach would provide the necessary flexibility and facilitate
---------------------- timely intervention for debt restructuring. Prescribing any milestone(s) may not
be necessary, since the debt restructuring exercise is being triggered by banks
---------------------- and financial institutions or with their consent.
---------------------- In no case, the requests of any corporate indulging in willful default, fraud
or misfeasance, even in a single bank, will be considered for restructuring under
---------------------- CDR system.
---------------------- The accounts, where recovery suits have been filed by the lenders against
the company, may be eligible for consideration under the CDR system provided,
---------------------- the initiative to resolve the case under the CDR system is taken by at least 75%
---------------------- of the lenders (by value). However, for restructuring of such accounts under the
CDR system, it should be ensured that the account meets the basic criteria for
---------------------- becoming eligible under the CDR mechanism.
---------------------- BIFR cases are not eligible for restructuring under the CDR system.
However, large value BIFR cases may be eligible for restructuring under the
---------------------- CDR system if specifically recommended by the CDR Core Group. The Core
Group shall recommend exceptional BIFR cases on a case-to-case basis for
----------------------
consideration under the CDR system. It should be ensured that the lending
---------------------- institutions complete all the formalities in seeking the approval from BIFR
before implementing the package.
----------------------
----------------------

Notes
----------------------
----------------------
i. CDR Standing Forum a. Lay down the policies and
guidelines ----------------------
ii. CDR Core Group b. CDR Empowered Group
iii. CDR Empowered Group c. CDR Empowered Group ----------------------
iv. CDR Cell d. Representative general body of ----------------------
all financial institutions
v. Final decision e. Initial scrutiny of proposals ----------------------
----------------------
8.8 REFERENCE TO CDR SYSTEM
----------------------
Reference to Corporate Debt Restructuring System could be triggered by
----------------------
(i) any or more of the creditor who have minimum 20% share in either working
capital or term finance, or (ii) by the concerned corporate, if supported by a ----------------------
bank or financial institution having stake as in (i) above.
----------------------
Though flexibility is available whereby the lenders could either consider
restructuring outside the purview of the CDR system or even initiate legal ----------------------
proceedings where warranted, banks/FIs should review all eligible cases where
the exposure of the financial system is more than Rs. 100 crore and decide about ----------------------
referring the case to CDR system or to proceed under the new Securitization ----------------------
and Reconstruction of Financial Assets and Enforcement of Securities Interest
Act, 2002 or to file a suit in DRT etc. ----------------------
8.9 LEGAL BASIS ----------------------
----------------------
CDR will be a non-statutory mechanism which will be a voluntary system
based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement ----------------------
(ICA).
----------------------
The Debtor-Creditor Agreement (DCA) and the Inter-Creditor Agreement
(ICA) shall provide the legal basis to the CDR mechanism. The debtors shall ----------------------
have to accede to the DCA, either at the time of original loan documentation (for
future cases) or at the time of reference to Corporate Debt Restructuring Cell. ----------------------
Similarly, all participants in the CDR mechanism through their membership of ----------------------
the Standing Forum shall have to enter into a legally binding agreement, with
necessary enforcement and penal clauses, to operate the System through laid- ----------------------
down policies and guidelines. The ICA signed by the creditors will be initially
valid for a period of 3 years and subject to renewal for further periods of 3 years ----------------------
thereafter. The lenders in foreign currency outside the country are not a part of ----------------------
CDR system. Such lenders and also lenders like GIC, LIC, UTI, etc., and other
third parties who have not joined the CDR system, could join CDR mechanism ----------------------
of a particular corporate by signing transaction-to-transaction ICA, wherever
they have exposure to such corporate. ----------------------

Notes The Inter-Creditor Agreement would be a legally binding agreement
amongst the creditors, with necessary enforcement and penal clauses, wherein
---------------------- the creditors would commit themselves to abide by the various elements of CDR
system. Further, the creditors shall agree that if 75 per cent of creditors by value,
---------------------- agree to a restructuring package of an existing debt (i.e., debt outstanding),
---------------------- the same would be binding on the remaining creditors. Since Category 1 CDR
Scheme covers only standard and sub-standard accounts, which in the opinion
---------------------- of 75 per cent of the creditors are likely to become performing after introduction
of the CDR package, it is expected that all other creditors (i.e., those outside
---------------------- the minimum 75 per cent) would be willing to participate in the entire CDR
---------------------- package, including the agreed additional financing. However, in case of any
internal reason, any creditor (outside the minimum 75 per cent) does not wish
---------------------- to commit additional financing, that creditor will have the option. At the same
time, in order to avoid the “free rider” problem, it is necessary to provide some
---------------------- disincentive to the creditor who wishes to exercise this option. Such creditor
---------------------- can either (a) arrange for his share of additional financing to be provided by
a new or existing creditor, or (b) agree to deferment of the first year’s interest
---------------------- due to him after the CDR package becomes effective. The first year’s deferred
interest as mentioned above, without compounding, will be payable along with
---------------------- the last installment of the principal due to the creditor.
----------------------
----------------------

1. CDR is a statutory mechanism which will be a voluntary system based
---------------------- on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement
(ICA).
----------------------
2. The debtors shall have to accede to the DCA, either at the time of
---------------------- original loan documentation or at the time of reference to Corporate
Debt Restructuring Cell.
----------------------
3. The Inter-Creditor Agreement would not be legally binding agreement
---------------------- amongst the creditors.
4. The lenders in foreign currency outside the country are part of CDR
----------------------
system.
---------------------- 5. The ICA signed by the creditors will be initially valid for a period of
3 years.
----------------------
---------------------- 8.10 STANDSTILL CLAUSE

---------------------- One of the most important elements of Debtor-Creditor Agreement would
---------------------- be ‘standstill’ agreement binding for 90 days or 180 days by both sides. Under
this clause, both the debtor and creditor(s) shall agree to a legally binding
---------------------- ‘standstill’ whereby both the parties commit themselves not to taking recourse to
any other legal action during the ‘standstill’ period. This would be necessary for
----------------------

enabling the CDR System to undertake the necessary debt restructuring exercise Notes
without any outside intervention, judicial or otherwise. However, the standstill
clause will be applicable only to any civil action either by the borrower or any ----------------------
lender against the other party and will not cover any criminal action. Further,
during the standstill period, outstanding foreign exchange forward contracts, ----------------------
derivative products, etc., can be crystallised, provided the borrower is agreeable ----------------------
to such crystallisation. The borrower will additionally undertake that during the
standstill period the documents will stand extended for the purpose of limitation ----------------------
and also that he will not approach any other authority for any relief and the
directors of the borrowing company will not resign from the Board of Directors ----------------------
during the standstill period. ----------------------
During pendency of the case with the CDR system, the usual asset
----------------------
classification norms would continue to apply. The process of reclassification
of an asset should not stop merely because the case is referred to the CDR ----------------------
Cell. However, if restructuring under the CDR system takes place, the asset
classification status should be restored to the position, which existed when ----------------------
the reference to the Cell was made. Consequently, any additional provisions
----------------------
made by banks towards deterioration in the asset classification status during the
pendency of the case with the CDR system may be reversed. ----------------------
Additional finance
----------------------
The providers of additional finance, whether existing lenders or new
lenders, shall have a preferential claim, to be worked out under the restructuring ----------------------
package, over the providers of existing finance with respect to the cash flows
----------------------
out of recoveries, in respect of the additional exposure.
The additional finance extended to borrowers in terms of restructuring ----------------------
packages approved under the CDR system may be exempted from provisioning ----------------------
requirement for the specified period.
Exit Option ----------------------
The proposals for restructuring package should provide for option to a ----------------------
particular lender or lenders (outside the minimum 75 per cent who have agreed
----------------------
for restructuring) who for any internal reason, does/do not fully abide by the
CDR Empowered Group’s decision on restructuring. The lenders who wish to ----------------------
exit from the package would have the option to sell their existing share to either
the existing lenders or fresh lenders, at an appropriate price, which would be ----------------------
decided mutually between the exiting lender and the taking over lender. The
----------------------
new lenders shall rank on par with the existing lenders for repayment and
servicing of the dues since they have taken over the existing dues to the exiting ----------------------
lender. In addition, the ‘exit option’ will also be available to all other lenders
within the minimum 75 per cent, provided the purchaser agrees to abide by the ----------------------
restructuring package approved by the Empowered Group.
----------------------
The exiting lenders may be allowed to continue with their existing level
of exposure to the borrower provided they tie up with either the existing lenders ----------------------
or fresh lenders for taking up their share of additional finance.
----------------------

Notes 8.11 CONVERSION OPTION
---------------------- The CDR Empowered Group, while deciding the restructuring package,
should decide on the issue regarding convertibility (into equity) option as a part
----------------------
of restructuring exercise whereby the banks/financial institutions shall have the
---------------------- right to convert a portion of the restructured amount into equity, keeping in
view the statutory requirement under Section 19 of the Banking Regulation Act,
---------------------- 1949, (in the case of banks) and relevant SEBI regulations.
---------------------- Exemptions from the capital market exposure ceilings prescribed by RBI
in respect of such equity acquisitions should be obtained from RBI on a case-
---------------------- to-case basis by the lenders concerned.
---------------------- Category 2 CDR System
There have been instances where the projects have been found to be
----------------------
viable by the lenders but the accounts could not be taken up for restructuring
---------------------- under the CDR system as they fell under doubtful category. Hence, a second
category of CDR is introduced for cases where the accounts have been classified
---------------------- as doubtful in the books of lenders, and if a minimum of 75 per cent (by value)
of the lenders satisfy themselves of the viability of the account and consent for
----------------------
such restructuring, subject to the following conditions:
---------------------- ●● I t will not be binding on the creditors to take up additional financing
worked out under the debt restructuring package and the decision to lend
----------------------
or not to lend will depend on each creditor bank/FI separately. In other
---------------------- words, under the proposed second category of the CDR mechanism, the
existing loans will only be restructured and it would be up to the promoter
---------------------- to firm up additional financing arrangement with new or existing lenders
individually.
----------------------
●● ll other norms under the CDR mechanism such as the standstill clause,
A
---------------------- asset classification status during the pendency of restructuring under
CDR, etc., will continue to be applicable to this category also.
----------------------
No individual case should be referred to RBI. CDR Core Group may take
---------------------- a final decision whether a particular case falls under the CDR guidelines or it
does not.
----------------------
All the other features of the CDR system as applicable to the First Category
---------------------- will also be applicable to cases restructured under the Second Category.
---------------------- Accounting treatment for restructured accounts

The accounting treatment of accounts restructured under CDR system,
---------------------- including accounts classified as ‘doubtful’ under Category 2 CDR, would be
---------------------- governed by the prudential norms indicated in circular DBOD.BP.BC.98/
21.04.048/ 2000-01 dated March 30, 2001. Restructuring of corporate debts
---------------------- under CDR system could take place in the following stages:
---------------------- ●● Stage 1 - before commencement of commercial production;
●● tage 2 - after commencement of commercial production but before the
S
---------------------- asset has been classified as sub-standard;

●● tage 3 - after commencement of commercial production and the asset
S Notes
has been classified as sub-standard or doubtful.
The prudential treatment of the accounts, subjected to restructuring under ----------------------
CDR system, would be governed by the following norms: ----------------------
Treatment of standard accounts restructured under CDR
----------------------
●● A rescheduling of the installments of principal alone, at any of the
aforesaid first two stages would not cause a standard asset to be classified in ----------------------
the sub-standard category, provided the loan/credit facility is fully secured.
----------------------
●● rescheduling of interest element at any of the foregoing first two stages
A
would not cause an asset to be downgraded to sub-standard category ----------------------
subject to the condition that the amount of sacrifice, if any, in the element
of interest, measured in present value terms, is either written off or ----------------------
provision is made to the extent of the sacrifice involved. For the purpose, ----------------------
the future interest due as per the original loan agreement in respect of an
account should be discounted to the present value at a rate appropriate ----------------------
to the risk category of the borrower (i.e., current PLR + the appropriate
credit risk premium for the borrower-category) and compared with the ----------------------
present value of the dues expected to be received under the restructuring
----------------------
package, discounted on the same basis.
●● I n case there is a sacrifice involved in the amount of interest in present ----------------------
value terms, as in the second stage, the amount of sacrifice should either
----------------------
be written off or provision made to the extent of the sacrifice involved.
Treatment of sub-standard/doubtful accounts restructured under CDR ----------------------
●● rescheduling of the installments of principal alone would render a
A ----------------------
sub-standard/doubtful asset eligible to be continued in the sub-standard/
doubtful category for the specified period, provided the loan/credit facility ----------------------
is fully secured.
----------------------
●● rescheduling of interest element would render a sub-standard/doubtful
A
asset eligible to be continued to be classified in sub-standard/doubtful ----------------------
category for the specified period subject to the condition that the amount
of sacrifice, if any, in the element of interest, measured in present value ----------------------
terms, is either written off or provision is made to the extent of the ----------------------
sacrifice involved. For the purpose, the future interest due as per the
original loan agreement in respect of an account should be discounted to ----------------------
the present value at a rate appropriate to the risk category of the borrower
(i.e., current PLR + the appropriate credit risk premium for the borrower ----------------------
category) and compared with the present value of the dues expected to be
----------------------
received under the restructuring package, discounted on the same basis.
●● I n case there is a sacrifice involved in the amount of interest in present ----------------------
value terms, as in second stage, the amount of sacrifice should either be
----------------------
written off or provision made to the extent of the sacrifice involved. Even
in cases where the sacrifice is by way of write off of the past interest dues, ----------------------
the asset should continue to be treated as sub-standard/doubtful.
----------------------

Notes The sub-standard/doubtful accounts which have been subjected to
restructuring, etc. whether in respect of principal installment or interest amount,
---------------------- by whatever modality, would be eligible to be upgraded to the standard category
only after the specified period, i.e., a period of one year after the date when first
---------------------- payment of interest or of principal, whichever is earlier, falls due under the
---------------------- rescheduled terms, subject to satisfactory performance during the period. The
amount of provision made earlier, net of the amount provided for the sacrifice in
---------------------- the interest amount in present value terms as aforesaid, could also be reversed
after the one-year period.
----------------------
During this one-year period, the sub-standard/doubtful asset will not
---------------------- deteriorate in its classification if satisfactory performance of the account is
demonstrated during the period. In case, however, the satisfactory performance
---------------------- during the one-year period is not evidenced, the asset classification of the
---------------------- restructured account would be governed as per the applicable prudential norms
with reference to the pre-restructuring payment schedule.
---------------------- The asset classification under CDR would continue to be bank-specific
---------------------- based on record of recovery of each bank, as per the existing prudential norms
applicable to banks.
---------------------- Disclosure
---------------------- Banks/FIs should also disclose in their published annual balance sheets,
under “Notes on Accounts”, the following information in respect of corporate
---------------------- debt restructuring undertaken during the year:
---------------------- a. Total amount of loan assets subjected to restructuring under CDR. [(a) =
(b) + (c) + (d)]
----------------------
b. The amount of standard assets subjected to CDR.
----------------------
c. The amount of sub-standard assets subjected to CDR. d. The amount
---------------------- of doubtful assets subjected to CDR.
---------------------- 8.12 IMPLEMENTATION OF THE REVISED GUIDELINES

---------------------- The above guidelines will be implemented with prospective effect. The
ICA and DCA will have to be suitably amended for incorporating the changes
----------------------
introduced in the scheme.
---------------------- Revised Guidelines on Corporate Debt Restructuring (CDR) Mechanism
(Reference http://rbi.org.in/scripts/NotificationUser.aspx?Id=2617&Mode=0)
----------------------
RBI /2005-06/ 206DBOD.No.BP.BC. 45 / 21.04.132/ 2005-06
---------------------- 1. Please refer to our circular DBOD No. BP.BC. 68/21.04.114/2002-03 dated
February 5, 2003 on the captioned subject wherein detailed guidelines on
----------------------
Corporate Debt Restructuring System were issued incorporating therein
---------------------- the recommendations of the High Level Group under the chairmanship of
Shri Vepa Kamesam, then Deputy Governor, Reserve Bank of India, for
---------------------- facilitating timely and transparent mechanism for restructuring corporate
debts of viable corporate entities affected by internal or external factors,
----------------------

outside the purview of BIFR, DRT and other legal proceedings, for the Notes
benefit of all concerned.
----------------------
2. A Special Group was constituted in September 2004 with Smt. S.
Gopinath, Deputy Governor, Reserve Bank of India to undertake a ----------------------
review of the Scheme. The Special Group had suggested certain changes/
improvements in the existing Scheme for enhancing its scope and making ----------------------
it more efficient. Based on the recommendations made by the Special
Group, revised draft guidelines on Corporate Debt Restructuring were ----------------------
prepared and circulated among banks for comments. On the basis of the ----------------------
feedback received, the draft guidelines have been reviewed.
3. The major modifications made in the existing CDR mechanism relate to: ----------------------
●● xtension of the scheme to entities with outstanding exposure of

E ----------------------
Rs.10 crore or more.
----------------------
●● Requirement of support of 60% of creditors by number in addition
to the support of 75% of creditors by value with a view to make the ----------------------
decision- making more equitable.
●● Discretion to the core group in dealing with willful defaulters in ----------------------
certain cases other than cases involving frauds or diversion of funds ----------------------
with malafide intentions.
●● Linking the restoration of asset classification prevailing on the date ----------------------
of reference to the CDR Cell to implementation of the CDR package
----------------------
within four months from the date of approval of the package.
●● Restricting the regulatory concession in asset classification and ----------------------
provisioning to the first restructuring where the package also has
to meet norms relating to turnaround period and minimum sacrifice ----------------------
and funds infusion by promoters. ----------------------
●● Convergence in the methodology for computation of economic
sacrifice among banks and FIs. ----------------------
●● Limiting RBI’s role to providing broad guidelines for CDR
----------------------
mechanism.
●● Enhancing disclosures in the balance sheet for providing greater ----------------------
transparency.
----------------------
●● Pro-rata sharing of additional finance requirement by both term
lenders and working capital lenders. ----------------------
●● Allowing OTS as a part of the CDR mechanism to make the exit
----------------------
option more flexible.
●● Regulatory treatment of non-SLR instruments acquired while
----------------------
funding interest or in lieu of outstanding principal and valuation of
----------------------
such instruments.
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
1. What is the most important element of Debtor-Creditor Agreement?
---------------------- i. Standstill
ii. Stay slow
----------------------
iii. Stand steady
---------------------- iv. On stand
---------------------- 2. The process of reclassification of an assent should not stop merely
because the case is referred to:
---------------------- i. CDR Standing Forum
---------------------- ii. CDR Empowered Group
iii. CDR Cell
----------------------
iv. CDR Core Group
---------------------- 3. Second category of CDR is introduced for cases of the following kind
of classification of accounts:
----------------------
i. Insolvent
---------------------- ii. Profit
---------------------- iii. Fake
iv. Doubtful
----------------------
4. Which of the following is not a stage in restructuring of corporate
---------------------- debts under CDR system?
i. Before commencement of commercial production
----------------------
ii. After commencement of commercial production but before the
---------------------- asset has been classified as sub-standard
iii. After commencement of commercial production and the asset
---------------------- has been classified as sub-standard or doubtful
---------------------- iv. After the completion of commercial production
5. The major modification made in the existing CDR mechanism relates
----------------------
to:
---------------------- i. Discretion to the core group
ii. Selection to the core group
----------------------
iii. Discrimination to the core group
---------------------- iv. Election of the core group
----------------------
---------------------- Activity 1
---------------------- 1. List the members of the CDR Core Group.
---------------------- 2. Go through the latest CDR Circular

Summary Notes
●● orporate Debt Restructuring occurs when a company is in a financial

C ----------------------
crisis and cannot pay its present and perhaps short-term future credit
----------------------
responsibilities. In such case, the company looks for ways to spread out
its credit obligations with smaller repayment amounts and a longer time ----------------------
with which to pay off obligations.
●● Corporate debt restructuring plans are the most widely accepted way of ----------------------
dealing with cash flow issues. In many cases, even if a company’s creditors ----------------------
do not like the plan the company offers to defer credit repayments, a court
may find the plan acceptable and therefore the creditors must abide by the ----------------------
plan.
----------------------
●● corporation may begin its corporate debt restructuring plan by seeking
A
to lowering of interest rates on its present debts. ----------------------
●● or a company, even a quarter of a point or a half a point on a hundred
F
----------------------
million dollar loan could be the difference between continuing business
and closing its doors. In addition to perhaps cutting its workforce, its ----------------------
advertising and production costs, a company saving a million dollars a
year on interest payments may be able to survive the roughest of financial ----------------------
weather. The problem comes in convincing the creditors to agree to less
----------------------
money at the moment.
●● orporate debt restructuring can provide creative ways of refinancing
C ----------------------
debt much the way home buyers who want to get into larger homes than
they really can afford might use. ----------------------
●● reditors of a company seeking debt restructuring might agree to a

C ----------------------
balloon payment at the end of ten years with much smaller monthly debt
repayments each month or each year until those ten years are up. Or ----------------------
perhaps the time period might be five years or three years, depending on ----------------------
the needs of the company and the mood of the creditors.
----------------------
Keywords
----------------------
●● Advances: All kinds of credit facilities including cash credit, overdrafts,
term loans, bills discounted/purchased, factored receivables, etc. and ----------------------
investments other than that in the nature of equity. ----------------------
●● ully secured: When the amounts due to a bank (present value of principal
F
and interest receivable as per restructured loan terms) are fully covered by ----------------------
the value of security, duly charged in its favour in respect of those dues,
----------------------
the bank’s dues are considered to be fully secured.
●● Repeatedly restructured accounts: When a bank restructures an account ----------------------
a second (or more) time(s), the account will be considered as a ‘repeatedly
restructured account’. However, if the second restructuring takes place ----------------------
after the period up to which the concessions were extended under the ----------------------
terms of the first restructuring, that account shall not be reckoned as a
‘repeatedly restructured account’. ----------------------

Notes ●● pecified Period: A period of one year from the date when the first
S
payment of interest or installment of principal falls due under the terms
---------------------- of restructuring package.
---------------------- ●● reditworthiness: A creditor’s measure of consumer’s or company’s
C
past and future ability and willingness to repay debts.
----------------------
---------------------- Self-Assessment Questions
---------------------- 1. Explain the Structure of CDR system in India.

2. Write down the objectives and need for CDR system in India.
----------------------
3. What is the legal basis for CDR system in India?
----------------------
4. Critically analyse the CDR system.
----------------------
----------------------
----------------------
Fill in the blanks.
----------------------
1. CDR is a non-statutory voluntary mechanism based on Debtor-Creditor
---------------------- Agreement (DCA) and Inter-Creditor Agreement (ICA).
---------------------- 2. The CDR system was envisaged to have a three-tier structure comprising
the CDR Standing Forum, CDR Empowered Group and the CDR cell.
----------------------
3. The CDR Empowered Group will consist of Executive Director level
---------------------- representatives of IDBI, ICICI and SBI as standing members.
4. The Group is mandated to approve restructuring within a specified time
----------------------
frame of 90 days.
---------------------- 5. CDR mechanism is used by companies with outstanding debt obligations
---------------------- to alter the terms of the debt agreements in order to achieve some
advantage.
---------------------- i. – d.
ii. – a.
----------------------
iii. – e.
----------------------
iv. – c.
---------------------- v. – b.
1. False
----------------------

2. True Notes
3. False
----------------------
4. False
----------------------
5. True
Multiple Choice Single Response. ----------------------
1. What is the most important element of Debtor-Creditor Agreement? ----------------------
i. Standstill
----------------------
2. The process of reclassification of an assent should not stop merely because
the case is referred to: ----------------------
iii. CDR Cell ----------------------
3. Second category of CDR is introduced for cases of the following kind of ----------------------
classification of accounts:
iv. Doubtful ----------------------
4. Which of the following is not a stage in restructuring of corporate debts ----------------------

under CDR system?
----------------------
i. Before commencement of commercial production
----------------------
5. The major modification made in the existing CDR mechanism relates to:
i. Discretion to the core group ----------------------
----------------------
Suggested Reading
----------------------
1. http://www.cdrindia.org/aboutus.htm
----------------------
2. http://www.cdrindia.org/cdrcell.htm
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Financial Restructuring
UNIT
9
Structure:
9.1 Introduction
9.2 Need for Financial Restructuring
9.3 Increase of Share Capital
9.4 Reduction of Share Capital
9.5 Reorganisation of Share Capital (Splitting/Reverse Splitting of Shares)
9.6 Buyback of Shares
9.7 Buyback for Listed Companies
9.8 Buyback for Private and Unlisted Public Limited Companies
Summary
Key Words
Suggested Reading
Financial Restructuring 127

Notes
Objectives
----------------------
----------------------
• Recognise the need for financial restructuring
----------------------
• Define reorganisation of capital
---------------------- • Describe reduction of share capital
---------------------- • Examine buyback of shares – concepts and objects
---------------------- • Assess private limited company and unlisted public

• List SEBI (buyback of securities) Regulations, 1998
----------------------
----------------------
9.1 INTRODUCTION
----------------------
Financial restructuring of a company involves a rearrangement of its
---------------------- financial structure so as to make the company’s finances more balanced. Both,
an under-capitalised and an over-capitalised company may restructure their
----------------------
capital by taking certain corrective steps. If a company is undercapitalized, the
---------------------- company may restructure its capital by way of injecting more capital, issuing
debentures, bonds, etc. and in case of over- capitalisation, one of the methods
---------------------- for company’s restructuring is to buy back of its own shares. A dynamic board
of the company should constantly review the financial structure of the company
----------------------
and effect financial restructuring and reorganisation whenever the need arises.
---------------------- Financial restructuring of a company involves rearrangement of its financial
structure so as to make the company’s finances more balanced.
----------------------
---------------------- 9.2 NEED FOR FINANCIAL RESTRUCTURING
---------------------- A company is required to balance between its debt and equity in its capital
structure and the funding of the resulting deficit.
----------------------
When, during the lifetime of a company, any of the following situations
---------------------- arise, the Board of Directors of a company is compelled to think and decide on
the company’s restructuring:
----------------------
●● ecessity for injecting more working capital to meet the market demand
N
---------------------- for the company’s product or services.
---------------------- ●● When the company is unable to meet its current commitments.

●● hen the company is unable to obtain further credit from suppliers of
W
---------------------- raw materials, consumable stores, bought-out components etc. and from
---------------------- other parties like those doing job for the company.
●● hen the company is unable to utilise its full production capacity for lack
W
---------------------- of liquid funds.
----------------------

Restructuring of under-capitalised company Notes
An under-capitalised company may restructure its capital by taking one or
----------------------
more of the following corrective steps:
●● I njecting more capital whenever required either by resorting to rights ----------------------
issue/preferential issue or additional public issue. ----------------------
●● esorting to additional borrowings from financial institutions, banks or
R
other companies etc. ----------------------
●● Issuing debentures, bonds, etc. ----------------------

●● I nviting and accepting fixed deposits from directors, their relatives, ----------------------
business associates and public.
----------------------
Restructuring of over-capitalised company
If a company is over-capitalised, its capital also requires restructuring by ----------------------
taking following corrective measures: ----------------------
●● Buyback of own shares.
----------------------
●● Paying back surplus share capital to the shareholders.
----------------------
●● Repaying loans to financial institutions, banks, etc.
●● Repaying fixed deposits to public. ----------------------
●● Redeeming its debentures, bonds, etc. ----------------------
9.3 INCREASE OF SHARE CAPITAL ----------------------
Financial restructuring also includes increase in the share capital of the ----------------------
company. If during the lifetime of the company, it wants additional capital, ----------------------
the company may issue the same after complying with the relevant provisions
of the Companies Act. Additional fund flow in the form of working capital ----------------------
can increases the productivity of the company and indirectly the losses will
reduce. In order to increase share capital, the company has to call meeting of ----------------------
shareholders of the company and also file form SH-7 of Companies Central ----------------------
Government General Rules and Forms prescribed under the Companies Act.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
Fill in the blanks.
----------------------
1. A company is required to balance between its ______and _________
---------------------- in its capital structure and the finding of the resulting deficit.
---------------------- 2. When company is unable to utilise its full production capacity for
lack of liquid funds, Board of Directors of a company is compelled to
---------------------- think and decide on the company’s _____________________.
---------------------- 3. An ___________________ company may restructure its capital by
injecting more capital whenever required either by resorting to rights
---------------------- issue/preferential issue or additional public issue.
---------------------- 4. Buyback of own shares is a kind of capital restructuring measure for
____________________ company.
----------------------
5. Financial restructuring also includes increase in the ______________
---------------------- of the Company.
----------------------
9.4 REDUCTION OF SHARE CAPITAL
----------------------
Reduction of capital means reduction of issued, subscribed and paid-up capital
---------------------- of the company. Section 66 of the Companies Act, 2013 provides for the
---------------------- reduction of share capital, if the articles of the company so authorise. If there
is no such clause in the articles, these must be altered by a special resolution
---------------------- giving the company the power to reduce the capital.
---------------------- The need for reduction of capital may arise in various circumstances like trading
losses, heavy capital expenses and assets of reduced or doubtful value.
---------------------- The mode of reduction as laid down in Section 66 of the Companies Act is
---------------------- as follows:
Subject to confirmation by the Tribunal on an application by the company, a
----------------------
company limited by shares or limited by guarantee and having a share capital
---------------------- may, by a special resolution, reduce the share capital in any manner and in
particular, may—
----------------------
●● extinguish or reduce the liability on any of its shares in respect of the
---------------------- share capital not paid-up; or
●● either with or without extinguishing or reducing liability on any of its
----------------------
shares,—
---------------------- ●● cancel any paid-up share capital which is lost or is unrepresented by
available assets; or
----------------------
●● pay off any paid-up share capital which is in excess of the wants of the
---------------------- company, alter its memorandum by reducing the amount of its share
capital and of its shares accordingly:
----------------------

●● Provided that no such reduction shall be made if the company is in arrears Notes
in the repayment of any deposits accepted by it, either before or after the
commencement of this Act, or the interest payable thereon. ----------------------
●● By following a combination of any of the preceding methods. ----------------------
●● When exercising its discretion, the Tribunal must ensure that the reduction
is fair and equitable. The Tribunal has to consider the following while ----------------------
sanctioning the reduction: ----------------------
●● The interests of creditors are safeguarded.
----------------------
●● Interest of shareholders are considered.
●● The public interest is taken care of. ----------------------
Reduction of share capital without sanction of the Tribunal ----------------------
Following are the cases which amount to reduction of share capital but
----------------------
where no confirmation of Tribunal is necessary:
●● Surrender of shares: It means the surrender of shares already issued ----------------------
to the Company by the registered holder of shares. Where shares are ----------------------
surrendered to the Company, whether by way of settlement of a dispute
or for any other reason, it will have the same effect as a transfer in favour ----------------------
of the Company and amount to a reduction of capital.
----------------------
The Companies Act contains no provision for the surrender of shares.
Thus, surrender of shares is valid only when Articles of Association provide for ----------------------
the same and
----------------------
(i) Where forfeiture of such shares is justified; or
(ii) When shares are surrendered in exchange for new shares of same nominal ----------------------
value. ----------------------
Both forfeiture and surrender lead to termination of membership.
However, in case of forfeiture, it is at the initiative of the company and in case ----------------------
of surrender it is at the initiative of the member or shareholder. ----------------------
●● Forfeiture of shares: A Company may, if authorised by its articles, forfeit
----------------------
shares for non-payment of calls and the same will not require confirmation
of the Tribunal. ----------------------
●● Diminution of capital: Where the Company cancels shares which have
----------------------
not been taken or agreed to be taken by any person.
●● Redemption of redeemable preference shares. ----------------------
●● Buyback of its own shares which is not incompliance of Section 68. ----------------------
●● Reduction of capital when company is defunct: The Registrar of
Companies has been empowered under Section 248 and 252 of the ----------------------
Companies Act, 2013 to strike off the name of the company from its ----------------------
register on the ground of non-working company. Therefore, where the
company has ceased to trade and the Registrar exercises his power under ----------------------
Section 248 and 252, a reduction of capital cannot be prevented.
----------------------

Notes ●● Reduction of capital of unlimited company: An unlimited company to
which Section 66 does not apply, can reduce its capital in any manner that
---------------------- its Memorandum and Articles of Association allow. It is not governed by
Sections 61 and 66 of the Act.
----------------------
●● In the following cases, the diminution of share capital is not to be treated
---------------------- as reduction of the capital:
---------------------- ●● Where the Company cancels shares which have not been taken or agreed
to be taken by any person.
---------------------- ●● Where redeemable preference shares are redeemed in accordance with
---------------------- the provision of Section 55 of the Act.
●● Where any shares are forfeited for non-payment of calls and such forfeiture
---------------------- amounts to reduction of capital.
---------------------- ●● Where the company buys back its own shares which is not incompliance
of Section 68 of the Act.
----------------------
----------------------
---------------------- i. Reduction of capital a. Section 61 & 66 not

applicable
---------------------- ii. Both forfeiture and surrender b. Not reduction of capital
leads to
---------------------- iii. When company is defunct c. Issued, subscribed & paid
up capital
----------------------
iv. Diminution of share capital d. Termination of membership
---------------------- v. Unlimited company e. Section 248 and 252 of
Companies Act
----------------------
---------------------- 9.5 REORGANISATION OF SHARE CAPITAL (SPLITTING/

---------------------- REVERSE SPLITTING OF SHARES)
---------------------- During the lifetime of a company, it will often need to restructure the
format of its capital by the issue of new shares to include new investors or new
---------------------- classes of shares with different class rights with different voting and dividends
rights for each class of shares. It may be necessary to sub-divide or consolidate
----------------------
shares where the nominal value needs to reflect the market or floatation value.
---------------------- Where capital is in excess of requirements or the balance sheet needs to be re-
aligned or capital needs to be released to reserves to pay dividends to encourage
---------------------- investors, in these cases a reduction of capital may be required.
---------------------- The company may at some time need to purchase its own share from an
existing shareholder to prevent the shares being sold to a third party. All these
----------------------
----------------------

changes, however, will require documentation and may also require alteration Notes
to company’s Articles of Association to grant authority to the directors to alter
the capital structure. ----------------------
It is a fundamental, voluntary change in a firm’s capital structure, effected ----------------------
by altering the voting rights of the providers of equity capital and/or loan
capital, such as converting common stock (ordinary shares) into redeemable ----------------------
preferred stock (preference shares). Capital reorganisation is resorted to in case
----------------------
of serious financial and operating problems, such as loss of a major customer or
the danger of an imminent bankruptcy. ----------------------
In accordance with Explanation to Section 230 (b), the expression
----------------------
“arrangement” includes a re-organisation of the share capital of the company
by the consolidation of shares of different classes or by division of shares or by ----------------------
both these methods. Splitting of shares means division of shares. For example,
if the face value of shares is Rs.10, the company can split the same into two ----------------------
shares of Rs.5 each. The reorganisation of share capital of a company may be
----------------------
proposed -
●● Between a company and its creditors or any class of them, or ----------------------
●● Between a company and its members or any class of them. ----------------------
In such a case, the Tribunal may, on the application of the company or
----------------------
of any creditor or member of the company, order a meeting of the creditors
or of the members. The meeting is to be called, held and conducted in such ----------------------
manner as the Tribunal directs. Majority of 3/4th in number of the creditors or
members present and voting either in person or by proxy at the meeting should ----------------------
agree to the reorganisation of share capital. The reorganisation should also be
----------------------
sanctioned by the Tribunal. The order of Tribunal has no effect until a certified
copy of the order in e-form 21 has been filed with the Registrar (Section 230). ----------------------
9.6 BUYBACK OF SHARES ----------------------
The concept of buyback of shares is a recent one so far as India is ----------------------
concerned. As per the Section 68 of the Companies Act, 2013 reduction of
capital shall not apply to buy back of its own securities by a company, however, ----------------------
if the reduction falls under Section 66 it will be the reduction of capital.
----------------------
Buyback of shares means the purchase by the Company of its own
shares. Buyback of equity shares is an important mode of capital restructuring. ----------------------
It is a corporate financial strategy which involves capital restructuring and is
----------------------
prevalent globally with the underlying objectives of increasing earnings per
share, averting hostile takeovers, improving returns to the shareholders, etc. ----------------------
Objectives of Buyback
----------------------
Good corporate governance calls for the maximising the shareholder
value. When company has surplus funds for which it does not have good ----------------------
avenues for deployment assuring an average return on capital employed and
----------------------
earning per share, the company’s financial structure requires balancing. The
reasons for buyback may be one or more of the following: ----------------------

Notes ●● To improve the earning per share.
●● To improve return on capital, return on net worth and to enhance the long-
---------------------- term shareholders value.
---------------------- ●● To enhance consolidation of stake in the company.
---------------------- ●● To prevent unwelcome takeover bids.

