MERGERS AND

ACQUISITIONS COURSE
MATERIAL

PROGRAM: BA/BBA/B.COM.LL.B (H)

SEMSTER: VIIi

COURSE INSTRUCTOR/FACULTY: MR. INDRANIL

BANERJEE

AMITY LAW SCHOOL, NOIDA

Course Title: MERGERS AND L T P/ SW/ TOTA
ACQUISITIONS S FW L
CREDI
Course Code: LAW533 T
UNITS
2 1 - - 3
Credit Units: 3

Course Objective:

The objective of the course is to acquaint the students with the law relating to
Mergers and Acquisitions in general with emphasis on corporate laws especially
laws relating to companies, competition, SEBI , besides, corporate accounting
procedures and debt restructuring and other connected concepts .

Pre-requisites:

The student ought to have preliminary knowledge of commercial laws and various
commercial entities operating in different geographies.

Student Learning Outcome:

This course acquaints the students with the Mergers and Acquisitions of companies
and other business entities. After undergoing the course the student is expected to
be well versed with the integrities and finer elements of the course particularly the
legal requirement as required under various statutes.
Course Contents/Syllabus:

Module I: Basic Concepts Weghtage (%)

25
Corporate restructuring and its forms, Mergers and Acquisitions and
their kinds , Merger Jurisprudence including Process thereto ,
Negotiating the deal and Due Diligence, Reverse Mergers , De-
Mergers, Hiving of Business , Successor ship issues especially
assignment of contractual rights and successors liability .
25
Module II: Mergers and Acquisitions under Company Law

Types of Companies, Compromise, Arrangement and Amalgamation

of Companies under Companies Act, 2013 and its comparison with
Act of 1956, Reduction of Share Capital & Buy Back of Shares, Inter
Corporate Loans & Investments, Winding up, Merger of Foreign
Companies with Indian Companies

Module III: Revival and Rehabilitation of Sick 25

Companies
Procedure for Revival and Rehabilitation, Scheme of Revival &
Rehabilitation, sanction of Scheme and its binding nature , Company
Administrator ,Tribunal and its Powers, Rehabilitation and
Insolvency fund . Computation and Exclusion of time for filing
Suits/Proceedings, BIFR & AAIFR and cursory understanding of
SICA, 1985.
Module IV: Mergers/Acquisitions and Compliance to various 25
Laws

Testing System / Compliances under SEBI, Competition Laws,

FEMA, and treatment to IPR with reference to mergers and
Acquisitions. Valuation of Business and Accounting for
Amalgamations. Tax Aspects of Amalgamation, Mergers & Human
Resource dimensions

Pedagogy for Course Delivery:

The course will be conducted using lectures, assignments. The students will be
acquainted with important case laws on the subject to understand the intricacies
involved in Mergers and Acquisitions .

Lab/ Practical details, if applicable: NA

 List of Experiments: NA

Assessment/ Examination Scheme:

Assessment/ Examination Scheme:

Theory L/T Lab/Practical/Studio (%) End Term

(%) Examination

30% NA 70%

Theory Assessment (L&T):

Continuous Assessment/Internal Assessment
End Term
Components Examination
(Drop
down) Mid- Project Viva Attendance
Term
Exam

Weightage
(%)
10% 10% 5% 5% 70%

Text and References:

• Mergers et al - S. Ramanujam
• Mergers and Acquisitions : A step by step Legal & Practical Guide - Edwin
L.Miller
• Corporate Structuring in India - H.R. Machiraju
• Mergers , Amalgamations, Takeovers & Corporate Restructure-K.R. Sampath
• Mergers and Acquisitions of Companies – P. Mohana Rao
• Company Law - Dr. Avtar Singh
 MATERIAL FOR MODULE 1

TOPIC: Basic Understanding of Merger and

Acquisitions
1. STUDY MATERIAL ON BASIC CONCEPTS OF MERGER AND
ACQUISITION

1.1 Corporate restructuring: Corporate restructuring refers to the changes in ownership,

business mix, assets mix and alliances with a view to enhance the shareholder value. Hence,
corporate restructuring may involve ownership restructuring, business restructuring and assets
restructuring.

As per Collins English dictionary, meaning of corporate restructuring is a change in the business
strategy of an organization resulting in diversification, closing parts of the business, etc, to
increase its long-term profitability. Corporate restructuring is defined as the process involved in
changing the organization of a business. Corporate restructuring can involve making dramatic
changes to a business by cutting out or merging departments. It implies rearranging the business
for increased efficiency and profitability. In other words, it is a comprehensive process, by which
a company can consolidate its business operations and strengthen its position for achieving
corporate objectives-synergies and continuing as competitive and successful entity.

A company can affect ownership restructuring through mergers and acquisitions, leveraged buy-
outs, buyback of shares, spin-offs, joint ventures and strategic alliances. Business restructuring
involves the reorganization of business units or divisions. It includes diversification into new
businesses, out-sourcing, divestment, brand acquisitions etc. Asset restructuring involves the
acquisition or sale of assets and their ownership structure. The examples of asset restructuring
are sale and leaseback of assets, securitization of debt, receivable factoring, etc. The basic
purpose of corporate restructuring is to enhance the shareholder value. A company should
continuously evaluate its portfolio of businesses, capital mix and ownership and assets
arrangements to find opportunities for increasing the shareholder value. It should focus on assets
utilization and profitable investment opportunities, and reorganize or divest less profitable or loss
making businesses/products. The company can also enhance value through capital restructuring;
it can design innovative securities that help to reduce cost of capital. Merger and acquisition falls
under external restructuring of a company where a company needs to take the help from another
firm to sustain themselves.
In earlier years, India was a highly regulated economy. Though Government participation was
overwhelming, the economy was controlled in a centralized way by Government participation
and intervention. In other words, economy was closed as economic forces such as demand and
supply were not allowed to have a full-fledged liberty to rule the market. There was no scope of
realignments and everything was controlled. In such a scenario, the scope and mode of Corporate
Restructuring were very limited due to restrictive government policies and rigid regulatory
framework. These restrictions remained in vogue, practically, for over two decades. These,
however, proved incompatible with the economic system in keeping pace with the global
economic developments if the objective of faster economic growth were to be achieved. The
Government had to review its entire policy framework and under the economic liberalization
measures removed the above restrictions by omitting the relevant sections and provisions.

