Session 4&16

https://www.mondaq.com/india/shareholders/754950/substantial-acquisition-of-shares-and-take-
over-sebi-regulations-2011-overview

file:///C:/Users/HP/Downloads/765-Article%20Text-765-1-10-20160308.pdf

In September 2011, SEBI declared an overhaul SEBI (Substantial Acquisitions of Shares and Takeover)
Regulations 1997 by introducing the 2011 regulations. The Regulation was mainly added to regulate
the acquisition of shares and voting rights in Public Listed Companies in India. The various changes
made in the new regulations is traceable to the recommendations of a committee which was mainly
set up to evaluate the many provisions mentioned in the 1997 rules.

Regulation 3 of the SEBI Takeover Regulations, 2011 provides the following. Shares or voting rights
shall not be acquired by a target company which, when taking together shares or voting rights
held by them and by persons acting in concert with him in such target company, entitling them to
exercise 25% percent or more of the voting rights in such target company. The single exception to
this is if the acquirer makes a public announcement of an open offer for acquiring shares of such
target company following these regulations.

As per the Regulation 4 of the SEBI Takeover Regulations 2011, "any acquirer acquiring, directly or
indirectly, control over a target company must make a public announcement of an open offer for
acquiring shares of such target company."

Delisting Offer

Regulation 5A of SEBI Takeover Regulations, 2011 deals with delisting offer in case of some
instances arising out of open proposal as discussed below:

In the event the acquirer makes a public announcement of a free offer on shares of a target
company concerning regulations 3, 4 or 5, he may delist the company under provisions of the SEBI
(Delisting of Equity Shares) Regulations, 2009. However, the acquirer shall have declared upfront
his intention to so delisting at the time of making the detailed public statement.

Regulation 29 of the Takeover Regulations requires disclosures for acquisition of shares

aggregating to five per cent or more; and any two per cent change in shareholding of such persons
holding five per cent or more within two working days of acquisition / sale.

If an acquisition is contemplated by way of issue of new shares, or the acquisition of existing shares
or voting rights, of a listed company, to or by an acquirer, the provisions of the Takeover Code are
applicable. The Takeover Code regulates both direct and indirect acquisitions of shares33 or voting
rights in, and control over a target company. The key objectives of the Takeover Code are to provide
the shareholders of a listed company with adequate information about an impending change in
control of the company or substantial acquisition by an acquirer and provide them with an exit
option (albeit a limited one) in case they do not wish to retain their shareholding in the company.

Mandatory offer
Under the Takeover Code, an acquirer is mandatorily required to make an offer to acquire shares
from the other shareholders in order to provide an exit opportunity to them prior to consummating
the acquisition, if the acquisition fulfils the conditions as set out in Regulations 3, 4 and 5 of the
Takeover Code. Under the Takeover Code, the obligation to make a mandatory open offer by the
acquirer36 is triggered in the following events:

a. Initial trigger: If the acquisition of shares or voting rights in a target company entitles the acquirer
along with the persons acting in concert (“PAC”) to exercise 25% or more of the voting rights in the
target company.

b. Creeping Acquisition: If the acquirer already holds 25% or more and less than 75% of the shares
or voting rights in the target, then any acquisition of additional shares or voting rights that entitles
the acquirer along with PAC to exercise more than 5% of the voting rights in the target in any
financial year.

It is important to note that the 5% limit is calculated on a gross basis i.e. aggregating all purchases
and without factoring in any reduction in shareholding or voting rights during that year or dilutions
of holding on account of fresh issuances by the target company. If an acquirer acquires shares along
with other subscribers in a new issuance by the company, then the acquisition by the acquirer will be
the difference between its shareholding pre and post such new issuance.

It should be noted that an acquirer (along with PAC) is not permitted to make a creeping acquisition
beyond the statutory limit of nonpublic shareholding in a listed company i.e. 75%.

c. Acquisition of ‘Control’: If the acquirer acquires control over the target Regardless of the level of
shareholding, acquisition of ‘control’ of a target company is not permitted, without complying with
the mandatory offer obligation under the Takeover Code. What constitutes ‘control’ is most often a
subjective test and is determined on a case-tocase basis. For the purpose of the Takeover Code,
‘control’ has been defined to include:

 Right to appoint majority of the directors;

 Right to control the management or policy decisions exercisable by a person or PAC, directly
or indirectly, including by virtue of their shareholding or management rights or shareholders
agreements or voting agreements or in any other manner.

Over time, the definition of ‘control’ has been subject to different assessments and has turned out to
be, quite evidently, a grey area under the Takeover Code. The Supreme Court order in case of SEBI
vs. Subhkam Ventures Private Limited, the out-of-court settlement between the parties - left open
the legal question as to whether negative control would amount to ‘control’ under the Takeover
Code. In fact, the Supreme Court had ruled that SAT ruling in this case (against which SEBI had
appealed before the Supreme Court) which ruled that ‘negative control’ would not amount to
‘control’ for the purpose of Takeover Code, should not be treated as precedent. With no clear
jurisprudence on the subject-matter, each veto right would typically be reviewed from the
commercial parameters underlying such right and its impact on the general management and policy
decisions of the target company.