●● To return surplus cash to shareholders.
----------------------
●● To achieve optimum capital structure.
---------------------- ●● To support share price during periods of sluggish market conditions.
---------------------- ●● To service the equity more efficiently.
The decision to buy back is also influenced by various other factors
---------------------- relating to the company such as growth opportunities, capital structure, sourcing
---------------------- of funds, and cost of capital and optimum allocation of funds generated.
Powers of Tribunal
----------------------
Prior to the enactment of the Companies (Amendment) Act, 1999 no
---------------------- company limited by shares and no company limited by guarantee and having
a share capital could buy its own securities unless the consequent reduction of
----------------------
capital was effected and sanctioned pursuant to the provisions of Section 66 or
---------------------- of Sections 241 and 242 of the Act.
---------------------- The Tribunal pursuant to the provisions of Sections 241 and 242 of the
Act may order a company to purchase the shares or any interest of its members
---------------------- in the company on an application made by members under Sections 241 and
242 of the Act to remedy oppression and mismanagement. The reduction of
---------------------- share capital as a consequence of such an order is not affected by nor will it be
---------------------- governed by the provisions of the Act relating to buyback of securities.
The provisions of the Act relating to the buyback of securities are also
---------------------- not applicable to the extent of the sanction of a Tribunal to any scheme of
---------------------- compromise or arrangement pursuant to Sections 230 to 232 of the Act.
Sections 241 and 242 specifically empowers the Tribunal to order
---------------------- purchase of the shares or interest of any member of the company by other
---------------------- members or by the company and consequent reduction in the share capital. The
issue considered in this case was whether this power of Tribunal is subject to
---------------------- compliance with the provisions of Section 68 in view of its non-obstante clause.
It was observed that the object of Section 68 is to put some checks and balances
---------------------- when a company, on its own, desires to buy back its own shares and as such
---------------------- Section 68 has no application in a case where the Tribunal exercises its power
under Sections 241 and 242 of the Act. Thus, the powers of the Tribunal to pass
---------------------- an order directing a company to purchase its own shares in terms of Sections
241 and 242 are not curtailed by the provisions of Section 68.
----------------------
Rules and Regulations for Buyback of Securities
----------------------
Under Section 66 and 68 of the Companies Act, 2013 any company
---------------------- limited by shares or a company limited by guarantee and having a share capital

can buy back its own securities, whether it is a private, public, listed or unlisted Notes
company.
----------------------
The buyback in respect of shares or other specified securities which are not listed
on any recognised stock exchange must be in accordance with the guidelines as ----------------------
may be prescribed [Section 68(2)(g)]. Provided that no offer of buy-back under
this sub-section shall be made within a period of one year reckoned from the ----------------------
date of the closure of the preceding offer of buy-back, if any.
----------------------
The guidelines prescribed on this behalf are Private Limited Company and
Unlisted Public Limited Company (Buyback of Securities) Rules, 1999. ----------------------
The procedure to be followed for buyback of securities by listed companies ----------------------
is contained in Sections 68, 69 and 70 of the Companies Act, 2013 and the
Securities and Exchange Board of India (Buyback of Securities) Regulations, ----------------------
1998, (referred to as ‘the Regulations’ hereinafter).
----------------------
Authority and Quantum of Buyback of Securities Authority in the Articles
----------------------
Buyback of securities should be authorised by the Articles of Association
of the company. [Section 68(2)(a)]. In case the Articles do not contain such a ----------------------
provision, they should be amended appropriately authorising the buyback of
securities. Such an amendment should be made either at a meeting preceding ----------------------
the meeting wherein the resolution for buyback is to be passed or at the same ----------------------
meeting wherein the resolution for buyback is to be passed but the resolution for
amendment of Articles should precede the resolution for buyback of securities. ----------------------
Board Resolution and the Quantum of Buyback ----------------------
By passing a resolution, the Board can authorise the buyback of securities
----------------------
not exceeding 10% of the total paid-up equity capital and out of free reserves or
securities premium account of the company [Provision to Section 68 (2)]. The ----------------------
aforesaid limit is to be applied not to the number of securities to be bought back
but to the amount required for buyback of such securities. ----------------------
The resolution authorising buyback of securities should be passed at ----------------------
the meeting of the Board [Section 179(3)(b)]. Such a resolution should not be
passed by circulation or at a meeting of a committee of the Board. However, the ----------------------
methodology, mode of buyback and other procedural requirements for buyback
----------------------
may be delegated by the Board.
Shareholders’ Resolution and Quantum of Buyback ----------------------
By passing a special resolution, the shareholders can authorise the buy- ----------------------
back of securities not exceeding 25% of the total paid-up capital and free reserves
of the company in that financial year [Section 68 (2) (b) and (c)]. Paid-up capital ----------------------
includes both equity and preference share capital. Whereas unlisted companies ----------------------
should obtain shareholders’ approval by passing the special resolution only at a
duly convened general meeting, listed companies should obtain such approval ----------------------
by postal ballot. The notice containing the special resolution proposed to be
passed should be accompanied by an explanatory statement stating: ----------------------
----------------------

Notes ●● All material facts, fully and completely disclosed;
●● The necessity for buyback;
----------------------
●● The class of security intended to be purchased under the buyback;
---------------------- ●● The amount to be invested under buyback;
---------------------- ●● The time limit for completion of buyback [Section 68(3)].
The detailed requirements in this regard, as laid down in the Regulations
----------------------
and Rules respectively for listed and unlisted companies, are explained later.
---------------------- Maximum Quantum of Buyback
---------------------- A company cannot buy back more than 25% of its total paid-up capital
and out of free reserves or securities premium account [Section 68 (2) (c)]. The
---------------------- aforesaid limit is to be applied not to the number of securities to be bought back
---------------------- but to the amount required for buyback of such securities. Buyback of equity
shares in any financial year should not exceed 25% of the total paid-up equity
---------------------- capital of the company. [Section 68 (2) (c)].
---------------------- A company may buy back its entire (i.e., 100%) securities other than
equity shares, viz., preference shares and any other securities as may be notified
---------------------- by the Central Government from time to time, in a financial year, subject to
the overall limit of 25% of the total paid-up capital and out of free reserves or
---------------------- securities premium account of the company.
---------------------- Further offer of buyback
---------------------- Once the buyback has been made within the authorisation of the Board and
not that of the shareholders, no further offer for buyback of any securities can
---------------------- be made without his consent of shareholders accorded by a special resolution
within 1 year reckoned from the date of the date of the preceding offer of buy-
----------------------
back. [Section 68 (2)].
---------------------- However, shareholders can make further offer within a period of 1 year,
provided the aggregate of authorisation does not exceed the quantum specified.
----------------------
Available Sources for Buyback of Securities
----------------------
According to Section 68 (1) of the Companies Act, 2013, a company may
---------------------- purchase its own shares or other specified securities (hereinafter referred to as
buyback) out of:
----------------------
●● Its free reserves; or
---------------------- ●● The securities premium account; or
---------------------- ●● The proceeds of any shares or other specified securities.
---------------------- However, no buyback of any kind of shares or other specified securities

can be made out of the proceeds of an earlier issue of the same kind of shares
---------------------- or same kind of other specified securities. Thus, the company must have at the
time of buyback, sufficient balance in any one or more of these accounts to
---------------------- accommodate the total value of buyback.
----------------------

Free reserves and securities premium account Notes
While the surplus in the profit and loss account can be used for buyback
----------------------
of securities, in case the profit and loss account shows a debit balance, such
debit balance should first be deducted from free reserves. ----------------------
Capital redemption reserve, revaluation reserve, investment allowance
----------------------
reserve, profit on reissue of forfeited shares, profits earned prior to incorporation
of the company and any other specific reserve are not available for the ----------------------
distribution as dividend and hence do not form part of free reserves for the
purpose of buyback. ----------------------
Even though Section 68(1) provides that a company may buy back its ----------------------
securities out of securities premium account, Section 52 does not mention
buyback of securities as one of the purposes for which the balance in the ----------------------
securities premium account may be utilised. However, by the virtue of non-
----------------------
obstante clause in Section 68, namely, notwithstanding anything contained in
this Act, Section 68 prevails over Section 52. Therefore, the securities premium ----------------------
account can be utilised for buyback of securities.
----------------------
Proceeds of issue
Buyback may be made out of the proceeds of an issue of securities other ----------------------
than the same kind of securities as are proposed to be bought back.
The proceeds of an earlier issue of one kind of securities may be used ----------------------
for the purpose of buyback of any other kind of securities. The proceeds of
an issue of preference shares may be used to buyback equity shares and the ----------------------
proceeds of an issue of equity shares may be used to buyback preference shares.
----------------------
However, the proceeds of an issue of preference shares carrying
differential rights as to dividend, voting, etc. cannot be utilised inter se for the ----------------------
purpose of buyback. For instance, the proceeds of issue of 10% preference
shares cannot be utilised for buyback of 8% preference shares, as these are of ----------------------
the same kind, though of different classes of shares.
Borrowings from banks/financial institutions ----------------------
Where a company has borrowed any money from banks/financial ----------------------
institutions for any purpose, it should not utilise such money for buyback of
securities. [Rule 8(e)]. Further, if any approval is required to be obtained from ----------------------
banks/financial institutions, such approval should be obtained before passing
the board resolution for buyback o securities. ----------------------
Conditions to be fulfilled and Obligations for Buyback of Securities
----------------------
●● Only fully paid-up securities qualify for buyback. [Section 68 (2) (e)]. If
some security holders have not made the payment of calls or any sums ----------------------
due on the securities, it would not disentitle the company from buyback.
However, the securities on which the call money remains in arrears cannot ----------------------
be bought back. Fully paid-up securities, even if quoted below par on the ----------------------
stock exchanges, qualify for buy-back.
●● If a security has been issued at a discount, the payment of the total amount ----------------------
due thereon should be considered as a sufficient qualification for its
----------------------
buyback.
----------------------

Notes ●● After buyback, the company should have a debt-equity ratio not exceeding
2:1, i.e., all secured and unsecured debts of the company should not be
---------------------- more than twice the aggregate of its capital and free reserves. However,
the Central Government has the power to prescribe a higher debt-equity
---------------------- ratio for a class or classes of companies. [Section 68 (2)(d)]. For the
---------------------- purpose of computing debt-equity ratio, ‘debt’ includes:
●● Long-term loans/deposits (repayable after 12 months) including interest
---------------------- bearing unsecured loans from government;
---------------------- ●● Debentures including convertible debentures (except the part of debentures
which are compulsorily convertible into equity), until they are converted,
---------------------- irrespective of the maturity period;
---------------------- ●● Deferred payments;
●● Redeemable preference shares due for redemption between 1 to 3 years.
----------------------
‘Equity’ includes:
----------------------
●● Paid-up equity share capital;
---------------------- ●● Redeemable preference shares due for redemption after 3 years;
---------------------- ●● S hare premium;
●● Free reserves less accumulated losses, arrears of unabsorbed depreciation,
----------------------
all items of assets which are of intangible nature or expenditure not written
---------------------- off;
●● Government subsidies.
----------------------
●● Where buyback of shares is made out of free reserves, the company
---------------------- should transfer to the capital redemption reserve account referred to
Section 55, a sum equal to the nominal value of the shares so bought back
---------------------- and the details of such transfer should be disclosed in the balance sheet
---------------------- [Section 69].
●● I n any other case, the company is not required to transfer to the capital
---------------------- redemption reserve account a sum equal to the nominal value of the shares
---------------------- so bought back.
●● uch transfer to capital redemption reserve account will also not be
S
---------------------- required when buyback is of securities other than shares.
---------------------- ●● o further issue of the same kind of securities should be made within a
N
period of 6 months from the date of completion of buyback of securities.
---------------------- [Section 68 (8)]. The date of further issue of securities, for this purpose,
---------------------- means the date of the resolution passed by the Board or shareholders, as
the case may be.
---------------------- Hence, an issue of preference shares may be made by a company within
a period of 6 months from the date of completion of buyback of equity shares
----------------------
and vice versa. However, further issue of the same kind of securities is allowed
---------------------- by way of bonus issue or in discharge of subsisting obligations such as stock
option schemes, sweat equity or conversion of preference shares or debentures
---------------------- into equity shares. [Section 68 (8)].

An issue of shares in pursuance of a scheme of amalgamation, being by Notes
virtue of a Tribunal order, is permissible. However, no buyback of securities
should be undertaken while a petition for amalgamation is pending. ----------------------
●● No issue of any security including bonus shares should be made till the ----------------------
closure of offer of buyback. [Regulation 19(1)(b) & Rule 8(1)(b).]
●● A company should not make any announcement in respect of buy-back ----------------------
of securities from the date of approval by the Board of any scheme of ----------------------
compromise or arrangement pursuant to the provisions of the Act, up to
the date of filing of the Tribunal order with the Registrar. [Regulation ----------------------
19(2)].
----------------------
●● No offer of buyback of securities should be made if such offer would
result in reducing the non-promoter holding below the limit of public ----------------------
shareholding specified under the SEBI (Disclosure and Investor
Protection) Guidelines, 2000 as applicable at the time of initial listing. ----------------------
[Clause 40A (iii) of Listing Agreement of Mumbai Stock Exchange]. ----------------------
●● Convertible debentures can be bought back before the date of their
conversion but such a purchase would amount to the company purchasing ----------------------
its own shares and all the provisions relating to buyback shall become ----------------------
applicable.
●● Promoters or persons acting in concert should not deal in the securities ----------------------
of the company while the buyback offer is open. [Regulation 19(1)(e)]. ----------------------
Disputed Securities kept in Abeyance
----------------------
Securities which are under dispute and have been kept in abeyance
under Section 126, or in respect of which transfer or transmission has not been ----------------------
affected, are not available for buyback. Before undertaking any buyback, the
company should ensure that no transfer deed is pending for registration. ----------------------
Restrictions on Buyback of Securities on Certain Circumstances ----------------------

●● if a default, is made by the company, in the repayment of deposits accepted ----------------------
either before or after the commencement of this Act, interest payment
thereon, redemption of debentures or preference shares or payment of ----------------------
dividend to any shareholder, or repayment of any term loan or interest
----------------------
payable thereon to any financial institution or banking company: [Section
70 (1)(c)]. ----------------------
●● Deposits for this purpose include deposits under Section 2(31), 73, and 74
read with Rule 2(b) of the Companies, (Acceptance of Deposits) Rules, ----------------------
1975. ----------------------
●● Buyback should not be made if a company has defaulted in relation to
preparation and filing of its annual return. [Section 70(2)]. However, such ----------------------
a company may buy back its securities after the default has been rectified. ----------------------
●● Buyback should not be made in the event of any default in relation to
payment of dividend to any equity or preference shareholder. [Section 70 ----------------------
(2)]. Where a dividend has been declared by a company but has not been ----------------------
paid in accordance with the provisions of the Act, the company may buy

Notes back its securities only after payment of dividend and interest thereon as
per the provisions of the Act.
---------------------- ●● Buyback should not be made in the event of default in preparation of
---------------------- the annual accounts. [Section 70 (2)]. Where the report of the statutory
auditors of the company contains a qualification that annual accounts
---------------------- are not prepared as per the accounting standards or otherwise are not in
accordance with the provisions of Section 129 and 133, the company
---------------------- cannot proceed to buy back its securities.
---------------------- ●● However, compounding of the afore-mentioned defaults or subsequent
curing of the default may qualify as an enabling provision for buyback.
----------------------
●● Buyback should not be made by a company:
---------------------- ●● Through any subsidiary company including its own subsidiary companies;
---------------------- ●● Through any investment company or group of investment companies.
[Section 70].
----------------------
Declaration of Solvency
---------------------- As per Section 68(6), where the Board or the shareholders of a listed
company pass a resolution to buy back shares, the company should, before
----------------------
making such buyback, file with the registrar and SEBI a declaration of solvency
---------------------- in the prescribed form.
---------------------- A private company and a public company whose shares are not listed on
a stock exchange should file a declaration of solvency with the registrar in the
---------------------- prescribed form.
---------------------- Stamp Duty on Buyback

Transfer of shares attracts stamp duty vide Schedule I, entry 62 to the
---------------------- Indian Stamp Act, 1899. For completion of transfer of shares, a company is
---------------------- required to register the shares in the name of the transferee. In the case of
buyback, the shares bought back have to be statutorily extinguished within 7
---------------------- days from the last date of completion of buyback. Hence, no registration of such
shares takes place in the name of the company. The names of the members/
---------------------- holders of the shares have to be struck off from the register of members if the
---------------------- entire holding is bought back. Therefore, buyback cannot be considered as
transfer and stamp duty would not be payable in a case where buy-back of
---------------------- shares takes place in physical form even if the shares are accompanied by an
application form for transfer of shares in favour of the company. Further buy-
---------------------- back of shares will not be construed as “release” falling under Article 55 of the
---------------------- Indian Stamp Act attracting stamp duty.
Shares received by the company for buy-back in electronic mode do not
----------------------
attract stamp duty in terms of the provisions contained in the Depositories Act,
---------------------- 1996.
----------------------
----------------------

Income Tax Aspects Notes
Section 46A has been inserted in the Income Tax Act, 1961 with effect
----------------------
from the assessment year 2000−01. The said Section provides that any
consideration received by a security holder from any company on buy back ----------------------
shall be chargeable to tax on the difference between the cost of acquisition
and the value of consideration received by the security holder as capital gains. ----------------------
The computation of capital gains shall be in accordance with the provisions of
----------------------
Section 48 of the Income Tax Act, 1961.
In respect of Foreign Institutional Investors (FIIs), as per the provisions of ----------------------
Section 196D(2) of the Income Tax Act, 1961 no deduction of tax at source shall
----------------------
be made before remitting the consideration for equity shares tendered under the
offer by FIIs as defined under section 115AD of the Income Tax Act, 1961. NRIs, ----------------------
OCBs and other non-resident shareholders (excluding FIIs) will be required to
submit a No Objection Certificate (NOC) or tax clearance certificate obtained ----------------------
from the Income Tax authorities under the Income Tax Act. In case the aforesaid
----------------------
NOC or tax clearance certificate is not submitted, the company should deduct tax
at the maximum marginal rate as may be applicable to the category of shareholders ----------------------
on the entire consideration amount payable to such shareholders.
----------------------
Procedure and Practice for Buy-Back of Securities
Under Section 68 of the Companies Act, 2013 any company limited ----------------------
by shares or a company limited by guarantee and having a share capital can ----------------------
buy-back is own securities, whether it is a private, public, listed or unlisted
company. The buy-back in respect of shares or other specified securities which ----------------------
are not listed on any recognised stock exchange must be in accordance with the
guidelines as may be prescribed [Section 68(2)(g)]. The guidelines prescribed in ----------------------
this behalf are Private Limited Company and Unlisted Public Limited Company ----------------------
(Buy-Back of Securities) Rules, 1999.
----------------------
----------------------
Multiple Choice single Response. ----------------------
1. Which of the following is not a reason for buyback?
i. To improve the earning per share ----------------------
ii. To prevent unwelcome takeover bids ----------------------
iii. To service the equity more efficiently
----------------------
iv. To prevent welcome takeover bids
2. By passing a resolution, the Board can authorise the buyback of ----------------------
securities not exceeding ________of the total paid-up equity capital
----------------------
and free reserves of the company.
i. 20% ----------------------
ii. 30% ----------------------
iii. 50%
iv. 10% ----------------------

Notes 3. According to Section 68, a company may purchase its own shares or
---------------------- other specified securities out of:
i. Its free reserves
---------------------- ii. The securities premium account
---------------------- iii. The proceeds of any shares or other specified
iv. The dividends
----------------------
---------------------- 9.7 BUYBACK FOR LISTED COMPANIES

----------------------
The procedure to be followed for buy-back of securities by listed
---------------------- companies is contained in Sections 68, 69, and 70 of the Companies Act,
2013 and the Securities and Exchange Board of India (Buy-back of Securities)
---------------------- Regulations, 1998, (referred to as ‘The Regulations’ hereinafter) and is detailed
below:
----------------------
Amendment of Articles
----------------------
As per Section 68 (2) of the Companies Act, 2013, a buyback must
---------------------- be authorised by the Articles of Association of the company. It is, therefore,
necessary for a company proposing to resort to a buy-back to make sure that
---------------------- such an authority exists in its articles.
---------------------- Approval of Shareholders
---------------------- In terms of Sub-section (2)(b) of Section 68, a buyback must be approved by
a special resolution. However, a special resolution at a general meeting is not
---------------------- necessary where buy-back is or less than 10% of the total paid-up equity capital
and free reserves of the company and such buyback has been authorised by the
----------------------
Board of Directors of the company by means of a resolution passed at its meeting
---------------------- and not by way of a resolution of board of directors passed by circulation. In
case of a listed company, the approval of shareholders should be taken only by
---------------------- way of postal ballot [Section 2(65), 110].
---------------------- Sub-regulation 1 of Regulation 5 of the Regulations, lays down that for
the purposes of passing a special resolution under Sub-section (2) of Section
---------------------- 68 of the Companies Act, 2013 the explanatory statement to be annexed to the
notice for the general meeting pursuant to Section 102 of the Companies Act
----------------------
shall contain disclosures as specified in Schedule I to the Regulations.
---------------------- Sub-regulation (2) provides that a copy of the resolution passed at the
general meeting under Sub-section (2) of Section 68 of the Companies Act, 2013
----------------------
shall be filed with Securities and Exchange Board of India (SEBI) and the stock
---------------------- exchanges where the shares or other specified securities of the company are
listed, within seven days from the date of passing of the resolution. Regulation
---------------------- 5A of the Regulations, provides the following conditions subject to which a
company may buy-back its shares to other specified securities when authorized
----------------------
by a Board resolution pursuant to proviso to Section 68 (2) of the Companies
---------------------- Act:

●● Before making a public announcement under Regulation 8(1), a public Notes
notice shall be given in at least one English national daily, one Hindi
national daily and a regional language daily, all with wide circulation at ----------------------
the place where the registered office of the company is situated.
----------------------
●● The public notice shall be given within 2 days of the passing of the
resolution by the Board of Directors. ----------------------
●● he public notice shall contain the disclosures as specified in Schedule I
T ----------------------
of the Regulations.
Also, a copy of the resolution, passed by the Board of Directors at its ----------------------
meeting, authorising buy back of its shares or other specified securities, shall be ----------------------
filed with the SEBI and the stock exchanges where the shares or other specified
securities of the company are listed, within 2 days of the date of passing a ----------------------
special resolution. All the shares or other specified securities for buy-back must
be fully paid-up [Section 68 (2)(e)]. ----------------------
Special resolution and explanatory Statement to be annexed ----------------------
Where buy-back of securities needs the approval of the company at the ----------------------
general meeting by special resolution, Section 68 provides that the notice of the
meeting at which the special resolution authorising the buy-back is proposed to ----------------------
be passed should be accompanied by an explanatory statement stating:
----------------------
●● A full and complete disclosure of all material facts;
●● Necessity for the buyback; ----------------------
●● Class of security intended to be purchased under the buyback; ----------------------

●● Amount to be invested under the buyback; and ----------------------
●● Time limit for the completion of buyback.
----------------------
●● Exceptional importance has been given to the explanatory statement in
the SEBI Buyback Regulations because maximum disclosures can be ----------------------
made through it.
----------------------
Explanatory Statement
An explanatory statement containing full and complete disclosure ----------------------
of all the material facts and the disclosures prescribed in Schedule I of the ----------------------
Regulations should be annexed to the notice where the buy-back is pursuant
to the shareholders’ approval. The explanatory statement should include the ----------------------
following [Regulation 5 (1)]:
----------------------
●● The date of Board meeting at which the proposal for buy-back was
approved by the Board; ----------------------
●● An indication that the shareholders at the general meeting may authorise ----------------------
the Board to adopt at the appropriate time one of the methods referred to
in sub-regulation (1) of the Regulation 4; ----------------------
●● The maximum amount required under the buyback and the sources of ----------------------
funds from which the buy-back would be financed;
●● The basis of arriving at the buyback price; ----------------------

Notes ●● The number of securities that the company proposes to buyback;
●● The aggregate shareholding of the promoter and of the directors
---------------------- of the promoter company, and of persons who are in control of the
---------------------- company as on the date of the notice convening the general meeting
of the Board;
---------------------- ●● The aggregate number of equity shares purchased or sold by persons,
---------------------- including persons mentioned in (a) above during a period of 6 months
preceding the date of the Board meeting at which the buy-back was
---------------------- approved till the date of notice convening the general meeting;
---------------------- ●● The maximum and minimum price at which purchases and sales
referred to in (b) above were made along with the relevant dates;
---------------------- ●● I ntention of the promoters and persons in control of the company to tender
their specified securities for buyback indicating the number of specified
----------------------
securities, details of acquisition, with dates and price;
---------------------- ●● If the promoters and persons in control of the company do not intend
to tender their specified securities for buyback, it is desirable that the
----------------------
reasons thereof are given in the explanatory statement.
---------------------- ●● A confirmation that there are no defaults subsisting in repayment of
deposits, redemption of debentures or preference shares or redemption of
----------------------
term loans to any financial institution or bank;
---------------------- ●● A confirmation that the Board has made a full enquiry into the affairs and
prospects of the company and that it has formed the opinion;
----------------------
●● That immediately following the date on which the general meeting or the
---------------------- meeting of the Board is convened there will be no grounds on which the
company could be found unable to pay its debts;
----------------------
●● As regards its prospects for the year immediately following that date that,
---------------------- having regard to the intentions with respect to the management of the
company’s business during that year and to the amount and character of
---------------------- the financial resources which will in the view of the Board be available
---------------------- to the company during that year, the company will be able to meet its
liabilities as and when they fall due and will not be rendered insolvent
---------------------- within a period of one year from that date; and
---------------------- ●● In forming their opinion for the above purposes, the directors have taken
into account the liabilities as if the company were being wound up under
---------------------- the provisions of the Act (including prospective and contingent liabilities).
---------------------- ●● A report addressed to the Board by the company’s auditor stating that:
●● They have inquired into the company’s state of affairs;
----------------------
●● The amount of the permissible capital payment for the securities in
---------------------- question is in their view properly determined; and
●● The Board has formed the opinion as specified in the clause (x) on
----------------------
reasonable grounds and that the company will not, having regards to its
---------------------- state of affairs, be rendered insolvent within a period of one year from
that date.
Nomination of Compliance Officer Notes
The company should nominate a compliance officer for ensuring
----------------------
compliance of the provisions of the Act, the Regulations, listing agreement and
any other applicable laws relating to buy-back of securities and to redress the ----------------------
grievances of the investors.
----------------------
[Regulation 19(3)]
For this purpose, a Board resolution should be passed and Form 1AA and ----------------------
Form 1AB of the Companies (Central Government) General Rules and Forms,
----------------------
1956 should be filed with the Registrar by the person designated as compliance
officer. The name, telephone no., fax no., and e-mail ID of the compliance ----------------------
officer should be given in the public announcement and letter of offer.
----------------------
Investor Service Centre
The company should have at least one investor service centre. It is desirable ----------------------
that such centres are opened in all such cities where the security holders holding ----------------------
10% or more of voting rights reside. [Regulation 19(3)].
Appointment of Merchant Banker ----------------------
The company should appoint a merchant banker registered with SEBI, for ----------------------
buy-back of securities through any of the modes specified. Such appointment
----------------------
should be made before the public announcement for buyback of securities.
Time limit for completion of Buyback ----------------------
Every buy-back must be completed within 1 year from the date of passing ----------------------
of the special resolution or the resolution of the Board of Directors (i.e. in case
of buy-back is or less than 10% of the total paid-up equity capital and free ----------------------
reserves of the company), as the case may be. [Section 68(4)].
----------------------
Methods of Buy-Back
----------------------
According to Sub-section (5) of Section 68, a buy-back may be made:
----------------------
●● From the existing security holders on a proportionate basis; or
●● From the open market; or ----------------------
●● By purchasing the securities issued to employees of the company pursuant
----------------------
to a scheme of stock option or sweat equity.
●● According to Regulation 4 of the Regulations, a company may buy-back ----------------------
its own shares or other specified securities by any one of the following
methods; ----------------------
●● From the existing security holders on a proportionate basis through the ----------------------
tender offer;
●● From the open market through; ----------------------
●● Book-building process; ----------------------
●● Stock exchange;
----------------------
●● From odd-lot holders;
----------------------

Notes Declaration of Solvency to be filed with SEBI
In case of buy-back of listed securities, before making a buy-back, the
----------------------
company must file with the Registrar of Companies and SEBI, a declaration
---------------------- of solvency in the prescribed form and verified by an affidavit and should be
signed by at least two directors of the company one of whom should be the
---------------------- Managing Director, if any.
---------------------- Filing of return of bought-back securities with the Registrar:
After completion of buyback, the Company should within 30 days of its
----------------------
completion file with the Registrar and SEBI, a return containing the prescribed
---------------------- particulars relating to the buy-back. [Section 68 (10)].
---------------------- SEBI’s power to remove difficulties

Regulation 26 provides that in order to remove any difficulties in the
---------------------- interpretation or application of the provisions of these Regulations, SEBI has
---------------------- the power to issue directions through guidance notes or circulars. However,
any direction issued by SEBI in a specific case relating to interpretation or
---------------------- application of any provision of these Regulations can be done only after
affording a reasonable opportunity to the concerned parties and after recording
---------------------- reasons for the direction.
----------------------
----------------------
----------------------
1. Buyback of securities needs the approval of the company with
---------------------- i. Shareholders of the company
---------------------- ii. Directors of the company
iii. Special resolution
---------------------- iv. Explanatory statement
---------------------- 2. Before making a buyback, a declaration of solvency must be filed by
company with __________and _________in the prescribed form and
---------------------- certified by an affidavit and should be signed by at least two directors
of the company one of whom should be the Managing Director.
----------------------
i. Registrar of Companies
---------------------- ii. SEBI
---------------------- iii. Board of Directors
iv. High Court
----------------------
---------------------- 9.8 BUYBACK FOR PRIVATE AND UNLISTED PUBLIC

---------------------- LIMITED COMPANIES
---------------------- The procedure to be adopted for buyback of securities by private
limited companies and by unlisted public limited companies is laid down in
---------------------- Section 68, 69 and 70 of the Companies Act, 2013 and the Private Limited

Company and Unlisted Public Limited Company (Buyback of Securities) Rules, Notes
1999 [hereinafter referred to as ‘the Rules’] issued by the Central Government
(DCA). The procedure is detailed below: ----------------------
Buying Back ----------------------
According to Rule 3, an unlisted company can buy back its shares from
----------------------
the existing shareholders on a proportionate basis through private offers or
by purchasing the securities issued to employees of the company pursuant ----------------------
to scheme of stock option or sweat equity. The process of buyback of shares
begins with the approval of the Board of Directors of the company. The Board ----------------------
will pass the necessary resolutions approving the proposal for buy-back.
----------------------
Contents of Explanatory Statement
----------------------
When buyback is subsequently to be approved by a special resolution
passed in a general meeting of the company, the notice of the general meeting ----------------------
at which the special resolution is proposed to be passed should be accompanied
by an explanatory statement. In terms of Rule 4, for passing the required special ----------------------
resolution under Section 68 (2), the explanatory statement to be annexed to the ----------------------
notice for the general meeting pursuant to Section 102 of the Companies Act
should, inter alia, contain the following disclosures: ----------------------
●● The date of the Board meeting at which the proposal for buyback was ----------------------
approved by the Board;
●● The necessity for the buyback; ----------------------
●● The class of security intended to be bought back; ----------------------
●● The method to be adopted for the buyback;
----------------------
●● The maximum amount required for the buyback and the sources of funds
to finance it; ----------------------
●● The basis of arriving at the buyback price; ----------------------
●● The number of securities proposed to be bought back;
----------------------
●● Time limit for completion of buy back;
●● The aggregate shareholding of the promoter and of the directors ----------------------
of the promoter company, and of persons who are in control of the ----------------------
company as on the date of the notice convening the general meeting
of the Board; ----------------------
●● The aggregate number of equity shares purchased or sold by ----------------------
persons including persons mentioned in (a) above during a period
of 6 months preceding the date of the Board meeting at which the ----------------------
buyback was approved till the date of notice convening the general
meeting; ----------------------
●● The maximum and minimum price at which purchases and sales ----------------------
referred
----------------------
●● To in (b) above were made along with the relevant dates;
----------------------

Notes ●● Intention of the promoters and persons in control of the company to tender
shares for buy-back indicating the number of shares, details of acquisition
---------------------- with dates and price;
---------------------- ●● A confirmation that there are no defaults subsisting in the repayment of
deposits, redemption of debentures or preference shares or repayment of
---------------------- term loans to any financial institution or bank;
---------------------- ●● A confirmation that the Board of Directors has made a full enquiry into
the affairs and prospects of the company and that they have formed the
---------------------- opinion:
---------------------- ●● That immediately following the date on which the general meeting
is convened there will be no grounds on which the company could
---------------------- be found unable to pay its debts;
●● As regards its prospects for the year immediately following that
----------------------
date that, having regard to their intentions with respect to the
---------------------- management of the company’s business during that year and to the
amount and character of the financial resources which in their view
---------------------- will be available to the company during that year, the company will
be able to meet its liabilities as and when they fall due and will not
----------------------
be rendered insolvent within a period of one year from that date
---------------------- and;
●● In forming their opinion for the above purposes, the directors should
----------------------
take into account the liabilities as if the company were being wound up
---------------------- under the provisions of the Companies Act, (including prospective and
contingent liabilities).
----------------------
●● A report addressed to the Board of Directors by the company’s
---------------------- auditors stating that: They have inquired into the company’s state
of affairs;
----------------------
●● The amount of the permissible capital payment for the securities in
---------------------- question is in their view properly determined.
●● The price at which the buy-back of shares will be made.
----------------------
Filing of letter of offer with Registrar
----------------------
Rule 5 lays down that before buyback, the company should file with
---------------------- the concerned Registrar of Companies a draft letter of offer containing the
prescribed particulars as specified in Schedule II of the Rules. The company
---------------------- should also file along with the letter of offer, a declaration of solvency in Form
No. 4A prescribed under the Companies (Central Government’s) General Rules
----------------------
and Forms, 1956 and in accordance with the provisions of Section 68 (6) of the
---------------------- Companies Act, 2013.
Offer Procedure
----------------------
According to the Rule 6, the letter of offer should be dispatched
---------------------- immediately after filing with the Registrar of Companies but not later than 21
days from such filing. The offer should remain open to the members for a period
----------------------
of not less than 15 days and not exceeding 30 days from the date of dispatch
of the letter of offer. In case the number of shares offered by the shareholders Notes
is more than the total number of shares to be bought back by the company,
the acceptance per shareholder should be on proportionate basis. The company ----------------------
should complete the verification of the offers received within 15 days of the
closure of the offer and the shares lodged will be deemed to be accepted unless ----------------------
a communication of rejection is made within 21 days from the closure of the ----------------------
offer.
----------------------
Payment to Shareholders
Rule 7 provides that the company should immediately after the date ----------------------
of closure of the offer open a special bank account and deposit therein, such
----------------------
sum, as would make up the entire sum due and payable as consideration for
the buyback in terms of the Rules. The company should within 7 days of the ----------------------
specified period make the payment of consideration in cash or bank draft/pay
order to those shareholders whose offer has been accepted or return the share ----------------------
certificates to the shareholders forthwith.
----------------------
General Obligations of the Company
----------------------
According to Rule 8, following are the general obligations of the company:
●● The letter of offer should contain true, factual and material information ----------------------
and not contain any misleading information. ----------------------
●● The company should not issue any shares including by way of bonus till
the date of closure of the offer under these Rules. ----------------------
●● The company should confirm in its offer the opening of a separate bank ----------------------
account testifying the availability of funds earmarked for this purpose and
pay the consideration only by way of cash or Bank draft/pay order. ----------------------
●● The company should not utilise any money borrowed from Banks/ ----------------------
Financial institutions for the purpose of buying back its shares.
----------------------
Return to be filed with Registrar
After completion of buyback, the company should file with the Registrar ----------------------
of Companies, a return in the prescribed Form specified in Annexure ‘A’ of the ----------------------
Rules [Rule 9].
Extinguishment of Certificates ----------------------
Rule 10 lays down that the company should extinguish and physically ----------------------
destroy the share certificates so bought back in the presence of a company
secretary in whole time practice within 7 days from the date of acceptance of ----------------------
the shares. ----------------------
The company should furnish a certificate to the Registrar of Companies
----------------------
duly verified by (a) two whole-time directors including the managing director
and (b) company secretary in whole-time practice, certifying compliance of ----------------------
these rules including those specified in sub-rule (1) above within 7 days of the
extinguishment and destruction of the certificates. ----------------------
----------------------

Notes The company should maintain a record of share certificates which have
been cancelled and destroyed within 7 days of the buyback of the shares.
----------------------
Register of Shares
---------------------- The company should maintain a register of shares bought back by it,
which should be in the prescribed format specified in Annexure ‘B’ of the Rules
----------------------
[Rule 11].
----------------------
----------------------
----------------------
1. According to Rule 3, an unlisted company can buy back its shares
---------------------- from the existing shareholders on a proportionate basis through
---------------------- private offers.
2. Rule 5 lays down that before buyback, the company should not file
---------------------- with the concerned Registrar of Companies a draft letter of offer.
---------------------- 3. The company should complete the verification of the offers received
within 15 days of the closure of the offer.
----------------------
4. The company should within 17 days of the specified period make the
---------------------- payment of consideration in cash.
---------------------- 5. The company should extinguish and physically destroy the share
certificates so bought back in the presence of a company secretary in
---------------------- whole time practice within 7 days from the date of acceptance of the
shares.
----------------------
----------------------
Activity 1
----------------------
Find the companies who made Buyback offers recently and go through the
---------------------- Post Offer Public Announcement regarding completion of Buyback issued
---------------------- in compliance with the SEBI (Buyback of Securities) Regulations.
----------------------
Summary
----------------------
●● inancial Restructuring of the Company means rearrangement of Capital
F
---------------------- in such a way so as to make the Company’s capital more balanced and
---------------------- systematically arranged.
●● I t is either by way of issue of fresh capital or by way of reduction of
---------------------- capital in the form of buy back of shares.
---------------------- ●● inancial Restructuring is such a tool available to the Company with the
F
help of that Company can change its capital structure and come out with
---------------------- the accumulated losses and unutilised capital.
---------------------- ●● It also helps to increase the market value of shares of the Company.

Keywords Notes
----------------------
●● I nter alia: Latin for “among other things”. This phrase is often found
in legal pleadings and writings to specify one example out of many ----------------------
possibilities.
●● Explanatory statement: The statement attached to the notice calling ----------------------
general meeting of the shareholders. ----------------------
●● Affidavit: A written declaration made under oath. It is legal document
and always attached to a statement confirming the truth of that statement. ----------------------
----------------------
----------------------
1. State the meaning of financial restructuring.
2. What is increase of share capital and reduction of share capital? ----------------------
3. Explain the rules and regulations for buyback of securities. ----------------------
4. Discuss buyback for listed companies.
----------------------
5. Examine buyback for private and unlisted public limited companies.
----------------------
----------------------
----------------------
Fill in the blanks.
----------------------
1. A company is required to balance between its debt and equity in its capital
structure and the finding of the resulting deficit. ----------------------
2. When company is unable to utilise its full production capacity for lack of ----------------------
liquid funds, Board of Directors of a company is compelled to think and
decide on the company’s restructuring. ----------------------
3. An under-capitalised company may restructure its capital by injecting ----------------------
more capital whenever required either by resorting to rights issue/
preferential issue or additional public issue. ----------------------
4. Buy back of own shares is a kind of capital restructuring measure for ----------------------
over-capitalised company.
----------------------
5. Financial restructuring also includes increase in the share capital of the
Company. ----------------------
Check your progress 2 ----------------------
Match the following-
----------------------
i. – c.
ii. – d. ----------------------
iii. – e. ----------------------
iv. – b.
----------------------
v. – a.