The real opening up of the economy started with the Industrial Policy, 1991 whereby 'continuity
with change' was emphasized and main thrust was on relaxations in industrial licensing, foreign
investments, transfer of foreign technology etc. With the economic liberalization, globalization
and opening up of economies, the Indian corporate sector started restructuring to meet the
opportunities and challenges of competition. The economic and liberalization reforms, have
transformed the business scenario all over the world. The most significant development has been
the integration of national economy with 'market-oriented globalized economy'. The multilateral
trade agenda and the World Trade Organization (WTO) have been facilitating easy and free flow
of technology, capital and expertise across the globe. A restructuring wave is sweeping the
corporate sector the world over, taking within its fold both big and small entities, comprising old
economy businesses, conglomerates and new economy companies and even the infrastructure
and service sector. From banking to oil exploration and telecommunication to power generation,
petrochemicals to aviation, companies are coming together as never before. Not only this new
industries like e-commerce and biotechnology have been exploding and old industries are being
transformed. With the increasing competition and the economy, heading towards globalisation,
the corporate restructuring activities are expected to occur at a much larger scale than at any time
in the past. Corporate Restructuring play a major role in enabling enterprises to achieve
economies of scale, global competitiveness, right size, and a host of other benefits including
reduction of cost of operations and administration.
1.2 Mergers and Acquisitions-definitions and types: Mergers are a normal activity
within the economy and are means for enterprises to expand business activity. A merger is a
transaction that brings about change in control of different business entities enabling one
business entity effectively to control a significant part of the assets or decision making process of
another.

One plus one makes three- this equation is the special alchemy of a merger or an acquisition. The
key principle behind buying a company is to create shareholder value over and above that of the
sum of the two companies. Two companies together are more valuable than two separate
companies - at least, that's the reasoning behind M&A. This rationale is particularly alluring to
companies when times are tough. Strong companies will act to buy other companies to create a
more competitive, cost-efficient company. The companies will come together hoping to gain a
greater market share or to achieve greater efficiency. Because of these potential benefits, target
companies will often agree to be purchased when they know they cannot survive alone.
In the pure sense of the term, a merger happens when two firms, often of about the same size,
agree to go forward as a single new company rather than remain separately owned and operated.
This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks
are surrendered and new company stock is issued in its place. For example, both Daimler-Benz
and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler,
was created. In practice, however, actual mergers of equals don't happen very often, in fact, it is
impossible to think of an arrangement where we can find two companies who are absolutely
equal to each other. Usually, one company will buy another and, as part of the deal's terms,
simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's
technically an acquisition. Being bought out often carries negative connotations, therefore, by
describing the deal as a merger, deal makers and top managers try to make the takeover more
palatable.
From the perspective of business structures, there is a whole host of different mergers. Here are a
few types, distinguished by the relationship between the two companies that are merging:
1. Horizontal merger - It is a merger of two or more companies that compete in the same
industry. It is a merger with a direct competitor and hence expands as the firm's operations in the
same industry. Horizontal mergers are designed to achieve economies of scale and result in
reduce the number of competitors in the industry.
2. Vertical merger - It is a merger which takes place upon the combination of two companies
which are operating in the same industry but at different stages of production or distribution
system. If a company takes over its supplier/producers of raw material, then it may result in
backward integration of its activities. On the other hand, Forward integration may result if a
company decides to take over the retailer or Customer Company. Vertical merger provides a way
for total integration to those firms which are striving for owning of all phases of the production
schedule together with the marketing network
Think of a cone supplier merging with an ice cream maker.
3. Conglomeration - These mergers involve firms engaged in unrelated type of activities i.e. the
business of two companies are not related to each other horizontally or vertically. In a pure
conglomerate, there are no important common factors between the companies in production,
marketing, research and development and technology. Conglomerate mergers are merger of
different kinds of businesses under one flagship company. The purpose of merger remains
utilization of financial resources enlarged debt capacity and also synergy of managerial
functions. It does not have direct impact on acquisition of monopoly power and is thus favoured
throughout the world as a means of diversification.

4. Acquisition- An acquisition may be only slightly different from a merger. In fact, it may be
different in name only. Like mergers, acquisitions are actions through which companies seek
economies of scale, efficiencies and enhanced market visibility. Unlike mergers, all acquisitions
involve one firm purchasing another - there is no exchange of stock or consolidation as a new
company. Acquisitions are often congenial, and all parties feel satisfied with the deal. Other
times, acquisitions are more hostile and to some extend forceful and that’s the reason why they
are called take over arrangements.
Sometimes, a distinction between takeover and acquisition is made. The term takeover is
understood to connote hostility. When an acquisition is a ‘forced’ or ‘unwilling’ acquisition, it is
called a takeover. In an unwilling acquisition, the management of “target” company would
oppose a move of being taken over. When managements of acquiring and target companies
mutually and willingly agree for the takeover, it is called acquisition or friendly takeover. An
example of such would be the acquisition of controlling interest (45 per cent shares) of Universal
Luggage Manufacturing Company Ltd. by Blow Plast Ltd. Similarly, Mahindra and Mahindra
Ltd., a leading manufacturer of jeeps and tractors acquired a 26 per cent equity stake in Allwyn
Nissan Ltd. Yet another example is the acquisition of 28 per cent equity of International Data
Management (IDM) by HCL Ltd. In recent years, due to the liberalisation of financial sector as
well as opening up of the economy for foreign investors, a number of hostile take-overs could be
witnessed in India.
Regardless of their category or structure, all mergers and acquisitions have one common goal:
they are all meant to create synergy that makes the value of the combined companies greater than
the sum of the two parts. The success of a merger or acquisition depends on whether this synergy
is achieved.
5. Amalgamation- According to Section 2(1B) of the Income-tax Act, 1961, 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-

1. All the property of the amalgamating company or companies immediately before the
amalgamation becomes the property of the amalgamated company by virtue of amalgamation

2. All the liabilities of the amalgamating company or companies immediately before the
amalgamation become the liabilities of the amalgamated company by virtue of amalgamation