SEBI, in light of Jet-Etihad transaction, had indicated its plans to introduce new guidelines to define
‘bright lines’ to provide more clarity as regards ‘change in control’ in cases of mergers and
acquisitions by issuing a discussion paper.However, SEBI finally decided not to go ahead with the
bright line test for determination of acquisition of ‘control’ and concluded that it needs to be
determined on case-to-case basis

Case: Nirma Vs. SEBI https://www.bulwarksolicitors.com/securities-law/supreme-courts-verdict-on-

withdrawal-of-open-offer-by-nirma/#

Arbutus Consultancy v SEBI https://finseclawforum.com/2017/sat-sebi-rulings-takeover-regulations/

Takeover Code

The Securities and Exchange Board of India (the “SEBI”) is the nodal authority regulating entities that
are listed or to be listed on stock exchanges in India. The SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011 (the “Takeover Code”) restricts and regulates the acquisition of shares,
voting rights and control in listed companies. Acquisition of shares or voting rights of a listed
company, entitling the acquirer to exercise 25% or more of the voting rights in the target company
or acquisition of control , obligates the acquirer to make an offer to the remaining shareholders of
the target company. The offer must be to further acquire at least 26% of the voting capital of the
company.

Further, if the acquirer already holds 25% or more but less than 75% of the target company and
acquires at least 5% shares or voting rights in the target company within a financial year, it shall be
obligated to make an open offer. However, this obligation is subject to the exemptions provided
under the Takeover Code. Exemptions from open offer requirement under the Takeover Code
include inter alia acquisition pursuant to a scheme of arrangement approved by the NCLT. Further,
SEBI has the power to grant exemption or relaxation from the requirements of the open offer under
the Takeover Code in the interest of investors and the securities market. Such relaxations or
exemptions can be sought by the acquirer by making an application to SEBI.

Indirect Acquisition of Shares or Voting Rights:

For an indirect acquisition obligation to be triggered under the Takeover Code, the acquirer must,
pursuant to such indirect acquisition be able to direct the exercise of such percentage of voting
rights or control over the target company, as would otherwise attract the mandatory open offer
obligations under the Takeover Code. This provision was included to prevent situations where
transactions could be structured in a manner that would side-step the obligations under Takeover
Code. Further, if:

 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; or
 the proportionate sales turnover of the target company as a percentage of the consolidated
sales turnover of the entity or business being acquired; or
 the proportionate market capitalisation of the target company as a percentage of the
enterprise value for the entity or business being acquired; is in excess of 80%, on the basis of
the most recent audited annual financial statements, then an indirect acquisition would be
regarded as a direct acquisition under the Takeover Code for the purposes of the timing of
the offer, pricing of the offer etc.
Voluntary open offer

An acquirer who holds between 25% and 75% of the shareholding/ voting rights in a company is
permitted to voluntarily make a public announcement of an open offer for acquiring additional
shares of the company subject to their aggregate shareholding after completion of the open offer
not exceeding 75%.In case of a voluntary offer, the offer must be for at least 10% of the voting rights
in the target company, but the acquisition should not result in a breach of the maximum non-public
shareholding limit of 75%.

Any person holding less than 25% shareholding/voting rights can also make a voluntary open offer
for acquiring additional shares. Any person who has been declared as a willful defaulter or is a
fugitive economic offender cannot make an open offer or enter into any transaction that would
attract obligations to make a public announcement of open offer.

ii. Minimum Offer Size

a. Mandatory Offer :

Open offer for acquiring shares must be for at least 26% of the shares of the target company. It is
also possible for the acquirer to provide that the offer to acquire shares is subject to a minimum
level of acceptance.

b. Voluntary Open Offer

In case of a voluntary open offer by an acquirer holding 25% or more of the shares/voting rights, the
offer must be for at least 10% of the voting rights in the target company. While there is no maximum
limit, the shareholding of the acquirer post acquisition should not exceed 75%. In case of a voluntary
offer made by a shareholder holding less than 25% of shares or voting rights of the target company,
the minimum offer size is 26% of the total shares of the company.

iii. Pricing of Offer

Regulation 8 of the Takeover Code sets out the parameters to determine offer price to be paid to the
public shareholders, which is the same for a mandatory open offer as well as a voluntary open offer.
There are certain additional parameters prescribed for determining the offer price when the open
offer is made pursuant to an indirect acquisition. In Regulation 8 of the Takeover Code, It is
important to note that an acquirer cannot reduce the offer price but an upward revision of offer
price is permitted, subject to certain conditions.

iv. Competitive Bid/Revision of offer/bid The Takeover Code also permits a person other than the
acquirer (the first bidder) to make a competitive bid, by a public announcement, for the shares of
the target company. This bid must be made within 15 working days from the date of the detailed
public announcement of the first bidder. The competitive bid must be for at least the number of
shares held or agreed to be acquired by the first bidder (along with PAC), plus the number of shares
that the first bidder has bid for. Each bidder (whether a competitive bid is made or not) is permitted
to revise his bid, provided such revised terms are more favourable to the shareholders of the target
company.The revision can be made up to 3 working days prior to the commencement of the
tendering period.
v. private mechanism: The SEBI (Delisting of Equity Shares) Regulations, 2009 (“SEBI Delisting
Regulations”) prescribe the method and conditions for delisting of a company. The SEBI Delisting
Regulations allow an acquirer in addition to the promoter of the company to initiate delisting of such
company. Pursuant to Regulation 5A of the Takeover Code, an acquirer may delist the company
pursuant to an open offer in accordance with the SEBI Delisting Regulations provided that the
acquirer declares upfront his intention to delist. Prior to the inclusion of Regulation 5A, an open offer
under the Takeover Regulations could not be clubbed with a delisting offer, making it burdensome
for acquirers to delist the company in the future.