Notes Check your Progress 3
----------------------
1. Which of the following is not a reason of buyback?
----------------------
iv. To prevent welcome takeover bids
---------------------- 2. By passing a resolution, the Board can authorise the buyback of securities
---------------------- not exceeding ________of the total paid-up equity capital and free
reserves of the company.
---------------------- iv. 10%
---------------------- 3. According to section 68, a company may purchase its own shares or other
specified securities out of.
----------------------
iv. The dividends
----------------------
---------------------- Multiple choice multiple response.
---------------------- 1. Buyback of securities needs the approval of the company with
---------------------- iii. Special resolution

iv. Explanatory statement
----------------------
2. Before making a buyback, a declaration of solvency must be filed by
---------------------- company with __________and _________in the prescribed form and
certified by an affidavit and should be signed by at least two directors of
----------------------
the company one of whom should be the Managing Director.
---------------------- i. Registrar of Companies
---------------------- ii. SEBI

----------------------
1. True
----------------------
2. False
---------------------- 3. True
---------------------- 4. False
5. True
----------------------

---------------------- 1. http://investor.sebi.gov.in/Reference%20Material/Corporate.pdf
---------------------- 2. A Comparative Study of Companies Act, 2013 & Companies Act, 1956
by Taxmann.
----------------------
----------------------

Due Diligence and Corporate Governance
UNIT
10
Structure:
10.1 Introduction
10.2 Need for Due Diligence
10.3 Due Diligence vs. Audit
10.4 Factors to be considered while conducting Due Diligence
10.5 Due Diligence in Case of Mergers and Acquisitions
10.6 Human Resource Due Diligence
10.7 Legal Due Diligence
10.8 Due Diligence of Tangible and Intangible Assets
Summary
Key Words
Suggested Reading
Due Diligence and Corporate Governance 153

Notes
Objectives
----------------------
----------------------
• State the meaning of due diligence
----------------------
• Name types of due diligence
---------------------- • List factors to be kept in mind when conducting due diligence
---------------------- • Record due diligence of tangible and intangible assets
---------------------- • Examine documents related to due diligence
----------------------
10.1 INTRODUCTION
----------------------
“Caveat emptor” means the buyer must examine the goods or property at
---------------------- his own risk. Under the doctrine of “caveat emptor”, the buyer cannot recover
from the seller the defects in the property that rendered the property unfit for
---------------------- ordinary purposes. In any given business transaction, a seller can be a company
---------------------- seeking a merger or acquisition, promoting an Initial Public Offer (IPO) or an
entrepreneur seeking an venture capital investment. Here, buyers are not the
---------------------- groups looking to acquire, invest or otherwise purchase from the seller; rather
the seller seeks to achieve the highest price for their goods, and as a result has
---------------------- an opportunity not to disclose certain facts that would reduce the value for
---------------------- their goods, or preclude the transaction from occurring. It is responsibility of
the buyer to uncover these and to determine how that affects the deal. The Due
---------------------- Diligence comes to the rescue of the buyer.
----------------------
10.2 NEED FOR DUE DILIGENCE
----------------------
“Due Diligence” is an analysis and risk assessment of an impending
---------------------- commercial transaction. It is the careful and methodological investigation of
a business or persons, or the performance of an act with a certain standard of
---------------------- care to ensure that information is accurate, and to uncover information that may
---------------------- affect the outcome of the transaction.
The term “Due Diligence” is synonymous with “background check” and
---------------------- refers to the period during which buyers make sure they have all the information
---------------------- they need to proceed with the transaction.
In common parlance, Due Diligence is the effort by an ordinarily prudent
----------------------
or reasonable party to avoid harm to another party or himself. To be specific, it is
---------------------- the process by which confidential legal and financial information is exchanged,
reviewed and appraised by the parties to a transaction. The essence of a Due
---------------------- Diligence process is an effort to make everyone to come to terms through
transactions. Due Diligence is done prior to the transaction.
----------------------
----------------------

Due Diligence is necessary to restrict the reliance placed on vendor’s Notes
warranties – it is better to discover a “skeleton in the closest” before it is bought
than afterwards. The costs of buying a business with unexpected difficulties can ----------------------
be disastrous.
----------------------
10.3 DUE DILIGENCE VS. AUDIT ----------------------
Due Diligence goes far beyond the financial analysis. It differs from an ----------------------
audit as audit is concerned with the truth and correctness of historical financial
statements only and the scope of a Due Diligence review is generally wider. Due ----------------------
Diligence includes a review of historical figures as one of its elements along ----------------------
with analysing the sustainability of business, competition, business plan, future
prospects, corporate and management structure, technology, synergy of target ----------------------
business to company’s business apart from researching regulatory compliances,
legal issues and other financial data. ----------------------
----------------------
----------------------
1. Due Diligence is an analysis and _________________ of an
impending commercial transaction. ----------------------
2. The term due diligence is synonymous with ___________________. ----------------------

3. Due Diligence is the process by which confidential ____________ ----------------------
and ___________________ information is exchanged, reviewed and
appraised by the parties to a transaction. ----------------------
----------------------
10.4 FACTORS TO BE CONSIDERED WHILE CONDUCTING ----------------------
DUE DILIGENCE
----------------------
Objective and Focus
----------------------
A key step in any Due Diligence exercise is to develop an understanding
of the purpose of the transaction. The goal of Due Diligence is to provide the ----------------------
party proposing the transaction with sufficient information to make a reasoned
decision as to whether or not to complete the transaction as proposed. It should ----------------------
provide a basis for determining or validating the appropriate terms and price ----------------------
for transaction incorporating consideration of the risks inherent in the proposed
transaction. The focus should in the following elements: ----------------------
●● Expectations: The expectation should be clear in terms of revenues, ----------------------
profits and the probability of the target company to provide the same.
----------------------
●● ommitment: Whether there are resources to make the business succeed
C
by putting hard work, skills, etc. ----------------------
----------------------

Notes Negotiate Adequate Time
Most sellers want the process to get over as soon as possible and try to
----------------------
hurry the proceedings. Do not succumb to the pressure as you are trying to
---------------------- understand and learn about business − its past working and its future prospects,
which will take time. It is in the best interest that seller should give adequate
---------------------- time to complete the Due Diligence in proper way.
---------------------- Minimise Rest
All the information should be double checked − financial, tax returns,
----------------------
patents, copyrights and customer base to ensure that the company does not face
---------------------- a lawsuit or criminal investigation. The financials are very important and one
needs to be certain that the target company did not engage in creative accounting.
---------------------- The asset position and profitability of the company are vital.
---------------------- Since Due Diligence exercise deals with the overall business, it is important to
consider:
----------------------
●● The management team’s past performance, roles and talent
---------------------- ●● Organisation strategy, business plans
---------------------- ●● Risk management structure
●● Technological superiority
----------------------
●● Adequacy of infrastructure
----------------------
●● Scope of optimum utilisation of available resources
---------------------- Seek Information from External Sources
---------------------- The Company’s customers and vendors can be quite informative. Find
out from the vendors whether the target company falls in their most favoured
---------------------- clients’ list. Seek out customers who were not considered by the company for
doing business. Due Diligence use any flaws that the audit uncovers to negotiate
----------------------
down the sale price. Due Diligence is a chance to get a better deal. Even if the
---------------------- seller and staff do not stay on after the deal, they may prove useful as advisers
in the future.
----------------------
Process of Due Diligence
---------------------- The Due Diligence exercise should reduce uncertainties, confirm
---------------------- assumptions and defined scope and prioritise issues. The exercise should
combine an understanding of the organisation, its operations, technologies,
---------------------- logistics, corporate strategy and finance and then summarise complex issues
into concise, easily understandable terms.
----------------------
The most important thing is to make sure that the first the organisation
---------------------- defines its expectation from the process of diligence. Once the objectives are
clear it will be easier to communicate it to the Due Diligence team.
----------------------
The process would generally comprise:
----------------------
●● Planning phase: This stage includes the following:
---------------------- ●●
Defining the scope and time schedule

●●
Deciding the focus areas Notes
●●
Finalising the team structure
----------------------
●●
Clear delineation of responsibilities
●●
Timely communications of information requirements ----------------------
●●
Finalisation of the template and tools required ----------------------
Reports by advisors highlighting important issues to be considered in ----------------------
deciding the value to be assigned to the transaction.
●● Preparation of a Due Diligence checklist: The Due Diligence is a ----------------------
process which is more structured than the preparation of business plan. ----------------------
The following is an illustrative checklist for the same:
●● Incorporation documents of the company and subsidiaries ----------------------
●● Capital structure ----------------------
●● Company’s goodwill
----------------------
●● Details pertaining to the Board of Directors like their Director
Identification number, Companies in which they are directors, etc. ----------------------
●● Regulatory frame work ----------------------
●● Personnel/employment/HR
----------------------
●● Business plans
●● Contractual commitments ----------------------
●●
Legal actions/cases filed by the company ----------------------
●●
Intellectual property rights owned/leased/hired ----------------------
●● Immovable properties in the name of the company
----------------------
●● Assets of the company
●● Outstanding debentures/ Borrowings/security ----------------------
●● Insurance policies taken by the company ----------------------
●● Environmental clearances
----------------------
●● Related party transactions
●● Applicable taxes and assessment status ----------------------
●● Accounts and audit status ----------------------
●● Business plans for future ----------------------
●● Unusual transactions/events/contingent liabilities
----------------------
●● ata collection phase: This stage includes collecting existing business
D
process data, key products critical to quality services, etc. Information ----------------------
sources can be Internet, regulatory organisations like Ministry of
Corporate Affairs (MCA), income tax department, competitors, vendors, ----------------------
customers, industry associations, chambers of commerce. It also includes
----------------------
site visits, preparation of specific questionnaires and interviewing key
customers and personnel. ----------------------

Notes ●● ata analysis phase: This stage involves analysis of the collected data
D
and arriving at a conclusion based on the critical factors like business
---------------------- criticality, functional complexity, technical complexity, infrastructure
requirements, etc. The analysis of Due Diligence findings is generally to
---------------------- determine whether to buy the target company/business or not.
---------------------- ●● eport finalisation phase: Once all the interviews and site visits have
R
been completed by the Due Diligence team and all of the accompanying
---------------------- analysis performed, the next step is to formalise into final presentation and
---------------------- final deliverables. The Due Diligence team prepares the Due Diligence
report and presents its conclusion that becomes an integral component of
---------------------- the decision making and negotiation process.
---------------------- ●● Due Diligence report: It should contain:
●● Outline of the review mandated
----------------------
●● List of information reviewed and information requested but not
---------------------- provided
●● Details of any assumption made in conducting the Due Diligence
----------------------
●● Limitations or disclaimers, if any, of liability in making the report
----------------------
●● Summary of information reviewed, the legal issues identified and
---------------------- advice as to the legal implications of such information
●● Decision to buy the target company or not
----------------------

---------------------- 1. A key step in any Due Diligence exercise is to develop:
i. Understanding of the purpose of the transaction
----------------------
ii. Mediation of the purpose of the transaction
---------------------- iii. Agreement of the purpose of the transaction
---------------------- iv. Covenant of the purpose of the transaction
2. Which of the following is not an element of focus in due diligence?
---------------------- i. Expectations
---------------------- ii. Commitment
iii. Maximize rest
----------------------
iv. Negotiate adequate time
---------------------- 3. The process of Due Diligence does not comprise one of the following:
---------------------- i. Defining the scope and time schedule
ii. Deciding the focus areas
----------------------
iii. Making an agreement
---------------------- iv. Finalising the team structure
----------------------

4. One of the following is not part of checklist of process of due Notes
diligence:
----------------------
i. Company’s goodwill
----------------------
ii. Capital structure
iii. Accounts and audit status ----------------------
iv. Investments in foreign company
----------------------
5. Which of the following the Due Diligence report should not contain?
i. Outline of the review mandated ----------------------
ii. List of information reviewed and information requested but not ----------------------
provided
----------------------
iii. Shares of the company
iv. Decision to buy the target company or not ----------------------
----------------------
10.5 DUE DILIGENCE IN CASE OF MERGERS AND ----------------------
ACQUISITIONS
----------------------
The most common reasons for diligence investigation are corporate ----------------------
acquisitions and mergers, i.e., investigation of the company being acquired or
merged. The buyer or transferee company wants to know what it is buying. ----------------------
Due Diligence seeks to fulfill two purposes. As regards the acquirer – the
opportunity to confirm the correct value of the business transaction, accuracy ----------------------
of the information disclosed by the target company as well as to determine ----------------------
whether there are any potential business concerns that need to be addressed
in the definitive and the final transactional document. This process helps to ----------------------
evaluate and plan for integration of business between transacting parties. As
regards the target company, it should ascertain the ability of the acquirer to pay ----------------------
or raise funds to complete the transaction of rights that should be retained by ----------------------
the target company, determination of any obstacles that could delay the closing
and aid in the preparation of the target company’s disclosure schedules for the ----------------------
definitive and the final transactional document.
----------------------
However, it is not only the buyer who will carry out the Due Diligence.
The sale of the business will invariably include warranties given by the seller in ----------------------
relation to certain aspects of the business. For example, the seller will usually
be asked to warrant that so far that it is aware, the activities of the business do ----------------------
not in infringe any third party intellectual rights, and that no other parties are ----------------------
infringing any of the company’s rights. There will also typically be warranties
relating to the company’s licenses, IT systems and so on. Thus, it is preferable ----------------------
that the seller must also carry out a Due Diligence exercise of his own.
----------------------
Similarly, business sellers might conduct their own Due Diligence to be
assured of the ability of the buyer to complete the sale, the track record of ----------------------
complying with agreements etc. Specifically, they may look into:
----------------------

Notes ●● Whether the buyer has the resources to complete the sale.
●● Whether there is a past record of previous acquisitions.
----------------------
●● Whether commitments made have been complied with in the past.
---------------------- ●● hether confidential and Non-Disclosure Agreements have been
W
---------------------- complied with.
Cultural Due Diligence considers corporate cultures and attempts to
---------------------- ascertain an organisational fit between the two merging companies. Each company
will have its own culture, derived from several components – corporate policies,
----------------------
rules, compensation plans, leadership styles, internal communication, physical
---------------------- work environment, etc. Cultural Due Diligence attempts to answer the questions
– to what extent can the two companies can adapt to differences between the two
---------------------- corporate cultures? The wider the cultural gap, the more difficult it would be
to integrate the two companies. Consequently, cultural Due Diligence identifies
----------------------
issues that are critical to integration and helps management plan necessary actions
---------------------- for resolving these differences before the merger is announced.
---------------------- 10.6 HUMAN RESOURCE DUE DILIGENCE

----------------------
Human resource Due Diligence attempts to evaluate how people are
---------------------- managed between both the companies. Several issues need to be analysed:
●● How do we continue to maximise the value of human resource capital?
----------------------
●● What is the appropriate mix of pay and benefits of the new organisation?
----------------------
●● What incentives programmes are needed to retain essential personnel
---------------------- after the merger is announced?
●● How are employees rewarded and compensated by the target company?
----------------------
●● How does base pay compare to the market place?
---------------------- ●● How do we merge pension plans, severance pay, etc.?
---------------------- It is very important to get Human Resource Department involved in the
merger and acquisition process early on since they have strong insights into
---------------------- cultural and human resource issues. Failure to address cultural, social, and
---------------------- human resource issues in Phase II Due Diligence is a major reason behind failed
mergers.
---------------------- As one executive observed: “We never anticipated people’s problem and much
---------------------- they would prevent integration”. Therefore, make sure to include the “people’s”
issues in Phase II Due Diligence. He says for a moment, put aside a fact that the
---------------------- people within the business you are thinking of buying human instead, consider
them a financial asset:
----------------------
●● I n any business, people costs will range from 30% to 75% of annual
---------------------- operating expenditures, making it by far the largest investment the
organisation makes each year.
----------------------
●● I n his book, The Age of Unreason, Charles Handy estimates that intellectual
---------------------- assets are usually worth three to four times the tangible book value of a
business, on average across all industries.
●● his asset is active and changing. You have to manage and monitor it
T Notes
constantly to get a reasonable return.
●● his asset is perishable but equally, you can grow it and get a better return
T ----------------------
from it, depending on your managerial approach. ----------------------
●● roductivity return is variable. This asset chooses whether or not it will be
P
productive. ----------------------
●● his asset is only on a short-term lease to you. It walks out of your door
T ----------------------
every night. It chooses how long the asset will be for.
----------------------
●● This asset is actually more like a highly valued customer.
Despite the commercial criticality of people in business, the human ----------------------
factors in acquisition routinely get little attention in the planning, investigation
----------------------
and Due Diligence phases of buying a business. Research tells us in that in only
22% of acquisition was the Human Resources function heavily involved prior ----------------------
to acquiring the target business. A number of reasons are suggested for this:
----------------------
●● he buyers lack expertise in human resources – the leaders of many
T
acquisitions are highly trained experts in Finance and Law, not Human ----------------------
Resources.
----------------------
●● The people factors are seen as an ‘implementation’, after-the-event issue.
●● I n some companies, the Human Resources function doesn’t get involved ----------------------
in all business cases or planning major transactions. One study by a
----------------------
major consulting firm reports that “the involvement of HR in a merger or
acquisition is largely dependent on the respect the CEO has for people in ----------------------
the HR function.”
----------------------
●● he perceived need for speed – reluctance to “add something else” to the
T
planning and Due Diligence phases. ----------------------
●● Beliefs that people factors are too intangible to access and measure.
----------------------
●● hen it comes to judging people, we like to think ‘gut-feel’ is a highly
W
reliable analytical tool. ----------------------
There may be an element of validity in all of these reasons. However, the ----------------------
commercial bottom line is that people factors are a fundamental determinant in
success of the purchase so they should be investigated with the same vigour and ----------------------
thoroughness as customer, product, financial and legal considerations.
----------------------
10.7 LEGAL DUE DILIGENCE ----------------------
The paramount objective of legal Due Diligence is to gather information ----------------------
and identify any risks or problems associated with a business or an asset.
However, a Legal Due Diligence undertaken by lawyers should be distinguished ----------------------
from any financial, accounting or commercial review conducted by the client ----------------------
and its other advisers.
A legal Due Diligence therefore covers the legal aspects of a business transaction, ----------------------
liabilities of the target company, veracity of representations, potential legal ----------------------
pitfalls and other issues.

Notes Scope of Legal Due Diligence
Due Diligence is understood by the legal, financial and business
----------------------
communities to mean the disclosure and assimilation of public and proprietary
---------------------- information related to the assets and liabilities of the business being purchased.
This information includes financial, human resources, tax, environmental
---------------------- and legal matters. Due Diligence would include full understanding all of the
obligations of the target company: debts, rights and obligations, pending and
----------------------
potential lawsuits, leases, warranties, all high and impact laden contracts –
---------------------- both interoperate and intra-corporate. The objectives of a legal Due Diligence
exercise may vary from case to case. Some of the basic objectives may, however,
---------------------- be summarised as follows:
---------------------- ●● athering of information from the target company
G
●● Uncovering of the target company’s strong and weak sides, relevant risks
---------------------- and advantages in connection with the transaction
---------------------- ●● Minimising the risk of unexpected situations
●● Improvement of the seller’s bargaining position
----------------------
●● Identification of areas where representations and warranties from the
---------------------- seller should be obtained in the acquisition agreement
●● Determined for each transaction in light of the size of the transaction, the
----------------------
perceived risks and budgetary constraints
---------------------- ●● Asset purchases in opposition to stock purchases or mergers
●● Very important to be meticulous in a stock purchase
----------------------
●● Does the acquisition make sound business sense?
---------------------- ●● Is the business what it was represented to be?
---------------------- ●● What assets and liabilities will be acquired at closing?
●● What are the risks and prospects of the business after closing?
----------------------
●● The last but not the least goal is to know the target better than the current
---------------------- owner of the Company.

---------------------- 1. Human resource Due Diligence attempts to evaluate how people are
managed between both the companies.
----------------------
2. Failure to address cultural, social and human resource issues in Phase
---------------------- II Due Diligence is a major reason behind successful mergers.
---------------------- 3. The buyers lack expertise in human resources − the leaders of many
acquisitions are highly trained experts in Finance and Law, not Human
---------------------- Resources.
---------------------- 4. When it comes to judging people, we like to think ‘gut-feel’ is a less
reliable analytical tool.
----------------------

10.8 DUE DILIGENCE OF TANGIBLE AND INTANGIBLE Notes
ASSETS
----------------------
An asset means the properties of the business. In order to ascertain the ----------------------
assets of the sellers, the Due Diligence should verify the latest audited balance
sheet, its fixed asset register, invoices, etc. Due Diligence of assets is very much ----------------------
important as one of the major factor to determine the price of the business
acquired. Also assets helps buyer to start it’s productively and to generate ----------------------
income. ----------------------
Tangible assets are those assets which we can see like plant and machinery,
stock, land, building, etc. Brands, customer relationships, patents and exclusive ----------------------
supply agreements are all forms of intangible assets that give acquirers comfort ----------------------
and visibility over future earnings of acquired entities, and are key value drivers
in a business. In order to assess the tangible assets the team of Due Diligence ----------------------
has to physically verify those assets, available insurance policies in the name of
assets, its technology, value in the books of accounts, etc. ----------------------
Intangible assets frequently underpin the price a buyer is prepared to ----------------------

pay for an acquisition. International Financial Reporting Standards (IFRS)
----------------------
recognise this issue and require all assets and liabilities, tangible and intangible,
acquired as part of a business combination to be valued to arrive at the residual ----------------------
amount to be attributed to goodwill. This requirement has put intangible assets
firmly in the spotlight as companies must go through a process of identifying ----------------------
and valuing these assets in order to recognise them separately to goodwill. In
----------------------
addition, as shareholders have become more familiar with intangible assets,
their recognition has become increasingly important to reflect the value drivers ----------------------
of an acquisition. A key concern for companies recognising intangible assets is
their impact on the financial statements, in particular on earnings, as all definite ----------------------
lived intangible assets are amortised over their remaining useful life. This is
----------------------
important for companies where an acquisition can have a significant impact on
earnings due to a large portion of the purchase price being allocated to goodwill ----------------------
and intangible assets. In order to address these concerns companies should
consider performing a high level estimate of the fair value of the intangible ----------------------
assets during the Due Diligence phase. This will inform management on the
----------------------
potential amortisation charge and enable them to determine whether the overall
impact on earnings is acceptable. The detailed work can then be carried out post ----------------------
acquisition. Companies should ensure they go through a robust identification
and valuation process to make certain that the fair value of the intangible assets ----------------------
are accurately reflected in the financial statements and that the remaining useful
----------------------
life assigned to each category of asset reflects its nature and importance to the
business. ----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
i. Gathering the information a.
To gather information and
---------------------- identify risks
ii. Minimising the risk b. Lands, buildings, plants
---------------------- and machinery
---------------------- iii. Improvement of the seller’s c. From the target company
iv. Tangible assets d. Bargaining position
---------------------- v. Objective of legal Due Diligence e. Of unexpected situation
----------------------
----------------------
Activity 1
---------------------- Name a few firms who help clients in conducting due diligence for assessing
the legal position and credibility of their potential business partners before
---------------------- entering into joint ventures, mergers, acquisitions, etc.
----------------------
---------------------- Summary
---------------------- ●● ignificant Due Diligence often precedes merger and acquisition

S
transactions and extensive data rooms may need to be established to
---------------------- provide potential purchasers and their advisers with access to the relevant
documents.
----------------------
●● ue Diligence investigations simply gives the most complete picture of a
D
---------------------- company.
---------------------- ●● The fact that Due Diligence investigations is so good at finding liabilities
in a company, these investigations can help to negotiate a lower price in
---------------------- a negotiation.
---------------------- ●● I f Due Diligence is properly conducted by the expert teams consisting of
lawyers, chartered accountants, company secretaries, cost accountants,
---------------------- etc., the chance of future risk will be less.
----------------------
Keywords
----------------------
●● aveat Emptor: A legal principle derived from Latin that means ‘let the
C
---------------------- buyer beware’.
---------------------- ●● elated party transactions: Transactions in which directors of the
R
Company are directly or directly interested.
----------------------
----------------------
----------------------

Notes
----------------------
1. Explain in brief the concept of due diligence.
----------------------
2. What are the different factors to be considered while conducting due
diligence? ----------------------
3. Discuss human resource due diligence.
----------------------
4. State the objectives of legal due diligence.
----------------------
5. What is the difference between due diligence of tangible and intangible
assets? ----------------------
----------------------
----------------------
1. Due Diligence is an analysis and risk assessment of an impending ----------------------

commercial transaction.
----------------------
2. The term due diligence is synonymous with background check.
----------------------
3. Due Diligence is the process by which confidential legal and financial
information is exchanged, reviewed and appraised by the parties to a ----------------------
transaction.
----------------------
Multiple choice single responses ----------------------
1. A key step in any Due Diligence exercise is to develop: ----------------------

i. Understanding of the purpose of the transaction ----------------------
2. Which of the following is not an element of focus in due diligence?
----------------------
iii. Maximise rest
----------------------
3. The process of Due Diligence does not comprise one of the following:
iii. Making an agreement ----------------------
4. One of the following is not part of checklist of process of due diligence: ----------------------
iv. Investments in foreign company ----------------------
5. Which of the following the Due Diligence report should not contain?
----------------------
iii. Shares of the company
----------------------
----------------------
----------------------
----------------------

----------------------
1. True
----------------------
2. False
---------------------- 3. True
---------------------- 4. False
----------------------
i. – c.
----------------------
ii. – e.
---------------------- iii. – d.
---------------------- iv. – b.
---------------------- v. – a.
----------------------
Suggested Reading
----------------------
1. Arya, B.P., B.B. Tandon and A. K. Vashisht. 2004. Corporate Governance.
---------------------- New Delhi: Deep & Deep Publications.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Taxes and Stamp Duty Aspects of Mergers and
Acquisitions
UNIT
Structure: 11
11.1 Introduction
11.2 Applicability of Income Tax Act, 1961
11.3 Tax on Capital Gains
11.4 Carry Forward of Losses and Unabsorbed Depreciation Allowances
11.5 Important Income Tax Provision related to Amalgamation
11.6 Excise Law Implications in case of Amalgamation
11.7 Applicability of Stamp Duty
11.8 Stamp Duty on Share Transfers
11.9 Amalgamation between Holding and Subsidiary Company
Summary
Key Words
Suggested Reading
Taxes and Stamp Duty Aspects of Mergers and Acquisitions 167

Notes
Objectives
----------------------
----------------------
• Record taxation aspects of mergers and amalgamation
----------------------
• State the provisions related to carry forward losses and unabsorbed
---------------------- depreciation
• Discuss the excise law implications in case of amalgamation
----------------------
• Examine applicability of stamp duty on court orders State the
---------------------- provisions related to amalgamation between Holding and Subsidiary
---------------------- Company
---------------------- 11.1 INTRODUCTION

---------------------- The incidence of income tax and stamp duty is an important consideration
in the planning of any merger or amalgamation. Ordinarily acquisition, demerger
----------------------
& mergers are possible by entering into agreements and arrangements between
---------------------- the parties and passing special resolution, etc. This may require consents,
arrangements, agreements and settlements with large number of parties, e.g.,
---------------------- shareholders, creditors, lenders, debtors, employees, government departments,
etc. and may also involve substantial taxation and other operational constraints.
----------------------
In fact, the whole form in which the merger is sought to take place is selected
---------------------- taking into account the saving in income tax and stamp duty. The incidence of
stamp duty, more particularly on transfer of immovable property is fairly high
---------------------- to merit serious consideration. The fact that, in India, stamp duty is substantially
levied by the states has given considerable scope for savings in stamp duty.
----------------------
---------------------- 11.2 APPLICABILITY OF INCOME TAX ACT, 1961

---------------------- The word ‘amalgamation’ or ‘merger’ is not defined anywhere in the
Companies Act, 2013. However Section 2(1B) of the Income Tax, 1961 defines
----------------------
amalgamation as follows:
---------------------- “Amalgamation” in relation to companies, means the merger of one or
more companies with another company or the merger of two or more companies
----------------------
to form one company (the company or companies which so merge being referred
---------------------- to as the amalgamating company or companies and the company with which
they merge or which is formed as a result of the merger, as the amalgamated
---------------------- company) in such a manner that −
---------------------- ●● ll the property of the amalgamating company or companies immediately
A
before the amalgamation becomes the property of the amalgamated
---------------------- company by virtue of the amalgamation.
---------------------- ●● ll the liabilities of the amalgamating companies or companies
A
immediately before the amalgamation become the liabilities of the
---------------------- amalgamated company by virtue of the amalgamation.

●● hareholding not less than three-fourth in value of the shares in the
S Notes
amalgamating company or companies (other than shares already held
therein immediately before the amalgamation by a nominee for the ----------------------
amalgamated company or its subsidiary) become shareholders of the
amalgamated company by virtue of the amalgamation. ----------------------
Otherwise, as a result of the acquisition of the property by one company ----------------------

by another company pursuant to the purchase of such property by the other
company or as a result of the distribution of such property to the other company ----------------------
after the winding up of the first mentioned company. ----------------------
Thus, for a merger to qualify as an ‘amalgamation’ for the purpose of the
Income Tax Act, the above three conditions have to be satisfied. ----------------------
----------------------
11.3 TAX ON CAPITAL GAINS
----------------------
Capital gains tax is leviable if capital gain arises due to transfer of capital
assets. The word ‘transfer’ under Section 2(47) of the Income Tax Act includes ----------------------
the sale, exchange or relinquishment of any right therein or the compulsory ----------------------
acquisition thereof under any law. Under Section 47(vi) and (vii) transfer does
not include any transfer in the scheme of amalgamation of capital assets by the ----------------------
amalgamating company to the amalgamated company if the latter is an Indian
company. ----------------------
Further the term transfer also does not include any transfer by a shareholder ----------------------
in the scheme of amalgamation of capital asset being a share or shares held
by him in the amalgamating company if the transfer is made in consideration ----------------------
of the allotment to him of any share or shares in the amalgamated company ----------------------
and the amalgamated company is an Indian company. Even in the absence of
Section 47(vii) of the Act, a shareholder is not liable to pay any capital gain ----------------------
tax since an amalgamation does not include exchange or relinquishment of
the assets. However, no benefit will be available under Section 47(vii) if the ----------------------
shareholders of amalgamating company are allotted something more than share ----------------------
in the amalgamated company like bonds, debentures, etc.
----------------------

1. ______________ of the Income Tax, 1961 defines amalgamation. ----------------------
2. Capital gains tax is leviable if capital gain arises due to transfer of
----------------------
capital _________.
3. The word ‘transfer’ under Section _____ of the Income Tax Act ----------------------
includes the sale, exchange or relinquishment of any right therein or
----------------------
the compulsory acquisition thereof under any law.
----------------------
----------------------

Notes 11.4 CARRY FORWARD OF LOSSES AND UNABSORBED
DEPRECIATION ALLOWANCES
----------------------
---------------------- The income tax is referred when considering a proposal involving the merger
of a sick industrial company with another company in order to reap the benefits
---------------------- of, inter alia, the facility of carrying forward and setting-off of accumulated losses
and unabsorbed depreciation. “Industrial undertaking” as given in Section 72A of
---------------------- the Income Tax Act means any undertaking, which is engaged in-
---------------------- ●● The manufacture or processing of goods or
●● Manufacture of computer software or
----------------------
●● he business of generation or distribution of electricity or any other form
T
---------------------- of power or
---------------------- ●● The business of providing telecommunication services or
●● Mining or
----------------------
●● The construction of ships, aircrafts or rail systems
---------------------- In case of any scheme under this Act, an amalgamation of a sick industrial
---------------------- company with another company, the provisions of Section 72A of the Income
Tax Act, 1961 shall subject to the modification that the power of the Central
---------------------- Government under that Section may be exercised by the BIFR without any
recommendation by the specific authority referred in that Section, apply in
---------------------- relation to such amalgamation as they apply in relation to the amalgamation of
a company owing an industrial undertaking with another company.
----------------------
Under Section 72A, a special provision is made which relaxes the
---------------------- provisions relating to carrying forward and set-off of accumulated business
loss and unabsorbed depreciation allowances in certain cases of amalgamation.
----------------------
Where there has been an amalgamation of a company owing an industrial
---------------------- company or a ship with another company, then, notwithstanding anything
contained in any other provision of the Act, the accumulated loss and the
---------------------- unabsorbed depreciation of the amalgamating company shall be deemed to be
a loss or as the case may be, allowance for the deprecation of the amalgamated
----------------------
company for the previous year in which the amalgamation was effected and
---------------------- other provisions of this Act, relating to set-off and carry forward of loss and
allowance for depreciation shall apply accordingly.
----------------------
It is to be noted that as unabsorbed losses of the amalgamating company
---------------------- are deemed to be the losses for the previous year in which the amalgamation was
effected, the amalgamated company will have right to carry forward the loss for
---------------------- a period of eight assessment years immediately succeeding the assessment year
relevant to the previous year in which the amalgamation was effected.
----------------------
However, the above relaxations shall not be allowed in the assessment of
---------------------- the amalgamated company unless the amalgamated company −
---------------------- ●● Holds continuously for a minimum period of five years from the date of
amalgamation at least three-fourth in the book value of fixed assets of
---------------------- amalgamating company acquired in the scheme of amalgamation.