3. Shareholders holding not less than 3/4th in value of the shares in amalgamating company or
companies (other than shares held therein immediately before the amalgamation or by a nominee
for the amalgamated company or its subsidiary) become shareholders of the amalgamated
company by virtue of the amalgamation, otherwise than as a result of the acquisition of the
property of one company by another company pursuant to the purchase of such property by the
other company or as a result of distribution of such property to the other company after the
winding up of first mentioned company.
Thus, legally speaking there was absolutely no practical differences made by the IT Act, 1961
between mergers and amalgamations and that’s the reason of calling all kinds of external
corporate restructuring arrangement as amalgamation before the amendment of the Companies
Act in 2013.
1.3 Advantages and disadvantages of merger- Why do mergers take place? It is believed
that mergers and acquisitions are strategic decisions leading to the maximisation of a company’s
growth by enhancing its production and marketing operations. They have become popular in the
recent times because of the enhanced competition, breaking of trade barriers, free flow of capital
across countries and globalisation of business as a number of economies are being deregulated
and integrated with other economies. A number of reasons are attributed for the occurrence of
mergers and acquisitions. A number of benefits of mergers are claimed. All of them are not real
benefits. Based on the empirical evidence and the experiences of certain companies, the most
common motives and advantages of mergers and acquisitions are explained below:
1. Maintaining or accelerating a company’s growth, particularly when the internal growth is
constrained due to paucity of resources;
2. Enhancing profitability, through cost reduction resulting from economies of scale, operating
efficiency and synergy;
3. Diversifying the risk of the company, particularly when it acquires those businesses whose
income streams are not correlated;
4. Reducing tax liability because of the provision of setting-off accumulated losses and
unabsorbed depreciation of one company against the profits of another;
5. Limiting the severity of competition by increasing the company’s market power.
There are certain common benefits that corporations can have in cases of merger, which are as
follows-
Accelerated Growth: Growth is essential for sustaining the viability, dynamism and value-
enhancing capability of a company. A growth-oriented company is not only able to attract the
most talented executives but it would also be able to retain them. Growing operations provide ]
challenges and excitement to the executives as well as opportunities for their job enrichment and
rapid career development. This helps to increase managerial efficiency. Other things remain
same, growth leads to higher profits and increase in the shareholders’ value. A company can
achieve its growth objective by:
-Expanding its existing markets
-Entering in new markets.
A company may expand and/or diversify its markets internally or externally. If the company
cannot grow internally due to lack of physical and managerial resources, it can grow externally
by combining its operations with other companies through mergers and acquisitions. Mergers
and acquisitions may help to accelerate the pace of a company’s growth in a convenient and
inexpensive manner.
Economies of scale: Economies of scale arise when increase in the volume of production leads
to a reduction in the cost of production per unit. Merger may help to expand volume of
production without a corresponding increase in fixed costs. Thus, fixed costs are distributed over
a large volume of production causing the unit cost of production to decline. Economies of scale
may also arise from other indivisibilities such as production facilities, management functions and
management resources and systems. This happens because a given function, facility or resource
is utilised for a larger scale of operation. For example, a given mix of plant and machinery can
produce scale economies when its capacity utilisation is increased. Economies will be maximised
when it is optimally utilised. Similarly, economies in the use of the marketing function can be
achieved by covering wider markets and customers using a given sales force and promotion and
advertising efforts. Economies of scale may also be obtained from the optimum utilisation of
management resource and systems of planning, budgeting, reporting and control. A company
establishes management systems by employing enough qualified professionals irrespective of its
size. A combined firm with a large size can make the optimum use of the management resource
and systems resulting in economies of scale.
Operating economies: In addition to economies of scale, a combination of two or more firms
may result into cost reduction due to operating economies. A combined firm may avoid or reduce
overlapping functions and facilities. It can consolidate its management functions such as
manufacturing, marketing, R&D and reduce operating costs.
For example, a combined firm may eliminate duplicate channels of distribution, or create a
centralised training centre, or introduce an integrated planning and control system. In a vertical
merger, a firm may either combine with its suppliers of input (backward integration) and/or with
its customers (forward integration). Such merger facilitates better coordination and
administration of the different stages of business operations—purchasing, manufacturing, and
marketing—eliminates the need for bargaining (with suppliers and/or customers), and minimises
uncertainty of supply of inputs and demand for product and saves costs of communication.
Synergy: Synergy implies a situation where the combined firm is more valuable than the sum of
the individual combining firms. It is defined as ‘one plus one equals to three’ (1 + 1 = 3)
phenomenon. Synergy refers to benefits other than those related to economies of scale. Operating
economies are one form of synergy benefits. However, apart from operating economies, synergy
may also arise from enhanced managerial capabilities, creativity, innovativeness, R&D and
market coverage capacity due to the complementarities of resources and skills and a widened
horizon of opportunities.
Diversification of Risk: Diversification implies growth through the combination of firms in
unrelated businesses. Such mergers are called conglomerate mergers. It is difficult to justify
conglomerate merger on the ground of economies, as it does not help to strengthen horizontal or
vertical linkages. It is argued that it can result into reduction of total risk through substantial
reduction of cyclicality of operations. Total risk will be reduced if the operations of the
combining firms are negatively correlated. At the same time in the cases of conglomerate
mergers both the companies can utilise each other’s customer bases and thereby increase the
market share significantly.
Reduction in Tax Liability: In a number of countries, a company is allowed to carry forward its
accumulated loss to set-off against its future earnings for calculating its tax liability. A loss-
making or sick company may not be in a position to earn sufficient profits in future to take
advantage of the carry forward provision. If it combines with a profitable company, the
combined company can utilise the carry forward loss and save taxes. In India, a profitable
company is allowed to merge with a sick company to set-off against its profits the accumulated
loss and unutilised depreciation of that company. A number of companies in India have merged
to take advantage of this provision.
An example of a merger to reduce tax liability is the absorption of Ahmadabad Cotton Mills
Limited (ACML) by Arbind Mills. ACML was closed in August 1977 on account of labour
Problem. At the time of merger, ACML had an accumulated loss of Rs 3.34 crore. Arbind Mills
saved about Rs 2 crore in tax liability for the next two years after the merger because it could set-
off ACML’s accumulated loss against its profits.
A strong urge to reduce tax liability, particularly when the marginal tax rate is high (as has been
the case in India) is a strong motivation for the combination of companies. For example, the high
tax rate was the main reason for the post-war merger activity in the USA. Also, tax benefits are
responsible for one-third of mergers in the USA.
Increased Market Share: A merger can increase the market share of the merged firm. The
increased concentration or market share improves the profitability of the firm due to economies
of scale. The bargaining power of the firm vis-à-vis labour, suppliers and buyers is also
enhanced. The merged firm can also exploit technological breakthroughs against obsolescence
and price wars. Thus, by limiting competition, the merged firm can earn super-normal profit and
strategically employ the surplus funds to further consolidate its position and improve its market
power. We can once again refer to the acquisition of Universal Luggage by Blow Plast as an
example of limiting competition to increase market power. Before the merger, the two
companies were competing fiercely with each other leading to a severe price war and increased
marketing costs. As a result of the merger, Blow Plast has obtained a strong hold on the market
and now operates under near monopoly situation.
Illustration: Sharing Economic Advantage Firm P has a total market value of Rs 18 crore (12
lakh shares of Rs 150 market value per share). Firm Q has a total market value of Rs 3 crore (5
lakh of Rs 60 market value per share). Firm P is considering the acquisition of Firm Q. The value
of P after merger (that is, the combined value of the merged firms) is expected to be Rs 25 crore
due to the operating efficiencies. Firm P is required to pay Rs 4.5 crore to acquire Firm Q. What
is the net economic advantage to Firm P if it acquires Firm Q?
- The net economic advantage is the difference between the economic advantage and the cost of
merger to P: NEA = [25 – (18 + 3)] – (4.5 – 3) = 4 – 1.5 = Rs 2.5 crore The economic advantage
of Rs 4 crore is divided between the acquiring firm Rs 2.5 crore and the target firm, Rs 1.5 crore.
However, there are certain potential disadvantages related to mergers and acquisitions, for
instances-
Short-Term Financial losses
Despite the assumed cost savings that come along with eliminating duplicative back-office and
marketing functions that occur within the same industry, acquisitions still require significant
outlay of either cash or company stock and may not be immediately profitable. Companies may
decide to proceed with an acquisition for strategic reasons to firm up their competitive position,
not necessarily to increase short-term profits, which may cause a decline in stock prices. Any
hint of monopolistic tendencies suggested by the merger, however, may draw the attention of
regulators and increase legal fees.