The Takeover Code provided for a 1 year off period between the completion of an open offer under
the Takeover Code and a delisting offer in situations where on account of the open offer the
shareholding of the promoters exceeded the maximum permissible non-public shareholding of 75%.
This restriction is not affected by Clause 5A in that the acquirer will continue to be bound by this
restriction if the acquirer’s intent to delist the company is not declared upfront at the time of making
the detailed public statement.

SESSION 6: Business Acquisition

Section 179: Powers of Board pursuant to Section 179 read with Rule 8 of the Companies (Meeting
of Board and its Powers) Rules, 2014. Regulation 14(2)(f) of LODR

A company which is a subsidiary of a company, not being a private company, shall be deemed to
be public company for the purposes of this Act even where such subsidiary company continues to
be a private company.

1. Board of Directors of a company shall be entitled to exercise all such powers, and to do all such
acts and things, as the company is authorised to exercise and do.

But while exercising such power or doing such act or thing, the Board shall be subject to the
provisions contained in that behalf in: Act; Memorandum; Articles; In any regulations not
inconsistent therewith and duly made thereunder; Including regulations made by the company in
general meeting.

Also the Board shall not exercise any power or do any act or thing which is directed or required,
whether under: Act; Memorandum; Articles ; or Which is to be exercised or done by the company
in general meeting.

2. no regulation made by the company in general meeting shall invalidate any prior act of the
Board which would have been valid if that regulation had not been made.

3. the Board of Directors of a company shall exercise the following powers on behalf of the
company by means of resolutions passed at meetings of the Board, namely:— a) to make calls
on shareholders in respect of money unpaid on their shares; b) to authorise buy-back of
securities under section 68; c) to issue securities, including debentures, whether in or outside
India; d) to borrow monies; e) to invest the funds of the company; (f)to grant loans or give
guarantee or provide security in respect of loans; g) to approve financial statement and the
Board’s report; h) to diversify the business of the company; i) to approve amalgamation, merger
or reconstruction; j) to take over a company or acquire a controlling or substantial stake in
another company; k) any other matter which may be prescribed
Rule 8 of the Companies(Meeting of Board & Powers) Rules, 2014- Additional powers which can
be exercised by BOD only by means of resolution passed at the time of the Board:

1. to make political contributions

2. to appoint or remove key managerial personnel (KMP);
3. to appoint internal auditors and secretarial auditor.

By passing the resolution at its meeting, the Board may delegate the powers specified in clauses
on such conditions as it may specify to: any committee of directors, the managing director, the
manager, any other principal officer of the company or the principal officer of the branch office (in
ithe case of a branch office of the company)

It shall also be noted that the acceptance by a banking company in the ordinary course of its
business of deposits of money from the public repayable on demand or otherwise and
withdrawable by cheque, draft, order or otherwise, or the placing of monies on deposit.

by a banking company with another banking company on such conditions as the Board may
prescribe, shall not be deemed to be a borrowing of monies or making of loans by a banking
company within the meaning of this section as the case may be.

Explanations to section 179(3)

I. shall apply to borrowings by a banking company from other banking companies or from the
Reserve Bank of India, the State Bank of India or any other banks established by or under any
Act.

II. In respect of dealings between a company and its bankers, the exercise by the company of the
power means that the arrangement made by the company with its bankers for the borrowing of
money by way of overdraft or cash credit or otherwise and not the actual day-to-day operation on
overdraft, cash credit or other accounts by means of which the arrangement so made is actually
availed of.

In case of a Specified IFSC private company, the Board can exercise the powers by means
of resolutions passed at the meetings of the Board or through resolutions passed by
circulation.

Section 179(4): Nothing in this section shall be deemed to affect the right of the company in
general meeting to impose restrictions and conditions on the exercise by the Board of any of the
powers specified in this section.

Setion 180- Restriction on power of the BOD

Section 180 of the Companies Act, 2013 imposes restrictions on the powers of the board
of directors of a company. It says that the board of directors should exercise certain
powers only with the consent of the company passed by a special resolution.

1. Sell, lease or dispose undertaking ---- Undertaking means in which the investment of the company
exceeds 20% of its net worth as per the audited balance sheet of the preceding financial year or an
undertaking which generates 20% of the total income of the company during the previous financial
year;
2. To borrow money, where --- Money to be borrowed+ money already borrowed > aggregate of its
paid-up share capital + free reserves + securities premium, apart from temporary loans obtained
from the company’s bankers in the ordinary course of business

3. Invest otherwise in trust securities the amount of compensation received by it as a result of any
merger or amalgamation.