●● ontinues the business of the amalgamating company for a minimum
C Notes
period of five years from the date of amalgamation.
●● ulfills such other conditions as may be prescribed to ensure the revival
F ----------------------
of the business of the amalgamating company or to ensure that the ----------------------
amalgamation if for genuine business purpose.
It further provides that in case where any of the above conditions are not ----------------------
complied with, the set-off of loss or allowance of depreciation made in any ----------------------
previous years in the hands of the amalgamated company shall be deemed to be
the income of the amalgamated company chargeable to tax for the year in which ----------------------
such conditions are not complied with.
----------------------
Multiple Choice Multiple Response. ----------------------

1. Industrial undertaking as given in Section 72 A of the Income Tax Act ----------------------
means any undertaking, which is engaged in –
----------------------
i. Manufacture of processing of goods
ii. Manufacture of computer software ----------------------
iii. Distribution of materials ----------------------
iv. Selling of goods ----------------------
2. Relaxation under Section 72A shall not be allowed in the assessment
of the amalgamated company unless the amalgamated company − ----------------------
i. Is insolvent ----------------------
ii. Holds many shareholder ----------------------
iii. Holds three-fourth in the book value for minimum five years ----------------------
iv. Continues business of the amalgamating company for a
minimum period of five years from the date of amalgamation ----------------------
----------------------
11.5 IMPORTANT INCOME TAX PROVISION RELATED ----------------------
TO AMALGAMATION
----------------------
Amortisation of preliminary expenses
----------------------
The benefit of amortisation of preliminary expenses under Section 35D is
ordinarily available only to the assessee who incurred the expenditure. However, ----------------------
the benefit will not be lost in case of the undertaking of an Indian company
----------------------
which is entitled to amortisation in transferred to another Indian company in a
scheme of amalgamation within 10 years/5 years period of amalgamation. ----------------------
Capital Expenditure on Scientific Research
----------------------
In case of an amalgamation, if the amalgamating company transfers to
the amalgamated company, which is an Indian company, any asset representing ----------------------

Notes capital expenditure on scientific research, the provisions of Section 35 would
apply to the amalgamated company as they would have applied to amalgamating
---------------------- company if the latter had not transferred the asset.
---------------------- Expenditure on acquisition of Patent Right or Copyright
Where the assessee has purchased patent right or copyrights he is entitled
----------------------
to a deduction under Section 35A for a period of 14 years in equal installments.
---------------------- The amalgamated company gets the right to claim the unexpired installments as
a deduction from its total income. The deduction under this Section is however
---------------------- available for the expenditure incurred before 1st April 1988 only.
---------------------- Expenditure on Amalgamation
---------------------- Section 35DD provides that where an assessee being an Indian company
incurs any expenditure, on or after 1st day of April 1999, wholly and exclusively
---------------------- for the purpose of amalgamation, the assessee shall be allowed a deduction of
an amount equal to one-fifth of such expenditure for each of the five successive
---------------------- previous years beginning with the previous year in which the amalgamation
---------------------- takes place.
Expenditure on Know-how
----------------------
Section 35AB (3) of the income tax provides that where there is a transfer
---------------------- of an undertaking under a scheme of amalgamation and the amalgamating
company is entitled to a deduction for expenditure incurred in acquiring know-
---------------------- how, then the amalgamated company shall be entitled to claim deduction under
---------------------- this Section in respect of such undertaking to the same extent and in respect
of the residual period as it would have been allowable to the amalgamating
---------------------- company, had such amalgamation not taken place.
---------------------- Expenditure for obtaining licence to operate telecommunication
services (Section 35ABB)
----------------------
Provisions of the Section 35ABB of the Income Tax Act relating
---------------------- to deduction of expenditure, incurred for obtaining licence to operate
telecommunication services shall, as far as may be, apply to the amalgamated
---------------------- company as they would have applied to the amalgamating company if the latter
had not transferred the licence.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
1. One of the following is not an important Income Tax provision related
to amalgamation. ----------------------
i. Expenditure on know-how
----------------------
ii. Capital expenditure on scientific research
iii. Amortisation of preliminary expenses ----------------------
iv. Expenditure on property ----------------------
2. Where the assessee has purchases patent right or copyrights he is
entitled to a deduction under Section_____. ----------------------
i. 35 ----------------------
ii. 36
----------------------
iii. 35A
iv. 35B ----------------------
3. The benefit of amortisation of preliminary expenses under Section 35D
----------------------
is ordinarily available only to______ who incurred the expenditure.
i. Assessee ----------------------
ii. Transferor
----------------------
iii. Copyright holder
iv. Income tax authority ----------------------
4. The deduction under Section 35A is available for the expenditure ----------------------
incurred before
i. 1st May 1988 ----------------------
ii. 1st April 1988 ----------------------
iii. 1st April 1998
----------------------
iv. 1st January 1988
----------------------
11.6 EXCISE LAW IMPLICATIONS IN CASE OF ----------------------

AMALGAMATION ----------------------
Consequent to the amalgamation there is no change in excise duty ----------------------
liability as the excise duty as such is payable on goods manufactured and has
no correlation whatsoever to the entities amalgamating. Similarly even mod ----------------------
vat credit benefits remain unaffected consequent to the merger. Excise duty
----------------------
benefits available to the amalgamating company would be transferred to the
amalgamated company. ----------------------
----------------------
----------------------

Notes 11.7 APPLICABILITY OF STAMP DUTY
---------------------- The provisions of Indian Stamp Act are very important in case of
amalgamation and mergers. Stamp duty is levied in India on almost all, except
----------------------
a few documents, by the states and hence the rate and incidence of stamp in
---------------------- different states varies. By sanctioning of amalgamation scheme, the properties
including the liabilities are transferred and on that transfer instrument stamp
---------------------- duty is leviable.
----------------------
----------------------
----------------------
i. Stamp duty a. By registration
---------------------- ii. The collector b. By virtue of High Court
order
---------------------- iii. Amalgamation c. Under the stamp rules
iv. The transfer and vesting of d. Adjudicates and
----------------------
Transferor Company’s property determines stamp duty
---------------------- v. Conveying title of the immovable e. Assets and liabilities
property absorbed
----------------------
----------------------
Activity 1
----------------------
Go through the judgment of the Hon’ble Delhi High Court in the case of
---------------------- Delhi Towers Limited vs GNCT of Delhi.
----------------------
----------------------
11.8 STAMP DUTY ON SHARE TRANSFERS
---------------------- The term ‘transfer’ has been defined under Section 2(47) of the Income
Tax Act which includes the sale, exchange or relinquishment of any right
---------------------- therein or the compulsory acquisition thereof under any law. However, Sub-
Section (vii) of Section 47 specifically exempts from taxability any transfer
---------------------- by a shareholder in the scheme of amalgamation of capital asset being a share
---------------------- or shares held by him in the amalgamating company if the transfer is made in
consideration of the allotment to him of any share or shares in the amalgamated
---------------------- company and the amalgamated company is an Indian company.
----------------------
11.9 AMALGAMATION BETWEEN HOLDING AND
---------------------- SUBSIDIARY COMPANY
---------------------- The Central Government has exempted the payment of stamp duty on
instrument evidencing transfer of property between companies limited by
----------------------
shares as defined in the Indian Companies Act −
----------------------

●● here at least 90 per cent of the total number of share capital of the transferee
W Notes
company is the beneficial ownership of the transferor company or
●● here the transfer takes place between a parent company and a subsidiary
W ----------------------
company one of which is the beneficial owner of not less than 90 per cent ----------------------
of the total number of share capital of the other or
●● here the transfer takes place between two subsidiary companies each
W ----------------------
of which is not less than 90 per cent of the share capital in the beneficial ----------------------
ownership of a common parent company.
Therefore, if property is transferred by way of order of the High Court in ----------------------
respect of the scheme of amalgamation between companies which fulfill any ----------------------
of the above mentioned three conditions, then no stamp duty would be levied
provided a certificate certifying the relation between companies is obtained ----------------------
from the officer appointed in this behalf by the local Government, generally
this officer is the Registrar of Companies. ----------------------
However, stamp being a state subject the above would only be applicable ----------------------
in those states where the State Government follows the above-stated notification
of the Central Government otherwise the stamp duty would be applicable ----------------------
irrespective of the relations mentioned in the said notification. ----------------------
----------------------
1. The term transfer under Section 2(47) of the Income Tax Act includes ----------------------
the sale, exchange or relinquishment of any right. ----------------------
2. The Central Government has not exempted the payment of stamp duty
on instrument evidencing transfer of property between companies ----------------------
limited by shares. ----------------------
3. The stamp is a State subject.
----------------------
----------------------
Summary
----------------------
●● Income tax and stamp duty plays a critical role in case of amalgamation
and mergers. ----------------------
●● The word ‘amalgamation’ or ‘merger’ is not defined anywhere in the
----------------------
Companies Act, 2013. However Section 2(1B) of the Income Tax, 1961
defines amalgamation. ----------------------
●● Both amalgamated and amalgamating company have to comply with all
----------------------
the provisions related with Indian Income Tax Act, 1961 and Indian Stamp
Act including respective State Stamp Act in order to avail the various ----------------------
benefits mentioned in the respective Acts.
----------------------
----------------------

Notes ●● The Income Tax Act exempts from taxability any transfer by a
shareholder in the scheme of amalgamation of capital asset being a share
---------------------- or shares held by him in the amalgamating company if the transfer is
made in consideration of the allotment to him of any share or shares in
---------------------- the amalgamated company and the amalgamated company is an Indian
---------------------- company.
---------------------- Keywords
----------------------
●● ccumulated loss: It means so much of the loss of the amalgamating
A
---------------------- company under the head “Profits and gains of business or profession”
(not being a loss sustained in a speculation business) which amalgamating
---------------------- company would have been entitled to carry forward and set off under
these provisions if the amalgamation had not taken place.
----------------------
●● nabsorbed depreciation: It means so much of the allowance for
U
---------------------- depreciation of the amalgamating company which remains to be allowed
and which would have been allowed to the amalgamating company under
---------------------- the provisions of this Act, if the amalgamation had not taken place.
----------------------
----------------------
1. What is the important tax provisions related to amalgamation?
----------------------
2. Explain in brief the concept of stamp duty.
----------------------
3. What are the tax implications of merger?
----------------------
----------------------
----------------------
Fill in the blanks.
----------------------
1. Section 2(1B) of the Income Tax, 1961 defines amalgamation.
---------------------- 2. Capital gains tax is leviable if capital gain arises due to transfer of capital
---------------------- assets.
3. The word ‘transfer’ under Section 2(47) of the Income Tax Act includes
---------------------- the sale, exchange or relinquishment of any right therein or the compulsory
---------------------- acquisition thereof under any law.
----------------------
----------------------
1. Industrial undertaking as given in Section 72 A of the Income Tax Act
---------------------- means any undertaking, which is engaged in –
---------------------- i. Manufacture of processing of goods

ii. Manufacture of computer software
----------------------

2. Relaxation under section 72A shall not be allowed in the assessment of Notes
the amalgamated company unless the amalgamated company-
----------------------
iii. Holds three-fourth in the book value for minimum five years
iv. Continues business of the amalgamating company for a minimum ----------------------
period of five years from the date of amalgamation
----------------------
----------------------
1. One of the following is not an important Income Tax provision related to ----------------------
amalgamation. ----------------------
iv. Expenditure on property
----------------------
2. Where the assessee has purchases patent right or copyrights he is entitled
to a deduction under Section _____. ----------------------
iii. 35A ----------------------
3. The benefit of amortization of preliminary expenses under section 35D is ----------------------
ordinarily available only to______ who incurred the expenditure.
i. Assessee ----------------------
4. The deduction under section 35A is available for the expenditure incurred ----------------------
before
----------------------
ii. 1st April 1988
----------------------
Match the following. ----------------------
i. – c. ----------------------
ii. – d. ----------------------
iii. – e.
----------------------
iv. – b.
----------------------
v. – a.
1. True ----------------------
2. False
----------------------
3. True
----------------------
Suggested Reading ----------------------
1. Chhaparia, K.K. Legal, Accounting and Taxation Aspect of Amalgamation, ----------------------

Demerger and Takeover. Available at: http://www.incometaxparaskochar.
com/Image/amalgamation%20article1.pdf ----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

FEMA, SEBI and Accounting Issues
UNIT
12
Structure:
12.1 Introduction
12.2 Foreign Exchange Management Act Provisions
12.3 SEBI Directions in Respect to Amalgamation and Mergers
12.4 Listing Agreement Requirements
12.5 Accounting Aspects of the Merger and Amalgamation Transactions
12.6 Purchase Consideration
12.7 Treatment of Goodwill
12.8 Valuation
Summary
Key Words
Suggested Reading
FEMA, SEBI and Accounting Issues 179

Notes
Objectives
----------------------
----------------------
• Describe the Foreign Exchange Management Act’s implication on
---------------------- Merger and Acquisition
---------------------- • State various discloser requirements by SEBI
• List various listing agreement requirements
----------------------
----------------------
12.1 INTRODUCTION
----------------------
The requirements of SEBI, FEMA, Accounting Standard with respect to
---------------------- corporate restructuring and various approvals of Reserve Bank of India, Central
---------------------- Government, etc. is important to comply with. SEBI has issued press release for
discloser requirements. Also there is requirement relating to listing agreement
---------------------- with stock exchange for listed companies.
---------------------- The accounting standards for Amalgamation are prescribed as per AS-
14. With respect to accounting of merger or amalgamation, various angles of
---------------------- accounting standard and provisions of Companies Act are required to comply.
At the same time the treatment of various adjustments like goodwill, reserve,
---------------------- expense on amalgamation, purchase consideration, etc. should be accounted for.
---------------------- Fair and appropriate valuation of Assets and Shares during the course
of its schemes of merger is necessary. Valuation should be carried out by
---------------------- independent registered valuer. As valuation is not standardised process, it is
---------------------- more a judgmental process; hence, expertise is required to arrive at appropriate
valuation.
----------------------
----------------------
12.2 FOREIGN EXCHANGE MANAGEMENT ACT
PROVISIONS
----------------------
Where any Scheme of Merger or Amalgamation between two or more
---------------------- companies has been approved by a Tribunal in India, then the transferee
company may issue shares of transferee company to the shareholders of the
----------------------
transferor company. Where any Scheme of Merger or Amalgamation between
---------------------- two or more companies has been approved by a Tribunal in India and transferor
company is resident outside India then the transferee company may issue shares
---------------------- of transferee company to the shareholders of the transferor company resident
outside India subject to ensuring that 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 Reserve Bank or the Central
Government.
----------------------
In case 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, apply to the Reserve Bank for its approval under these Notes
Regulations after obtaining an approval from the Central Government.
The transferor company or the transferee company shall not be engaged in ----------------------
agriculture, plantation or real estate business or trading in TDRs, etc.
----------------------
12.3 SEBI DIRECTIONS IN RESPECT TO AMALGAMATION ----------------------
AND MERGERS
----------------------
With respect to amalgamation and merger there are certain necessities
----------------------
and requirements of disclosures as required under the SEBI (Disclosure and
Investors Protection) Guidelines (DIP) and as per listing agreement in case of ----------------------
Listed companies.
----------------------
Securities Exchange Board of India had issued a Press Release 311-
2003 dated 17th Dec 2003, The Press Release stated that the requirements with ----------------------
respect to the disclosure would be implemented through the Listing Agreement.
The press release explains the summary of their proposals for disclosures to ----------------------
shareholders.
----------------------
Following are the relevant terms for the purpose of proposals for
disclosures to shareholders. ----------------------
●● ompany means the companies which are parties to the terms of

C ----------------------
arrangement as specified under Sections 230 to 232 of the Companies
Act, 2013. ----------------------
●● Issuing company means the listed company which is seeking approval of ----------------------
shareholders for the scheme of arrangement.
----------------------
●● esultant company means the company which comes into existence as a
R
result of the scheme of arrangement. ----------------------
The relevant details of discloser to shareholders under Section 230 as
----------------------
prescribed by SEBI under the said press release are mentioned below. The
discloser requirements pertaining to the details about the companies stating the ----------------------
following points:
----------------------
●● The details about the Names and registered office of the companies.
●● Capital structure of the companies. ----------------------
●● hareholding pattern signifying the shares held by the promoters and
S ----------------------
other than promoters.
----------------------
●● ates of agreement with the other companies which are parties to the
D
scheme of arrangement. ----------------------
●● Names and Profile of the promoters and directors.
----------------------
●● Names of subsidiary or group companies.
●● The manner in which the companies are related to each other if applicable. ----------------------
●● apital Structure and Shareholding pattern, before and after the proposed
C ----------------------
scheme of arrangement and the management’s views on the said change
in the public holding. ----------------------

Notes ●● Audited financial statements of the companies for the last 3 years.
●● Material development after balance sheet date.
----------------------
The disclosure requirements pertaining to the details about the scheme of
---------------------- arrangement stating the following points:
---------------------- ●● Nature of purchase consideration payable or receivable under the scheme.

●● Mode of payment or receipt.
----------------------
●● Basis of valuation for the calculation of consideration.
---------------------- ●● he time limit stating within which the shares or securities are to be
T
surrendered and payments to the made.
----------------------
●● Tentative date by which the scheme would become effective.
----------------------
●● Details of approvals obtained from creditors and authorities.
---------------------- ●● Dates of Board Meeting when the proposal was considered or approved.
---------------------- ●● Any other details which deemed necessary for information to shareholders.

----------------------
Fill in the blanks.
----------------------
1. Issuing company means the listed company which is seeking approval
---------------------- of __________ for the scheme of arrangement.
2. _____________________ is the company which comes into existence
----------------------
as a result of the scheme of arrangement.
---------------------- 3. Mode of ______________ is the disclosure requirement pertaining to
the details about the scheme of arrangement.
----------------------
----------------------
12.4 LISTING AGREEMENT REQUIREMENTS
----------------------
Listing agreement to Stock Exchange requires a listed company to comply
----------------------
with the following with respect to the case of any scheme of arrangement
---------------------- amalgamation, merger, reconstruction or reduction of capital, etc.
1. As per clause 24 of Listing Agreement the company is required to submit
----------------------
to the relevant stock exchange any scheme or petition proposed to be filed
---------------------- before any Tribunal under Sections 230, 232 of the Companies Act, 2013,
for their approval, at least a month before it is presented to the Tribunal.
---------------------- Also the Company required to ensure that any scheme of arrangement
amalgamation, merger etc., to be presented to any Tribunal does not in
----------------------
any way violate, override or circumscribe the provisions of securities
---------------------- laws or the stock exchange requirements.
2. The company is required to specify the pre-arrangement and post-
----------------------
arrangement or amalgamation capital structure and shareholding pattern
---------------------- in the explanatory statement forwarded to the shareholders.

3. As per clause 27 the Company has to promptly notify the exchange of any Notes
action which will result in the redemption, cancellation or retirement in
whole or in part of any securities listed on the Stock Exchange. ----------------------
4. As per clause 28 the Company will not make any change in the form or ----------------------
nature of any of its securities that are listed on the exchange or in the
rights or privileges of the holders thereof without giving 21days’ prior ----------------------
notice to the Stock Exchange of the proposed change.
----------------------
5. As per clause 31 the company is required to file with the relevant Stock
Exchange three copies of all the notices, together with Annexure thereto ----------------------
at the time when they are sent to the shareholders, debenture holders or
----------------------
creditors of them. The company is required to file with the Stock Exchange
three copies of all notices, circulars issued or advertised in the press by ----------------------
the Company and copies of the proceedings at all such meetings.
----------------------
6. It should be confirmed that both the transferor and transferee companies
have filed the copy of order of Tribunal with the respective Registrar of ----------------------
companies within the stipulated period.
----------------------
A certified true copy of Tribunal Order received by both the companies
along with the Scheme of Amalgamation should be submitted. ----------------------
●● nything stated therein regarding listing, dividend entitlement,
A ----------------------
allotment of shares of transferee company, ratio of exchange of
shares, mode of exchange of shares, cancellation of shares due to ----------------------
cross holdings in each other and such relevant matters concerning
listing should be underlined. ----------------------
●● imilarly, a statement therein not approving any clause in the
S ----------------------
scheme or adding into the scheme should be underlined with red
colour. ----------------------
7. A certified true copy filing of tribunal Order with the Registrar of ----------------------
companies should be submitted.
----------------------
8. In case of Amalgamation or Merger of two or more listed companies, a
record date for the transferor company should be fixed at least 42 days in ----------------------
advance as per clause 16 of the Listing Agreement to ascertain the names
of shareholders of transferor company who will be entitled to receive the ----------------------
securities of the transferee company. ----------------------
9. A certified true copy of the valuation report of the appointed auditors
should be sent to the stock exchange for their records. ----------------------
10. A detailed statement of new securities (other than equity shares) issued ----------------------
on amalgamation, merger, stating such as nature of securities, number of
----------------------
securities, their paid-up value, ratio, distinctive numbers, etc. should be
submitted. ----------------------
11. A complete list of allotted of unlisted transferor company should be
----------------------
submitted.
----------------------

Notes 12. The company should confirm the following:
●● Register of Member is open for transfer.
----------------------
●● ispatch of share certificates to all shareholders of the erstwhile
D
---------------------- transferor company who have to surrender the old share certificates
of the transferor company.
----------------------
●● Address of office where share transfers are accepted for registration.
---------------------- ●● ompany’s officer’s name, his designation and telephone number
C
---------------------- to be made available to the investors or brokers for satisfying their
queries.
---------------------- 13. The Managing Director or Company Secretary of the transferee company
---------------------- has to give a declaration to the Exchange that all the necessary legal
statutory formalities for giving effect to the scheme of amalgamation, etc.
---------------------- are complied.
---------------------- 14. The company should forward the credit details of the holdings of the
shareholders in the Demat form to NSDL or CDSL.
----------------------

1. According to which clause the company is required to submit to the
----------------------
relevant stock exchange any scheme or petition proposed to be filed
---------------------- before any tribunal under Section 230, 232 of the Companies Act,
2013 for their approval?
---------------------- i. Clause 24 of Listing Agreement
---------------------- ii. Clause 25 of Listing Agreement
iii. Clause 28 of Listing Agreement
----------------------
iv. Clause 31 of Listing Agreement
---------------------- 2. As per clause 27 the company has to promptly notify the Exchange
of any action which will result in the redemption, cancellation
----------------------
or retirement in whole or in part of any securities listed on the
---------------------- __________.
i. Share market
----------------------
ii. Stock Exchange
---------------------- iii. Share capital
iv. Stock market
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
3. Whose valuation report certified true copy should be sent to the stock
exchange for their records? ----------------------
i. Appointed judge ----------------------
ii. Appointed auditors
----------------------
iii. High court judge
iv. Shareholders ----------------------
4. What is required to be given to the Exchange by the managing director
----------------------
or company secretary that all necessary legal statutory formalities for
giving effect to the scheme of amalgamation etc. are complied with? ----------------------
i. A declaration ----------------------
ii. An affidavit
iii. A notice ----------------------
iv. An application ----------------------
5. The company should forward the credit details of the holding of the
shareholders in the demat form to: ----------------------
i. NSDL or CDSL ----------------------

ii. NSLD ----------------------
iii. NDLS
iv. Stock exchange ----------------------
----------------------
12.5 ACCOUNTING ASPECTS OF THE MERGER AND ----------------------
AMALGAMATION TRANSACTIONS
----------------------
Section129 of the Companies Act, 2013 provides that the companies’
profit and loss account and balance sheet shall comply with accounting standards ----------------------
as prescribed and recommended by the Institute of Chartered Accountants of ----------------------
India, constituted under the Chartered Accountants Act, 1949. Accounting
aspects of the Merger and Amalgamation transactions is another issue which is ----------------------
to be considered.
----------------------
Accounting Standard for Merger or Amalgamation
----------------------
In the case of amalgamations which are in the nature of ‘merger’ the
accounting treatment should ensure that the resultant figures of assets, liabilities, ----------------------
capital and reserves more or less represent the sum of the relevant figures of the
amalgamating companies. On the other hand, in the case of amalgamation in the ----------------------
nature of purchase, the accounting treatment is similar to the same principles as
----------------------
are applied in the normal purchase of assets.
Accounting Standard broadly covers the following salient points: ----------------------
●● The value at which the assets and/or liabilities should be recorded in the ----------------------
transferee company’s books of account;
----------------------

Notes ●● ow the different, if any, accounting policies of the transferor and
H
transferee companies should be reflected in the accounts of the transferee
---------------------- company;
---------------------- ●● ow the share capital account of the transferor and transferee companies
H
should be treated;
---------------------- ●● The treatment of reserves of the transferor and transferee companies;
---------------------- ●● ccounting disclosures to be made by both the transferor and the transferee
A
companies;
----------------------
●● Treatment of consideration for the amalgamation; and
---------------------- ●● Treatment of goodwill.
---------------------- Accounting Standard 14 issued by the Institute of Chartered Accountants
is prescribed as the Standard for Accounting. In case of amalgamation of
---------------------- companies a broad summary of the various requirements of the Accounting
Standards AS-14 is as described in the chapter.
----------------------
Accounting Standard 14 does not deal with cases of acquisitions which
---------------------- arise when there is a purchase by one company of the whole or part of the
shares, or the whole or part of the assets, of another company in consideration
----------------------
for payment in cash or by issue of shares or other securities in the acquiring
---------------------- company or partly in one form and partly in the other. The distinguishing feature
of an acquisition is that the acquired company is not dissolved and its separate
---------------------- entity continues to exist. AS-14, however, considers two methods − one relating
to amalgamations in the nature of merger and the second, amalgamations in the
----------------------
nature of purchase.
---------------------- It would appear that where there is purchase combined with the dissolution
---------------------- of the transferor company AS-14 could apply. Further, while dealing with the
definition of the term ‘amalgamation in the nature of merger’ the Standard
---------------------- does not mention about the dissolution of the transferor company as one of the
requirement.
----------------------
The following terms are used in AS-14 with the meanings specified:
---------------------- ●● malgamation means an amalgamation pursuant to the provisions of the
A
---------------------- Companies Act, 2013 or any other statute which may be applicable to
companies.
---------------------- ●● ransferor company means the company which is amalgamated into
T
---------------------- another company.
●● ransferee company means the company into which a transferor company
T
---------------------- is amalgamated.
---------------------- ●● eserve means the portion of earnings, receipts or other surplus of an
R
enterprise appropriated by the management for a general or a specific
---------------------- purpose other than a provision for depreciation or diminution in the value
---------------------- of assets or for a known liability. It may be capital or revenue reserve.
----------------------

AS-14 identifies following two categories of amalgamations: Notes
An amalgamation may be either -
----------------------
●● An amalgamation in the nature of merger, or
----------------------
●● An amalgamation in the nature of purchase
1. Amalgamation in the nature of merger is an amalgamation which satisfies ----------------------
all the following conditions:
----------------------
(i) All the assets and liabilities of the transferor company become, after
amalgamation, the assets and liabilities of the transferee company; ----------------------
(ii) Shareholders holding not less than 90% of the face value of the ----------------------
equity shares of the transferor company become equity shareholders
of the transferee company by virtue of the amalgamation. ----------------------
(iii) The consideration for the amalgamation receivable by those equity ----------------------
shareholders of the transferor company who agree to become
equity shareholders of the transferee company is discharged by ----------------------
the transferee company wholly by the issue of equity shares in the ----------------------
transferee company, except that cash may be paid in respect of any
fractional shares. ----------------------
(iv) The business of the transferor company is intended to be carried on, ----------------------
after the amalgamation, by the transferee company.
(v) No adjustment is intended to be made to the book values of the ----------------------
assets and liabilities of the transferor company when they are ----------------------
incorporated in the financial statements of the transferee company
except to ensure uniformity of accounting policies. ----------------------
2. Amalgamation in the nature of Purchase ----------------------
If any of the above five conditions does not fulfill then it will be
----------------------
amalgamation in the nature of purchase. Under the purchase method, the
transferee company accounts for the amalgamation either by incorporating ----------------------
the assets and liabilities at their existing carrying amounts or by allocating
the consideration to individual identifiable assets and liabilities of ----------------------
the transferor company on the basis of their fair values at the date of
----------------------
amalgamation. The identifiable assets and liabilities may include assets
and liabilities not recorded in the financial statements of the transferor ----------------------
company.
----------------------
The use of the pooling of interests method is confined to circumstances
which meet the criteria referred to in paragraph 3(e) for an amalgamation ----------------------
in the nature of merger.
----------------------
The object of the purchase method is to account for the amalgamation
by applying the same principles as are applied in the normal purchase of ----------------------
assets. This method is used in accounting for amalgamations in the nature
of purchase. ----------------------
----------------------

Notes The Pooling of Interests Method
The method of accounting for amalgamation in the nature of merger is
----------------------
pooling of interests method. Pooling of interests is a method of accounting for
---------------------- amalgamation of the object of which is to account for the amalgamation as if
the separate businesses of the amalgamating companies were intended to be
---------------------- continued by the transferee company. Under the pooling of interests method,
the assets, liabilities and reserves of the transferor company are recorded by the
----------------------
transferee company at their existing carrying amounts after making the required
---------------------- adjustment.
The Purchase Method
----------------------
The method of accounting for amalgamation in the nature of purchase is
---------------------- Purchase method. Under the purchase method, the transferee company accounts
for the amalgamation either by incorporating the assets and liabilities at their
----------------------
existing carrying amounts or by allocating the consideration to individual
---------------------- identifiable assets and liabilities of the transferor company on the basis of their
fair values at the date of amalgamation. The identifiable assets and liabilities
---------------------- may include assets and liabilities not recorded in the financial statements of the
transferor company.
----------------------
Where assets and liabilities are restated on the basis of their fair values, the
---------------------- determination of fair values may be influenced by the intentions of the transferee
---------------------- company as the valuation methods may be different in different situation. For
example, the transferee company may have a specialised use for an asset, which
---------------------- is not available to other potential buyers. The transferee company may intend to
effect changes in the activities of the transferor company which necessitate the
---------------------- creation of specific provisions for the expected costs.
----------------------
12.6 PURCHASE CONSIDERATION
----------------------
Purchase consideration is any sum paid or payable by transferee company
---------------------- to transferor company either in cash or in securities or in any other format.
As a common procedure, the AS-14 provides that the consideration for the
----------------------
amalgamation should include any non-cash element at fair value. In case of
---------------------- issue of securities, the value fixed by the statutory authorities may be taken to
be the fair value. In case of other assets, the fair value may be determined by
---------------------- reference to the market value of the assets given up. Where the market value
of the assets given up cannot be reliably assessed, such assets may be valued at
----------------------
their respective net book values.
---------------------- The consideration for the amalgamation may consist of securities, cash
---------------------- or other assets. In determining the value of the consideration, an assessment is
made of the fair value of its elements.
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
i. Purchase consideration a. Standard of Accounting
----------------------
ii. Purchase method b. Reserve
iii. Pooling of interests method c. Securities, cash or other assets ----------------------
iv. Portion of earnings, receipts d. Assets and liabilities are recorded
----------------------
v. Accounting Standard 14 e. Assets and liabilities are incorporated
----------------------
----------------------
12.7 TREATMENT OF GOODWILL
----------------------
If the purchase consideration is higher than the fair value of the asset
then for transferor company, the difference amount is goodwill as they are ----------------------
getting more than the worth. The accounting effect of such goodwill purchase
by the transferee company according to the AS-14 is that the goodwill arising ----------------------
on amalgamation should be amortised to income on a systematic basis over its
----------------------
useful life. The amortisation period should not exceed five years unless a longer
period can be justified. ----------------------
The following factors may be considered in estimating the useful life of ----------------------
goodwill:
●● The foreseeable life of the business or industry; ----------------------
●● he effects of product obsolescence, changes in demand and other
T ----------------------
economic factors;
----------------------
●● The service life expectancies of key individuals or groups of employees;
●● Expected actions by competitors or potential competitors; and ----------------------
●● Legal, regulatory or contractual provisions affecting the useful life. ----------------------
Treatment of Reserves
----------------------
In case of amalgamation in the nature of merger, the identity of the assets,
liability and reserve, etc. is conserved. In view of this the identity of reserves ----------------------
is preserved and it should appear in the financial statements of the transferee
----------------------
company in the same form in which they appeared in the financial statements of
the transferor company. ----------------------
For example, the General Reserve of the transferor company becomes ----------------------
the General Reserve of the transferee company; the Capital Reserve of the
transferor company becomes the Capital Reserve of the transferee company and ----------------------
the Revaluation Reserve of the transferor company becomes the Revaluation
Reserve of the transferee company. ----------------------
----------------------
----------------------

Notes However, in the case of amalgamation in the nature of purchase, the
identity of assets, liabilities and reserve, etc. in the hands of the transferee
---------------------- company is not the same in terms of value. The value would be taken at the fair
value. Therefore, the identity of reserves is also not preserved.
----------------------
The amount of the consideration is deducted from the value of the net
---------------------- assets of the transferor company acquired by the transferee company. If the
result of the computation is negative, the difference is debited to goodwill arising
----------------------
on amalgamation. If the result of the computation is positive, the difference is
---------------------- credited to Capital Reserve.
Disclosures
----------------------
As the shareholders need to have complete information in the case of
---------------------- a scheme of merger or acquisition, specially in the case of promoter-initiated
mergers, the Act, Rules list out the disclosure requirements in the explanatory
----------------------
statements to be sent to the shareholders in respect of the scheme filed before the
---------------------- Tribunals. In the case of Companies required to appoint independent directors,
the Act should mandate the Committee of independent directors as a monitoring
---------------------- body to ensure adequacy of disclosures.
---------------------- It is also a requirement that the balance sheet after the amalgamation
should contain appropriate disclosures as to −
----------------------
●● The names of the amalgamating companies
---------------------- ●● General nature of business of the amalgamating companies
---------------------- ●● Effective date of amalgamation for accounting purposes
●● The method of accounting used to reflect the amalgamation
----------------------
●● Whether purchase method or pooling of interest method
----------------------
●● Whether particulars of the scheme sanctioned
----------------------
12.8 VALUATION
----------------------
Value is what someone is prepared to pay for, so there cannot be one best
---------------------- value of anything. The value keeps changing depending on various factors and
---------------------- situation.
Valuation cannot be regarded as an exact science and given the same set
---------------------- of facts and using the same assumptions, expert opinions may differ due to the
---------------------- number of separate judgement decisions, which have to be made. Although
certain appropriate formulae are useful for establishing reasonableness but
---------------------- there cannot be standard formulae or method to establish an indisputable value.
---------------------- Fair valuation of Assets and Shares during the course of its schemes of
merger is binding with respect to such companies which are involved in the
---------------------- transaction. Such valuation should be carried out by independent registered
valuer so appointed by Tribunal. The law should also recognise valuation of
----------------------
incorporeal property. The valuation should be transparent so that the aggrieved
---------------------- person may get an opportunity to challenge the same before Tribunal.

Considering the tremendous demand or growth potential for the Company’s Notes
products, which will be achieved through a combination of an efficient man,
machinery mix, increased productivity, re-engineering, long-term cost- ----------------------
effectiveness as well as diversification, the management contemplated future
expansion plans. For this purpose the Company proposes to enter into a ----------------------
strategic alliance. The purpose of this exercise is to determine the fair value of ----------------------
the existing business carried out by the aforesaid unit on a going concern basis.
----------------------
Need for valuation:
Following are various situations where valuation is required ----------------------
●● External” or “Internal” M & A ----------------------
●● Transfer of businesses or shareholdings
----------------------
●● Capital restructuring exercises
----------------------
●● Issue of new shares
●● Right issues ----------------------
●● Preferential allotments ----------------------
●● Take-over
----------------------
●● Issue of ESOP/Sweat Equity (particularly by unlisted companies)
●● Family realignments ----------------------
●● Liquidation ----------------------
There is no one right way for valuation. There may be more than one right
----------------------
method for valuation. The techniques that are generally used in ascertaining the
fair value of a business are: ----------------------
●● Historical cost valuation method
----------------------
●● Net Assets Value (“NAV”)
----------------------
●● Profit Earning Capacity Value (“PECV”)
●● Current cost valuation method or The Current Market Quotations in case ----------------------
of a listed Company
----------------------
●● Valuation based on Discounted Cash Flow technique (“DCF”)
●● Capitalisation of cash flow method ----------------------
●● Dividend capitalisation method ----------------------
Considering the various aspects such as actual business condition, ----------------------
forecasts, budgets drawn up by the management of the Company, the same
trend is expected to continue even in the future. Also in the past few years the ----------------------
actual performance of the Company is compared favourably with the forecasts,
budgets are drawn at the beginning of the respective years. With factors such ----------------------
as management and change in management, shareholding pattern, risk and ----------------------
sensitivity, etc. the appropriate valuation method may be selected.
----------------------
----------------------

Notes
----------------------
----------------------
1. Transfer of businesses or shareholdings is a situation where valuation
---------------------- is required.
---------------------- 2. Value is what someone is prepared to pay for, so there can be one best
value of anything.
----------------------
3. The balance sheet after the amalgamation should contain appropriate
---------------------- disclosures as to the method of accounting used to reflect the
amalgamation.
----------------------
4. The effects of products obsolescence, changes in demand and other
---------------------- economic factors may not be considered in estimating the useful life
of goodwill.
----------------------
5. Legal, regulatory or contractual provisions affecting the useful life is
---------------------- considered in estimating the goodwill.
----------------------
---------------------- Activity 1
---------------------- Visit http://www.nseindia.com/ and check the simplified listing agreement
as given.
----------------------
----------------------
Summary
----------------------
●● cheme of Merger or Amalgamation has been approved by a Tribunal in
S
---------------------- India.
---------------------- ●● here transferor company is resident outside India then the transferee
W
company may issue shares of transferee company to the shareholders of
---------------------- the transferor company resident outside India except approval granted by
the Reserve Bank or the Central Government.
----------------------
●● ecurities Exchange Board of India had issued a Press Release which
S
---------------------- requires the disclosure through the Listing Agreement.
---------------------- ●● isting Agreement to stock exchange requires a listed company to comply
L
with respect to the case of any scheme of arrangement, amalgamation,
---------------------- merger, reconstruction or reduction of capital such as submitting to stock
exchange any scheme or petition proposed to be filed before any Tribunal.
----------------------
●● ccounting standards as prescribed and recommended by the Institute
A
---------------------- of Chartered Accountants of India, constituted under the Chartered
Accountants Act, 1949 is relevant with respect to merger or amalgamation.
----------------------
----------------------

●● S-14 is prescribed as the Standard for accounting in case of amalgamation
A Notes
of companies. Accounting Standard 14 does not deal with cases of
acquisitions. ----------------------
●● S-14 considers two methods − one relating to amalgamations in the
A ----------------------
nature of merger and the second amalgamations in the nature of purchase
depending upon five conditions. ----------------------
●● he method of accounting is pooling of interest method or purchase
T ----------------------
method as the case may be.
----------------------
●● Valuation is an important aspect to define or fix the purchase consideration.
●● here cannot be one best way to arrive at fair value as value is what
T ----------------------
someone is prepared to pay for, so there cannot be one best value of ----------------------
anything. The value keeps changing depending on various factors and
situation. ----------------------
●● aluation cannot be regarded as an exact science and given the same set
V ----------------------
of facts and using the same assumptions, expert opinions may differ due
to the number of separate judgement by following the various method of ----------------------
valuation most suited to the situation.
----------------------
Keywords ----------------------
●● malgamation: An amalgamation pursuant to the provisions of the
A ----------------------
Companies Act, 2013 or any other statute which may be applicable to
companies. ----------------------
●● ransferor company: The company which is amalgamated into another
T ----------------------
company.
----------------------
●● ransferee company: The company into which a transferor company is
T
amalgamated. ----------------------
●● eserve: The portion of earnings, receipts or other surplus of an enterprise
R ----------------------
appropriated by the management for a general or a specific purpose other
than a provision for depreciation or diminution in the value of assets or ----------------------
for a known liability. It may be capital or revenue reserve.
----------------------
●● urchase consideration: Any sum paid or payable by transferee company
P
to transferor company either in cash or in securities or in any other format. ----------------------
●● I ssuing company: The listed company which is seeking approval of ----------------------
shareholders for the scheme of arrangement.
----------------------
●● esultant company: The company which comes into existence as a
R
result of the scheme of arrangement. ----------------------
----------------------
----------------------
----------------------

Notes
----------------------
1. Explain the method of accounting as per AS-14.
---------------------- 2. What is pooling of interests method of accounting. Explain.
---------------------- 3. Explain the discloser to shareholder requirements pertaining to SEBI
press release.
----------------------
4. What are the categories of amalgamations as per AS-14?
---------------------- 5. Which conditions are to be fulfilled for amalgamation in the nature of
---------------------- merger? Explain.
5. Explain the various techniques of valuation.
----------------------
6. Explain the treatment of goodwill according to AS-14.
----------------------

Fill in the blanks.
----------------------
1. Issuing company means the listed company which is seeking approval of
---------------------- shareholders for the scheme of arrangement.
---------------------- 2. Resultant company is the company which comes into existence as a result
of the scheme of arrangement.
----------------------
3. Mode of payment or receipt is the disclosure requirement pertaining to
---------------------- the details about the scheme of arrangement.