Customer Impact
Companies that acquire other businesses within the same industry may feel they can raise their
prices given the reduced competition, yet consumers may well rebel when confronted by
increased costs as they seek cheaper product alternatives within the marketplace. The impetus for
innovation may decrease if companies attempt to maximize their profits at the expense of
research and development budgets, which would lead to less customer choice and a weaker
foundation for future profitability.

Complacency
Companies may become too set in their ways when they feel that competition no longer
aggressively breathes down their corporate backs. Customer service may suffer as employees
feel less of an urgent need to go out of their way to help clients and shoppers. The
entrepreneurial spirit can also drag when it becomes too satisfied, which can lead to less
executive work hours and more time on the golf course. That scenario will eventually catch up
with the acquiring company as new businesses emerge to fill market gaps.

Unmatched Corporate Cultures

Two companies may operate well within the same industry, but have entirely different corporate
cultures. One may be more of the buttoned-down, leather-shoe variety, the other boasting a more
freewheeling T-shirt and sneakers brilliance. Both have their place, yet integrating such starkly
different customs can take months of effort, create ill will and result in layoffs or departures that
directly impact the bottom line.

Anti-Trust Issues

Both mergers and acquisitions can have potential negative impact on the competitiveness of a
market concerned. Particularly this is true in cases of monopolistic and oligopolistic markets
where the number of key firms are less. When giant corporate bodies enter into merger
arrangements, in most of the cases they tend to make the market less competitive and such a
situation is completely unacceptable in an open market economy and that’s the reason of having
regulatory bodies examining each and every such arrangements whenever they occur.

Reasons of mergers and acquisitions to fail

Some of the main risks that may precipitate the failure of an M&A transaction are –

Integration risk: In many cases, integrating the operations of two companies proves to be a
much more difficult task in practice than it seemed in theory. This may result in the combined
company being unable to reach the desired targets in terms of cost-savings from synergies and
economies of scale. A potentially accretive transaction could therefore well turn out to be
dilutive.

Overpayment: If company A is unduly bullish about company B’s prospects – and wants to
forestall a possible bid for B from a rival – it may offer a very substantial premium for B. Once it
has acquired company B, the best-case scenario that A had anticipated may fail to materialize.
For instance, a key drug being developed by B may turn out to have unexpectedly severe side-
effects, significantly curtailing its market potential. Company A’s management (and
shareholders) may then be left to rue the fact that it paid much more for B than what it was
worth. Such overpayment can be a major drag on future financial performance.

Culture Clash: M&A transactions sometimes fail because the corporate cultures of the potential
partners are so dissimilar. Think of a staid technology stalwart acquiring a hot social media start-
up and you may get the picture.

1.4 Demerger- It is a form of corporate restructuring in which the entity's business operations
are segregated into one or more components. A demerger is often done to help each of the
segments operate more smoothly, as they can focus on a more specific task after demerger.

Demergers were an American invention of the 1920s and became common since the 1950s.
Corporate demerger is one of several ways through which a firm may divest a division and
improve its focus. A demerger is a pro-rata distribution of the shares of a firm‘s subsidiary to the
shareholders of the firm. There is neither a dilution of equity nor a transfer of ownership from the
current shareholders. After the distribution, the operations and management of the subsidiary are
separated from those of the parent. Demerger constitutes a unique mode of divesting assets since
they do not involve any cash transactions. Thus, they cannot be motivated by a desire to generate
cash to pay off debt, as is often the case with other modes of divestitures. In American English
this process is termed spin-off, in British English, demerger. A De-merger results in the transfer
by a company of one or more of its undertakings to another company. The company whose
undertaking is transferred is called the De-merged company and the company (or the
companies) to which the undertaking is transferred is referred to as the Resulting company.
Demerger Companies often have to downsize or contract ‘their operations in certain
qacircumstances such as when a division of the company is performing poorly or simply because
it no longer fits into the company‘s plans or give effect to rationalization or specialization in the
manufacturing process. This may also be necessary to undo a previous merger or acquisition
which proved unsuccessful. This type of restructuring can take various forms such as demergers
or spin offs, split offs, etc. Large entities sometimes hinder entrepreneurial initiative, sideline
core activities, reduce accountability and promote investment in non-core activities. There is an
increasing realization among companies that demerger may allow them to strengthen their core
competence and realize the true value of their business. After the drive down the mergers and
acquisitions avenue, India Incorporations has turned into the road of de-mergers as it speeds
towards corporate restructuring. Be it the Birla group's decision to break up Indo Gulf
Corporation into the fertilizer and copper businesses, or L&T hiving off its cement division,
spin-offs have emerged as key vehicles for corporate regimes. Spin-offs, which essentially break
up a company into two or more parts, strive to attain better focus or a better valuation for parts of
the business which tended to be neglected in a conglomerate structure.