4. To remit, or give time for the repayment of, any debt due from a director.

Interpretation of the word ‘Undertaking’

For a transaction to be considered within the purview of Section 180(1)(a) of Act, 2013, it has to
comply with the following criteria – • should relate to an “undertaking”; and • should be in respect
of sale, lease or disposal of such ‘undertaking’ in any other manner.

Explanation (ii) to section 180(i)(a) defines the meaning of the expression “undertaking”.

Explanation to section 180(1)(a): “undertaking” shall mean an undertaking in which the investment
of the company exceeds twenty per cent. Net worth as per the audited balance sheet of the
preceding financial year or an undertaking which generates 20%. Of the total income of the company
during the previous financial year

The explanation to Section 180 furnishes only the qualifying criteria of an ‘undertaking’ to be
considered under section 180(1)(a), but does not actually define an ‘undertaking’.

The concept of ‘undertaking’ may also be derived from the explanation stated under section 2(19AA)
of Income Tax Act, 1961, wherein it has been defined to include:

• “any part of an undertaking or a unit or division of an undertaking or a business activity taken as a

whole, but does not include individual assets or liabilities or any combination thereof not
constituting a business activity.”

• Also, ‘undertaking’ is defined in section 2(v) of the Monopolies and Restrictive Trade Practices Act,
1969

• "undertaking" means an enterprise which is, or has been, or is proposed to be, engaged in the
production, storage, supply, distribution, acquisition or control of articles or goods, or the provision
of services, of any kind, either directly or through one or more of its units or divisions, whether such
unit or division is located at the same place where the undertaking is located or at a different place
or at different places.

BORROWING POWER OF THE COMPANY – SEC. 179(3)(D) & 180(1)(C)?

Section 179 (3) (d): The powers to borrow money can only be exercised by the Directors at a duly
convened meeting of the board, to borrow moneys. 

However, the power to borrow money may be delegated by the Board by passing a resolution at a
duly convened Board Meeting, to any committee of directors, the managing director, the manager
or any other principal officer of the company or in the case of a branch office of the company, the
principal officer of the branch office.
Section 180 (1) (c): Section prohibits the Board from borrowing a sum which together with the
moneys already borrowed by the company, exceeds the aggregate of its paid-up share capital, free
reserves and securities premium, apart from the temporary loans obtained by the company’s
bankers in the ordinary course of business unless the company has received the prior approval of the
shareholders of the company, through a special resolution in general meeting.

Borrowings by private companies: Private companies are exempted from the entire provisions of
section 180 of Act, 2013 vide MCA Notification[2] dated June 5, 2015.

Borrowings by banking companies: As per the proviso provided in section 180(1)(C), the acceptance
of deposits of money from the public, repayable on demand or otherwise, and withdrawable by
cheque, draft, order or otherwise, in the ordinary course of its business by a banking company, shall
not be deemed to be borrowing of monies by the banking company. 

Ultra Vires Borrowings: As per the provision of section 180 (5), where a company borrows in excess
of its borrowing limits as approved by the shareholders, then such borrowing in excess of the limit
shall not be valid or effectual unless the lender proves that he advances the loan in good faith
without knowledge that the limit imposed by the law has been exceeded.

Requirement of Valuation under Companies Act, 2013

Valuation under Companies Act, 2013 is governed by Section 247 read with Companies
(Registered Valuers and Valuation) Rules, 2017. It sets various guidelines for qualification,
independence, and methodology of working as a registered valuer under the Companies Act
2013.

Section 247 permits only Registered Valuers to undertake valuation of any stock, share,
debenture, security. Goodwill, asset, liability or net worth of the company as required under this
act. The eligibility of being a registered valuer under the Companies Act 2013 is stated under the
Companies (Registered Valuers and Valuation) Rules, 2017. The act requires a true, fair, and
impartial valuation to be performed and prohibits the registered valuer from undertaking valuation
of any asset in which he is interested, whether directly or indirectly, at any time whether during or
after valuation.

As per Rule 16 of Companies (Registered Valuers and Valuation) Rules, 2017, a valuation is
required to be performed as per the Central Government notified valuation standards. Until any
standard is notified, the Registered Valuer shall perform the valuation according to:

 Valuation standards of any valuation professional organization

 Internationally accepted Valuation Methodology
 Valuation Standards specified by SEBI, RBI, or any other regulatory body.

Qualifications of registered valuers for different class of assets

 For valuation of land & building, a registered valuer must be a graduate or post graduate
in Civil engineering, architecture or town planning with minimum experience of 3 to 5
years.
 For valuation of plant & machinery, a registered valuer must be a graduate or post
graduate in Electrical or Mechanic Engineering with minimum experience of 3 to 5 years
  For valuation of securities or financial assets, a person must be a member of ICAI, ICSI
or Institute of Cost Accountants of India or an MBA with specialization in Finance, with
minimum experience of 3 years in the discipline after completing graduation

Session 9&10

A merger that happens between two companies across borders is called a cross-border merger.
With economies getting globalised, the concept of cross-border mergers is increasing
significantly. It allows the expansion of companies globally. If India is to be placed on the global
commercial map, a solid legal framework for cross-border mergers is required. This is the
rationale behind the introduction of Section 234 of the Companies Act, 2013. The need for a
cross-border merger stems from the desire for economic growth and scale economies.