----------------------
1. According to which clause, the company is required to submit to the
---------------------- relevant stock exchange any scheme or petition proposed to be filed
before any court or tribunal under Section 230, 232 of the Companies
---------------------- Act, 2013 for their approval?
---------------------- i. Clause 24 of Listing Agreement
---------------------- 2. As per clause 27 the company has to promptly notify the Exchange of any
action which will result in the redemption, cancellation or retirement in
---------------------- whole or in part of any securities listed on the ________.
---------------------- ii. Stock Exchange
3. Whose valuation report certified true copy should be sent to the stock
----------------------
exchange for their records?
---------------------- ii. Appointed auditors
----------------------
----------------------

4. What is required to be given to the Exchange by the managing director or Notes
company secretary that all necessary legal statutory formalities for giving
effect to the scheme of amalgamation, etc. are complied? ----------------------
i. A declaration ----------------------
5. The company should forward the credit details of the holding of the
shareholders in the demat form to: ----------------------
i. NSDL or CDSL ----------------------

----------------------
i. − c.
----------------------
ii. − e.
iii. − d. ----------------------
iv. − b. ----------------------
v. − a. ----------------------
----------------------
1. True
----------------------
2. False
3. True ----------------------
4. False ----------------------
5. True ----------------------
----------------------
1. Chandratre, K.R. 2010. Corporate Restructuring. Bharat Law House.
2. Companies Act, 2013 ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Mergers and Amalgamations under Sick Industrial
Companies (Special Provisions) Act, 1985 (SICA) UNIT
Structure: 13
13.1 Introduction
13.2 Causes of Sickness of Industrial Companies
13.3 Definition of Sick Industrial Companies
13.4 Application to the Board
13.5 Power to enquire into the working of Sick Industrial Companies
13.6 Scheme of Rehabilitation
Summary
Key Words
Suggested Reading
Mergers and Amalgamations under Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) 197
Notes
Objectives
----------------------
----------------------
• Identify the problems of sick industrial companies
----------------------
• State major causes of sickness of industrial companies
---------------------- • List sickness indicators
---------------------- • Describe the provisions of Sick Industrial Companies Act, 1985
---------------------- • Examine the powers of tribunal in respect to sick industrial

companies
---------------------- • Assess the revival of sick industrial companies
----------------------
13.1 INTRODUCTION
----------------------
Sickness denotes lack of life and if a loss-making entity is permitted to
----------------------
continue to make losses, it will be a drain of valuable economic resources.
---------------------- The main impact would be felt by the large number of workers whose life will
be thrown out of gear if the Company or the said sick industrial unit were to
---------------------- be closed. In addition, there would be other economic issues and therefore it
is necessary to make all attempts to revive the Company rather than close it.
----------------------
While primarily, being a commercial enterprise, it is the responsibility of the
---------------------- Board of Directors of a company to make all necessary attempts to revive the
fortunes of the Company, it would not be proper if the regulatory environment
---------------------- does not facilitate revival and rehabilitation.
---------------------- The incidence and magnitude of all ill effects of sickness and the resultant
closure of industrial companies such as loss of production, loss of employment,
---------------------- loss of revenue to the Central and State Governments and locking up of investible
funds of banks and financial institutions, was a matter of serious concern to
----------------------
the Government. It was recognised that in order to fully utilise the productive
---------------------- industrial assets, to afford maximum protection of employment and optimise the
use of funds of banks and financial institutions, it would be imperative to revive
---------------------- and rehabilitate the potentially viable sick industrial companies as quickly as
possible.
----------------------
Need for legislation
----------------------
Prevention is better than cure. It was held prudent that timely and advance
---------------------- measure should be taken either by legislation or by administrative order and
machinery so that preventive and remedial measure can be taken before a
---------------------- company goes sick. To enact in the public interest a legislation need to provide
---------------------- for timely detection of sickness in industrial companies and for expeditious
determination by a body of experts of the preventive, remedial and other
---------------------- measures that would need to be adopted with respect to such companies and for
enforcement of the measures considered appropriate.
----------------------

It was in this background that the Sick Industrial Companies (Special Notes
Provisions) Act,1985 was enacted, which provide for the establishment of the
Board for Industrial and Financial Reconstruction (BIFR) and also its appellate ----------------------
authority called Appellate Authority for Industrial and Financial Reconstruction
(AAIFR). ----------------------
The major constraint of the Act was that it was applicable only to sick ----------------------
industrial companies including Government companies keeping away other
----------------------
companies which are in trading, service or other activities. However, the overall
experience was not satisfactory and hence these provisions were proposed to be ----------------------
merged in Companies Act, 2013. Accordingly, powers of Board for Industrial
and Financial Reconstruction (BIFR) were to be exercised by National Company ----------------------
Law Tribunal (NCLT) to be constituted under Section 408 of the Companies
----------------------
Act, 2013 and appeal against the order of NCLT could be referred to National
Company Law Appellate Tribunal (NCLAT) to be constituted under Section ----------------------
410,411 of the Companies Act, 2013.
----------------------
13.2 CAUSES OF SICKNESS OF INDUSTRIAL COMPANIES ----------------------
Causes of the industrial sickness are: ----------------------
●● I nability of the management of the Company to keep a constant vigil over
----------------------
competitive forces.
●● I nability of the management to introduce dynamic changes to suit the ----------------------
developments taking place in the industry.
----------------------
●● ack of serious efforts to combat sickness at the initial stage and thereafter
L
to take efforts to revive the company. ----------------------
●● Lack of adequate and quality manpower. ----------------------
●● ack of funds required for meeting much needed modernisation and up-
L
gradation programme. ----------------------
●● Technological obsolescence. ----------------------
●● Political and economic factors.
----------------------
●● Change in consumer behaviour.
----------------------
●● Lack of timely Government support.
●● Family disputes between major shareholders groups. ----------------------
●● Mismanagement by directors. ----------------------
●● Belligerent workforce and unions.
----------------------
Thus, the health of an industrial company depends upon various factors
which include the quality of Board of Directors, efficiency in performing its ----------------------
duties and functions, calibre of skilled, semi-skilled and unskilled work force,
timely availability of adequate funds, raw materials, and ready market for semi- ----------------------
finished and finished products of the company. ----------------------
----------------------
Notes Major reasons for industrial sickness could be categorised into two parts:
A. Internal causes: Internal causes are those that are within the control of
----------------------
the management of an industrial company and therefore attempt could be
---------------------- made by the management to rectify them at the earliest. They relate to the
functioning of the company and include:
----------------------
●● Under-estimation of project cost.
---------------------- ●● Poor quality of management.
---------------------- ●● Faulty choice of product.
●● Inadequacy of working capital.
----------------------
●● Diversion of funds
---------------------- ●● Inadequate market forecast and sales planning
---------------------- B. External causes: External causes are related to the environment and
other factors which are not within the control of the given industry. They
---------------------- include the following:
---------------------- ●● Non-cooperative Government policies
---------------------- ●● Recession/adverse economic conditions

●● Powerful competitors in the market
----------------------
●● Non-availability of inputs
---------------------- ●● Technological advancements
---------------------- ●● Frequent and long power cuts
●● Delayed financial assistance
----------------------

---------------------- 1. The following is not a cause of sickness of industrial companies:
i. Lack of adequate and quality manpower
----------------------
ii. Political and economic factors
---------------------- iii. Change in consumer behaviour
---------------------- iv. Lack of immovable property
2. Major reasons for industrial sickness include:
---------------------- i. Internal causes
---------------------- ii. Implied causes
iii. Hidden causes
----------------------
iv. Express causes
----------------------
----------------------
----------------------

3. Internal causes are those that are within the control of the management Notes
of an industrial company, they relate to the functioning of company
----------------------
and include
i. Adequacy of working capital ----------------------
ii. Adequate market forecast and sales planning ----------------------
iii. Rich quality of management
----------------------
iv. Under-estimation of project cost
4. External causes are related to the environment and other factors which ----------------------
are not within the control of the given industry. They include:
----------------------
i. Cooperative government policies
ii. Availability of inputs ----------------------
iii. Fast financial assistance ----------------------
iv. Frequent and long power cuts
----------------------
----------------------
13.3 DEFINITION OF SICK INDUSTRIAL COMPANIES
----------------------
According to Section 3(1)(o) of the Sick Industrial Companies ( Special
Provisions) Act, 1985 “Sick Industrial Company” means an Industrial Company ----------------------
(being a company registered for not less than five years), which has at the end of
any financial year accumulated losses equal to or exceeding its entire net worth. ----------------------
Net worth ----------------------

“Net worth” means the sum total of the paid-up capital and free reserves. ----------------------
Free reserves means all reserves credited out of the profits and share premium
account but it does not include reserves credited out of the re-valuation of assets, ----------------------
write back of depreciation provisions and amalgamation.
----------------------
Criteria of sickness
----------------------
According to the Act, the sickness of a company was related to the
age of the Company, i.e., the date of its registration as per the certificate of ----------------------
incorporation issued by the Registrar of Companies and not the date on which
the Company was granted the certificate of commencement of business. Also ----------------------
the date of actual commencement of its activities, i.e., commercial production ----------------------
or rendering services in which the company was engaged was not considered
relevant. ----------------------
Before going into the provisions of the law on the anvil, one needs to understand ----------------------
the provisions of the SICA as these are presently applicable.
----------------------
13.4 APPLICATION TO THE BOARD
----------------------
Under Section 15 of the Act, where an industrial company has become ----------------------
sick, the Board of Directors of the Company shall within 60 days from the date
----------------------
Notes of finalisation of duly audited accounts of the company for the financial year
at the end of which the Company has become sick, make a reference to the
---------------------- Board (BIFR) for determination of measures to be adopted with respect to the
Company.
----------------------
Interestingly, if the Board of Directors had sufficient reason even before
---------------------- such finalisation to form opinion that the company had become a sick unit
shall within 60 days after it has formed such opinion, make a reference to the
----------------------
Board for determination of measures which shall be adopted in respect of the
---------------------- Company.
Further, the Central Government or Reserve Bank or State Government
----------------------
or a public financial institution or a state level institution or a scheduled bank
---------------------- may provide sufficient reason that any industrial company has become sick
industrial company, may make a reference to the Board for determination of
---------------------- measures which shall be adopted in respect of the company.
---------------------- The finalisation of the accounts for the above purpose implies that the
date on which the accounts have been approved by the members at the Annual
---------------------- General Meeting of the Company in accordance to the Companies Act.
---------------------- Once a company is determined to be referred to BIFR, it needs to file a
formal application in BIFR Regulation, 1987 as amended from time to time.
----------------------

---------------------- i. Net worth a. Age of the company
---------------------- ii. Criteria of sickness b. Reference to BIFR

iii. Section of 15 of SIC Act, 1985 c. Losses exceeding net worth
----------------------
iv. Sick industrial company d. Paid-up capital & free reserves
----------------------
---------------------- 13.5 POWER TO ENQUIRE INTO THE WORKING OF SICK

----------------------
INDUSTRIAL COMPANIES
---------------------- The salient features of the inquiry into the status of sick industrial
companies contained in Section 16 of the SICA are as follows:
---------------------- ●● IFR upon receipt of a reference with respect to such company under
B
---------------------- Section 15 may make such inquiry as it may deem fit for determining
whether the industrial company has become a sick industrial company.
---------------------- ●● IFR may require, by order, any operating agency to enquire into and
B
---------------------- make a report and complete its inquiry as expeditiously as possible.
●● ndeavour should be made to complete the inquiry within 60 days from
E
---------------------- the commencement of the inquiry.
----------------------

●● n inquiry shall be deemed to have commenced upon the receipt by BIFR
A Notes
of any reference or information or upon its own knowledge reduced in
writing by BIFR. ----------------------
●● IFR has power to appoint one or more persons to be special director
B ----------------------
or special directors of the Company if it deems it necessary to make an
inquiry. ----------------------
●● he appointment of a special director shall be valid and effective not
T ----------------------
withstanding anything to the contrary contained in the Companies Act,
2013 or in any other law for the time being in force or in the memorandum ----------------------
and articles of association or any other instrument relating to the industrial
company. ----------------------
●● ny provision regarding share qualification, age limit, number of
A ----------------------
directorships, removal from office of directors shall not apply to any
special director appointed by BIFR. ----------------------
●● IFR may issues necessary directions to special directors for proper
B ----------------------
discharge of duties.
----------------------
●● pecial Director will hold office only during the pleasure of BIFR. He
S
does not incur any obligation or liability by reason of his being a director ----------------------
or for anything done or omitted to be done in good faith in the discharge
of his duties as a director. He is not liable to retirement by rotation and ----------------------
shall not be taken into account for computing the number of director liable
----------------------
to such retirement.
Power of the Board to make suitable order on completion of inquiry − ----------------------
Section 17
----------------------
If, after making an inquiry under Section 16, the Board is satisfied
that a company has become a sick industrial company, the Board shall after ----------------------
considering all the relevant facts and circumstances of the case, decides, whether
----------------------
it is practicable for the company to make its net worth exceed the accumulated
losses within a reasonable time, the Board, shall by order in writing, give time ----------------------
to the company to make its net worth exceed the accumulated losses. What is
reasonable time depends on the facts and circumstances of each case. ----------------------
If the Board decides that it is not practicable for a sick industrial company ----------------------
to make its net worth exceed the accumulated losses within a reasonable time
by order in writing directs any operating agency specified in the order to prepare ----------------------
a scheme for revival/rehabilitation of sick industrial company. The operating ----------------------
agency would normally be a public financial institution notified as such by the
Board through a general or special order. ----------------------
----------------------
----------------------
----------------------
----------------------
Notes
----------------------
Fill in the blanks.
----------------------
1. BIFR upon receipt of a reference with respect to such company under
---------------------- _______ may make inquiry for determining whether the industrial
company has become a sick industrial company.
----------------------
2. BIFR may require, by order, any _________________ to enquire and
---------------------- make report and complete its inquiry as expeditiously as possible.
---------------------- 3. BIFR has power to appoint one or more persons to be _______
or_________ of the company if it deems it necessary to make an
---------------------- inquiry.
---------------------- 4. Special Director will hold office only during the pleasure of
___________.
----------------------
5. Under __________, the Board has power to make suitable order on
---------------------- completion of inquiry.
----------------------
---------------------- 13.6 SCHEME OF REHABILITATION

---------------------- If the Board appoints an operating agency under Section 17(3) of the
Act, then the operating agency is required to prepare and submit a schedule
---------------------- in respect of the referred company by providing any or more of the following
---------------------- measures:
●● The financial reconstruction of the sick industrial company.
----------------------
●● he proper management of the sick industrial company by change in or
T
---------------------- takeover of the management of sick industrial company.
●● he amalgamation of the sick industrial company with any other company
T
----------------------
or by other company with the sick industrial company.
---------------------- The Board may finalise the scheme after considering the views and
suggestions of the Company, the operating agency and the public by publishing
----------------------
the draft scheme in the newspaper and thereafter formally sanction the same
---------------------- which is referred to as the “sanctioned scheme”.
---------------------- Winding up of sick industrial company:

The salient features of Section 20 of SICA are as follows:
----------------------
●● fter making necessary inquiry under Section 16 and after making an
A
---------------------- opportunity to all concerned parties, if BIFR is of the opinion that the
sick industrial company is not likely to make its net worth exceed the
---------------------- accumulated losses within a reasonable time and it is not likely to become
---------------------- viable in future and as such it is just and equitable to wind up by the
company, BIFR may record and forward its opinion to the concerned
---------------------- Tribunal.

●● ribunal shall, on the basis of the opinion of the Board, order winding
T Notes
up of sick industrial company and may proceed and cause to proceed
with the winding up of sick industrial company in accordance with the ----------------------
provisions of the Companies Act, 2013.
----------------------
●● or the purpose of winding up, the Tribunal may with the consent of
F
the operating agency appoint any office of the operating agency as the ----------------------
liquidator and such officer, if appointed, shall be deemed to be and have
all the powers of the official liquidator under the Companies Act, 2013. ----------------------
●● hen BIFR recommends the winding up of the sick industrial company
W ----------------------
pursuant to Section 20(1) of the SICA, 1985 and forward its opinion to
the connected Tribunal, the Tribunal is bound to order the winding up of ----------------------
the Company on the basis of opinion of BIFR and further the role of BIFR ----------------------
comes to an end in respect of the said sick industrial company.
●● he BIFR has the power to direct the sale of assets of the sick industrial
T ----------------------
company in such manner as it may deem fit. ----------------------
●● rom the various judicial judgments it was clear that till the passing of an
F
order of winding up by the Tribunal, BIFR retains absolute control over ----------------------
the affairs of the Company and can either prevent any sale or permit any
----------------------
sale and the sick industrial company is entirely governed by the provisions
of the SICA. On the other hand, once an order of winding up is made by ----------------------
the Tribunal on the basis of opinion of BIFR, the jurisdiction and control
over the company, its affairs and assets passes over to the Tribunal and ----------------------
BIFR ceases to have any power to pass any order or give any directions.
----------------------
Immunity from certain litigations
----------------------
One of the important provisions of SICA is Section 22. In certain
circumstances, no proceedings for the winding up of the industrial company ----------------------
or for execution, distress or like against any of the properties of the industrial
company or for the appointment of a receiver in respect thereof and no suit ----------------------
for the recovery of money or for the enforcement of any security against the
----------------------
industrial company or any guarantee in respect of any loans or advances granted
to the industrial company shall lie or be proceeded with further except with the ----------------------
consent of BIFR or as the case may be. The protection under Section 22 of the
SICA is a superior protection as it operates notwithstanding anything contained ----------------------
in the Companies Act, 2013 or any other law or as per the memorandum and
----------------------
articles of association of the industrial company or any other instrument having
effect under the said Act or other law. ----------------------
BIFR may by order declare with respect to the sick industrial company ----------------------
concerned that the operation of all or any of the contracts, assurances of property,
agreements, settlements, awards, standing orders or other instruments in force, ----------------------
applicable to the sick industrial company in question shall remain suspended
or that all or any of the rights, privileges, obligations and liabilities accruing ----------------------
or arising thereunder before the said date, shall remain suspended or shall be ----------------------
enforceable with such adaptations and in such manner as may be specified by
BIFR. Provided that such declaration shall not be made for a period exceeding ----------------------
Notes two years which may be extended by one year at a time so however that the total
period shall not exceed seven years in aggregate. Any such declaration is valid
---------------------- and is protected notwithstanding anything contained in the Companies Act or
any other law or agreement or instrument or any decree or order of a court,
---------------------- tribunal, office or other authority or of any submission, settlement or standing
---------------------- order.
Accordingly any remedy for the enforcement of any right, privilege,
----------------------
obligation and liability suspended or modified by such declaration and all
---------------------- proceedings relating thereto pending before any court, tribunal, officer or other
authority shall remain stayed or to continued subject to such declaration. On
---------------------- the declaration ceasing to have effect any right, privilege, obligation or liability
so remaining suspended or modified shall become revived and enforceable as
----------------------
if the declaration had never been made and any proceeding so remaining stayed
---------------------- shall be proceeded with, subject to the provisions of any law which may then be
in force, from the stage which has been reached when the proceedings became
---------------------- stayed. It is also clear that the Section 22 does not grant any immunity against
criminal proceedings against the company or its directors.
----------------------
Ban against disposal of assets
----------------------
In the interest of the sick industrial company or creditors or shareholders
---------------------- or in the public interest, Section 22A of the SICA empowers BIFR to order not
to dispose of any assets of the company in the interest of creditors. Such order
---------------------- can be passed during the period of preparation or consideration of the scheme
and during the period beginning with the recording of opinion by the board
----------------------
for winding up of the company and upto commencement of the proceedings
---------------------- relating to the winding up before the concerned tribunal.

----------------------
---------------------- 1. In the interest of the sick industrial company or creditors or shareholders
---------------------- or in the public interest, Section 22A of the SICA empowers NCLT to
order not to dispose off any assets of the company in the interest of
---------------------- creditors.
2. The BIFR has the power to direct the sale of assets of the sick industrial
----------------------
company in such manner as it may deem fit.
----------------------
---------------------- Activity 1
----------------------
Visit the BIFR website and find the details of cases of Sick companies in the
---------------------- current financial year.
----------------------
----------------------

Summary Notes
●● ICA is an Act which makes in the public interest, special provisions, with
S ----------------------
a view to secure timely detection of sick and potentially sick companies
----------------------
owing industrial undertakings.
●● peedy determination by a Board of experts of the preventive, ameliorative,
S ----------------------
remedial and other measures which need to be taken with respect to such
companies and expeditious enforcement of measures so determined. ----------------------
●● ICA was enacted to evaluate the viability of the sick industrial companies
S ----------------------
with a view to rehabilitate them and to protect the interest of employees,
resources of the country and public at large. ----------------------
●● he Act has delegated powers to Board for Industrial and Financial
T ----------------------
Reconstruction (BIFR) for the revival of the sick industrial companies.
----------------------
Keywords ----------------------
●● oing concern concept: Accounting concept pursuant to that company
G ----------------------
has to assume that business of the company will remain for unlimited
years. ----------------------
●● Creditors: Parties from whom company has purchased goods on credit. ----------------------
----------------------
----------------------
1. Explain in brief the causes of sickness of industrial companies.
2. Define sick industrial company and discuss the procedure of application ----------------------
to the board.
----------------------
3. What is winding up of a sick industrial company?
----------------------
4. State different provisions of immunity from certain litigations.
5. Describe the National Company Law Tribunal and its role in sick industrial ----------------------
company. ----------------------
Answers to Check your Progress ----------------------

Multiple Choice Single Response. ----------------------
1. The following is not a cause of sickness of industrial companies: ----------------------
iv. Lack of immovable property
----------------------
2. Major reasons for industrial sickness include:
i. Internal causes ----------------------
3. Internal causes are those that are within the control of the management of ----------------------
----------------------
Notes a company, they relate to the functioning of company and include:
iv. Under-estimation of project cost
----------------------
4. External causes are related to the environment and other factors which are
---------------------- not within the control of the given industry. They include:
---------------------- iv. Frequent and long power cuts.

----------------------
i. – d.
----------------------
ii. – a.
---------------------- iii. – b.
---------------------- iv. – c.

Fill in the blanks.
----------------------
1. BIFR upon receipt of a reference with respect to such company under
---------------------- Section 15 may make inquiry for determining whether the industrial
company has become a sick industrial company.
----------------------
2. BIFR may require, by order, any operating agency to enquire and make a
---------------------- report and complete its inquiry as expeditiously as possible.
---------------------- 3. BIFR has power to appoint one or more persons to be special director
or special directors of the company if it deems it necessary to make an
---------------------- inquiry.
---------------------- 4. Special Director will hold office only during the pleasure of BIFR.
---------------------- 5. Under Section 17, the Board has power to make suitable order on
completion of inquiry.
1. False
----------------------
2. True
----------------------

---------------------- 1. http://business.gov.in/closing_business/sica.php
----------------------
----------------------
----------------------
----------------------

Cross-Border Restructuring
UNIT
14
Structure:
14.1 Introduction
14.2 Forms in which Business can be conducted by a Foreign Company in
India
14.3 Procedure for receiving Foreign Direct Investment in an Indian Company
14.4 Guidelines for Transfer of existing Shares from Non-Residents to
Residents or Residents to Non-Residents
14.5 Significance of Overseas Investment for the Country and for the Investor
14.6 Direct Investment outside India
14.7 Obligations of the Indian Party making Direct Investment outside India
14.8 Foreign Exchange Management Compliance
14.9 The Need for Comparison
14.10 Historical Chronos of US Merger Laws
14.11 Brief History of Indian Merger Laws
14.12 Legal Framework in India
14.13 Legal Framework in US
14.14 Procedures for Mergers in India
14.15 Procedures for Mergers in US
14.16 Brief Overview of BRIC Countries
Summary
Key Words
Suggested Reading
Cross-Border Restructuring 209

Notes
Objectives
----------------------
----------------------
• Describe foreign investment in India
----------------------
• Discuss the Direct investment outside India
---------------------- • Explain Direct Investment in a Joint Venture/Wholly Owned
Subsidiary
----------------------
• Discuss FEMA Compliance
----------------------
• Compare between Indian merger laws and US merger laws
----------------------
---------------------- 14.1 INTRODUCTION

---------------------- In recognition of the important role of Foreign Direct Investment (FDI) in
the accelerated economic growth of the country, Government of India initiated
---------------------- a slew of economic and financial reforms in 1991. India is now ushering in the
---------------------- second- generation reforms aimed at further and faster integration of Indian
economy with the global economy. As a result of the various policy initiatives
---------------------- taken, India has been rapidly changing from a restrictive regime to a liberal one,
and FDI is encouraged in almost all the economic activities under the automatic
---------------------- route.
---------------------- Over the years, FDI inflow in the country is increasing. However, India
has tremendous potential for absorbing greater flow of FDI in the coming years.
---------------------- Serious efforts are being made to attract greater inflow of FDI in the country by
---------------------- taking several actions both on policy and implementation front.
However, the subject relating to FDI Policy and its promotion and
----------------------
facilitation as also promotion and facilitation of investment by Non-Resident
---------------------- Indians (NRIs) and Overseas Corporate Bodies (OCBs) will continue to be
handled by Department of Industrial Policy and Promotion.
----------------------
---------------------- 14.2 FORMS IN WHICH BUSINESS CAN BE CONDUCTED

BY A FOREIGN COMPANY IN INDIA
----------------------
A foreign company planning to set up business operations in India may:
----------------------
Incorporate a company under the Companies Act, 2013, as a Joint Venture
---------------------- or a wholly owned subsidiary.
---------------------- Set up a Liaison Office/Representative Office or a Project Office or a

Branch Office of the foreign company which can undertake activities permitted
---------------------- under the Foreign Exchange Management (Establishment in India of Branch
Office or Other Place of Business) Regulations, 2000.
----------------------
----------------------

14.3 PROCEDURE FOR RECEIVING FOREIGN DIRECT Notes
INVESTMENT IN AN INDIAN COMPANY ----------------------
An Indian company may receive Foreign Direct Investment under the two ----------------------
routes as given under:
----------------------
i. Automatic route
FDI up to 100 per cent is allowed under the automatic route in all activities/ ----------------------
sectors except where the provisions of the consolidated FDI Policy, paragraph
----------------------
on ‘entry routes for investment’ issued by the Government of India from time
to time, are attracted. ----------------------
FDI in sectors/activities to the extent permitted under the automatic route
----------------------
does not require any prior approval either of the Government or the Reserve
Bank of India. ----------------------
ii. Government route ----------------------
FDI in activities not covered under the automatic route requires prior
approval of the Government which is considered by Department of Industrial ----------------------
Policy & Promotion, Ministry of Commerce & Industry. ----------------------
The Indian company having received FDI either under the automatic
route or the Government route is required to report in the Advance Reporting ----------------------
Form, the details of the receipt of the amount of consideration for issue of ----------------------
equity instrument, viz. shares/fully and mandatorily convertible debentures/
fully and mandatorily convertible preference shares through an AD Category ----------------------
– I Bank, together with copy/ies of the FIRC evidencing the receipt of inward
remittances along with the Know Your Customer (KYC) report on the non- ----------------------
resident investors from the overseas bank remitting the amount, to the Regional ----------------------
Office concerned of the Reserve Bank of India within 30 days from the date of
receipt of inward remittances. ----------------------
Further, the Indian company is required to issue the equity instrument ----------------------
within 180 days, from the date of receipt of inward remittance or debit to NrE/
FCNr (B) account in case of NRI/ PIO. ----------------------
After issue of shares/fully and mandatorily convertible debentures/fully ----------------------
and mandatorily convertible preference shares, the Indian company has to file
the required documents along with Form FC-GPR with the Regional Office ----------------------
concerned of the Reserve Bank of India within 30 days of issue of shares to the
----------------------
non-resident investors.
Sectors where FDI is not allowed in India, both under the automatic route ----------------------
as well as under the Government route
----------------------
●● Activities/sectors not open to private sector investment e.g. (I) Atomic
Energy and (II) Railway operations ----------------------
●● ottery Business including Government/private lottery, online lotteries,
L ----------------------
etc.
----------------------

Notes ●● Gambling and Betting including casinos etc.
●● Business of Chit Fund
----------------------
●● Nidhi Company
---------------------- ●● eal Estate Business or Construction of Farm Houses (‘Real estate
R
---------------------- business’ shall not include development of townships, construction
of residential /commercial premises, roads or bridges and Real Estate
---------------------- Investment Trusts (REITs) registered and regulated under the SEBI
(REITs) Regulations 2014.)
----------------------
●● Trading in Transferable Development Rights (TDRs).
---------------------- ●● anufacture of cigars, cheroots, cigarillos and cigarettes of tobacco or of
M
tobacco substitutes.
----------------------
Procedure to be followed after investment is made under the automatic
---------------------- route or with Government approval
---------------------- A two-stage reporting procedure has to be followed:
---------------------- On receipt of share application money:

Within 30 days of receipt of share application money/amount of
---------------------- consideration from the non-resident investor, the Indian company is required
---------------------- to report to the Regional Office concerned of the Reserve Bank of India, under
whose jurisdiction its Registered Office is located, the Advance Reporting
---------------------- Form, containing the following details:
---------------------- ●● Name and address of the foreign investor/s;

●● Date of receipt of funds and the rupee equivalent;
----------------------
●● ame and address of the authorised dealer through whom the funds have
N
---------------------- been received;
●● Details of the Government approval, if any; and
----------------------
●● YC report on the non-resident investor from the overseas bank remitting
K
---------------------- the amount of consideration.
---------------------- Upon issue of shares to non-resident investors:
Within 30 days from the date of issue of shares, a report in Form FC-
----------------------
GPr- PArT A together with the following documents should be filed with the
---------------------- Regional Office concerned of the Reserve Bank of India.
---------------------- ●● ertificate from the Company Secretary of the company accepting

C
investment from persons resident outside India certifying that:
---------------------- The company has complied with the procedure for issue of shares as
laid down under the FDI scheme as indicated in the Notification No. FEMA
----------------------
20/2000-RB dated 3rd May 2000, as amended from time to time.
----------------------
----------------------
----------------------

The investment is within the sectorial cap/statutory ceiling permissible Notes
under the Automatic Route of the Reserve Bank and it fulfills all the conditions
laid down for investments under the Automatic route, namely − ----------------------
a) Non-resident entity/ies (other than individuals), to whom it has issued ----------------------
shares have existing joint venture or technology transfer or trade mark
agreement in India in the same field and Conditions stipulated at Paragraph ----------------------
4.2 of the Consolidated FDI policy Circular of Government of India have
----------------------
been complied with.
Or ----------------------
b) Non-resident entity/ies (other than individuals), to whom it has issued ----------------------
shares do not have any existing joint venture or technology transfer or
trademark agreement in India in the same field. ----------------------
Note: For the purpose of the ‘same’ field, 4 digit NIC 1987 code would be ----------------------
relevant.
----------------------
b) The company is not an Industrial Undertaking manufacturing items
reserved for small sector. ----------------------
Or ----------------------
The company is an Industrial Undertaking manufacturing items reserved
----------------------
for the small sector and the investment limit of 24 per cent of paid-up
capital has been observed/requisite approvals have been obtained. ----------------------
c) Shares issued on rights basis to non-residents are in conformity with
----------------------
regulation 6 of the RBI Notification No. FEMA 20/2000-RB dated 3rd
May 2000, as amended from time to time. ----------------------
Or ----------------------
Shares issued are bonus shares.
----------------------
Or
----------------------
Shares have been issued under a scheme of merger and amalgamation
of two or more Indian companies or reconstruction by way of de-merger or ----------------------
otherwise of an Indian company, duly approved by a Court in India.
----------------------
Or
Shares are issued under ESOP and the conditions regarding this issue ----------------------
have been satisfied.
----------------------
●● Shares have been issued in terms of SIA/FIPB approval No. --------
-------- dated -------------------- ----------------------
●● Certificate from Statutory Auditors/SEBI registered Category - I ----------------------
Merchant Banker/Chartered Accountant indicating the manner of
arriving at the price of the shares issued to the persons resident ----------------------
outside India.
----------------------
----------------------

Notes
----------------------
----------------------
i. Automatic route a. Share issued to non-residents
---------------------- ii. Government route b. Other than individual
---------------------- iii. Lottery business c. 100% FDI allowed
iv. Non-resident entity d. Prior approval of Government
----------------------
v. Regulation 6 of RBI notification e. FDI not allowed sector
----------------------
---------------------- 14.4 GUIDELINES FOR TRANSFER OF EXISTING SHARES

---------------------- FROM NON-RESIDENTS TO RESIDENTS OR RESIDENTS
TO NON-RESIDENTS
----------------------
A. Transfer of shares/fully and mandatorily convertible debentures
---------------------- from non-resident to resident
---------------------- The term ‘transfer’ is defined under FEMA as including “sale, purchase,
acquisition, mortgage, pledge, gift, loan or any other form of transfer of
---------------------- right, possession or lien”{Section 2 (ze) of FEMA, 1999}.
---------------------- The FEMA Regulations give specific permission covering the following
forms of transfer, i.e., transfer by way of sale and gift. These permissions
---------------------- are discussed below:
---------------------- i. Transfer of shares/fully and mandatorily convertible debentures by
way of sale: A person resident outside India can freely transfer shares/
----------------------
fully and mandatorily convertible debenture by way of sale to a person
---------------------- resident in India as under:
●● ny person resident outside India (not being a NRI or an erstwhile
A
----------------------
OCB), can transfer by way of sale the shares/fully and mandatorily
---------------------- convertible debentures to any person resident outside India or an
NRI may transfer by way of sale, the shares/fully and mandatorily
---------------------- convertible debentures held by him to another NRI only provided
that the person to whom the shares are being transferred has obtained
----------------------
prior permission of the Central Government to acquire the shares if
---------------------- he has previous venture or tie up in India through investment in
shares or debentures or a technical collaboration or a trade mark
---------------------- agreement or investment by whatever name called in the same field
or allied field in which the Indian company whose shares are being
----------------------
transferred is engaged.
---------------------- ●● ny person resident outside India may sell shares/fully and
A
mandatorily convertible debenture acquired in accordance with
----------------------
the FEMA regulations, on a recognised Stock Exchange in India
---------------------- through a registered broker.

●● ny person resident outside India may also sell share or convertible
A Notes
debenture of an Indian company to a resident subject to adherence
to pricing guidelines, documentation and reporting requirements as ----------------------
specified from time to time.
----------------------
●● hares/convertible debentures of Indian companies purchased
S
under Portfolio Investment Scheme by NRIs and erstwhile OCBs ----------------------
cannot be transferred, by way of sale under private arrangement.
----------------------
ii. Transfer of shares/fully and mandatorily convertible debentures by
way of gift: A person resident outside India can freely transfer shares/ ----------------------
fully and mandatorily convertible debentures by way of gift to a person
resident in India as under: ----------------------
Any person resident outside India, (not being a NRI or an erstwhile OCB), ----------------------
can transfer by way of gift the shares/ fully and mandatorily convertible
debentures to any person resident outside India; a NRI may transfer by ----------------------
way of gift, the shares/convertible debentures held by him to another NRI ----------------------
only, provided that the person to whom the shares are being transferred
has obtained prior permission of the Central Government to acquire the ----------------------
shares if he has previous venture or tie up in India through investment in
shares or debentures or a technical collaboration or a trademark agreement ----------------------
or investment by whatever name called in the same field or allied field in ----------------------
which the Indian company whose shares are being transferred is engaged.
----------------------
Any person resident outside India may transfer share/fully and mandatorily
convertible debentures to a person resident in India by way of gift. ----------------------
B. Transfer of shares/fully and mandatorily convertible debentures
----------------------
from resident to non-resident
i. Transfer of shares/fully and mandatorily convertible debentures by ----------------------
way of sale - General Permission under Regulation 10 of Notification
----------------------
No. FEMA 20/2000-rB dated May 3, 2000: A person resident in India
may transfer by way of sale to a person resident outside India any shares/ ----------------------
fully and mandatorily convertible debenture of an Indian company
whose activities (other than financial service sector activities) fall under ----------------------
the Automatic route of the FDI Scheme provided the parties concerned
----------------------
comply with the FDI sectorial limits, pricing guidelines, documentation
and reporting requirements for such transfers, as may be specified by the ----------------------
Reserve Bank of India, from time to time. However, the above general
permission is not available where: ----------------------
●● he transfer of shares/fully and mandatorily convertible debentures falls
T ----------------------
within the provisions of SEBI (Substantial Acquisition of Shares and
Takeovers) regulations, 1997, as amended from time to time. ----------------------
●● he transfer of shares/fully and mandatorily convertible debentures is at
T ----------------------
a price which does not adhere to the pricing guidelines specified by the
Reserve Bank of India from time to time ----------------------
----------------------

Notes ●● The activity of the Indian investee company falls outside the automatic
route and where FIPB approval has been obtained for the said transfer.
---------------------- Person’s position that is resident in India transferring security by
---------------------- way of gift to a person resident outside India
A person resident in India who proposes to transfer security by way of gift
---------------------- to a person resident outside India [other than erstwhile OCBs] shall make an
---------------------- application to the Central Office of the Foreign Exchange Department, Reserve
Bank of India furnishing the following information, namely:
----------------------
●● Name and address of the transferor and the proposed transferee.
---------------------- ●● Relationship between the transferor and the proposed transferee.
---------------------- ●● Reasons for making the gift.
●● I n case of Government dated securities, treasury bills and bonds, a
---------------------- certificate issued by a Chartered Accountant on the market value of such
---------------------- securities.
●● I n case of units of domestic mutual funds and units of Money Market
---------------------- Mutual Funds, a certificate from the issuer on the Net Asset Value of such
---------------------- security.
●● I n case of shares/fully and mandatorily convertible debentures, a certificate
---------------------- from a Chartered Account on the value of such securities according to the
---------------------- guidelines issued by the Securities & Exchange Board of India or the
Discount Free Cash Flow (DCF) method with regard to listed companies
---------------------- and unlisted companies, respectively.
●● ertificate from the Indian company concerned certifying that the
C
----------------------
proposed transfer of shares/convertible debentures, by way of gift, from
---------------------- resident to the non-resident shall not breach the applicable sectorial
cap/FDI limit in the company and that the proposed number of shares/
---------------------- convertible debentures to be held by the non-resident transferee shall not
exceed 5 per cent of the paid up capital of the company.
----------------------
The transfer of security by way of gift may be permitted by the Reserve
---------------------- Bank provided:
---------------------- (i) The donee is eligible to hold such security under Schedules 1, 4 and 5
to Notification No. FEMA 20/2000-RB dated May 3, 2000, as amended
---------------------- from time to time.
---------------------- (ii) The gift does not exceed 5 per cent of the paid up capital of the Indian
company/each series of debentures/ each mutual fund scheme.
----------------------
(iii) The applicable sectoral cap/ foreign direct investment limit in the Indian
---------------------- company is not breached.
(iv) The donor and the donee are relatives as defined in Section 2(77) of the
----------------------
---------------------- (v) The value of security to be transferred by the donor together with any
security transferred to any person residing outside India as gift in the
----------------------
calendar year does not exceed the rupee equivalent of USD 25,000.