In the era of globalization, corporate bodies all over the world are moving towards consolidation
and redefining core competencies to survive and achieve their 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.
Companies have to downsize or ‘contract’ their operations in certain circumstances such as when
a division of the company is performing poorly or simply because it no longer fits into the
company’s plans or to give effect to rationalisation or specialisation in the manufacturing
process. This may also be necessary to undo a previous merger or acquisition which proved
unsuccessful. This type of restructuring can take various forms such as demerger or spin off, split
off etc.

The word demerger has been defined in Section 2(19AA) of the Income-tax Act, 1961 for the
first time as follows: “demerger”, in relation to companies, means the transfer, pursuant to a
scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 by a demerged
company of its one or more undertakings to any resulting company in such a manner that –

(i) All the property of the undertaking, being transferred by the demerged company,
immediately before the demerger, becomes the property of the resulting company by virtue of
the demerger;

(ii) All the liabilities relatable to the undertaking, being transferred by the demerged company,
immediately before the demerger, become the liabilities of the resulting company by virtue of the
demerger;

(iii) The property and the liabilities of the undertaking or undertakings being transferred by the
demerger company are transferred at values appearing in its books of account immediately
before the demerger;

(iv) The resulting company issues, in consideration of the demerger, its shares to the
shareholders of the demerged company on a proportionate basis;

(v) The shareholders holding not less than three-fourths in value of the shares in the demerged
company (other than shares already held therein immediately before the demerger, or by a
nominee for, the resulting company or, its subsidiary) become shareholders of the resulting
company or companies by virtue of the demerger, otherwise than as a result of the acquisition of
the property or assets of the demerged company or any undertaking thereof by the resulting
company;
(vi) The transfer of the undertaking is on a going concern basis; (vii) the demerger is in
accordance with the conditions, if any, notified under sub-section (5) of section 72A by the
Central Government in this behalf.

According to section 2(19AAA) of Income Tax Act ‘demerged company’ means the company
whose undertaking is transferred, pursuant to a demerger, to a resulting company.

According to section 2(41A) of Income Tax Act ‘resulting company’ means one or more
companies (including a wholly owned subsidiary thereof) to which the undertaking of the
demerged company is transferred in a demerger and, the resulting company in consideration of
such transfer of undertaking, issues shares to the shareholders of the demerged company and
includes any authority or body or local authority or public sector company or a company
established, constituted or formed as a result of demerger.

For example, the demerger of the cement division of Larsen and Toubro Ltd. (L&T), named
Ultratech Cement Ltd., seems to be one of the L&Ts grand strategies to concentrate more on
infrastructure, engineering, energy businesses. The original Larsen and Toubro Ltd. (L&T) will
be considered as the demerged company, while Ultratech Cement Ltd. is the resulting company.

1.4.1 Types of demerger

Partial demerger- In a partial demerger, one of the undertakings or a part of the undertaking or
a department or a division of an existing company is separated and transferred to one or more
new company/companies, formed with substantially the same shareholders, who are allotted
shares in the new company in the same proportion as the separated division, department etc.
bears to the total undertaking of the company.

Complete Merger- In a complete demerger, an existing company transfers its various divisions,
undertakings etc. to one or more new companies formed for this purpose. The existing company
is dissolved by passing a special resolution for members’ voluntary winding up and also
authorising the liquidator to transfer its undertakings, divisions etc. to one or more companies as
per the scheme of demerger approved by the shareholders of the company by a special
resolution. The shareholders of the dissolved company are issued and allotted shares in the new
company or companies, as the case may be, on the basis of the pre-determined shares exchange
ratio, as per the scheme of demerger. In the case of complete demerger, the existing company
disappears from the corporate scene. It is voluntarily wound up and its entire business,
undertakings etc. are transferred to one or more new companies.

1.4.2 Ways of demerger

Demerger could be affected by any of the following three ways:

(i) Demerger by agreement between promoters.

(ii) Demerger under the scheme of arrangement with approval by the court.

(iii) Demerger under voluntary winding up and the power of liquidator.

Reasons for demerger:

1. Dismantling of conglomerates: Historically, demergers were used to dismantle

conglomerates after it became apparent that the costs of running such organizational structures
outweighed the benefits in the economic environment. The dismantling of conglomerates
‘argument is widely based on the idea of removing inefficient organizational structures and
hence the elimination of negative synergies.

2. Organizational improvements: From an organizational perspective, value can be created

through the elimination of misfits in the strategic focus or organizational properties of the
organization. In addition, the reduction of the size of an organization leads to an over-
proportional reduction in information losses ‘within the hierarchy.

3. Capital market improvements: More focused units might improve access to the capital
market or attract a new set of investors, thereby eliminating barriers to growth from a capital
market perspective.

4. Corporate Governance improvements: Value creation through improvements in the role and
function of the head office, improvements in the structuring of managerial incentives and more
effective market based governance mechanisms due to increased transparency.
5. To adjust with changing economic and political conditions.

6. Parent company’s inability to maximize return, thus giving chance for others.

7. Correction of any false investment decision made regarding stepping into a totally different
field of no expertise.

8. To focus more on the activities of various business units that is not possible to be done by the
giant corporate

9. Split between family members lead to the demerger gaining its importance.

10. To avoid being targeted by competition authorities in an oligopolistic market where the
company had already achieved dominance.

Case Study on Demerger:

TELEVISION EIGHTEEN INDIA LIMITED

Demerged Company: Television Eighteen India Limited

Resulting Company: Network 18 Fincap Limited

Effective Date: 27th September 2006

Scheme of Demerger: The shareholders will get the Equity shares of the Resulting Company i.e.
Network 18 Fincap Limited in the ratio of 12 equity shares of Rs 5/- each for every 10 shares of
Rs.10/- each held by them in the Company. Subsequently, 14 equity shares of Rs.5/- each of
Television Eighteen India Limited will be issued in lieu of every 10 equity shares of Rs. 10/-
each held by the members of the Company.