Section 234 of the Companies Act, 2013 which was brought into effect from 13th April 2017,
provides for the legal framework and hence, operationalising the concept of cross-border
mergers. There are two types of cross-border mergers mentioned in the Companies Rules, 2016
under the Companies Act, 2013:

Inbound Mergers: An inbound merger happens when a foreign company merges with the Indian
Company resulting in an Indian company being formed. In simple words, when a foreign
company merges with or acquires an Indian company, it is called an inbound merger. In this
case, the resultant company is an Indian company.

Eg. Acquisition of a 77% stake in Flipkart by Walmart.

Another example could be Acquisition of Ranbaxy by Diachi.

In an inbound merger,

(1) the resultant company may issue or transfer any security and/or a foreign security, as the case
may be, to a person resident outside India in accordance with the pricing guidelines, entry routes,
sectoral caps, attendant conditions and reporting requirements for foreign investment as laid down in
Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India)
Regulations, 2017.

Provided that

i. where the foreign company is a joint venture (JV)/ wholly owned subsidiary (WOS) of the Indian
company, it shall comply with the conditions prescribed for transfer of shares of such JV/ WOS by the
Indian party as laid down in Foreign Exchange Management (Transfer or issue of any foreign security)
Regulations, 2004;
ii. where the inbound merger of the JV/WOS results into acquisition of the Step down subsidiary of JV/
WOS of the Indian party by the resultant company, then such acquisition should be in compliance with
Regulation 6 and 7 of Foreign Exchange Management (Transfer or issue of any foreign security)
Regulations, 2004.

(2) An office outside India of the foreign company, pursuant to the sanction of the Scheme of cross
border merger shall be deemed to be the branch/office outside India of the resultant company in
accordance with the Foreign Exchange Management (Foreign Currency Account by a person resident
in India) Regulations, 2015. Accordingly, the resultant company may undertake any transaction as
permitted to a branch/office under the aforesaid Regulations.
(3) The guarantees or outstanding borrowings of the foreign company from overseas sources which
become the borrowing of the resultant company or any borrowing from overseas sources entering into
the books of resultant company shall conform, within a period of two years, to the External
Commercial Borrowing norms or Trade Credit norms or other foreign borrowing norms, as laid down
under Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations,
2000 or Foreign Exchange Management (Borrowing or Lending in Rupees) Regulations, 2000 or
Foreign Exchange Management (Guarantee) Regulations, 2000, as applicable.

Provided that no remittance for repayment of such liability is made from India within such period of
two years;

Provided further that the conditions with respect to end use shall not apply.

(4) The resultant company may acquire and hold any asset outside India which an Indian company is
permitted to acquire under the provisions of the Act, rules or regulations framed thereunder. Such
assets can be transferred in any manner for undertaking a transaction permissible under the Act or
rules or regulations framed thereunder.

(5) Where the asset or security outside India is not permitted to be acquired or held by the resultant
company under the Act, rules or regulations, the resultant company shall sell such asset or security
within a period of two years from the date of sanction of the Scheme by NCLT and the sale proceeds
shall be repatriated to India immediately through banking channels. Where any liability outside India is
not permitted to be held by the resultant company, the same may be extinguished from the sale
proceeds of such overseas assets within the period of two years.

(6) The resultant company may open a bank account in foreign currency in the overseas jurisdiction
for the purpose of putting through transactions incidental to the cross border merger for a maximum
period of two years from the date of sanction of the Scheme by NCLT

Outbound Mergers: An outbound merger is one where an Indian company merges with a
foreign company resulting in a foreign company being formed. In simple words, when an Indian
company or domestic company merges with or acquires any foreign company, it is called an
outbound merger. In this case, the resultant company is a foreign company.

Eg. Acquisition of Jaguar and Land Rover by Tata Motors in 2011, Acquisition of Hamleys by
Reliance Group, and Acquisition of Corus by Tata Steels are some examples of Outbound
Mergers.

There was no provision of Outbound mergers prior to the implementation of the Companies Act,
2013. The Reserve Bank of India (RBI) issued the Foreign Exchange Management (Cross
Border Merger) Regulations 2018 to regulate cross-border mergers.

Implication of Foreign Exchange Management (Cross Border Merger) Regulations 2018:

Until March 2018, it was not possible for an Indian company to merge with a foreign company.
Indian companies could only merge with an Indian company under the merger framework
sanctioned under corporate law at that time. In March 2018, RBI finally notified the Foreign
Exchange Management (Cross-Border Merger) Regulations, 2018 which allowed an Indian
enterprise that wishes to merge with foreign firms to do so with the RBI's prior clearance.

Outbound merger

In an outbound merger,
(1) a person resident in India may acquire or hold securities of the resultant company in accordance
with the Foreign Exchange Management (Transfer or issue of any Foreign Security) Regulations,
2004.