(vii) Such other conditions as considered necessary in public interest by the Notes
Reserve Bank.
----------------------
Transfer of shares from resident to non-resident does not fall under
the above categories: ----------------------
In case the transfer does not fit into any of the above categories, either the
----------------------
transferor (resident) or the transferee (non-resident) can make an application to
the Reserve Bank for permission for the transfer of shares. The application has ----------------------
to be accompanied with the following documents:
----------------------
●● A copy of the FIPB approval (if required).
●● Consent letter from transferor and transferee clearly indicating the ----------------------
number of shares, name of the investee company and the price at which ----------------------
the transfer is proposed to be affected.
●● he present/post-transfer shareholding pattern of the Indian investee
T ----------------------
company showing the equity participation by residents and non-residents ----------------------
category- wise.
●● opies of the Reserve Bank of India’s approvals/acknowledged copies of
C ----------------------
FC- GPR evidencing the existing holdings of the non-residents. ----------------------
●● I f the sellers/transferors are NRIs/OCBs, the copies of the Reserve Bank
----------------------
of India’s approvals evidencing the shares held by them on repatriation/
non- repatriation basis. ----------------------
●● pen Offer document filed with the SEBI if the acquisition of shares by
O
----------------------
non-resident is under SEBI Takeover regulations.
●● air Valuation Certificate from the SEBI registered Category-I-Merchant
F ----------------------
Banker or Chartered Accountant indicating the value of shares as per the ----------------------
following guidelines:
●● here shares of an Indian company are listed on a recognised stock
W ----------------------
exchange in India, the price of shares transferred by way of sale shall not ----------------------
be less than the price at which a preferential allotment of shares can be
made under the SEBI Guidelines, as applicable, provided that the same is ----------------------
determined for such duration as specified therein, preceding the relevant
date, which shall be the date of purchase or sale of shares. ----------------------
●● here the shares of an Indian company are not listed on a recognised

W ----------------------
stock exchange in India, the transfer of shares shall be at a price not less
than the fair value to be determined by a SEBI registered Category – I - ----------------------
Merchant Banker or a Chartered Accountant as per the Discounted Free ----------------------
Cash Flow (DCF) method.
----------------------
Reporting obligations in case of transfer of shares between resident and
non- resident ----------------------
The transaction should be reported by submission of form FC-TRS to
----------------------
the AD Category – I bank, within 60 days from the date of receipt/remittance
of the amount of consideration. The onus of submission of the form FC-TRS ----------------------

Notes within the given timeframe would be on the resident in India, the transferor or
transferee, as the case may be.
----------------------
Method of payment and remittance/credit of sale proceeds in case of
---------------------- transfer of shares between resident and non-resident
The sale consideration in respect of the shares purchased by a person
----------------------
resident outside India shall be remitted to India through normal banking
---------------------- channels. In case the buyer is a Foreign Institutional Investor (FII), payment
should be made by debit to its Special Non-Resident Rupee Account. In case
---------------------- the buyer is a NRI, the payment may be made by way of debit to his NRE/
FCNR (B) accounts. However, if the shares are acquired on non-repatriation
----------------------
basis by NRI, the consideration shall be remitted to India through normal
---------------------- banking channel or paid out of funds held in NRE/FCNR (B)/NRO accounts.
The sale proceeds of shares (net of taxes) sold by a person resident
----------------------
outside India) may be remitted outside India. In case of FII the sale proceeds
---------------------- may be credited to its special Non-Resident Rupee Account. In case of NRI, if
the shares sold were held on repatriation basis, the sale proceeds (net of taxes)
---------------------- may be credited to his NRE/FCNR(B) accounts and if the shares sold were held
on non-repatriation basis, the sale proceeds may be credited to his NRO account
----------------------
subject to payment of taxes. The sale proceeds of shares (net of taxes) sold by
---------------------- an erstwhile OCB may be remitted outside India directly if the shares were
held on repatriation basis and if the shares sold were held on non-repatriation
---------------------- basis, the sale proceeds may be credited to its NRO (Current) Account subject
to payment of taxes, except in the case of erstwhile OCBs whose accounts have
----------------------
been blocked by reserve Bank.
----------------------
----------------------

1. The term transfer defined under FEMA does not include:
----------------------
i. Sale
---------------------- ii. Mortgage
---------------------- iii. Pledge
iv. Auction
---------------------- 2. Any person resident outside India may sell shares/fully and
---------------------- mandatorily convertible debenture acquired in accordance with the
FEMA Regulations on a recognised Stock Exchange in India through:
---------------------- i. Registered company
---------------------- ii. Registrar
iii. Registered shareholder
----------------------
iv. Registered broker
----------------------
----------------------

Notes
3. Any person resident outside India may transfer share/fully and
mandatorily convertible debentures to a person resident in India by ----------------------
way of
i. Gift ----------------------
ii. Takeover ----------------------
iii. Handover
----------------------
iv. Mortgage
4. The sale consideration in respect of the shares purchased by a person ----------------------
resident outside India shall be remitted to India through:
----------------------
i. Regular banking channels
ii. Foreign banking channels ----------------------
iii. Normal banking channels ----------------------
iv. Indian banking channels
----------------------
14.5 SIGNIFICANCE OF OVERSEAS INVESTMENT FOR ----------------------

THE COUNTRY AND FOR THE INVESTOR ----------------------
Joint Ventures abroad promote economic co-operation between India and ----------------------
the host countries. They result in transfer of technology and skills, sharing the
results of research & development, access to the global market, promotion of the ----------------------
brand image, generation of employment and utilisation of raw materials available
----------------------
in India and the host country, increased exports of plant and machinery and goods
and services from India, foreign exchange earnings through dividend earnings, ----------------------
royalty, technical know-how fee, etc. Since globalisation of trade is a two-way
process, integration of the Indian economy with the rest of the world with all its ----------------------
attendant benefits is achieved through overseas investment. It is the reverse of
----------------------
Foreign Direct Investment (FDI), i.e., Indian direct investment abroad.
----------------------
14.6 DIRECT INVESTMENT OUTSIDE INDIA
----------------------
Direct investment outside India means investments, either under the
----------------------
Automatic route or the Approval route, by way of contribution to the capital or
subscription to the Memorandum of Association of a foreign entity, signifying a ----------------------
long-term interest (setting up a Joint Venture (JV) or a Wholly Owned Subsidiary
(WOS)) in the overseas entity. ----------------------
Overseas direct investment to be made in any activity ----------------------
An Indian party can make overseas direct investment in any bonafide ----------------------
activity (except those who are specifically prohibited). However, for undertaking
activities in the financial services sector, certain additional conditions as ----------------------
specified in Regulation 7 of the Notification should be adhered to.
----------------------
----------------------

Notes Permissible sources for funding overseas direct investment
A. Funding for overseas direct investment can be made by one or more of the
----------------------
following sources:
---------------------- 1. Drawal of foreign exchange from an AD bank in India.
---------------------- 2. Swap of shares (refers to the acquisition of the shares of an overseas
entity by way of exchange of the shares of the Indian entity).
----------------------
3. Capitalisation of exports.
---------------------- 4. Through the proceeds of External Commercial Borrowings/Foreign
---------------------- Currency Convertible Bonds.
5. In exchange of ADRs/GDRs issued in accordance with the Scheme
---------------------- for issue of Foreign Currency Convertible Bonds and Ordinary
---------------------- Shares (Through Depository receipt Mechanism) Scheme, 1993
and the guidelines issued by Government of India in the matter.
----------------------
6. Balances held in Exchange Earners Foreign Currency account of
---------------------- the Indian Party maintained with an Authorised Dealer.
7. Proceeds of foreign currency funds raised through ADR/GDR
----------------------
issues.
---------------------- 8. In respect of (6) and (7) above, the ceiling of 400 per cent of the net
worth does not apply
----------------------
Eligibility to make overseas direct investment under the automatic
---------------------- route, definition of Indian party “Indian Party”
---------------------- An Indian party is eligible to make overseas direct investment under the
Automatic route. An Indian party is a company incorporated in India or a body
---------------------- created under an Act of Parliament or a partnership firm registered under the
---------------------- Indian Partnership Act, 1932 and any other entity in India as may be notified by
the Reserve Bank. When more than one such company, body or entity makes
---------------------- investment in the foreign entity, such combination will also form an “Indian
Party”.
----------------------
Prohibited activities for overseas direct investment
----------------------
A. Real estate as defined in Regulation 2(p) of the Notification and
---------------------- banking businesses are the prohibited sectors for overseas direct investment.
However, Indian banks operating in India can set up JVs/WOSs abroad
----------------------
provided they obtain clearance under the Banking regulation Act, 1949, from
---------------------- DBOD, RBI, CO.
---------------------- Automatic route (Meaning)

Under the automatic route, an Indian party does not require any prior
---------------------- approval from the Reserve Bank for setting up a JV/WOS abroad. The Indian
---------------------- party should approach an Authorised Dealer Category – I bank with an
application in Form ODI and the prescribed enclosures/documents for affecting
---------------------- the remittances towards such investments. (However, in case of investment

in the financial services sector, prior approval is required from the regulatory Notes
authority concerned both in India and abroad).
----------------------
Limits and requirements for direct investment to be made under the
automatic route ----------------------
A. The criteria for direct investment under the automatic route are as under:
----------------------
●● he Indian party can invest up to 400 per cent of its net worth
T
(as per the last audited Balance Sheet) in JV/WOS for any lawful ----------------------
activity permitted by the host country. The ceiling of 400 per cent of
----------------------
net worth will not be applicable where the investment is made out
of balances held in the EEFC account of the Indian party or out of ----------------------
funds raised through ADRs/GDRs;
----------------------
●● he Indian party is not on the Reserve Bank’s exporters’ caution
T
list/list of defaulters to the banking system published/circulated by ----------------------
the Credit Information Bureau of India Ltd. (CIBIL)/RBI or any
other credit information company as approved by the Reserve Bank ----------------------
or under investigation by the Directorate of Enforcement or any
----------------------
investigative agency or regulatory authority; and
●● he Indian party routes all the transactions relating to the investment
T ----------------------
in a JV/ WOS through only one branch of an authorised dealer to be
----------------------
designated by the Indian party.
Charge on immovable property or pledge shares of Indian party in favour ----------------------
of a non-resident entity
----------------------
Prior permission of the Reserve Bank is required for creating such a
charge on immovable property as also pledge of shares of the Indian parent/ ----------------------
group companies.
----------------------
Overseas investments and restrictions regarding the currency of investment
----------------------
Investment in Pakistan is not allowed under the automatic route.
Investments in Nepal can be only in Indian rupees. Investments in Bhutan are ----------------------
allowed in Indian rupees and in freely convertible currencies.
----------------------
All the dues receivable on investments made in freely convertible
currencies as well as their sale/winding up proceeds are required to be repatriated ----------------------
to India in freely convertible currencies.
----------------------
Registration with the Reserve Bank necessary for direct investments under
the Automatic route ----------------------
No prior registration with the Reserve Bank is necessary for making direct ----------------------
investments under the automatic route. After the report of the first remittance/
investment in form ODI is received by the Reserve Bank, from the designated ----------------------
Authorised Dealer, a Unique Identification Number (UIN) for that particular
----------------------
JV/WOS will be issued for the purpose of taking on record the overseas direct
investment with the objective of maintaining a database for monitoring the ----------------------
outflows/inflows in respect of the overseas entities. Subsequent investments in
the same project can be made only after allotment of the UIN. ----------------------

Notes Approval route and the procedure to be followed for investment proposed
to be made under the approval route
----------------------
A. Proposals not covered by the conditions under the automatic route
---------------------- require the prior approval of the Reserve Bank for which a specific application
in form ODI with the documents prescribed therein is required to be made
---------------------- through the Authorised Dealer Category – I banks. Some of the proposals which
require prior approval are:
----------------------
i) Overseas investments in the energy and natural resources sector exceeding
---------------------- 400% of the net worth of the Indian companies as on the date of the last
audited balance sheet;
----------------------
ii) Investments in overseas unincorporated entities in the oil sector by
---------------------- resident corporates exceeding 400% of their net worth as on the date of
the last audited balance sheet provided the proposal has been approved
----------------------
by the competent authority and is duly supported by a certified copy of
---------------------- the Board Resolution approving such investment. However, Navaratna
Public Sector Undertakings, ONGC Videsh Ltd. and Oil India Ltd. are
---------------------- allowed to invest in overseas unincorporated entities in oil sector (i.e.,
for exploration and drilling for oil and natural gas, etc.), which are duly
----------------------
approved by the Government of India, without any limits, under the
---------------------- automatic route;
---------------------- iii) Overseas investments by proprietorship concerns and unregistered

partnership firms satisfying certain eligibility criteria; and
---------------------- iv) Investments by registered Trusts/Societies (satisfying certain eligibility
---------------------- criteria) engaged in the manufacturing/educational/ hospital sector in the
same sector in a JV/ WOS outside India.
----------------------
---------------------- Multiple Choice Multiple Response.
---------------------- 1. Joint ventures abroad promote economic co-operation between:

i. India
----------------------
ii. The host countries
----------------------
iii. USA
---------------------- iv. China
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
2. Direct investment outside India means investments, either under
____or_____. ----------------------
i. Government route
----------------------
ii. Special route
iii. Automatic route ----------------------
iv. Approval route ----------------------
3. Which of the following are permissible sources for funding overseas
direct investment? ----------------------
i. Capitalisation of exports ----------------------
ii. Funds in dollars
----------------------
iii. Swap of money
iv. Drawal of foreign exchange form an AD bank in India ----------------------
4. Under the Automatic Route, who does not require any prior approval
----------------------
from the Reserve Bank for setting up a ______.
i. A foreigner ----------------------
ii. An Indian party
----------------------
iii. FDI
iv. JV/WOS abroad ----------------------
5. Which of the following are the Limits and requirements for direct ----------------------
investment to be made under the Automatic Route?
i. The Indian party is not in the Reserve Bank’s exporters caution ----------------------
list ----------------------
ii. The Indian Party can invest up to 400 per cent of its net worth
iii. The Indian Party can invest up to 200 per cent ----------------------
iv. The Indian Party is in the list of defaulters to the banking system ----------------------
----------------------
14.7 OBLIGATIONS OF THE INDIAN PARTY MAKING ----------------------
DIRECT INVESTMENT OUTSIDE INDIA
----------------------
An Indian Party will have to comply with the following:
----------------------
●● eceive share certificates or any other documentary evidence of
R
investment in the foreign entity as an evidence of investment; ----------------------
●● epatriate to India, all dues receivable from the foreign entity like
R ----------------------
dividend, royalty, technical fees, etc.;
●● ubmit to the Reserve Bank through the designated Authorised Dealer,
S ----------------------
every year, an Annual Performance Report in Part III of Form ODI in
----------------------
respect of each JV or WOS outside India set up or acquired by the Indian
party; ----------------------
----------------------

Notes ●● eport the details of the decisions taken by a JV/WOS regarding
R
diversification of its activities/setting up of step down subsidiaries/
---------------------- alteration in its share holding pattern within 30 days of the approval of
those decisions by the competent authority concerned of such JV/WOS in
---------------------- terms of the local laws of the host country. These are also to be included
---------------------- in the relevant Annual Performance report; and
●● I n case of disinvestment, sale proceeds of shares/securities shall be
---------------------- repatriated to India immediately on receipt thereof and in any case not
---------------------- later than 90 days from the date of sale of the shares/securities and
documentary evidence to this effect shall be submitted to the Reserve
---------------------- Bank through the designated Authorised Dealer.
---------------------- Avenues available to Indian Mutual Funds for investment abroad
Indian Mutual Funds registered with SEBI are permitted to invest within
---------------------- the overall cap of USD 7 billion in:
---------------------- a) ADRs/GDRs of the Indian and foreign companies;
---------------------- b) Equity of overseas companies listed on recognised overseas stock
exchanges; initial and follow on public offerings for listing at recognized
---------------------- overseas stock exchanges;
---------------------- c) Foreign debt securities – short- term as well as long term with rating not
below investment grade, in the countries with fully convertible currencies;
----------------------
d) Money market investments not below investment grade; repos where the
---------------------- counter party is not below investment grade;
---------------------- e) Government securities where countries are not rated below investment
grade;
---------------------- f) Derivatives traded on recognised stock exchanges overseas only for
---------------------- hedging and portfolio balancing with underlying as securities;
g) Short-term deposits with banks overseas where the issuer is rated not
----------------------
below investment grade;
---------------------- h) Units/securities issued by overseas Mutual Funds or Unit Trusts registered
with overseas regulators.
----------------------
Investment in agriculture
----------------------
Resident corporate and partnership firms registered under the Indian
---------------------- Partnership Act, 1932 may undertake agricultural operations including purchase
of land incidental to such activity either directly or through their overseas
---------------------- offices, provided:
---------------------- The Indian party is otherwise eligible to invest under Regulation 6 of the
Notification ibid and such investment is within the overall specified limits, and
----------------------
For the purpose of such investment by acquisition of land overseas the
---------------------- valuation of land is certified by a certified valuer registered with the appropriate
valuation authority in the host country.
----------------------

Guidelines pertaining to overseas investment Notes
The guidelines have been notified by Reserve Bank of India vide
----------------------
Notification No. FEMA 120/2004-rB dated July 7, 2004, as amended from
time to time, which can be accessed at the Reserve Bank’s website fema.rbi. ----------------------
org.in. A Master Circular entitled Direct Investment by residents in JV/WOS
Abroad dated July 1, 2009, which is a compendium of all notifications/circulars ----------------------
incorporating the developments, till that date, is also available on the website of
----------------------
RBI.
General permissions available to persons resident in India for purchase/ ----------------------
acquisition of securities abroad
----------------------
General permission has been granted to persons resident in India for
purchase/ acquisition of securities as under: ----------------------
a. Out of funds held in the RFC account; ----------------------
b. As bonus shares on existing holding of foreign currency shares; ----------------------
c. When not permanently resident in India, from the foreign currency
resources outside India. ----------------------
General permission is also available to sell the shares so purchased or ----------------------

acquired. A resident Indian can remit up to USD 2,00,000, per financial year
----------------------
under the Liberalised Remittance Scheme (LRS), for permitted current and
capital account transactions including purchase of securities. ----------------------
14.8 FOREIGN EXCHANGE MANAGEMENT COMPLIANCE ----------------------
The transaction involving foreign exchange is regulated by Foreign ----------------------

Exchange Management Act, 1999 in India. The main thrust from liberalisation ----------------------
of economy has been on promotion of foreign exchange rather than control of
foreign exchange. All transaction involving foreign exchange is regulated by ----------------------
FEMA and the provisions of FEMA have to comply with wherever applicable.
The preamble to the Act says that it is an Act to consolidate and amend the law ----------------------
relating to foreign exchange with the objective of facilitating external trade ----------------------
and payments and for promoting the orderly development and maintenance of
foreign exchange market in India. ----------------------
Foreign Exchange Management Act, 1999 (FEMA) has come in force ----------------------
from 1st June, 2000 by replacing Foreign Exchange Regulations Act (FERA).
The main change that has been brought is that FEMA is a civil law, whereas ----------------------
the FERA was a criminal law. FERA was popular for its draconian provisions.
----------------------
The shift of FERA to FEMA was the shift of control of foreign exchange to
regulation and promotion and orderly development of Foreign exchange. FEMA ----------------------
is forward looking legislation which aims to facilitate foreign trade.
----------------------
FEMA aims to achieve self-regulation instead of imposed restrictions.
The rationale for strict regulations under FERA 1973 after Independence ----------------------
was that India was left with little forex reserves and during the oil crisis of
70s ballooning oil import bills further drained foreign exchange reserves. ----------------------

Notes Unsatisfactory reserves made it imperative to put in place stringent controls to
conserve foreign exchange and to utilise it in the best interest of the country.
----------------------
FEMA has 49 Sections of which 9 Sections (Sections 1 to 9) are
---------------------- substantive and the rest are procedural or administrative. RBI is entrusted with
the administration and implementation of FEMA. RBI has so far issued over 200
---------------------- Notifications, each of which contains several regulations for a particular class
of transactions, e.g., Notification No. FEMA/21/rB-2000, deals with acquisition
----------------------
and transfer of immovable property in India and FEMA 24/2000-RB pertaining
---------------------- to investment in a firm or a proprietary concern in India. The definition section
of each Notification makes it clear that the words and expressions used therein,
---------------------- but not defined in that particular Notification shall have the same meanings
respectively assigned to them in the Act. Therefore, wherever a particular term
----------------------
is defined in the Notification, the meaning to be assigned is unique to that
---------------------- Notification and mostly cannot be applied to another. Thus, interpretation and
application of FEMA provisions and Notifications require utmost care. FEMA
---------------------- is applicable to the whole of India. The expression “whole of India” would
indicate that the provisions of the Act are applicable to all transactions taking
----------------------
place in India. Thus, any person who is present in India at the time of transaction
---------------------- has to comply with provisions of FEMA. FEMA is applicable to all branches,
offices and agencies outside India owned or controlled by a person resident in
---------------------- India. Thus, FEMA has retained its extra-territorial application, as under FERA.
The Enforcement of FEMA is done through Reserve Bank of India and Central
----------------------
Government. The power has been given to Central Government [Section 46]
---------------------- and RBI [Section 47] to lay down detailed rules and regulations to carry out
the various provisions of the Act. Where under Section 47 the Reserve Bank
---------------------- of India can make regulations governing procedural and administrative aspects
of FEMA the central government have been given the power to make rules
----------------------
governing enforcement of FEMA.
---------------------- The Central Government has established a Directorate of Enforcement
for the purpose of enforcement of Act [Section 36]. Officers under Directorate
----------------------
of enforcement are known as officers of Enforcement. These officers can
---------------------- investigate the contraventions of FEMA.
http://taxpertpro.com/international-tax/fema-compliance
----------------------
---------------------- 14.9 THE NEED FOR COMPARISON

---------------------- 1) It helps us understand the new concepts of law better.
---------------------- 2) We will not understand the lacuna in our laws if we will not compare the
laws.
----------------------
3) It helps us in better understandings of the international perspectives.
---------------------- Why comparison between India and USA
---------------------- With the Indian economy growing so rapidly and Indian firms and
consumers increasingly integrated into global markets, it is inevitable that
----------------------

foreign firms interested in participating in this growth will become exposed Notes
to a variety of Indian domestic policies, including antitrust law. Just as a
working knowledge of American and European antitrust has become an asset ----------------------
for competition policy practitioners in this country over the last many years,
knowledge of the emerging competition regimes in the new economic powers, ----------------------
particularly China and India, should be expected to become important as ----------------------
well. The second reason relates to what we can learn from the experience of
another country trying to prepare a modern law. In doing so, we try to draw on ----------------------
current economic thinking on competition, efficiency and on the experiences
of many countries with longer antitrust histories. First, it took on this task with ----------------------
great seriousness; the work involved numerous studies and consultations with ----------------------
experts from within and outside the country. Attempts are made to draw on the
experience of US and other countries with well-established antitrust regimes. ----------------------
Second, while our histories and traditions are clearly different on many levels,
there are also some important similarities in law, government and language ----------------------
thanks to our common historical connections to Britain. India is also a federal ----------------------
state struggling to balance the needs of states for the freedom to address more
local concerns with the need for a strong central authority. ----------------------
Why companies go in decline ----------------------
The corporate body has been linked by us to a human body; just as we
----------------------
sometimes become ill, so does a corporate body. For both us and a company,
various symptoms’ appear as a recognisable preclude to sickness. Company ----------------------
decline is a symptom of an incoming sickness, which if not identified and
remedied, may well lead to failure. ----------------------
Means of escape ----------------------
A company in decline is in financial distress. This leads to still further ----------------------
decline in the fortunes of company and it continues for any length of time, to
failure. What happens thereon depends on the business climate, the regulation ----------------------
and the laws are concerned.
----------------------
In countries like US, the company may find a way of escape by filling
for bankruptcy. Chapter 11 of the US bankruptcy laws allows a company to ----------------------
continue to operate while agreeing to meet its liabilities in accordance with
agreed schemes. This has been done when a company has been threatened by ----------------------
a large number of suits for liability in respect of product, or claims from an ----------------------
entire community that has been adversely affected by its operations. Finding it
liability then to be far in excess of its assets it seeks protection under Chapter11, ----------------------
since this allows it to continue to operate.
----------------------
In India, due to variety of social, economic and political factors, the
government will go to almost any length to protect jobs. They therefore seek ----------------------
to avoid the closure of companies. This can go to such an extreme that sick
units are used along even then they appear to be no longer viable. This seems ----------------------
to you to be throwing good money after bad and we find the solution worse ----------------------
than the problem. In the ultimate analysis the country’s economy suffers. There
is an emergent need with a consequent disastrous effect on productivity. The ----------------------

Notes economy then has to be protected and sheltered against the import of cheaper
goods of equal quality and by the same token the country cannot compete in the
---------------------- fiercely competitive international market.
----------------------
14.10 HISTORICAL CHRONOS OF US MERGER LAWS
----------------------
In US, the merger laws are divided in three types:
---------------------- 1) Antitrust Laws
---------------------- 2) Securities Laws
---------------------- 3) Antitakeover Laws
Brief History of USA Merger Laws
----------------------
The Sherman Act codified the long-standing common law prohibition on
---------------------- contracts and conspiracies in restraint of trade but did not expressly deal with
---------------------- mergers. Although the Act was somewhat successful in eliminating trusts and
holding companies as vehicles for cooperation among companies, the Supreme
---------------------- Court did not extend its reach to mergers unless it could be shown that their very
purpose was to restrain trade. Not surprisingly, businesses and barons adapted
---------------------- their techniques and the US saw its first great merger wave in the 1890s, after
---------------------- and perhaps because of the Sherman Act.
In 1914, Congress has created the Federal Trade Commission and passed
---------------------- the Clayton Act. The Clayton Act prohibited a number of specific business
---------------------- practices including anticompetitive acquisitions. The merger provision, Section
7, prohibited the acquisition of the stock or other share capital of another
---------------------- corporation, where the effect of such acquisition may be to substantially
lessen competition between the corporation whose stock is so acquired and the
---------------------- corporation making the acquisition. By using the words “may be to substantially
---------------------- lessen competition,” Congress indicated that it wanted to stop even potentially
anticompetitive transactions. If there were competing interests, Congress came
---------------------- down on the side of intervention. It did not require proof that an acquisition
definitely would lessen competition substantially, but only a reasonable
---------------------- probability that it would the Clayton Act.
---------------------- The Origin of the Clayton Act
---------------------- The end of the Civil War in the United States brought prosperity as well as
peace. The economy boomed and commerce became for the first time national
---------------------- in scope. State laws that had limited the activities of corporations were loosened
and large companies began to flourish. “Robber barons” created great fortunes
----------------------
and then increased them by creating trusts, large combinations of companies
---------------------- that dominated entire industries’ railroads, oil, steel and tobacco were among
the sectors that came to be controlled in this fashion.
----------------------
The chief purpose of antitrust legislation is to protect the public from
---------------------- extortion practiced by the trust, but at the same time not to take away from the
trust any advantages of cheapness or better service which honest, intelligent
---------------------- cooperation may bring.

In 1909, the 200 largest non-banking corporations owned about one-third Notes
of all corporate assets; in 1928 they owned 48%; in the early 30s they owned
54%; by 1940 they held 55%. Aggregate concentration increased even further ----------------------
during the Second World War, in large part due to the federal government’s war
production efforts. Some viewed the concentration trend as a threat to the entire ----------------------
economic, social and political fabric of the nation to the very existence of free ----------------------
enterprise and political democracy.
----------------------
Congress enacted the Celler-Kefauver amendments in 1950, making the
Clayton Act applicable to asset acquisitions and to acquisitions involving firms ----------------------
other than direct competitors.
----------------------
In 1962, the Supreme Court decided the Brown Shoe Case. That case
involved the third and eighth largest shoe retailers, whose merged retail shoe ----------------------
chain would have had 5% of retail shoe sales in over one hundred communities.
Even though there had been prior mergers in the industry, the market was ----------------------
still, in the Court’s words, “fragmented.” In many cities there were a large
----------------------
number of competitors. Viewed with today’s eyes, the merger did not appear
likely to create market power, that is, the ability of a firm to raise price above ----------------------
competitive levels. But the Supreme Court ruled that the removal of even a
relatively small competitor from the market presented a significant threat to ----------------------
competition. By blocking an acquisition in an unconcentrated market in order
----------------------
to protect small businessmen, the Court chose to ignore the possibility that a
somewhat larger shoe store chain would be more efficient and result in lower ----------------------
prices for consumers.
----------------------
In 1963, the Court decided another landmark case, Philadelphia National
Bank. This time the merging parties were the second and third largest commercial ----------------------
banks in the Philadelphia area. Their combined share of a highly concentrated
market would have exceeded 30% and concentration among the leading firms ----------------------
would have increased by 33%. This was precisely the kind of acquisition that
----------------------
Congress sought to prevent by amending the Clayton Act. The Supreme Court
also established some important rules of law in that case. One of them is that ----------------------
there should be a strong but rebuttable presumption of illegality for mergers that
produce a firm with an “undue” percentage share of the market and result in a ----------------------
significant increase in concentration.
----------------------
In other words, mergers in concentrated markets are so likely to create
market power and put consumers at risk of anticompetitive prices that they ----------------------
are presumptively unlawful. The Court based this presumption in part on the ----------------------
economic theory that competition is likely to be greatest when there are many
sellers, none of which has any significant market share. ----------------------
Then in 1966 came Von’s Grocery, another well-known case. Von’s ----------------------
Grocery reverted to a Brown Shoe kind of analysis, relying perhaps even more
heavily on a simple numerical count of competitors and the beginnings of a ----------------------
trend toward concentration. The Supreme Court held unlawful a merger of two
grocery store chains holding a combined share of 7.5% of the grocery market in ----------------------
Los Angeles, where the four leading firms accounted for 24.4% of sales, and the ----------------------

Notes top eight firms accounted for 40.9%. The total number of grocery stores in Los
Angeles was in the thousands. The market share and concentration figures did
---------------------- not approach those in Philadelphia National Bank. Yet the Court did not engage
in an analysis of likely competitive effect, other than noting the trend toward
---------------------- concentration single-store groceries in Los Angeles had declined from 5,365 in
1950 to 3,818 in 1961.
----------------------
The central goal of merger policy, as reflected in new guidelines announced
---------------------- in 1982, was not simply to prevent undue concentration, but to prevent mergers
that may create or enhance market power or facilitate its exercise. The thrust
----------------------
of the policy changes reflected in the 1982 and 1984 revised merger guidelines
---------------------- was generally well received, even by some who criticised the government’s
actual enforcement efforts.
----------------------
The Commission and the Department of Justice jointly issued new
---------------------- horizontal merger guidelines in 1992, but the fundamental policy stated in the
1984 guidelines did not change. The policy still is to prevent mergers that may
---------------------- create or enhance market power or facilitate its exercise.
----------------------
----------------------
----------------------
1. Indian Mutual Funds registered with SEBI are permitted to invest
---------------------- within the overall cap of USD 7 billion in ADRs/GDRs of the Indian
and foreign companies.
----------------------
2. The Central Government has established a Directorate of Enforcement
---------------------- for the purpose of enforcement of Act.
---------------------- 3. In countries like US the company may not find a way to escape by
filing for bankruptcy.
----------------------
4. In US the merger laws are divided in four types.
---------------------- 5. Congress enacted the Celler-Kefauver amendments in 1950, making
---------------------- the Clayton Act applicable to asset acquisitions and to acquisitions
involving firms other than direct competitors.
----------------------
---------------------- 14.11 BRIEF HISTORY OF INDIAN MERGER LAWS

---------------------- The Indian Companies Act, 1913 contained only four provisions, namely,
Sections 152, 153, 153A and 153B, which regulated the schemes of arrangement
----------------------
including Amalgamations, etc. And among these, Section 153A was the only
---------------------- Section which dealt directly with mergers/amalgamations.
---------------------- The Indian Companies Act, 1913 was replaced by the Companies Act,
1956 which brought extensive changes in the provisions relating to the scheme
---------------------- of arrangement, all of which were brought under Chapter V Part VI of the Act
commencing from Section 390 to Section 396A of the Act. The provisions of
---------------------- Section 153(6) of 1913

Act were incorporated in the Section 390 of the present Act, and even Notes
the provisions of Section 153 of previous Act were incorporated in Section
391 of new Act. The Act, 1956 brought in two new Sections namely Section ----------------------
392, dealing with powers of the High court to enforce scheme of arrangement
and Section 396A, dealing with powers of Central Government to provide for ----------------------
amalgamation of companies in national interest. ----------------------
Thus, the edifice was built by Act, 1956 on the foundation laid down by
----------------------
the Act, 1913.
Further amendments were brought in, in piecemeal, by Companies ----------------------
(Amendment) Act, 1960, and Companies (Amendment) Act, 1965. By the Act,
----------------------
1965 a new Section was introduced − Section 394A − which for the first time
provide that notice should be given to Central Government for application under ----------------------
Sections 391 and 394 and thus brought Central Government into picture. In real
sense, the Indian Government woke up with the starting of the 1985 period ----------------------
towards the liberalisation policies and started taking initiative steps towards it.
----------------------
And finally on June 24th, 1991 the first step in the direction of liberalisation
and globalisation came into existence in the form of the Statement on Industrial ----------------------
Policy. With this statement there came continuity to such economic and
industrial reforms which have striven to clear the obstacles to faster industrial ----------------------
development. Then, India witnessed the rise in Mergers and Acquisitions
----------------------
in industrial and financial sectors of the economy. The merger scenario has
undergone rapid modifications, where many firms seriously examined their ----------------------
portfolios and the rest of them which were burly and dominant, restructured
their industries resulting in the degree of attentiveness. This resulted in what ----------------------
was called the first merger wave in India which tended to show the drastic
----------------------
changes in the stock market of the country.
Before 1991’s cool wind for the opening up of the economy, mergers and ----------------------
acquisitions were not focus. The reason for it was absence of restrictions on the
----------------------
size and volume of business which encouraged enterprises to opt for mergers
and amalgamations. The intention was to produce on massive scale, to enjoy the ----------------------
benefits of scales of operation, to reduce costs of production and to make prices
internationally competitive. During 1988−92, there were about 121 takeovers ----------------------
and mergers. In 1991, the first year of economic reform, Indian corporate world
----------------------
declared 71 Mergers and Acquisitions plans. With the commencement of the
year 1994, the number swelled to 324 and by 1995 it was approximately 412. ----------------------
The Mergers and Acquisitions activity matured and grew each year.
----------------------
Since mid-90s, the concept of mergers and acquisitions caught like fire.
They became popular from all angles whether it was policy considerations ----------------------
or businessman’s outlook or consumer’s point of view. The other aspects of
merger are in the sick undertakings merging with the healthy undertakings for ----------------------
tax advantages. Here the sick unit survives and the healthy one extinguishes. ----------------------
As a result of it the profits of the healthy unit are adjusted with the losses of the
sick surviving unit. This is called reverse merger. ----------------------
----------------------

Notes Monopolies and Restrictive Trade Practice Act contained some provisions
of mergers. Then FERA & FEMA was carrying some provisions of mergers and
---------------------- acquisitions. But the main Act is Competition Act which came into force in 2002.
----------------------
14.12 LEGAL FRAMEWORK IN INDIA
----------------------
In quest of globalisation, India has responded to the opening up of its
---------------------- economy, removing all sorts of controls and moving towards liberalisation. The
rationale behind it is a tough competition which the Indian corporate sector
---------------------- is facing, in the country and outside the country also with regard to corporate
---------------------- restructuring. The boom in the corporate sector regarding the different business
strategies of mergers and acquisitions has come due to absence of restrictions
---------------------- on business, so that the business can flourish and develop and enjoy all sorts
of benefits by making profits and reducing the costs and making the prices
---------------------- according to the competition at international level. Thus, there comes the
---------------------- necessity to understand the laws and their provisions which govern mergers.
Merger may be defined as an arrangement whereby the assets of two (a
---------------------- merger may involve more than two companies) companies become vested in,
---------------------- or under the control of, one company (which may or may not be one of the
two original companies), which has its shareholders all, or substantially all,
---------------------- the shareholders of one or both the merging companies exchange their shares
(either voluntarily or as the result of the legal operation) for shares in the other
---------------------- or a third company. There is no definition for Amalgamation and here the term
---------------------- amalgamation is used as similar to mergers and the definition goes as described
above.
----------------------
So according to the laws dealing with Company Laws, the terms can be
---------------------- used interchangeably. It is said that under an “amalgamation” or “merger” two
or more companies are merged either by acquisition of their undertakings and
---------------------- assets by one of them or by a newly incorporated company or, more commonly,
by one such company acquiring or controlling shareholding in the others.
----------------------
The term “amalgamation” is not defined in the Companies Act, 2013.
---------------------- The term is defined under Income Tax Act, 1961. The Company Act just makes
a reference to “amalgamation” in Section 232 while dealing with the powers
----------------------
of the National Company Law Tribunal. In addition, there is a reference to
---------------------- “amalgamation” in Sections 237 and 239 dealing with the power of the Central
Government to amalgamate companies in public interest and maintenance of
---------------------- records by the amalgamated company.
---------------------- There is absence of explanation of the meaning or definition of
“amalgamation” and “merger” in the Company Law Act. So to complete it if we
---------------------- give a look to Halsbury’s Laws it says, “Neither ‘amalgamation’ (or ‘merger’
as it is an interchangeable term) nor ‘reconstruction’ had any precise legal
----------------------
meaning. Amalgamation is a blending of two or more existing undertakings
---------------------- into one undertaking, the shareholders of each blending company becoming
substantially the shareholders in the company which is to carry on the blended
---------------------- undertakings.