Eligibility Date: 24th November 2006

Shareholders’ Wealth:

Table-1A

Pre-Demerger: Shareholders’ Wealth in Television Eighteen India Limited

Company Equity Shares pre-demerger Share Average
Price Shareholders’
Wealth
Television Eighteen 100 Rs. 616.61 Rs. 61,661
India Limited

Table-1B

Post-Demerger: Shareholders’ Wealth in Television Eighteen India Limited

Company Equity Shares pre-demerger Share Average

Price Shareholders’
Wealth
Television Eighteen 140 Rs. 639.20 Rs. 89,488
India Limited
Network 18 Fincap 120 Rs. 432.97 Rs. 51956.40
Limited

Total Shareholder’s wealth after demerger Rs. 141444.40

From Table-1A and 1B, it is seen that there has been increase in the shareholder’s wealth
of Television Eighteen India Limited after demerger by 129.39%.
Due Diligence in the process of M&A

Mergers and acquisitions typically involve a substantial amount of due diligence by the buyer.
Before committing to the transaction, the buyer will want to ensure that it knows what it is
buying and what obligations it is assuming, the nature and extent of the target company’s
contingent liabilities, problematic contracts, litigation risks and intellectual property issues, and
much more. This is particularly true in private company acquisitions, where the target company
has not been subject to the scrutiny of the public markets, and where the buyer has little (if any)
ability to obtain the information it requires from public sources.

The following is a summary of the most significant legal and business due diligence activities
that are connected with a typical M&A transaction. By planning these activities carefully and
properly anticipating the related issues that may arise, the target company will be better prepared
to successfully consummate a sale of the company.

Of course, in certain M&A transactions such as “mergers of equals” and transactions in which
the transaction consideration includes a significant amount of the stock of the buyer, or such
stock comprises a significant portion of the overall consideration, the target company may want
to engage in “reverse diligence” that in certain cases can be as broad in scope as the primary
diligence conducted by the buyer. Many or all of the activities and issues described below will,
in such circumstances, apply to both sides of the transaction.

1. Financial Due Diligence: The buyer will be concerned with all of the target company’s
historical financial statements and related financial metrics, as well as the reasonableness of the
target’s projections of its future performance. Topics of inquiry or concern will include the
following:

• What do the company’s annual, quarterly, and (if available) monthly financial statements
for the last three years reveal about its financial performance and condition?

• Are the company’s financial statements audited, and if so for how long?

• Do the financial statements and related notes set forth all liabilities of the company, both
current and contingent?
• Are the margins for the business growing or deteriorating?

• Are the company’s projections for the future and underlying assumptions reasonable and
believable?

• How do the company’s projections for the current year compare to the board-approved
budget for the same period?

• What normalized working capital will be necessary to continue running the business?

• How is “working capital” determined for purposes of the acquisition agreement?

(Definitional differences can result in a large variance of the dollar number.)

• What capital expenditures and other investments will need to be made to continue
growing the business, and what are the company’s current capital commitments?

• What is the condition of assets and liens thereon?

• What indebtedness is outstanding or guaranteed by the company, what are its terms, and
when does it have to be repaid?

• Are there any unusual revenue recognition issues for the company or the industry in
which it operates?

• What is the aging of accounts receivable, and are there any other accounts receivable
issues?

• Should a “quality of earnings” report be commissioned?

• Are the capital and operating budgets appropriate, or have necessary capital expenditures
been deferred?

• Does the company have sufficient financial resources to both continue operating in the
ordinary course and cover its transaction expenses between the time of diligence and the
anticipated closing date of the acquisition?
2. Technology/Intellectual Property Due Diligence: The buyer will be very interested in the
extent and quality of the target company’s technology and intellectual property. This due
diligence will often focus on the following areas of inquiry:

• What domestic and foreign patents (and patents pending) does the company have?

• Has the company taken appropriate steps to protect its intellectual property (including
confidentiality and invention assignment agreements with current and former employees
and consultants)? Are there any material exceptions from such assignments (rights
preserved by employees and consultants)?

• What registered and common law trademarks and service marks does the company have?

• What copyrighted products and materials are used, controlled, or owned by the company?

• Does the company’s business depend on the maintenance of any trade secrets, and if so
what steps has the company taken to preserve their secrecy?

• Is the company infringing on (or has the company infringed on) the intellectual property
rights of any third party, and are any third parties infringing on (or have third parties
infringed on) the company’s intellectual property rights?

• Is the company involved in any intellectual property litigation or other disputes (patent
litigation can be very expensive), or received any offers to license or demand letters from
third parties?

• What technology in-licenses does the company have and how critical are they to the
company’s business?

• Has the company granted any exclusive technology licenses to third parties?

• Has the company historically incorporated open source software into its products, and if
so does the company have any open source software issues?

• What software is critical to the company’s operations, and does the company have
appropriate licenses for that software (and does the company’s usage of that software
comply with use limitations or other restrictions)?
 • Is the company a party to any source or object code escrow arrangements?

• What indemnities has the company provided to (or obtained from) third parties with
respect to possible intellectual property disputes or problems?

• Are there any other liens or encumbrances on the company’s intellectual property?

• Which part of the IPRs are to be retained by the company and which part they might lose.

3. Customers Due Diligence: The buyer will want to fully understand the target company’s
customer base including the level of concentration of the largest customers as well as the sales
pipeline. Topics of inquiry or concern will include the following:

• Who are the top 20 customers and what revenues are generated from each of them?

• What customer concentration issues/risks are there?

• Will there be any issues in keeping customers after the acquisition (including issues
relating to the identity of the buyer)?

• How satisfied are the customers with their relationship with the company? (Customer
calls will often be appropriate.)

• Are there any warranty issues with current or former customers?

• What is the customer backlog?

• What are the sales terms/policies, and have there been any unusual levels of
returns/exchanges/refunds?

• How are sales people compensated/motivated, and what effect will the transaction have
on the financial incentives offered to employees?

• What seasonality in revenue and working capital requirements does the company
typically experience?

4. Strategic Due Diligence: The buyer is concerned not only with the likely future performance
of the target company as a stand-alone business; it will also want to understand the extent to
which the company will fit strategically within the larger buyer organization. Related questions
and areas of inquiry will include the following:

• Will there be a strategic fit between the company and the buyer, and is the perception of
that fit based on a historical business relationship or merely on unproven future
expectations?

• Does the company provide products, services, or technology the buyer doesn’t have?

• What integration will be necessary, how long will the process take, and how much will it
cost?

• What cost savings and other synergies will be obtainable after the acquisition?

• What marginal costs (e.g., costs of obtaining third party consents) might be generated by
the acquisition?

• What revenue enhancements will occur after the acquisition?