(2) a resident individual may acquire securities outside India provided that the fair market value of
such securities is within the limits prescribed under the Liberalized Remittance Scheme laid down in
the Act or rules or regulations framed thereunder.

(3) An office in India of the Indian company, pursuant to sanction of the Scheme of cross border
merger, may be deemed to be a branch office in India of the resultant company in accordance with
the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a
project office or any other place of business) Regulations, 2016. Accordingly, the resultant company
may undertake any transaction as permitted to a branch office under the aforesaid Regulations.

(4) The guarantees or outstanding borrowings of the Indian company which become the liabilities of
the resultant company shall be repaid as per the Scheme sanctioned by the NCLT in terms of the
Companies (Compromises, Arrangement or Amalgamation) Rules, 2016.

Provided that the resultant company shall not acquire any liability payable towards a lender in India in
Rupees which is not in conformity with the Act or rules or regulations framed thereunder.

Provided further that a no-objection certificate to this effect should be obtained from the lenders in
India of the Indian company.

(5) The resultant company may acquire and hold any asset in India which a foreign company is
permitted to acquire under the provisions of the Act, rules or regulations framed thereunder. Such
assets can be transferred in any manner for undertaking a transaction permissible under the Act or
rules or regulations framed thereunder.

(6) Where the asset or security in India cannot be acquired or held by the resultant company under
the Act, rules or regulations, the resultant company shall sell such asset or security within a period of
two years from the date of sanction of the Scheme by NCLT and the sale proceeds shall be
repatriated outside India immediately through banking channels. Repayment of Indian liabilities from
sale proceeds of such assets or securities within the period of two years shall be permissible.

(7) The resultant company may open a Special Non-Resident Rupee Account (SNRR Account) in
accordance with the Foreign Exchange Management (Deposit) Regulations, 2016 for the purpose of
putting through transactions under these Regulations. The account shall run for a maximum period of
two years from the date of sanction of the Scheme by NCLT.

6. Valuation

(1) The valuation of the Indian company and the foreign company shall be done in accordance with
Rule 25A of the Companies (Compromises, Arrangement or Amalgamation) Rules, 2016.

7. Miscellaneous

(1) Compensation by the resultant company, to a holder of a security of the Indian company or the
foreign company, as the case may be, may be paid, in accordance with the Scheme sanctioned by
the NCLT.

(2) The companies involved in the cross border merger shall ensure that regulatory actions, if any,
prior to merger, with respect to non-compliance, contravention, violation, as the case may be, of the
Act or the Rules or the Regulations framed thereunder shall be completed.

8. Reporting
(1) The resultant company and/or the companies involved in the cross border merger shall be
required to furnish reports as may be prescribed by the Reserve Bank, in consultation with the
Government of India, from time to time.

9. Deemed approval

(1) Any transaction on account of a cross border merger undertaken in accordance with these
Regulations shall be deemed to have prior approval of the Reserve Bank as required under Rule 25A
of the Companies (Compromises, Arrangement and Amalgamations) Rules, 2016.

(2) A certificate from the Managing Director/Whole Time Director and Company Secretary, if available,
of the company(ies) concerned ensuring compliance to these Regulations shall be furnished along
with the application made to the NCLT under the Companies (Compromises, Arrangement or
Amalgamation) Rules, 2016.

Section 234 of Companies Act, 2013: “Merger or amalgamation of a company with foreign
company.

(1) The provisions of this Chapter unless otherwise provided under any other law for the time
being in force, shall apply mutatis mutandis to schemes of mergers and amalgamations between
companies registered under this Act and companies incorporated in the jurisdictions of such
countries as may be notified from time to time by the Central Government: Provided that the
Central Government may make rules, in consultation with the Reserve Bank of India, in
connection with mergers and amalgamations provided under this section.

(2) Subject to the provisions of any other law for the time being in force, a foreign company, may
with the prior approval of the Reserve Bank of India, merge into a company registered under this
Act or vice versa and the terms and conditions of the scheme of merger may provide, among
other things, for the payment of consideration to the shareholders of the merging company in
cash, or in Depository Receipts, or partly in cash and partly in Depository Receipts, as the case
may be, as per the scheme to be drawn up for the purpose.

Rule 25A of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016:

Merger or amalgamation of a foreign company with a Company and vice versa.

(1) A foreign company incorporated outside India may merge with an Indian company after
obtaining prior approval of the Reserve Bank of India and after complying with the provisions of
sections 230 to 232 of the Act and these rules.

(2) (a) A company may merge with a foreign company incorporated in any of the jurisdictions
specified in Annexure B after obtaining prior approval from the Reserve Bank of India and after
complying with provisions of sections 230 to 232 of the Act and these rules.

(b) The transferee company shall ensure that valuation is conducted by valuers who are
members of a recognised professional body in the jurisdiction of the transferee company and
further that such valuation is in accordance with internationally accepted principles on accounting
and valuation. A declaration to this effect shall be attached with the application made to the
Reserve Bank of India for obtaining its approval under clause (a) of this sub-rule.