The definition of the term ‘amalgamation’ is defined in the Section 2(1B) of Notes
the Income Tax Act, the definition which the Act gives is specifically describing
the term amalgamation same as ‘merger’. It describes that amalgamation means ----------------------
when one company blends with another company, both are existing companies
and carrying on business. Whereas ‘merger’ means two or more companies blend ----------------------
to form a third company and thus it is a ‘merger’. In the case of amalgamation ----------------------
only the amalgamating company or companies cease to exist after the blending
and the company into which it or they blended (amalgamated) continues to have ----------------------
the same legal existence. There is a minor difference between the two terms.
But in general, in all the laws, these two terms are used interchangeably to ----------------------
refer to the blending of one or more companies under a scheme or arrangement ----------------------
sanctioned by the National Company Law Tribunal constituted under 408 of the
Companies Act, 2013. ----------------------
The blending, fusion of two or more companies into one, is like a chemical ----------------------
process and for this process the Tribunal acts as a catalyst. The result is a new
corporate entity in case of merger. However, where there is an amalgamation ----------------------
namely one or more companies merging with an existing company there will
----------------------
be no new entity but often the same entity with varied undertakings and a larger
shareholder’s base. ----------------------
Without the Tribunal’s intervention amalgamation cannot take place. The
----------------------
tribunal assists in the process and through its supervisory powers secures that
the amalgamation is fully and effectively carried out. ----------------------
Mergers and takeovers are regulated by various laws and enactments
----------------------
which are amended from time to time through various prescribed provisions
made therein. There are various statutes which govern the regulation of mergers ----------------------
in proper way
----------------------
14.13 LEGAL FRAMEWORK IN US ----------------------
The major antitrust regulations of US which have a bearing on merger are ----------------------
contained in the following statutes:
----------------------
The Sherman Act, 1890
This Act, which prohibits any restraint on trade or attempt to monopolistic ----------------------
trade, was passed in the midst of greatest merger wave of US’s history. It has ----------------------
two Sections. Section 1 prohibits mergers that would tend to create a monopoly
or undue market control. Section 2 is directed against firms that had already ----------------------
become dominant in their markets.
----------------------
Although not directed solely at mergers, one of the goals of Section 2 of
the Act was to stop creation of monopolies through mergers as was occurring ----------------------
in numerous industries at that time. But the Act could not prevent mergers that
brought together companies of less than monopolistic dimensions. Recognition ----------------------
of this fact contributed to the impetus behind the second major effort to curtail ----------------------
corporate power in 1914.
----------------------

Notes The Clayton Act, 1914
The Clayton Act created the Federal Trade Commission (FTC) for the
----------------------
purpose of regulating the behaviour of business firms. Section 5 gives the FTC
---------------------- power to prevent the firm engaging in harmful business practices. Section 7
of the Act prohibits mergers that would substantially lessen competition or
---------------------- tend to create monopoly. More specifically, the section prohibits full or partial
acquisition by a commercial corporation of the stock or assets of another,
----------------------
engaged in commerce in the country, if the effect of such an acquisition may be
---------------------- substantially to lessen competition or tend to create monopoly. The prohibition
applies to horizontal, related and conglomerate acquisitions.
----------------------
The various statutory rules are enforced by the Federal Department of
---------------------- Justice (FDJ) and Federal Trade Commission (FTC). Prospective mergers
have to be notified to these agencies. Both agencies then investigate and if
---------------------- necessary, initiate proceedings in federal courts. The FTC also has various
appeal procedures involving the administrative law courts and independent
----------------------
FTC commissioners.
---------------------- Merger Guidelines, 1968
---------------------- In 1968, Department of Justice issued merger guidelines which made it
difficult for horizontal and vertical mergers in adjacent stages of production
---------------------- and distribution to take place. This had the effect of encouraging conglomerate
---------------------- mergers.
The Williams Act, 1968
----------------------
This Act regulates tender offers with the help of Security and Exchange
---------------------- Commission. It imposes obligations on both offeror and targets and prevents
secret accumulation of large securities by requiring acquisition of 50% or more
---------------------- of voting shares to be disclosed within 10 days. Williams Act defines that when
---------------------- a tender offer commences, the information to be disclosed includes sources of
funds and the purpose of the offer.
----------------------
Tender offer must be open for 20 business days and revised offer kept
---------------------- open for another 10 business days. Williams Act imposes obligations on targets
in response to tender offer. It requires the targets to inform its shareholders of
---------------------- its position on tender offer within 10 business days. Target management must
disclose any conflict of interest and also refrain from any materially misleading
----------------------
statements.
---------------------- Harr-Scott-Rodino Anti-Trust Improvement Act, 1976
---------------------- This Act of 1976 brought an improvement on Clayton Act, 1914 to lighten
anti-trust laws. Merger transactions in which parties have significant assets or
---------------------- sales are regulated by this Act. It requires such parties to notify the Department
of Trade (DOT) and Federal Trade Commission (FTC) of such a transaction,
----------------------
observe a prescribed waiting period before completing them. It consists of three
---------------------- major parts.
----------------------

Its objective is to strengthen the powers of the DOT and FTC by requiring Notes
approval before merger could take place. Before this act antitrust actions were
taken into consideration after completion of a transaction. The act stipulates ----------------------
a threshold test of applicability based on size of the parties and test based
transaction size. In April 1997, the US government unveiled new merger ----------------------
guidelines issued by FTC. ----------------------
14.14 PROCEDURES FOR MERGERS IN INDIA ----------------------
The various legislations in India that have an impact on M&A activities ----------------------
were discussed earlier, and the statutory provisions relating to amalgamation of ----------------------
companies are contained in Sections 230 to 239 of the Companies Act, 2013.
The procedural aspects are covered by rules 67 to 87 of the Companies (Court) ----------------------
Rules, 1959. In fact, merger or amalgamation under the scheme of arrangement
as explained under Sections 230-232 of the Act, is the simple method of ----------------------
obtaining complete merger or amalgamation between the companies. There is ----------------------
active involvement of the court and an amalgamation is complete only after the
tribunal sanctions it under Section 232 and takes effect when such order of the ----------------------
tribunal is filed with the Registrar of Companies. The Sections 230 to 232 of
the Act, along with Company (Court) Rules, 1959 serve as a complete code in ----------------------
themselves in respect of provisions and procedures relating to sponsoring of the ----------------------
scheme, the approval thereof by the creditors and the members, and the sanction
by the tribunal. The first step to be followed is to carry out the due diligence and ----------------------
agree to the terms of amalgamation and prepare the scheme of arrangements for
this purpose. ----------------------
The actual procedure to be adopted during the merger process is as under: ----------------------
1. Adequate provisions must be there in Memorandum of Association and ----------------------
Articles of Association of both acquirer and acquiree companies.
----------------------
2. Even the approvals from the Central Government and from Reserve Bank
are required to be obtained for filing the petition before the Tribunal for ----------------------
the approval of merger under Sections 230 and 232.
----------------------
3. Acquirer Company has to prepare a scheme of amalgamation under
Section 230 of Companies Act, 2013. The draft scheme has to be agreed ----------------------
to by Offeree Company and submitted to Tribunal.
----------------------
4. Both companies’ Board of Directors should approve the scheme and
authorise the directors to make an application to the Tribunal under ----------------------
Section 230 of Companies Act, 2013.
----------------------
5. The proposed merger should be informed to the regional stock exchange
where registered office of listed companies involved in the merger are ----------------------
located and to all other stock exchanges where shares of these companies
are listed. ----------------------
6. A press release should be made by both the companies of their decision. ----------------------
The acquiring company has to apply to financial institutions and banks
that have advanced funds to their projects for their approval. ----------------------

Notes 7. Both the companies have to make an application under Section 230 of
Companies Act, 2013 and Company (Court) Rules, 1959 for an order by
---------------------- judges’ summon convening the meeting of members of two companies to
approve the scheme (under Rule 67).The copy of the order is to be filed
---------------------- with the Registrar of the Companies.
---------------------- 8. Notice of meeting in prescribed in form No. 36 (as per Rule 73) are to
be printed and advertised in the newspaper 21days before the date of the
----------------------
meeting.
---------------------- 9. Separate meetings of equity shareholders, preference shareholders and
creditors for their approval are to be held. The reports are to be submitted
----------------------
to the High Court within seven days of holding these meeting.
---------------------- 10. The acquirer company has to submit an application to the prescribed
authority in case benefits of Section 72A of Income Tax Act, 1961 are to
----------------------
be availed.
---------------------- 11. The petition and affidavit have to be submitted to the tribunal for
---------------------- confirmation.
12. The copy of order is to be filed with the Registrar of Companies (ROC)
---------------------- within 30 days of passing of orders by the tribunal.
----------------------
14.15 PROCEDURES FOR MERGERS IN US
----------------------
Merger Approval Procedures
----------------------
Each state has a statute that authorises mergers and acquisitions of
---------------------- corporations. The rules may be different for domestic and foreign corporations.
Once the board of directors of each company reaches an agreement, they adopt
---------------------- a resolution approving the deal. This resolution should include the names of
---------------------- the companies involved in the deal and the name of the new company. The
resolution should include the financial terms of the deal and other relevant
---------------------- information such as the method that is to be used to convert securities of each
company into securities of the surviving corporation. If there are any changes
---------------------- in the articles of incorporation, these should be referenced in the resolutions.
---------------------- At this point the deal is taken to the shareholders for approval. Once
approved by the shareholders, the merger plan must be submitted to the relevant
---------------------- state official, usually the secretary of state. The document that contains this plan
---------------------- is called the articles for terser or consolidation. Once the state official determines
that the proper documentation has been received, it issues a certificate of merger
---------------------- or consolidation.
---------------------- Special Committees of the Board of Directors
The board of directors may choose to form a special committee of the
----------------------
board to evaluate the merger proposal. Directors who might personally benefit
---------------------- from the merger, such as when the buyout proposal contains provisions that
management directors may potentially profit from the deal should not be
---------------------- members of this committee. For more complex transaction, it is likely that

a committee will be appointed. This committee should seek legal counsel to Notes
guide it on legal issues such as the fairness of the transaction, the business
judgment rule, and numerous other legal issues. This committee and the board ----------------------
in general, need to make sure that it carefully considers all relevant aspects of
the transaction. A court may later scrutinise the decision-making process. ----------------------
Most mergers and acquisitions are negotiated in a friendly environment. ----------------------

The process usually begins when the management of one firm contacts the
----------------------
target company’s management, often through the investment bankers of each
firm. ----------------------
The management of both firms keeps the respective Boards of Directors
----------------------
up-to-date on the progress of the negotiations because mergers usually require
the boards’ approval. Sometimes this process works smoothly and leads to ----------------------
a quick merger agreement. A good example of this was the 1995 $19 billion
acquisition of Capital Cities/ABC Inc. by Walt Disney Co. In spite of the size of ----------------------
this deal, there was a quick meeting of the minds by management of these two
----------------------
firms and a friendly deal was completed relatively quickly.
Merger Negotiations ----------------------
Except for hostile transactions, mergers usually are the product of a ----------------------
negotiation process between the managements of the merging companies. The
bidding firm typically initiates the negotiations when it contacts the target’s ----------------------
management to inquire whether the company is for sale and to express its ----------------------
interest in buying the target. This interest may be the product of an extensive
search process to find the right acquisition candidates. ----------------------
----------------------
Fill in the blanks.
1. The blending, fusion of two or more companies into one is like a ----------------------
chemical process and for this process the Tribunal acts as a _______. ----------------------
2. The Clayton Act created the ____________________________ for
----------------------
the purpose of regulating the behaviour of business firms.
3. Adequate provisions must be there in Memorandum of Association ----------------------
and Articles of Association of both ______and ______ companies.
----------------------
4. Except for hostile transactions, mergers usually are the product of a
_____________ process between the managements of the merging ----------------------
companies. ----------------------
5. The Anti-monopoly Bureau within the Chinese Ministry of Commerce
is the authority responsible for reviewing and clearing merger filings ----------------------
which is also called ________. ----------------------
----------------------
----------------------

Notes
Activity 1
----------------------
---------------------- Do a research on the case of cross-border acquisition of Tata Honeywell

India by Honeywell Inc. USA.
----------------------
---------------------- 14.16 BRIEF OVERVIEW OF BRIC COUNTRIES

---------------------- Cross-border mergers and acquisitions (M&As) have long been an
---------------------- important strategy to expand abroad. Due to technological developments and
globalisation, M&As activity sharply increased over the last two decades. They
---------------------- increased in the 1990s reaching a peak in 2000 with the booming stock markets
and the larger degree of financial liberalisation worldwide, declined sharply
---------------------- in 2001 and 2002 and rebounded again with new developments in the world
---------------------- economy after 2003.
Traditionally, developed countries, and in particular the developed
---------------------- countries of the European Union (EU15) and the United States, have been the
---------------------- largest acquirer and target countries of M&As. Over the period of 2003−2005,
developed countries accounted for 85% of the USD 465 billion cross-borders
---------------------- M&As, 47% and 23% of which respectively pertain EU15 and US firms either
as acquirer or as target countries (UNCTAD (2006). Despite this increased
---------------------- importance of cross-border M&As, which constitute by far the largest share of
---------------------- foreign direct investment, the determinants underlying such activities remain
unclear.
---------------------- The institutional environment is of a particular interest for cross-border
---------------------- M&As since they are affected by various regulations at the country level (or
regional level) such as competition policy, corporate and capital taxes, various
---------------------- restrictions to capital movements across borders, protection of certain industries.
---------------------- Since the enactment of Law No. 8,884/94, Brazil has been experiencing
the consolidation of its merger control system. The big expectation of a deep
---------------------- renovation of the Brazilian Antitrust Law − which will bring a pre-merger control
system, among other features, to Brazil − did not curb the consolidation and
----------------------
technical evolution of the merger review. This is evidenced in recent decisions,
---------------------- such as the one related to the merger between Sadia and Perdigío (analysed in
more detail later).
----------------------
As one of the ‘BRIC’ economies, it goes without saying that the economic
---------------------- growth in Brazil brings an additional component to the context of its merger
control; the complexity of the transactions submitted to the Brazilian System of
---------------------- Competition Defense (SBDC) is increasing, as is, consequently, the expertise
of the authorities in charge of the competition defense in the country. This can
----------------------
be observed within the Administrative Council for Economic Defense (CADE),
---------------------- where an Economic Studies Department was created to handle difficult and
complex economic and econometric matters on CADE’s behalf. Therefore, the
---------------------- antitrust private practice is evolving through a technical path requiring a deeper

knowledge of the several theories and tools available worldwide, whether Notes
economic or legal, in order to handle the difficult and complex transactions at
hand. ----------------------
The Brazilian Merger review System ----------------------
Under Brazilian Law, the general concept of ‘concentration’ is very broad.
----------------------
Article 54 of Law No. 8,884/94, which governs antitrust and competition cases,
refers to ‘any form of market concentration’, including in its scope: cooperatives ----------------------
agreements, contracts, informal arrangements and other arrangements.
----------------------
Within the Brazilian system there is a twofold criterion that, if met
(whether in a horizontal or vertical merger), triggers a mandatory submission, ----------------------
requiring the parties to file the transaction before the SBDC. The criteria are
revenue and market share; more specifically, where one of the parties involved ----------------------
registered gross revenue of more than 400 million reais in the previous year or
----------------------
the resulting market share derived from the transaction is higher than 20 per
cent in some of the relevant markets or both. ----------------------
Brazilian law requires that the relevant authorities approach market ----------------------
concentration cases on a case-by-case basis, assessing the specific
circumstances of each transaction before concluding if it is anti-competitive ----------------------
or not. This approach, inspired by the rule of reason, considers that not all
market concentration is illegal or unacceptable and not every collaboration ----------------------
among competitors or market players is a cartel. It is essential in ensuring that ----------------------
only conducts that are actual or potential restraints on trade are deemed to be
unlawful. ----------------------
That is not to say, however, that CADE takes these cases lightly. In fact, ----------------------
in recent years, CADE has taken a more rigid view on mergers. Although (and
possibly because) Brazilian Law does not allow per se offences, CADE has ----------------------
been inclined to view arrangements among competitors as quasi-per se offences,
imposing their enforcement actions on any and all transactions in violation of ----------------------
the terms of Law No. 8,884/94. Besides laying out offending behaviour and ----------------------
sanctions to be imposed on such conduct, Law No. 8,884/94 governs the
standards for review of transactions that yield a market concentration and the ----------------------
procedures that should be carried out when investigating these cases. Article 54,
paragraph 4 of this Law states that all agreements that meet the aforementioned ----------------------
twofold criteria of revenue or market share or both are required to notify the ----------------------
SBDC of the transaction. The notification can be made prior to the signing or
execution of the relevant contractual arrangements; prior to the conclusion of ----------------------
the transaction; or within 15 business days of the execution of the contract.
----------------------
Once such notification is submitted, paragraph 6 (of the same article)
requires that SEAE issues a non-binding technical opinion on the transaction, and ----------------------
based on the principle of reasonability, within 30 days. Vertical and horizontal
mergers are reviewed based on objective criteria set out in the Brazilian ----------------------
Horizontal Merger Guidelines (which were inspired by the US FTC Horizontal ----------------------
Mergers Guidelines of 1992). The idea behind these Guidelines, which were
released by SEAE and the SDE in 2001, is to provide greater clarity to market ----------------------

Notes players with regard to applicable rules that they are bound by. The Guidelines’
idea of divulging the main stages of merger review that SEAE and the SDE
---------------------- should follow - namely the concepts, procedures and principles - allows for
greater transparency and clarity.
----------------------
By disclosing the objective criteria and the systematic analysis that both
---------------------- SEAE and the SDE are required to follow at each stage, the discretion of their
acts is consequently limited, and thus the fundamental applicability of the rule
----------------------
of reason and the transparency of the Public Administration in antitrust cases is
---------------------- established.
The analysis basically follows five main stages and is influenced by the
----------------------
Harvard School’s ‘structure-conduct-performance’ paradigm determination of
---------------------- the relevant market.
Determination of share and market control (assessment on barriers to entry
----------------------
and rivalry); probability of exercise of market power; review of efficiencies
---------------------- yielding from the transaction; assessment of the resulting costs and benefits to
society’s welfare.
----------------------
The first stage requires the relevant market to be established. In determining
---------------------- the relevant market, SEAE uses the ‘hypothetical monopolist test’, which
identifies market share by analysing if a (hypothetical) monopolist can impose
---------------------- a small but significant increase in price in the product market and still profit
---------------------- from it. The answer to this must be ‘yes’ for the market to have been correctly
identified, and the investigation can go forward in assessing if antitrust laws are
---------------------- being violated.
---------------------- The next stage is to analyse the impact that the transaction has on consumer
welfare and on competition. When a transaction does not generate a market
---------------------- concentration of more than 20 per cent (or more than 10 per cent in a market
where the combined market share of the four principle players is equal to or
---------------------- higher than 75 per cent), it tends to be favourable considered by the authorities.
---------------------- In these cases, the procedure is stayed and the last three stages are not analysed.
Alternatively, if the market concentration surpasses the threshold, the analysis
---------------------- moves onto the third stage.
---------------------- At this point, it is important to note that a transaction that merely results
in high market share and power is not a per se violation of antitrust laws. In
---------------------- theory, one has to actually and unilaterally abuse this power in order to offend
the antitrust and competition principles. However, due to the preventative
---------------------- nature of antitrust and competition authorities, the mere potential of abuse often
---------------------- prompts the authorities to either determine a full or partial divestiture order or
impose behavioral remedies or both. This third stage of the analysis considers
---------------------- the presence of barriers to entry, cost structures, vertical integration and product
differentiation. Once these conditions are favourable, resulting in a market that
---------------------- is inelastic to price changes, companies can exercise price variation (through
---------------------- restriction of output) at their leisure.
----------------------

The authorities will then measure the net effect of the three efficiencies Notes
(innovation, production/productivity efficiencies and allocated efficiencies)
against the costs to competition. In doing this, they consider factors such as the ----------------------
index of economies of scale and scope, fixed costs, average production levels
and costs, work productivity, introduction of new technology, the appropriation ----------------------
of positive externalities and the elimination (or internalisation) of negative ----------------------
externalities, to name but a few of the benefits of an increase in market share
and power. If the net effect is equal or superior to the costs to competition, ----------------------
the authorities are required to recommend clearance of the transaction. In
practice, clearance at this stage is very rare. In 2004, the merger between Nestlé ----------------------
Brazil Ltd. and Chocolates Garoto SA was rejected by CADE, setting a narrow ----------------------
precedent requiring efficiencies to be of such nature that the result thereof is a
reduction in the prices of the relevant products. ----------------------
Finally, in order to clear an act of concentration that results in significant ----------------------
market share with probability of exercise of market power, and based on yielding
efficiencies, it is necessary to demonstrate that the impact of the transaction on ----------------------
society’s welfare would be positive.
----------------------
Once this analysis has been done, SEAE and the SDE are required to
emit their non-binding Technical Opinion, containing their recommendations ----------------------
that range from the unconditional clearance of the transaction to the conditional
----------------------
clearance of the transaction, to the full divesture thereof.
It should be noted that the role of antitrust and competition laws, as ----------------------
well as of the relevant authorities, is to ensure the free functioning of a market
----------------------
structure, as well as the free initiative of its players, with the ultimate aim of
protecting economic efficiencies and, consequently, consumer welfare. As such ----------------------
transactions are approved only when there is a lack of control of a significant
share of the market. Despite significant market share, it is improbable that the ----------------------
player will exercise control and despite the exercise of control, the ultimate
----------------------
effect of the transaction is positive to the market and to consumer welfare.
Relevant merger authorities in Russia ----------------------
The Russian main merger control authority is the Federal Antimonopoly ----------------------
Service (FAS). The Central Bank of the Russian Federation (CBR) also performs
some merger control functions in respect of transactions involving banks and ----------------------
financial institutions. The FAS pursues its activities on the basis of the head ----------------------
office (consisting in its turn of departments responsible for certain fields of
economy) and local branches. ----------------------
Merger legislation ----------------------
The Russian antimonopoly legislation is based primarily on Federal
----------------------
Law No. 135-FZ “On the Competition Protection” (the “Competition Law”),
adopted on 26 July, 2006, effective as of 26 October, 2006. The Competition ----------------------
Law regulates competition in both the commodities market and the financial
services market. The current regulatory framework also includes other laws, ----------------------
international treaties entered into by the russian Federation and regulations of
----------------------

Notes the Russian governmental authorities. Resolution no. 30 “On application of
the antimonopoly legislation” issued by the Supreme Arbitrazh Court of the
---------------------- Russian Federation aims at elaboration of the unified approach to interpretation
of certain provisions of the Competition Law. This resolution shall serve as a
---------------------- guideline for lower courts when considering similar issues.
---------------------- The Competition Law does not provide a definition of control.
---------------------- However the Law sets a list of situations which may trigger merger
control, such as:
----------------------
1. Reorganisation of companies in the form of consolidation or accession;
---------------------- 2. Incorporation of a company (including incorporation as a result of
---------------------- reorganisation) if the charter capital thereof shall be paid by contribution
of more than either (i) 25%, 50%, 75% of voting shares in another
---------------------- company, (ii) 1/3, 1/2, 2/3 of participation interests in another company,
or (iii) 20% of another company’s fixed assets and intangible assets;
----------------------
3. Acquisition by a person (group of persons) of more than either (i)
---------------------- 25%, 50% or 75% of voting shares in another company, (ii) 1/3, 1/2,
2/3 of participation interests in another company, or (iii) 20% of another
---------------------- company’s fixed assets and intangible assets as a result of one or several
---------------------- transactions; and
4. Acquisition by a person (group of persons) of direct or indirect rights
---------------------- to determine business activities of another company (e.g., through
---------------------- shareholders’ agreements) or rights enabling to exercise functions of
another company’s executive body as a result of one or several transactions.
----------------------
Jurisdictional thresholds for application of merger control The pre-merger
---------------------- application states that
1. The aggregate book value of assets of the companies (their group) involved
----------------------
in reorganisation exceeds RUB 3,000,000,000 (EUR 81,583,148.18 or
---------------------- USD 126,886,270.36) according to the most recent balance sheet and/or
the previous year total turnover of the companies (their group) involved
---------------------- in reorganisation exceeds RUB 6,000,000,000 (EUR 163,166,296.36
or USD 253,772,540.74) and/or any of the companies participating in
----------------------
reorganisation is recorded in the Russian register of undertakings with a
---------------------- market share exceeding 35% or holding a dominant position in the certain
market stipulated by other Federal Laws (hereinafter the “Register”);
----------------------
2. The aggregate book value of assets of the companies (their group)
---------------------- involved in incorporation of another company and of the legal entity,
the shares and assets of which are contributed to the charter capital of
---------------------- another company exceeds RUB 3,000,000,000 (EUR 81,583,148.18 or
---------------------- USD 126,886,270.36) according to the most recent balance sheet and/
or their previous year total turnover exceeds RUB 6,000,000,000 (EUR
---------------------- 163,166,296.36 or USD 253,772,540.74) and/or any of them is recorded
in the register; and
----------------------

3. As to the situations envisaged in points 3 and 4 of paragraph 1 of Notes
question 2.1, the aggregate book value of assets of all the companies
within the acquirer’s group and the target company’s group exceeds ----------------------
RUB 3,000,000,000 (EUR 81,583,148.18 or USD 126,886,270.36)
according to the most recent balance sheet, provided the aggregate book ----------------------
value of assets of the target company is not less than RUB 150,000,000 ----------------------
(EUR 4,079,157.40 or USD 6,344,313.51) or their previous year total
turnover exceeds RUB 6,000,000,000 (EUR 163,166,296.36 or USD ----------------------
253,772,540.74) and/or any of them is recorded in the register.
----------------------
Post-completion notification shall be submitted:
----------------------
1. In situations envisaged in point 1 of question 2.1, if according to the
most recent balance sheet the aggregate book value of the assets of the ----------------------
companies (their group) involved in the reorganisation or in the form of
consolidation or accession or their previous year’s total turnover exceeds ----------------------
RUB 200,000,000 (EUR 5,438,876.54 or USD 8,459,084.70); and
----------------------
2. In situations envisaged in points 3 and 4 of question 2.1, if according to
the most recent balance sheet the aggregate book value of the assets of all ----------------------
the companies within the acquirer’s group and the target company’s group
----------------------
or their previous year’s total turnover exceeds RUB 200,000,000 (EUR
5,438,876.54 or USD 8,459,084.70) provided the aggregate book value of ----------------------
assets of the target company (group of companies) is not less than RUB
30,000,000 (EUR 815,831.48 or USD 1,268,862.70) and/or any of them ----------------------
is recorded in the register. It shall be noted that the implementation of the
----------------------
register threshold is not absolutely clear.
Merger technically requires notification and clearance. What are the risks ----------------------
of not filing? ----------------------
The risks include administrative and civil liability:
----------------------
Administrative liability: Failure to submit either pre-merger filing or post-
completion notification may be penalised by fines on legal entities, its officials ----------------------
and individuals.
----------------------
The fines to be imposed on legal entities may amount from RUB 300,000
(EUR 8,158.31 or USD 12,688.63) to RUB 500,000 (EUR 13,597.19 or USD ----------------------
21,147.71) for failure to submit premerger filing; and from RUB 150,000
(EUR 4,079.16 or USD 6,344.31) to RUB 250,000 (EUR 6,798.59 or USD ----------------------
10,573.85) for failure to submit post-completion notification. The fines to be ----------------------
imposed on officials of legal entities amount from RUB 15,000 (EUR 407.91
or USD 634.43) to RUB 20,000 (EUR 543.89 or USD 845.91) for failure to ----------------------
submit pre-merger filing and from RUB 5,000 (EUR 135.97 or USD 211.48) to
RUB 7,500 (EUR 203.96 or USD 317.21) for failure to submit post-completion ----------------------
notification. ----------------------
The fines to be imposed on individuals amount from RUB 1,500 (EUR
40.79 or USD 63.44) to RUB 2,500 (EUR 67.98 or USD 105.74) for failure to ----------------------
submit pre-merger filing; and from RUB 800 (EUR 21.75 or USD 33.84) to ----------------------

Notes RUB 1,200 (EUR 32.63 or USD 50.75) for failure to submit post-completion
notification.
----------------------
Civil liability: Either a company incorporated as a result of consolidation or by
---------------------- contribution of another company’s assets or shares, or company reorganised by
the means of another company’s accession may be liquidated or reorganised in
---------------------- the form of split-up or split-off and transactions may be invalidated, provided that
a compulsory prior consent has not been granted or post-completion notification
----------------------
has not been submitted. But such liquidation, reorganisation and invalidation
---------------------- are possible only in judicial order upon a lawsuit of the antimonopoly authority.
China
----------------------
The following two authorities deal with mergers:
----------------------
a. The Anti-Monopoly Bureau within the Chinese Ministry of Commerce
---------------------- (‘Mofcom’) is the authority responsible for reviewing and clearing merger
filings; and
----------------------
b. The Anti-Monopoly Commission (a division of the State Council) is the
---------------------- authority responsible for formulating and issuing merger guidelines (it
is also the coordinating government agency between Mofcom and the
---------------------- two other antitrust enforcement agencies, the National Development and
---------------------- Reform Commission (NDRC) and the State Administration for Industry
and Commerce (SAIC)).
---------------------- In China, pre-merger notification is required when the entities participating
---------------------- in the merger possess a certain amount of turnover. Specifically, pre-merger
notification is mandatory when, during the previous fiscal year:
----------------------
a. The total global turnover of all business operators participating in the
---------------------- concentration exceeded 10 billion renminbi, and at least two of these
business operators each had a turnover of more than 400 million renminbi
---------------------- within China; or
---------------------- b. The total turnover within China of all the business operators exceeded 2
billion renminbi, and at least two of these operators each had a turnover
---------------------- of more than 400 million renminbi within China.
---------------------- The Anti-Monopoly Law (AML) is the primary antitrust legislation which
governs merger control. Since the AML was enacted in August 2008, a number
---------------------- of regulations and guidelines relating to mergers have been promulgated. The
---------------------- regulations and guidelines listed below came into effect in 2009:
a. Market Definition Guidelines issued by the Anti-Monopoly Commission
---------------------- of the State Council (effective on 1 January 2009);
---------------------- b. Rules for Calculating Turnover concerning Concentration Notification of
Financial Operators (effective on 15 July 2009);
----------------------
c. Working Guidance for Anti-Monopoly review on Concentration of
---------------------- Business Operators (effective on 5 January 2009);
----------------------

d. Guidance on the Documentation of the Notification of Concentration of Notes
Business Operators (5 January 2009);
----------------------
e. Measures for the Undertaking Concentration Declaration (released on 21
November 2009, effective on 1 January 2010); and ----------------------
f. Measures for Examination of Concentration of Business of Operators
----------------------
(released on 24 November 2009, effective on 1 January 2010).
The Merger Control Regime ----------------------
i. Waiting periods and time frames ----------------------
There are broadly two review phases in which a merger filing would have ----------------------
to go through Mofcom. First, there is a pre-acceptance phase. Second,
there is a formal review phase. ----------------------
Pre-acceptance phase ----------------------
When entities submit a merger filing or notification to Mofcom, a ‘pre-
----------------------
acceptance’ case handler within Mofcom would determine if Mofcom is
able to formally accept the filing. This case handler would review the ----------------------
filing for completeness and may also seek clarifications or ask for more
details in respect of the filing, if certain aspects of the filing are unclear ----------------------
or need to be supplemented. From our experience, this pre-acceptance
----------------------
period generally takes between two and six weeks. In other cases (for
instance in the Coke/Huiyuan and Mitsubishi/Lucite cases) this phase ----------------------
may even ‘stretch’ to two or three months. We understand that during this
pre-acceptance phase, the entities listed above were repeatedly asked by ----------------------
Mofcom to submit supplementary information in respect of their filings.
----------------------
Formal review phase
----------------------
Pursuant to the AML, there are two phases within the formal review
phase: Phase 1, the preliminary review period and Phase 2, the further ----------------------
review period. Phase 1 is known as the preliminary review period and
lasts 30 calendar days. During this phase, Mofcom will attempt to review ----------------------
the merger filing and make a decision as to whether the filing should be ----------------------
cleared. If merging entities do not hear from Mofcom upon the expiry
of these 30 days, then the merger or acquisition is by default cleared or ----------------------
approved.
----------------------
Phase 2 is known as the further review period and lasts 90 calendar days. If
Mofcom has made a decision that a merger filing warrants further review, ----------------------
Mofcom will inform the parties (in writing) before or by the expiry of
Phase 1 that the review period is extended into Phase 2. ----------------------
Furthermore, Mofcom may extend the Phase 2 period by another 60 ----------------------

calendar days at the most, provided that:
----------------------
a. The applicant agrees to extend the time limit for the review;
----------------------
b. The documents submitted by the applicant are inaccurate and
require further verification; or ----------------------

Notes c. The circumstances surrounding the filing have significantly changed
after notification by the applicant.
----------------------
It is important to note that if Mofcom fails to make a decision upon the
---------------------- expiry of each set period of time as stated above, the parties may execute
the transaction.
----------------------
ii. Parties’ ability to accelerate the review procedure
---------------------- Most mergers are time-sensitive. Most merging entities generally wish
for the merger review period and procedures to be as swift as possible.
----------------------
In order to assist Mofcom in clearing merger filings smoothly and
---------------------- efficiently, we would recommend the following approach: first, articulate
why your merger is time- sensitive (e.g., is one entity a failing firm?);
---------------------- second, ensure that your merger filing report is complete (according
to the Mofcom requirements) and accurate; and third, if Mofcom asks
----------------------
any supplementary questions or asks for clarifications, respond to these
---------------------- further questions swiftly.
---------------------- iii. Third-party access to the file and rights to challenge mergers
Third parties do not possess a statutory right to access merger control files,
---------------------- nor do they possess a statutory right to challenge mergers in the process of
---------------------- review. However, in its review process, Mofcom may seek opinions from
third parties (including government agencies, industry associations and
---------------------- other entities) in respect of the proposed acquisition and third parties may
voice their opinions through these consultations.
----------------------
In addition, pursuant to Articles 7 and 8 of Mofcom’s Draft Measures
---------------------- for Inspecting Concentration of Business Operators, third parties may
be involved in the merger control review process if Mofcom decides to
---------------------- conduct hearings. Participants in these hearings may include: entities
---------------------- involved in the filing; competitors; representatives of upstream and
downstream entities (and other related entities); experts; representatives of
---------------------- industry associations; representatives of relevant government authorities;
and consumers. Third parties may therefore express their opinions on the
---------------------- proposed merger or acquisition through these hearings.
---------------------- iv. Resolution of authorities’ competition concerns, appeals and judicial
review
----------------------
Pursuant to Article 29 of the AML, Mofcom has the right to impose
---------------------- conditions in respect of mergers, in order to alleviate the negative impact
of a merger on competition. This gives Mofcom wide discretion to impose
----------------------
a variety of conditions, including structural and behavioural conditions
---------------------- or both. Further, pursuant to Article 11 of Mofcom’s Draft Measures
for Inspecting Concentration of Business Operators, either the entities
---------------------- involved in the merger or Mofcom may propose conditions.
---------------------- Pursuant to Article 53 of the AML, entities that are not satisfied with a
Mofcom decision in respect of merger control, may seek a review of the
---------------------- decision (i.e., appeal).

We understand that this review process and decision will be undertaken Notes
by the Treaty and Law Department of Mofcom.
----------------------
Entities who are dissatisfied with the decision of the Treaty and Law
Department of Mofcom may then seek a further review of the Treaty and Law ----------------------
Department’s decision in the courts (i.e., judicial review).
----------------------
Entities may only seek a review of Mofcom’s decisions based on an error
of law (including because administrative procedures are in violation of the law, ----------------------
administrative discretionary power has been abused or the result of the merger
control review is unjust). ----------------------
Effect of regulatory review ----------------------
Mofcom is the sole authority formally in charge of reviewing mergers. ----------------------
Therefore, it is not obligated by law to consult with or seek the opinions of other
authorities or regulators. ----------------------
However, we are aware that Mofcom does consult other government ----------------------
agencies on certain mergers. For instance, Mofcom may consult with the
State Administration of Radio, Film and Television (SARFT) and obtain the ----------------------
SARFT’s opinions in respect of a merger within the broadcasting industry. Such
consultation procedures will take time and this is a factor that entities have ----------------------
to consider when submitting a merger filing. Mofcom may consider that such ----------------------
consultations are important and a merger filing may therefore last into Phase 2
if Mofcom is awaiting responses from other government agencies. ----------------------
i. Pending legislation ----------------------
Currently, the measures listed are in draft form:
----------------------
a. Tentative Measures for Investigation and Handling of Concentration
of Business Operators That Are Not Legally Notified (Draft); ----------------------
Cf Article 54(2) of the now-repealed Acquisition of Domestic
----------------------
Enterprises by Foreign Investors Provisions.
b. Tentative Measures for Investigation and Handling of Concentration ----------------------
of Business Operators Not Satisfying Notification Thresholds but ----------------------
Involving Alleged Monopoly Acts (Draft); and
c. Tentative Measures for Collection of Evidences on Concentration ----------------------
of Business Operators Not Satisfying Notification Thresholds but ----------------------
Involving Alleged Monopoly Acts (Draft).
ii. Unresolved issues ----------------------
In our view, it would be useful for the merger control regime if Mofcom ----------------------
could clarify matters pertaining to the following issues:
----------------------
a. The factors that Mofcom would consider when determining whether
a joint venture is a notifiable transaction; ----------------------
b. The factors that Mofcom would consider when determining whether ----------------------
acquiring minority shares in an entity is a notifiable transaction; and
----------------------

Notes c. Whether the resale of goods to China should be taken into
consideration when considering an entity’s turnover in China.
----------------------
In addition, it would be helpful if Mofcom could issue public statements
---------------------- (or give a summary of issues considered) in relation to some of the mergers that
have been cleared.
----------------------
This would be helpful in terms of building jurisprudence and increasing
---------------------- transparency in relation to the merger clearance process.
---------------------- Summary
----------------------
●● oreign Direct Investment (FDI) policies play a major role in the economic
F
---------------------- growth of developing countries around the world.
●● ttracting FDI inflows with conductive policies has therefore become a
A
---------------------- key battleground in the emerging markets.
---------------------- ●● eveloped countries also seek to bring in more FDI and use various
D
policies and incentives to attract overseas investors, particularly for
---------------------- capital-intensive industries and advanced technology.
---------------------- ●● he primary aim of these policies is to create a friendly business
T
environment where foreign investors feel comfortable with the legal and
---------------------- financial framework of the country, and have the potential to reap profits
---------------------- from economically viable businesses.
●● he prospect of new growth opportunities and outsized profits encourages
T
---------------------- large capital inflows across a range of industry and opportunity types.
---------------------- ●● overnments are increasingly setting up promotional agencies to foster
G
foreign direct investment.
----------------------
●● hese agencies promote FDI-friendly policies; identify prospective
T
---------------------- sectors and investors, and structure specific deals and incentives for major
foreign investors such as Multinational Corporations (MNCs).
----------------------
●● lobal trade associations play a major role in some of these investment
G
---------------------- activities. These associations are tasked with creating a positive
environment for foreign direct investors and ensuring that both investors
---------------------- and recipient countries enjoy a favorable environment.
---------------------- ●● Fund flows into BRIC countries rose sharply during 2006.
●● I nterestingly, China has captured about half of all the net increases in
----------------------
investment from global equity managers. This BRIC mania has obscured
---------------------- three important basics about these markets.
●● hina and India are the most promising BRIC options. Both markets have
C
---------------------- been red hot and China is riding a super cycle of investment which may
---------------------- very well extend.
----------------------
----------------------

Keywords Notes
----------------------
●● ostile takeover: When the management of the target firm is opposed to
H
the takeover. ----------------------
●● cquisition premium: The premium is the value offered to the target
A
firm’s shareholders on top of the current market value of the target firm’s ----------------------
shares. ----------------------
●● Mofcom: Ministry of Commerce People’s Republic of China
----------------------
●● FAS: Federal Antimonopoly Service
----------------------
1. What types of routes are authorised for FDI in an Indian company? ----------------------
2. What are the other modes of issues of shares?
----------------------
3. Can a foreigner set up a partnership/proprietorship concern in India?
----------------------
4. Can a foreign investor invest in shares issued by an unlisted company in
India? ----------------------
5. What kinds of business formats are permissible to a foreign company in ----------------------
India?
6. Explain the procedure and legal framework of US merger laws. ----------------------
7. Write a note on comparison between Indian merger laws with foreign ----------------------
countries’ merger laws.
----------------------
Answers to Check your Progress ----------------------

i. – c.
----------------------
ii. – d.
----------------------
iii. – e.
iv. –b ----------------------
v. – a. ----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