5. Contractual Due Diligence: One of the most time-consuming (but critical) components of a
due diligence inquiry is the review of all material contracts and commitments of the target
company. The categories of contracts that are important to review and understand include the
following:

• Guaranties, loans, and credit agreements

• Customer and supplier contracts

• Agreements of partnership or joint venture; limited liability company or operating

agreements

• Contracts involving payments over a material dollar threshold

• Settlement agreements

• Past acquisition agreements

• Equipment leases
 • Indemnification agreements

• Employment agreements

• Exclusivity agreements

• Agreements imposing any restriction on the right or ability of the company (or a buyer)
to compete in any line of business or in any geographic region with any other person

• Real estate leases/purchase agreements

• License agreements

• Powers of attorney

• Franchise agreements

• Equity finance agreements

• Distribution, dealer, sales agency, or advertising agreements

• Non-competition agreements

• Union contracts and collective bargaining agreements

• Contracts the termination of which would result in a material adverse effect on the
company

• Any approvals required of other parties to material contracts due to a change in control or
assignment

6. HR/Management Due Diligence: The buyer will want to review a number of matters in
order to understand the quality of the target company’s management and employee base,
including:

• Management organization chart and biographical information

• Summary of any labor disputes

• Information concerning any previous, pending, or threatened labor stoppage

• Employment and consulting agreements, loan agreements, and documents relating to
other transactions with officers, directors, key employees, and related parties

• Schedule of compensation paid to officers, directors, and key employees for the three
most recent fiscal years showing separately salary, bonuses, and non-cash compensation
(e.g., use of cars, property, etc.)

• Summary of employee benefits and copies of any pension, profit sharing, deferred
compensation, and retirement plans

• Summary of management incentive or bonus plans not included in above as well as other
forms of non-cash compensation

• Employment manuals and policies

• Involvement of key employees and officers in criminal proceedings or significant civil

litigation

• Plans relating to severance or termination pay, vacation, sick leave, loans, or other
extensions of credit, loan guarantees, relocation assistance, educational assistance, tuition
payments, employee benefits, workers’ compensation, executive compensation, or fringe
benefits

• Appropriateness of the company’s treatment of personnel as independent contractors vs.

employees

• Actuarial reports for past three years

• What agreements/incentive arrangements are in place with key employees to be retained

by the buyer? Will these be sufficient to retain key employees?

• What layoffs and resultant severance costs will be likely in connection with the
acquisition?

• Number of persons to be retained or to be laid off.

7. Legal Due Diligence: An overview of any litigation (pending, threatened, or settled),
arbitration, or regulatory proceedings involving the target company is typically undertaken. This
review will include the following:

• Filed or pending litigation, together with all complaints and other pleadings

• Litigation settled and the terms of settlement

• Claims threatened against the company

• Consent decrees, injunctions, judgments, or orders against the company

• Attorneys’ letters to auditors

• Insurance covering any claims, together with notices to insurance carriers

• Matters in arbitration

• Pending or threatened governmental proceedings against the company (SEC, FTC, FDA,
etc.)

• Potentially speaking directly to the company’s outside counsel

8. Taxation Due Diligence: Tax due diligence may or may not be critical, depending on the
historical operations of the target company, but even for companies that have not incurred
historical income tax liabilities, an understanding of any tax carry-forwards and their potential
benefit to the buyer may be important. Taxes due diligence will often incorporate a review of the
following:

• Prospective issues of double taxation in case of cross-border merger

• Tax rebates to be asked to the government for the acquisition of sick companies

• Federal, state, local, and foreign incomes sales and other tax returns filed in the last five
years

• Government audits
 • Copies of any correspondence or notice from any foreign, federal, state, or local taxing
authority regarding any filed tax return (or any failure to file)

• Tax sharing and transfer pricing agreements

• Net operating losses or credit carry-forwards (including how a change in control might
affect the availability thereof)

• Agreements waiving or extending the tax statute of limitations

• Allocation of acquisition purchase price issues

• Correspondence with taxing authorities regarding key tax items

9. Antitrust and Regulatory Issues. Antitrust and regulatory scrutiny of acquisitions has been
increasing in recent years. The buyer will want to undertake the following activities in order to
assess the antitrust or regulatory implications of a potential deal:

• If the buyer is a competitor of the target company, understanding and working around
any limitations imposed by the company on the scope or timing of diligence disclosures

• Analyzing scope of any antitrust issues

• If the company is in a regulated industry that requires approval of an acquisition from a

regulator, understanding the issues involved in pursuing and obtaining approval

• Confirming if the company has been involved in prior antitrust or regulatory inquiries or
investigations

• Other Department of Commerce filings if the buyer is a foreign entity

• Understanding how consolidation trends in the company’s industry might impact the
likelihood and speed of antitrust or regulatory approval

10. Insurance Due Diligence: In any acquisition, the buyer will want to undertake a review of
key insurance policies of the target company’s business, including:

• If applicable, the extent of self-insurance arrangements

• General liability insurance

• Intellectual property insurance

• Car insurance

• Health insurance

• E&O insurance

• Key man insurance

• Employee liability insurance

• Worker’s compensation insurance

• Umbrella policies
Successor’s Liability:

General Rules
1. A successor corporation is liable for the debts and liabilities of its predecessor where
there is a merger or consolidation of the two entities.
2. In contrast, a purchaser (“Asset Purchaser”) of all or substantially all of the assets of a
seller does not by operation of law assume the liabilities of the seller (“Seller”).
Common Law Exceptions
Asset Purchaser is vicariously liable for the debts and liabilities (including environmental and
product liability) of Seller if one or more of the following common law exceptions apply:
Asset Purchaser expressly or impliedly agrees to assume the debts or liabilities of Seller
The transaction amounts to a de facto merger or consolidation
Asset Purchaser is a mere continuation of Seller
The transaction is an effort to fraudulently avoid liability
Other Theories
Courts may also hold Asset Purchaser liable beyond the bounds of the common law rules if:
There is substantial identity between the operations of Seller and Asset Purchaser
Asset Purchaser manufactures same product line as Seller
 MATERIAL FOR MODULE 2

TOPIC: Mergers and Acquisitions under

Company Law
STUDY MATERIAL ON REDUCTION OF SHARES AND BUY BACK OF
SHARES

Topic 1 Reduction of share capital:

Financial restructuring of a company involves rearrangement of its financial structure so as to

make the company’s finances more balanced i.e. the company should be neither overcapitalized
nor undercapitalized. Reduction of Capital, reorganization of capital through consolidation,
subdivision, buy back of shares, further issue of shares etc., are various forms of financial
restructuring.