(3) The concerned company shall file an application before the Tribunal as per provisions of
section 230 to section 232 of the Act and these rules after obtaining approvals specified in sub-
rule (1) and sub-rule (2), as the case may be.
The existing legal framework for M&A in India is favourable to attract foreign investment. At the
same time, this allows Indian companies to have global market access which in turn would
increase India’s global economic presence. The current legal framework of cross-border mergers
is still at a nascent stage, however, the government is taking sufficient steps to provide a smooth
enabling environment for the same.

Session 13: Stamp Act

A. Stamp duty on court order for mergers/demergers Since the order of the Court merging two or
more companies, or approving a demerger, has the effect of transferring property to the surviving
/resulting company, the order of the NCLT may be required to be stamped. The stamp laws of most
states require the stamping of such orders. The amount of the stamp duty payable would depend on
the state specific stamp law.

B. Stamp duty on share transfer The stamp duty payable on a share transfer form executed in
connection with a transfer of shares is 0.25% of the value of, or the consideration paid for, the
shares. Currently, if the shares are in dematerialised form, the abovementioned stamp duty is not
applicable. However, with effect from July 1, 2020, share transfers of unlisted securities both in
physical and dematerialized form will be subject to stamp duty at 0.015% of the purchase
consideration. Stamp duty in the case of listed securities varies from 0.015% to 0.003% depending
on whether they are traded on a cash on delivery basis or cash on non-delivery basis.

C. Stamp duty on shareholder agreements/joint venture agreements Stamp duty will be payable as
per the state specific stamp law.

D. Stamp duty on share purchase agreements Stamp duty may be payable on an agreement that
records the purchase of shares/debentures of a company. This stamp duty is payable in addition to
the stamp duty on the share transfers mentioned above.

E. Transaction costs for asset purchase vs. slump sale vs. share purchase Transaction related costs
are generally higher in the case of an asset purchase as compared to a share purchase or slump sale.
This is primarily because in a share purchase or slump sale, there would usually be no incidence of
GST, which may be levied on different aspects of an asset purchase. Further, the rate of stamp duty
is also usually higher in an asset purchase and slump sale, and it is dependent on the nature of the
assets being transferred. While for tax purposes, no values are assigned to the individual assets of
the undertaking being transferred (in a slump sale), it is necessary to assign values to assets for the
purpose of determining the stamp duty payable. The stamp duty on a transfer of shares is currently
0.25% (0.015% from July 1, 2020) of the consideration payable for the shares, which rate is usually
far less than the stamp duty rates applicable for transfer of movable/immovable assets which may
vary from 3% to 5% from state to state.

Session 18:

Goods and Services Tax From July 1, 2017, the Goods and Services Tax (“GST”) regime has come into
force, which replaced the erstwhile indirect tax regime. Under the GST regime, Central GST and State
GST is levied on all intra-state supplies of goods and/ or services, and Integrated GST is levied on
imports and all supplies of goods and/or services undertaken in the course of inter-state trade or
commerce. The slab rates for the levy of GST on the supply of goods/services are fixed at 5%, 12%,
18% or 28%.

Unutilized Input Tax Credit Section 18(3) of the GST law also permits transfer of unutilized GST
credit to the transferor in the case of transfer of a business. The transfer of credit is subject to the
condition that the liability of the business is also transferred along with the assets.

Further, Rule 41 of the GST Rules prescribes Form ITC-02 which is required to be submitted by the
transferor furnishing complete details of sale, merger, demerger, amalgamation, etc., along with the
details of unutilized input tax credit lying in the hands to the transferee. The transferee is required to
accept the details so furnished by the transferor on the common GST portal and, upon such
acceptance, the un-utilized credit specified in FORM GST ITC-02 shall be credited to his electronic
credit ledger The inputs and capital goods so transferred must be duly accounted for by the
transferee in his books of account The transferor shall also submit a copy of a certificate issued by a
practicing chartered account or cost accountant certifying that the sale, merger, de-merger,
amalgamation, lease or transfer of business has been done with a specific provision for transfer of
liabilities

Session 15:

Section 395 of the Companies Act, 1956 (“1956 Act”), provided a transferee company with a
limited mechanism for a minority squeeze-out, in situations where a scheme or contract involving
a transfer of shares between two companies receives approval of at-least 90% of the
shareholders, whose shares are being purchased.

Section 235 of the Companies Act, 2013 (“Act”) broadly corresponds to Section 395 of the
1956 Act. Section 235(1) provides for a compulsory acquisition of the shares held by the
dissenting shareholders, in situations where a scheme or contract involving the transfer of shares
or any class of shares in a company (i.e. the transferor company) to another company (i.e. the
transferee company) has, within four months after making of an offer in that behalf by the
transferee company, been approved by the holders of not less than nine-tenths (i.e. 90%) in
value of the shares, whose transfer is involved. Once the approval is received from at-least 90%
of the shareholders whose shares are being acquired, a company can issue notice to the
dissenting shareholders, stating that it desires to acquire their shares. It is pertinent to note that
in accordance with Sections 235(2) and 235(3) of the Act, the dissenting minority shareholders
(whose shares are being compulsorily acquired) have a right to object to the acquisition, by
approaching the NCLT.

In addition to the limited mechanism provided under Section 235, companies have also adopted
other methods like selective capital reduction (in accordance with Section 66 of the Act), for a
minority squeeze-out.