----------------------
1. The term transfer defined under FEMA does not include:
----------------------
iv. Auction
---------------------- 2. Any person resident outside India may sell shares/fully and mandatorily
---------------------- convertible debenture acquired in accordance with the FEMA Regulations
on a recognised Stock Exchange in India through:
---------------------- iv. Registered broker
---------------------- 3. Any person resident outside India may transfer share/fully and mandatorily
convertible debentures to a person resident in India by way of:
----------------------
i. Gift
----------------------
4. The sale consideration in respect of the shares purchased by a person
---------------------- resident outside India shall be remitted to India through:
iii. Normal banking channels
----------------------
----------------------
----------------------
1. Joint ventures abroad promote economic co-operation between:
---------------------- i. India
---------------------- ii. The host countries
---------------------- 2. Direct investment outside India means investments, either under ____
or_____.
---------------------- iii. Automatic route
---------------------- iv. Approval route
---------------------- 3. Which of the following are permissible sources for funding overseas
direct investment?
----------------------
i. Capitalisation of exports
---------------------- iv. Drawal of foreign exchange form an AD bank in India
---------------------- 4. Under the Automatic Route, who does not require any prior approval
from the Reserve Bank for setting up a ______.
----------------------
ii. An Indian party
----------------------
iv. JV/WOS abroad.
---------------------- 5. Which of the following are the limits and requirements for direct
investment to be made under the Automatic Route?
----------------------
i. The Indian party is not in the Reserve Bank’s exporters caution list
----------------------
ii. The Indian Party can invest up to 400 per cent of its net worth
----------------------

----------------------
1. True
----------------------
2. True
3. False ----------------------
4. False ----------------------
5. True ----------------------
----------------------
Fill in the blanks.
----------------------
1. The blending, fusion of two or more companies into one is like a chemical
process and for this process the Tribunal acts as a catalyst. ----------------------
2. The Clayton Act created the Federal Trade Commission for the purpose ----------------------
of regulating the behaviour of business firms.
3. Adequate provisions must be there in Memorandum of Association and ----------------------
Articles of Association of both acquirer and acquiree companies. ----------------------
4. Except for hostile transactions, mergers usually are the product of a
----------------------
negotiation process between the managements of the merging companies.
5. The Anti-monopoly Bureau within the Chinese Ministry of Commerce is ----------------------
the authority responsible for reviewing and clearing merger filings which
----------------------
is also called Mofcom.
----------------------
1. Mattoo, P.K. 2000. Corporate Restructuring – An Indian Perspective. ----------------------
New Delhi: Macmillan Publishers India.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Mergers and Acquisition Agreements, Schemes and
Documentation UNIT
Structure: 15
15.1 Introduction
15.2 Mergers and Acquisition Applicable Provisions
15.3 Major and Minor Activities in case of Merger and Acquisition
15.4 Specimen Scheme of Arrangement
15.5 Documentation for Merger and Acquisition, Arrangement
Summary
Key Words
Suggested Reading
Mergers and Acquisition Agreements, Schemes and Documentation 253

Notes
Objectives
----------------------
----------------------
• Describe the provision of different Acts applicable to merger and
---------------------- acquisition companies
---------------------- • Classify major and minor activities in case of merger and acquisition
• Examine documentation involved in case of merger and acquisition
----------------------
---------------------- 15.1 INTRODUCTION

----------------------
The importance of legal documentation in the corporate world cannot be
---------------------- overstated. One wrong provision and drafting may defeat the very purpose of
the document. Mergers and acquisition in a company involve a number of legal
---------------------- documents. In this unit, an outline of the procedural aspects of mergers and
acquisitions has been given along with specimen of various documents required
----------------------
for the purpose.
---------------------- The statutory provisions relating to amalgamation of companies are
---------------------- contained in Sections 230 to 239 of the Companies Act, 2013. The procedural
aspects are covered by Rules 67 to 87 of the Companies (Court) Rules, 1959.
---------------------- In fact, merger or amalgamation under the scheme of arrangement as explained
under Sections 230−232 of the Act, is the simple method of obtaining complete
---------------------- merger or amalgamation between the companies. There is active involvement
---------------------- of the Tribunal and an amalgamation is complete only after the Tribunal’s
sanction under Section 232 and takes affect when such order of the Tribunal is
---------------------- filed with the Registrar of Companies. The Sections 230 to 232 of the Act, along
with Company (Court) Rules, 1959 serve as a complete code in themselves in
---------------------- respect of provisions and procedures relating to sponsoring of the scheme, the
---------------------- approval thereof by the creditors and the members, and the sanction by the
Tribunal. The first step to be followed is to carry out the due diligence and agree
---------------------- to the terms of amalgamation and prepare the scheme of arrangements for this
purpose.
----------------------
---------------------- 15.2 MERGERS AND ACQUISITION APPLICABLE PROVISIONS

---------------------- The applicable provisions under various Acts in case of merger and
acquisition are as follows:
----------------------
Under the Companies Act
---------------------- ●● Section 230 - Presenting an application/petition to the tribunal.
---------------------- ●● ection 230 - Providing an explanatory statement about the various
S
aspects of mergers.
----------------------
●● The tribunal Rules - Mainly to understand the formalities and formats.
----------------------

Under the listing agreement Notes
●● nder Clause 24(f) of the listing agreement where the scheme of merger
U
----------------------
or amalgamation involves a listed company, it is necessary to send a copy
of the scheme to the stock exchange where the shares of the said company ----------------------
are listed to obtain No Objection Certificate (NOC). Generally, stock
exchanges raise several queries and on being satisfied that the scheme ----------------------
does not violate any laws concerning securities accord their approval.
----------------------
Under the Income Tax Act, 1961
----------------------
●● cheme of arrangement is not a transfer at all for the purpose of the Income
S
Tax Act, 1961. However, when a scheme of merger or demerger involves ----------------------
the merger of a loss-making company or a hiving off of a loss-making
division, it is necessary to check the relevant provisions of the Income ----------------------
Tax Act and rules for the purpose of ensuring, inter alia the availability of
----------------------
the benefit of carrying forward the accumulated losses and setting of such
losses against the profits of the transferor company. ----------------------
Under the Indian Stamp Act
----------------------
●● I t is necessary to refer to the Stamp Act to check the stamp duty payable
on transfer of undertaking through a merger, etc. ----------------------
----------------------
----------------------
Fill in the blanks.
----------------------
1. Scheme of arrangement is not a transfer at all for the purpose of the
_____________. ----------------------
2. It is necessary to refer to the _________ to check the stamp duty
----------------------
payable on transfer of undertaking through a merger, etc.
----------------------
Activity 1 ----------------------
----------------------
1. Write down the sections of the company law which are involved in the
process of Merger and Acquisition. ----------------------
2. Visit a company where the merger procedure is going on and prepare
----------------------
a summary.
----------------------
----------------------
----------------------
----------------------
----------------------
----------------------

Notes 15.3 MAJOR AND MINOR ACTIVITIES IN CASE OF
MERGER AND ACQUISITION
----------------------
The major activities in case of merger will be categorised in the following
---------------------- manner:
---------------------- S. No. Description of activities
1 Board meeting to decide about the need for merger and for fixing the
----------------------
transfer date.
---------------------- 2 Appointment of experts for valuation of shares and fixation of share
exchange ratio, appointment of experts/consultants for drafting the
---------------------- scheme.
3 Board meeting to approve the valuation and share exchange ration
----------------------
fixed by the experts and the scheme of merger.
---------------------- 4 Filing a copy of the scheme with stock exchanges and obtaining their
NOC.
---------------------- 5 Filing an application to Tribunal for obtaining order of the tribunal for
convening a general meeting.
---------------------- 6 Obtaining order of Tribunal.
---------------------- 7 Advertisement of general meeting and dispatch of notice of general
meeting.
---------------------- 8 General meeting.
9 Filing of chairman’s report and affidavit with Tribunal.
---------------------- 10 Filing of a petition for sanction of scheme of amalgamation with the
Tribunal.
----------------------
11 Advertisement of the petition.
---------------------- 12 Obtaining the sanction of the Tribunal.
13 Registration of the order of the Tribunal.
---------------------- 14 Application for appointment of auditor for scrutiny of books of post
merger defunct transferor company.
----------------------
15 Report of auditor.
---------------------- 16 Order of Tribunal for dissolution without winding up.
17 Registration of the order.
----------------------
Minor activities include:
---------------------- S. No. Description of activities
1 Scrutiny of memorandum of association of both the companies
----------------------
with regard to the power to amalgamate and the power of transferee
---------------------- company to carry on the activities of transferor company.
2 Preparation of notice of Board Meeting to approve the merger proposal
---------------------- and to determine the related issues.
3 Preparation of detailed notes on agenda with relevant statutory and
----------------------
other general references.
---------------------- 4 Dispatch of detailed notes on agenda with relevant statutory and other
general references.
---------------------- 5 Preparation of press release, if thought fit.
6 Preparation of minutes of Board Meeting.
----------------------

7 Preparation of application and affidavit to Tribunal. Notes
8 Fixing up date, time and venue for the general meeting.
9 Preparation of text of advertisement. ----------------------
10 Preparation of notice of general meeting and explanatory statement
----------------------
under Section 230 of the Act.
11 Dispatch of notice and explanatory statement to members. ----------------------
12 Preparation of minutes of general meeting.
13 Preparation of chairman’s report and affidavit. ----------------------
14 Preparation of petition.
15 Preparation of draft advertisement. ----------------------
16 Selection of newspapers. ----------------------
17 Filing of book of documents with the Registrar of Companies for his
report to the Regional Director. ----------------------
18 Filing of affidavit of Regional Director with his NOC for the sanction
of scheme. ----------------------
19 Follow up with official liquidator for appointment of auditor, ----------------------
dissolution without winding up.
----------------------
15.4 SPECIMEN SCHEME OF ARRANGEMENT
----------------------
Scheme of Arrangement of ABC Limited with XYZ Limited
----------------------
1. Definitions: In this scheme, unless inconsistent with the subject or
context 1.1 “Transferor Company” means ABC Limited; a Company ----------------------
incorporated under the Companies Act, 2013 having its registered office
----------------------
at ______________.
1.2 “Transferee Company” means XYZ Limited; a Company ----------------------
incorporated under the Companies Act, 2013 and having its
----------------------
registered office at .
1.3 “The Act” means the Companies Act, 2013. ----------------------
1.4 “The Appointed Date” means (in words). ----------------------

1.5 “The Effective Date” means the last of the dates on which certified ----------------------
copies of the order (s) of the Tribunal sanctioning the scheme are
filed with the Registrar of Companies. ----------------------
1.6 “Undertaking” shall mean ----------------------
●● he entire business, all the assets, rights, licenses and properties of
T
----------------------
the transferor company as on appointed date.
●● ll the debts, liabilities, duties and obligations of whatsoever kind of
A ----------------------
the transferor company as on the appointed date including liabilities
----------------------
for payment of gratuity, superannuation benefits, provident fund
compensation in the event of retrenchment and the liabilities as ----------------------
appearing in its Provisional Balance Sheet as on 31st March .
----------------------
●● ithout prejudice to the generality of the sub-clause (a) above, the
W
undertaking of the transferor company shall include all the movable ----------------------

Notes and immovable properties, assets both tangible and intangible
including land, building, furniture and fixtures, computers, vehicles,
---------------------- inventories, lease hold rights, tenancy rights, industrial and other
licenses, permits, quotas, trademarks, goodwill, patents, letter of
---------------------- intent, investment in shares and other investments, raw material,
---------------------- stock in trade, work in progress, finished goods, plant, machinery,
equipment, tools and implements, goods in transit, advances of all
---------------------- kinds, deposits, book debts, outstanding monies, recoverable claims,
agreements, arrangements and other industrial and intellectual
---------------------- property rights, rights and benefits of all agreements and other
---------------------- interests, including without any limitation, privileges, liberties,
rights, powers of all kinds, nature and description whosoever in any
---------------------- manner owned by, in relation to or connected with the transferor
company.
----------------------
1.7 “The Scheme” means this scheme of amalgamation in its present
---------------------- form or with any modification approved or imposed or directed by
the Tribunal at__ or by the shareholders in the general meeting.
----------------------
2. Share Capital
----------------------
2.1 The authorised share capital of the Transferor Company as per the
---------------------- Balance Sheet is Rs. /- divided into equity shares of Rs. ______
each and % cumulative preference shares of Rs. each. The issued,
---------------------- subscribed and paid-up capital of the transferor company is Rs.____
divided into ________equity shares of Rs._______ each which includes
----------------------
equity shares of Rs. /- each amounting to Rs. /- allotted against
---------------------- consideration other than cash.
2.2 The authorised share capital of the Transferee Company as per the
----------------------
Balance Sheet is Rs. _____/- divided into _____equity shares of Rs.
---------------------- ________each and % cumulative preference shares of Rs. e a c h .
The issued, subscribed and paid-up capital of the transferor company is
---------------------- Rs. Divided into equity shares of Rs. ______ each which
includes_______equity shares of Rs. /- each amounting to Rs. /-
----------------------
allotted against consideration other than cash.
---------------------- Transfer of undertaking
---------------------- With effect from the appointed date, the entire undertaking of the
transferor company shall without any further act, deed or order be transferred
---------------------- to and vested in or deemed to have been transferred to or vested in the transferee
---------------------- company in accordance with and pursuant to Section 232 of the Act.
Contracts, deeds, bonds and other instruments
----------------------
Subject to the other provision contained in this scheme all contracts, deeds,
---------------------- bonds, agreements, instruments, and writings and benefits of whatsoever to
which the transferor company is a party subsisting or having effect immediately
----------------------
before the effective date and subject to such changes and variations in the terms,
----------------------

conditions and provisions thereof as may be mutually agreed to between the Notes
transferee company and other parties thereto shall remain in full force and effect
against and in favor of the transferee company, as the case may be and may be ----------------------
enforced by and/or against the transferee company as fully and effectively as if
the transferee was party thereto instead of Transferor Company. ----------------------
Provided contracts, if any, between the transferor and the transferee ----------------------
companies shall stand cancelled and amounts if any due by the transferor
----------------------
company to the transferee company or vice versa shall stand cancelled.
Position as to charges ----------------------
The transfer/vesting of the undertaking as provided above shall be subject ----------------------
to existing charges/ hypothecation/mortgage (if any as may be subsisting) over
or in respect of said asset or any part thereof, including the encumbrances. ----------------------
Accounting Policy ----------------------
With effect from the appointed date, and subject to any adjustments, ----------------------
modifications as may, in the opinion of the Board of Directors of the transferee
company be required, the reserves of the transferor company will be merged ----------------------
with those of the transferee company in the same form as they appeared in the
financial statements of the transferor company with the identity of the reserves ----------------------
of the transferor company preserved at the hands of the transferee company. ----------------------
The difference between the face value for which share have been issued
by the transferee company to the members of transferor company in accordance ----------------------
with this scheme and the amount of share capital of the transferor company ----------------------
shall be accounted as capital reserves of the transferee company.
----------------------
In case of any differences in the accounting policy between the companies,
the impact of the same will be quantified and adjusted in the revenue reserves ----------------------
to ensure that the financial statements of the transferee company reflect the
financial position on the basis of consistent accounting policy. ----------------------
Legal proceedings ----------------------
If any suits, writ petition, appeal, revision or other proceedings of ----------------------
whatever nature called proceedings by or against the transferor company be
pending as on the effective date the same shall not be abate, be discontinued or ----------------------
be in any way prejudicially affected by reason of the transfer of undertaking of
the transferor company but the proceedings may be continued, prosecuted and ----------------------
enforced by or against the transferee company in the same manner and to the ----------------------
same extent as it would or might have been continued, prosecuted and enforced
by or against the transferor company as if the scheme had not been made. ----------------------
Operative date of the scheme: The scheme shall be operative from the ----------------------
appointed date.
Transferor Company’s staff, workmen and employees: All the staff, ----------------------
workmen and other employees in the service of the transferor company shall ----------------------
immediately before the transfer of the undertaking under the scheme shall
become the staff, workmen and employees of the transferee company as on the ----------------------

Notes effective date upon their respective existing conditions of service on the basis
that:
----------------------
●● heir service shall have been continuous and shall not have been
T
---------------------- interrupted by reason of the transfer of the undertaking.
●● he terms and conditions of service applicable to the said staff, workmen
T
---------------------- or employees after such transfer shall not in any way be less favourable
---------------------- to them than those applicable to them immediately before the transfer.
●● Conduct of business by the transferor company till effective date: With
---------------------- effect from the appointed date and up to the effective date:
---------------------- ●● he transferor company shall carry on and shall be deemed to carry on all
T
its activities for and on account of and in trust for the transferee company.
----------------------
●● ll income or profit accruing to the transferor company and all expenses
A
---------------------- or losses incurred by it shall for all purposes be treated as income, profits,
expenses and losses as the case may be of the transferee company.
----------------------
●● he transferor company shall not without the concurrence of the Board
T
---------------------- of Directors of the transferee company, alienate, charge, encumber or
otherwise deal with the said undertaking or any part thereof except in the
---------------------- ordinary course of business.
---------------------- ●● he transferor company shall not without the written prior consent of the
T
transferee company:
----------------------
●●
Undertake any new business
---------------------- ●●
Declare any dividend
---------------------- ●●
Issue any new shares, by way of rights, bonus or otherwise
Issue of shares by the transferee company
----------------------
Upon the scheme become finally effective, in consideration of the transfer
---------------------- and vesting of the undertaking of the transferor company in the transferee
company in terms of this scheme, the transferee company shall subject to
----------------------
the provisions of this scheme and without any further application or action
---------------------- or deed issue at par and allot _________ equity shares of Rs. /-_________
(Rupees only) credited as fully paid in the capital of transferee company
---------------------- to the shareholders of the transferor company whose names are found in the
Register of members of the transferor company on the effective date.
----------------------
If necessary, the transferee company shall before allotment of equity
---------------------- shares in terms of the scheme, increase its authorized share capital by creation
of at least such number of equity shares of Rs. each as may be necessary to
----------------------
satisfy its obligations under the provision of the scheme.
---------------------- The equity shares to be allotted as aforesaid, shall rank for divided, voting
and all other rights Pari Passu with the existing equity shares of the transferee
----------------------
company provided that they shall not qualify for dividend declared in respect of
---------------------- the period prior to the allotment.
----------------------

The shareholders shall surrender to the transferee company their share Notes
certificates in the transferor company for cancellation thereof and for fresh
issue by Transferee Company as per the said exchange ratio. ----------------------
1. Applications to Tribunal: On this scheme being approved by the ----------------------
respective Boards of the transferor company and the transferee company,
the two companies will, with reasonable dispatch, apply to the Tribunal ----------------------
for sanctioning the scheme, with modification, if any, and for dissolution
----------------------
of the transferor company without winding up.
2. Modifications/amendments to the scheme: The transferor company ----------------------
and the transferee company by their respective boards may agree to
----------------------
any modification or amendment to the scheme or agree to any terms or
conditions which the court and/or any other authorities under law deem ----------------------
fit to direct or impose or which may otherwise be considered necessary or
desirable for settling any question or doubt or difficulty that may arise for ----------------------
implementing and/or carrying out the scheme and do all acts, deeds and
----------------------
things as may be necessary, desirable or expedient for putting the scheme
into effect. ----------------------
3. Dissolution of transferor company without winding-up: Upon this scheme
----------------------
being sanctioned by the Tribunal under Section 232 of the Act and on its
becoming effective, the transferor company shall be dissolved without ----------------------
winding up with effect from the appointed date or such other date as may
be fixed by the Tribunal. ----------------------
Scheme conditional on approvals/sanctions: This scheme is conditional ----------------------
upon and subject to:
----------------------
●● he approval of the shareholders of both the transferor and
T
transferee Company by requisite majority and the sanction of the ----------------------
tribunal being accorded to the scheme.
----------------------
●● he requisite resolutions under the applicable provisions of the said
T
Act being passed by the shareholders of the transferee company for ----------------------
any of the matters provided for or relating to the scheme including
approval to the issue and allotment of equity shares in the transferee ----------------------
company to the members of the transferor company as may be ----------------------
necessary or desirable.
●● he sanction of the Tribunal under Section 230 and 232 of the
T ----------------------
said Act, in favour of the transferor company and the transferee ----------------------
company and to the necessary order or orders under Section 232 of
the said Act, being obtained. ----------------------
4. Effect of non-receipt of approval/sanctions: In the event of any of the said
----------------------
schemes and approvals not being obtained and/or the scheme not being
sanctioned by the Tribunal and/or the order or orders not being passed as ----------------------
aforesaid on before the or within such further period or periods as may be
agreed upon between the transferor company and the transferee company ----------------------
through their respective Board of Directors, the scheme shall become null
----------------------

Notes and void and each party shall bear and pay its respective costs, charges
and expenses for and/or in connection with the scheme of amalgamation.
----------------------
5. Expenses connected with the scheme: All costs, charges and expenses
---------------------- of the transferor company and the transferee company respectively in
relation to or in connection with this scheme and of carrying out and
---------------------- completing the terms and provisions of this scheme and/or incidental to
the completion of amalgamation of the said undertaking of the transferor
----------------------
company in pursuance of this scheme shall be borne and paid solely by
---------------------- the transferee Company.
For________________________________________Limited
----------------------
Managing Director
----------------------
---------------------- 15.5 DOCUMENTATION FOR MERGER AND ACQUISITION,

ARRANGEMENT
----------------------
The following are the documents that are required in the process of
---------------------- merger/amalgamation as per the prescribed formats:
---------------------- ●● ummons in form No.33 prescribed in the Companies (Court) Rules,
S
1959, for Tribunal directions to convene general meeting of shareholders/
---------------------- class of shareholders/creditors/debenture holders under Section 230.
---------------------- ●● Affidavit in form No. 34 in support of the summons.
---------------------- ●● otice in form no. 36 prescribed in the Companies (Court) rules for
N
convening general meeting of shareholders/ class of shareholders/
---------------------- debenture holders/ creditors etc. on a direction of the Tribunal under
Section 230 of the Companies Act.
----------------------
●● orm of proxy in form no. 37 prescribed in the Companies (Court) Rules,
F
---------------------- 1959, to be issued to the shareholders for voting through proxy at the
general meeting, if allowed by the Articles of Association of the Company.
----------------------
●● Advertisement of notice of the meeting in form no. 38.
---------------------- ●● eport of the result of the meeting in Form No.39 prescribed in the
R
Companies (Court) Rules, 1959 to the Tribunal by chairman of the general
----------------------
meeting called on the direction of the Tribunal.
---------------------- ●● orm no.23 along with the certified true copies of the resolutions passed
F
at the general meeting of the shareholders are required to be filed with the
----------------------
concerned Registrar of Companies for registration under Section 117 of
---------------------- the Companies Act.
●● Petition to Tribunal in form no. 40 prescribed under the rules pursuant
----------------------
to Section 232 of the Companies Act, to confirm the scheme of merger/
---------------------- demerger.
●● orm no. 21 prescribed in the Companies (Central Government’s) General
F
----------------------
Rules and Forms 1956 for giving notice to the concerned Registrar of
---------------------- Companies of the order of the Tribunal directing the holding of general

meeting of the shareholders of the Company, on the company’s application Notes
under Section 230 of the Companies Act, 2013.
----------------------
----------------------
i. Summons in form No. 33 a. For giving notice to Registrar
----------------------
ii. Affidavit in form No. 34 b. Form no. 38
----------------------
iii. Form of proxy in form no.37 c. Tribunal directions to convene
general meeting ----------------------
iv. Advertisement of notice d. In support of the summons of the ----------------------
meeting
v. Form no. 21 e. To be issued to shareholders ----------------------
----------------------
Activity 2 ----------------------
Give an example of the latest merger and acquisition in India. ----------------------
----------------------
Summary
----------------------
●● ocumentation plays a crucial role in the merger and acquisitions.
D ----------------------
Secondly, scheme should be drafted in such a way that will give cognizance
to all the parties like shareholders, workers, employees, etc. ----------------------
●● oard of Directors of the Transferor Company as well as Transferee
B ----------------------
Company should take relevant steps to implement the scheme in time as
prescribed under the Act. ----------------------
●● Merger is a tool used by companies for the purpose of expanding their
A
----------------------
operations often aiming at an increase of their long-term profitability.
●● here are different types of actions that a company can take when deciding
T ----------------------
to move forward using M&A.
----------------------
●● sually mergers occur in a consensual (occurring by mutual consent)
U
setting where executives from the target company help those from the ----------------------
purchaser in a due diligence process to ensure that the deal is beneficial to
----------------------
both parties.
●● cquisitions can also happen through a hostile takeover by purchasing the
A ----------------------
majority of outstanding shares of a company in the open market against
----------------------
the wishes of the target’s board.
----------------------
----------------------
----------------------

Notes Keywords
----------------------
●● Inter alia: Latin for “among other things”.
---------------------- ●● Pari Passu: Equal rights.
----------------------
----------------------
1. Give different provisions of various Acts in case of mergers and
---------------------- acquisition.
---------------------- 2. What are the major activities necessary in case of merger and acquisition?
---------------------- 3. Write about the kind of documentation necessary for merger and
acquisition.
----------------------
----------------------
----------------------
Fill in the blanks.
----------------------
1. Scheme of arrangement is not a transfer at all for the purpose of the
---------------------- Income Tax Act, 1961.
---------------------- 2. It is necessary to refer to the Stamp Act to check the stamp duty payable
on transfer of undertaking through a merger, etc.
----------------------
---------------------- i. – c.
---------------------- ii. – d.
iii. – e.
----------------------
iv. – b.
----------------------
v. – a.
----------------------
---------------------- 1. http://www.business-standard.com/article/companies/corporate-debt-
restructuring-cases-to-come-under-scanner-113090600859_1.html
----------------------
----------------------
----------------------
----------------------
----------------------

References Notes
----------------------
1. Patrick A Gauhan Mergers and Acquisitions and Corporate Restructurings
2nd ed.1999 ----------------------
2. Robert Puth American Economic History 3rd ed.1982 ----------------------

3. Gurminder Kaur, Corporate Mergers and Acquisitions (New Delhi: Deep ----------------------
& Deep Publications, 2005),
----------------------
4. K. R. Sampath, Law and Procedure for Mergers, Amalgamations,
Takeovers & Corporate Restructure (Mumbai: Snow white Publications, ----------------------
2007), 621.
----------------------
5. Hardings Stanley GifTard, Halsbury’s Laws of England (New Delhi:
Lexis Nexis Butterworths, Vol. VI! (2), Para 1461, 1991), 1103. ----------------------
6. Kharbanda o.p,. How to manage business turn around Heinman 1997 ----------------------
7. Jesse m, Survey on mergers priceton university press
----------------------
8. David Harding, Mastering the mergers 2nd Ed 1990
----------------------
9. India’s Competition Policy: A Brief Review” Working Paper, Phelps
Centre for the Study of Government and Business, Sauder School of ----------------------
Business, University of British Columbia.
----------------------
10. “Competition Act” (2002), Act No. 12 of 2003, Government of India,
online: Competition Commission of India http://www.competition ----------------------
-commission-india.nic.in
----------------------
11. World Bank (2007), World Development Indicators Database
12. Chakravarthy, S., Competition Policy and Development in Asia New ----------------------
York 2005 ----------------------
12. Industries development Act (1951), Act No.65 of 1951,Government of
India. ----------------------
14. “Hazari Committee Report on Industrial Licensing Procedure” (1955) ----------------------

Ministry of Industry, Government of India, New Delhi.
----------------------
15. “Mahalanobis Committee Report on Distribution and Levels of Income”
(1964) Government of India, New Delhi, ----------------------
16. “Monopolies Inquiry Commission Report’” ----------------------
17. Ahluwalia, Montek S “Economic Reforms in India since 1991: Has ----------------------
Gradualism Worked?” The Journal of Economic Perspectives, Vol. 16,
No. 3 (Summer, 2002), pp. 67-88 ----------------------
18. R. S. Khemani, “Exemp tions, Exceptions and Differential Application ----------------------
of Competition Law-Policy”, in Dhall, V. (ed), Competition Law Today:
Concepts, Issue, and the Law in Practice, Oxford University Press, India, ----------------------
2007.
----------------------
References 265
Notes 19. Vinod Dhall, “Competition law in India” Antitrust, Spring 2007, Volume
21
----------------------
20. Seth Dua and associates, Joint ventures and mergers in India 1st ed.2006
---------------------- 21. O.P.kharbanda Takeovers mergers and acquisitions( II ed 2007
---------------------- 22. S aloman v. Saloman and Co. (1897) A.C.22 H.C.
---------------------- 23. L E Talbot, ‘Critical Company Law’, 2008, Routledge Cavendish Taylor
and Francis Group Publication.
---------------------- 24. A.K.Mujumadar, Dr.G.K. Kapoor, ‘Taxmann’s Guide to Company Law’,
---------------------- 2004, Taxmann Publications (Pvt.) LTd.
25. Badruddin, ‘Company Directors under the Company Law’, 2000, Deep
---------------------- and Deep Publications Pvt. Ltd, New Delhi
---------------------- 26. Dr. K.R.Chandratre, ‘Students’Approach to Company Law and Secretarial
Practice’, first edition,2005, Bharat Law House Pvt. Ltd., p.11
----------------------
27. Taxmann’s companies Act, 18th edition, 2006, Taxman Allied Services
---------------------- (P.) Ltd
---------------------- 28. Cadman, THE CORPORATION IN NEW JERSEY, 327 (1949)
---------------------- 29. HC Shastri v. Dolphin Cornpack (p) Ltd, (1998)93 Comp Case 2010
Delhi
---------------------- 30. Lennard’s Carrying Co. Ltd v. Asiatic Petroleum Co. Ltd 1915 AC 70.
---------------------- 31. A.K.Mujumadar, Dr.G.K. Kapoor, ‘Taxmann’s Guide to Company Law’,
2004, Taxmann Publications (P.) Ltd.
----------------------
32. Avatar Singh, ‘Company Law’, 13th edition, 2001, Eastern Law Book
---------------------- Company,
---------------------- 33. Badruddin, ‘Company Directors under the company Law’, 2000, Deep
and Deep Publications Pvt. Ltd, New Delhi.
----------------------
34. Cadman, THE CORPORATION IN NEW JERSEY, 327 (1949)
---------------------- 35. Dr. K.R.Chandratre, ‘Students’Approach to Company Law and Secretarial
---------------------- Practice’, first edition, 2005, Bharat Law House Pvt. Ltd.,..
36. Taxmann’s companies Act, 18th edition, 2006, Taxman Allied Services
---------------------- (P.) Ltd
---------------------- 37. The Indian Partnership Act, 1932, Commercial Law Publishers (India)
Pvt. Ltd.
----------------------
38. Dr. K.R.Chandratre, ‘Company Law with Secretarial Practice’ in 4
---------------------- volume Bharat Law House Pvt. Ltd.,
---------------------- 39. Dr. D. K. Jain, ‘Company Law ready reckoner, Bharat Law House Pvt.
Ltd.,
----------------------
40. A.T. Kearney (2005) “Foreign Direct Investment Confidence Index”,
---------------------- Global Business Policy Council, 2005, Volume 8, A.T. Kearney Inc.

41. Industries development Act (1951), Act No. 65 of 1951, Government of Notes
India.
----------------------
42. Monopolies and Restrictive Trade Practices Act” (196 9), Act No. 54 of
1969, Government t of India. ----------------------
43. Manual of Foreign Direct Investment
----------------------
44. O.P.kharbanda Takeovers mergers and acquisitions( II ed 2007
----------------------
45. Dr. K. R. Chandrate : Corporate Restructuring, 2005 edition.
46. J.C. Verma: Corpoate Mergers, Amalgamations & Takeovers, Bharat ----------------------
Publishing House, New Delhi. ----------------------
47. Patrick A Gauhan Mergers and Acquisitions and Corporate Restructurings
2nd ed.1999 ----------------------
48. Gurminder Kaur, Corporate Mergers and Acquisitions (New Delhi: Deep ----------------------
& Deep Publications, 2005),
----------------------
49. K. R. Sampath, Law and Procedure for Mergers, Amalgamations,
Takeovers & Corporate Restructure (Mumbai: Snow white Publications, ----------------------
2007), 621.
----------------------
50. Sridharan & Pandian: Guide to Takeovers and Mergers, Wadhawa and
Company Law Publisher, Nagpur. ----------------------
51. A. Ramaiya: Guide to Companies Act, Wadhawa & Comoany.; Agra and ----------------------
Nagpur.
----------------------
52. “Competition Act” (2002), Act No. 12 of 2003, Government of India.
----------------------
53. M. C. Bhandari: Guide to Companies Act, Wadhawa & Company.; Agra
and Nagpur. ----------------------
54. Handbook on Mergers, amalgamation and Takeovers- Law and Practice
----------------------
– third edition issued by the Institute of Company Secretaries of
IndiMonopolies and Restrictive Trade Practices Act” (196 9), Act No. 54 ----------------------
of 1969, Government t of India.
----------------------
55. O. P. Kharbanda : Takeovers mergers and acquisitions( IInd 2007)
56. Dr. K.R.Chandratre, ‘Students’Approach to Company Law and Secretarial ----------------------
Practice’, first edition,2005, Bharat Law House Pvt. Ltd., p.11 ----------------------
57. Taxman’s companies Act, 18th edition, 2006, Taxman Allied Services (P.)
Ltd ----------------------
58. A. K. Mujumadar, Dr.G.K. Kapoor, ‘Taxmann’s Guide to Company Law’, ----------------------

2004, Taxmann Publications (P.) LTd.
----------------------
59. ICSI Publications: Handbook on Mergers and Amalgamations and
Takeover- Law and practice. ----------------------
60. ICSI Publications: Guidance note on Buy Back of Securities. ----------------------
61. Hindustan Steel Ltd. V. Dilip Construction Co. AIR 1969 SC 1238. ----------------------
References 267
Notes 62. Re Govind Rubber Ltd. (1995) 83 Comp Cas 556 (BOM)
63. Tata Motors LTD. V. Pharmaceuticals Products of India LTD and another
----------------------
(2008) 144 Comp Cas 178 (SC).
---------------------- 64. Securities and Exchange Board of India (Depositories and Participants)
(Amendment) Regulations, 2013
----------------------
65. Securities and Exchange Board of India (Substantial Acquisition of Shares
---------------------- and Takeovers) Regulations, 2011
---------------------- 66. Securities and Exchange Board of India (Substantial Acquisition of Shares
and Takeovers) (Amendment) Regulations, 2013
----------------------
67. Securities and Exchange Board of India {Kyc (Know Your Client)
---------------------- Registration Agency} Regulations, 2011
---------------------- 68. Securities and Exchange Board of India (Foreign Venture Capital
Investors) (Amendment) Regulations, 2010
----------------------
69. Companies Act, 2013
---------------------- Articles
---------------------- 1. Suharsh Sinha, ‘Corporate Prosecutions’, Company Law Journal (2007)
3 Comp LJ
----------------------
2. Suchita Saigal, Corporate Criminal Liability: From Velliappa Textiles to
---------------------- Standard Charted Bank, (2007) 1 Comp LJ
---------------------- 3. ‘Corporate Criminality and Law’, Journal of Indian Law Institute,

Vol.38.2.
----------------------
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----------------------
2. http://www.cdrindia.org/
----------------------
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---------------------- UrlPage=&ID=432
---------------------- 4. http://www.airwebworld.com/articles/index.php?article=1523
5. http://www.bankingonly.com/article_details.php?article_id=153
----------------------
6. http://www.zeus.firm.in/Journals/Corporate-Debet-Restructuring.pdf
----------------------
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11. http://www.legalserviceindia.com/articles/corporate.htm ,
----------------------
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----------------------

13. http://www.financialexpress.com/old/fefullstory.php?Content id=62378, Notes
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----------------------
15. http://store.eiu.com
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17. www.competition-coomission-india.nic.in/.
----------------------
18. http://en.wikipedia.org/wiki
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----------------------
References 269

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CORPORATE

(FOR PRIVATE CIRCULATION ONLY)

COURSE DESIGN AND REVIEW COMMITTEE

Published by Symbiosis Centre for Distance Learning (SCDL), Pune

Copyright © 2018 Symbiosis Open Education Society

Atul Bohra is a Bachelor of Commerce, Master of Business Administration (Finance). He is a Fellow

Unit No. TITLE Page No.

---------------------- In today’s modern, global economy and competitive age, professionalism,

---------------------- In globalised business environment, business can be expanded as much

---------------------- 1.2 MEANING OF CORPORATE

2 Corporate Restructure Law

Fill in the blanks. ----------------------

---------------------- 1.5 HISTORICAL BACKGROUND AND PRESENT

4 Corporate Restructure Law

State True or False. ----------------------

1.6 WHY RESTRUCTURING ----------------------

6 Corporate Restructure Law

1.8 WAYS OF RESTRUCTURING - MERGERS AND ----------------------

Corporate restructuring can be done internally or externally. Internal ----------------------

However, some organisations have done their restructuring through ----------------------

---------------------- Check your Progress 3

---------------------- Match the following.

8 Corporate Restructure Law

●● orporate restructuring: A process to alter, modify or process the

1. What are the characteristics of a company? ----------------------

---------------------- Answers to Check your Progress

---------------------- Check your Progress 1

---------------------- Suggested Reading

10 Corporate Restructure Law

Various Types of Corporate Restructuring 11

---------------------- 2.1 INTRODUCTION

---------------------- It is important to understand in detail the methods and types of restructuring

12 Corporate Restructure Law

Various Types of Corporate Restructuring 13

Various Types of Corporate Restructuring 15

In other words, in a scheme of amalgamation as per the Companies Act, ----------------------

Various Types of Corporate Restructuring 17

---------------------- c) The consideration for the amalgamation receivable by those equity

---------------------- 2.5 COMPROMISE AND ARRANGEMENT

18 Corporate Restructure Law

2. __________ presumes the existence of a dispute, which it seeks to ----------------------

Various Types of Corporate Restructuring 19

20 Corporate Restructure Law

2.7 ACQUISITION OR TAKEOVER ----------------------

Various Types of Corporate Restructuring 21

---------------------- 2.8 JOINT VENTURE

Traditionally, joint venture envisages an agreement for the transfer of ----------------------

Various Types of Corporate Restructuring 23

24 Corporate Restructure Law

Self-Assessment Questions ----------------------

1. Explain the various types of corporate restructuring. ----------------------

2. Restructuring is a method of changing the organisational structure. ----------------------

Various Types of Corporate Restructuring 25

---------------------- ii. Inferior company

26 Corporate Restructure Law

Various Types of Corporate Restructuring 27

28 Corporate Restructure Law

Mergers and Amalgamations 29

---------------------- 3.1 INTRODUCTION

30 Corporate Restructure Law

Mergers and Amalgamations 31

32 Corporate Restructure Law

3.4 PROVISIONS OF COMPANIES ACT, 2013 AND ITS PROCEDURES ----------------------

1. Section 230: Power to compromise or arrangements with creditors and ----------------------

1. Section 230: Power to compromise or arrangements with creditors and ----------------------

---------------------- e) a supplementary accounting statement if the last annual accounts of

(ii) made by a company whose principal business is the acquisition of ----------------------