Listed companies have the additional option of undertaking a delisting of equity shares, in
accordance with the SEBI (Delisting of Equity Shares) Regulation, 2021 (“Delisting Regulations”).

Along with Section 235, the Act has also added Section 236, which is a new provision dealing
with “purchase of minority shareholding”.

Scheme of Section 236 of the Act

Section 236(1) of the Act provides that in the event of an acquirer, or a person acting in concert
with such acquirer, becomes a registered holder of 90% or more of the issued equity share
capital of a company, or in the event of any person or group of persons becoming 90% majority
or holding 90% of the issued equity share capital of a company, by virtue of an amalgamation,
share exchange, conversion of securities or for any other reason, such acquirer, person or group
of persons, as the case may be, shall notify the company of their intention to buy the remaining
equity shares.

Section 236(2) provides that the acquirer/person/group of persons under Section 236(1) shall
offer to the minority shareholders of the company for buying the equity shares held by such
shareholders at a price determined on the basis of valuation by a registered valuer in accordance
with such rules as may be prescribed.

Section 236(3) provides that without prejudice to the provisions of Sections 236(1) and 236(2),
the minority shareholders of the company may offer to the majority shareholders to purchase the
minority equity shareholding of the company at the price determined in accordance with such
rules as may be prescribed under Section 236(2).

Sections 236(4) to 236(9) provide certain additional compliance requirements that must be
fulfilled, once the majority shareholder(s) have exercised the rights conferred by Sections 236(1)
and 236(2). Rule 27 of the Companies (Compromises, Arrangements and Amalgamations)
Rules, 2Reg016, provides the method for arriving at the fair value of the shares, in case of both
listed and unlisted companies.

It is also pertinent to note that for the purposes of Section 236(2), valuation should be
undertaken by a registered valuer, in accordance with Section 247 of the Act, and the
Companies (Registered Valuers and Valuation) Rules, 2017.

For evaluating the scope of Sections 236(1) and 236(2), it is instructive to refer to the
decision of the NCLAT in S. Gopakumar Nair v. OBO Bettermann India Private Limited[2]
(“OBO Bettermann”).

NCLAT’s interpretation of Sections 236(1) and 236(2)

In OBO Bettermann, the majority shareholders (who held 99.64% of the shareholding of the
company) tried to compulsorily acquire the shares of the minority, by issuing notices under
Section 236.

The NCLAT held that Section 236 can be invoked by the majority shareholder(s) only if either of
the ‘events’ specified under Section 236(1) have taken place – which implies that the majority
shareholder should hold or acquire a minimum of 90% of the shareholding “by virtue of an
amalgamation, share exchange, conversion of securities or for any other reason”. It was held that
the words “for any other reason” should be read ejusdem generis with the preceding words and
would only include ‘events’ that are similar to an amalgamation, share exchange and conversion
of securities.

The NCLAT had also observed that while Section 235 deals with the acquisition of shares from
dissenting shareholders in certain specified situations, Section 236 deals with the acquisition of
shares from assenting shareholders, if either of the ‘events’ specified in Section 236(1) have
taken place.

Whether Section 236(3) is independent from Sections 236(1) and 236(2)?

Section 236(3), which provides that without prejudice to the provisions of Sections 236(1) and
236(2), the minority shareholders of the company may offer to the majority shareholders to
purchase the minority equity shareholding of the company at the price determined in accordance
with the rules prescribed under Section 236(2).

While Sections 236(1) and 236(2) [which deal with the majority shareholders’ right to buyout the
minority], use the word “shall”, Section 236(3) uses the word “may”. This indicates that a person
who becomes a 90% majority shareholder [by virtue of an amalgamation, share exchange,
conversion of securities or for any other reason] has an obligation to make an ‘offer’ to purchase
the shares of the minority. However, there is no corresponding obligation on the minority
shareholders to compulsorily sell their shares to the majority.

Further, given that Section 236(3) begins with the words “without prejudice to”, at a prima facie
level, one could argue that Section 236(3) is an independent provision, that confers an
independent right to the minority shareholders to sell their shares to the majority. If one were to
take such a view, it would tantamount to the minority shareholders in Indian companies having a
perpetual ‘put option’ on the majority shareholder, without have any such right under a contract.
One could even argue that since Section 236(3) is an independent provision, the “minority” does
not mean shareholders holding 10% or less, but would cover a situation where a minority
shareholder holding 49% shares can exercise a ‘put option’ on the majority shareholder holding
51%.

Regulations of paid-up capital, subscribed capital and authorized capital and voting rights of

shareholders

Statutory requirements
According to Section 12 of the Banking Regulation Act, 1949, no banking company is allowed
to carry on its business unless it satisfies the following conditions:

1. Its subscribed capital is not less than one-half of its authorized capital;
2. Its paid-up capital is not less than one-half of the subscribed capital;
3. The capital of the company consists of ordinary shares only or of ordinary shares
or equity shares;
4. No person holding shares in a banking company shall have voting rights of above
10% of total voting rights of all the shareholders;
5. Every managing executive of the bank needs to disclose, to the RBI, the extent
and the amount of his shareholding in the firm.