The Provisions relating to alteration of Share Capital and of buy-back of Shares has already been
notified under Companies Act, 2013.

Companies have access to a range of sources from which they finance business. These funds are
called ‘Capital’. The sources of capital can be divided into two categories; internally generated
funds and funds provided by third parties. Whichever form of capital is used, it will fall into one
of the two categories – debt or equity. Equity capital is the permanent capital of the company,
which does not require any servicing in the form of interest. However, the return to the equity
capital is in the form of dividend paid to the equity shareholders out of the profits earned by the
company. The ideal capital structure would be to raise money through the issue of equity capital.
Debt is essentially an obligation, the terms of which are, inter alia, the repayment of the
principal sum within a specific time together with periodic interest payments. Perhaps the easiest
form of capital for a company to raise is a loan from a bank. This form of loan capital may be
comparatively expensive than equity.

A company is required to balance between its debt and equity in its capital structure and the
funding of the resulting deficit. The targets a company sets in striking this balance are influenced
by business conditions, which seldom remain constant. When, during the life time 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:

(i) Necessity for injecting more working capital to meet the market demand for the company’s
products or services;
(ii) When the company is unable to meet its current commitments;

(iii) When the company is unable to obtain further credit from suppliers of raw materials,
consumable stores, bought-out components etc. and from other parties like those doing job work
for the company.

(iv) When the company is unable to utilise its full production capacity for lack of liquid funds.

Financial restructuring of a company involves rearrangement of its financial structure so as to

make the company’s finances more balanced.

❖ An under-capitalized company may restructure its capital by taking one or more of

the following corrective steps:
(i) Injecting more capital whenever required either by resorting to rights issue/preferential issue
or additional public issue.

(ii) Resorting to additional borrowings from financial institutions, banks, other companies etc.

(iii) Issuing debentures, bonds, etc. or

(iv)Inviting and accepting fixed deposits from directors, their relatives, business associates and
public.

❖ If a company is over-capitalized, its capital also requires restructuring by taking

following corrective measures:
(i) Buy-back of own shares.

(ii) Paying back surplus share capital to shareholders.

(iii) Repaying loans to financial institutions, banks, etc.

The reorganization of share capital of a company may take place—

(1) By the consolidation of shares of different classes, or

(2) By the division of shares of one class into shares of different classes, or
(3) By both these methods

Besides, a company may reorganize its capital in different ways, such as – (a) reduction of paid-
up share capital; (b) conversion of one type of shares into another etc.

The following are cases which amount to reduction of share capital but where no confirmation
by the Court is necessary:

(a) Surrender of shares – “Surrender of shares” 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. But if, under any
arrangement, such shares, instead of being surrendered to the company, are transferred to a
nominee of the company then there will be no reduction of

Surrender may be accepted by the company under the same circumstances where forfeiture is
justified. It has the effect of releasing the shareholder whose surrender is accepted for further
liability on shares. The Companies Act contains no provision for 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 the case of
forfeiture, it is at the initiative of company and in the case of surrender it is at the initiative of
member or shareholder.

(b) 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 Court.

Procedure to be taken for the reduction of share capital of a company:

1. Passing of a special resolution: Power to reduce share capital shall have been authorized by
the articles of association. In the absence of such provision, the articles shall first be altered. A
Board Meeting shall be convened to approve the scheme of reduction of share capital and to
approve the draft notice of the general meeting. Notice of the general meeting shall be issued to
members and other eligible person at least 21 clear days’ before the date of general meeting. The
general meeting shall be held to pass a special resolution for reduction of share capital. In
case of a listed company, send a copy of the proceedings of the general meeting to the stock
exchange.

2. Application before the NCLT: Once in the general meeting held, majority members present
and voting passed the special resolution, an application has to be made by the board before the
NCLT to that effect. A copy of the resolution should also be added with the application. The
company shall also have to furnish a certificate of the auditor to the effect that, the scheme has
been made in conformity with all the accounting rules.

3. Information to be given to other organizations: After getting application from a company for
the reduction of share capital, the NCLT will start inspecting the situation and at the same time
they will circulate the information among the Registrar of Companies, SEBI and the Central
Government and ask for their opinion. All the organizations will have to inform their observation
within 3 months from the date of receiving information. In case no such communication is made
by them, the scheme shall be deemed to be approved. Otherwise all these organisations shall
provide their own representatives to inform their decision and act accordingly.

4. Sanction of the court: After passing the special resolution for the reduction of capital and the
approvals given by NCLT, the company is required to apply to the Court by way of petition for
the confirmation of the resolution.

Where the proposed reduction of share capital involves either (i) diminution of liability in respect
of unpaid share capital, or (ii) the payment to any shareholder of any paid-up share capital, or
(iii) in any other case, if the Court so directs, the following provisions shall have effect:

The creditors having a debt or claim admissible in winding up are entitled to object. To enable
them to do so, the Court will settle a list of creditors entitled to object. If any creditor objects,
then either his consent to the proposed reduction should be obtained or he should be paid off or
his payment be secured. The Court, in deciding whether or not to confirm the reduction will take
into consideration the minority shareholders and creditors.
A Company might decide to return a part of its capital when its paid-up share capital is in excess
of its needs. It is not simply handed over to shareholders in proportion to their holdings. Their
class rights will be considered with the Court treating the reduction as though it was analogous to
liquidation. Therefore, the preference shareholders who have priority to return of capital in
liquidation will be the first to have their share capital returned to them in a share capital
reduction, even if they prefer to remain members of the company.

There is no limitation on the power of the Court to confirm the reduction except that it must first
be satisfied that all the creditors entitled to object to the reduction have either consented or been
paid or secured

When exercising its discretion, the Court must ensure that the reduction is fair and equitable. In
short, the Court shall consider the following, while sanctioning the reduction:

(i) The interests of creditors are safeguarded;

(ii) The interests of shareholders are considered; and

(iii) Lastly, the public interest is taken care of.

5. Confirmation and Registration: If the Court is satisfied that either the creditors entitled to
object have consented to the reduction, or that their debts have been determined, discharged, paid
or secured, it may confirm the reduction. The Court may also direct that the words “and reduced”
be added to the company’s name for a specified period, and that the company must publish the
reasons for the reduction and the causes which led to it, with a view to giving proper information
to the public.
STUDY MATERIAL ON PROCESS OF MERGER UNDER COMPANIES ACT, 2013

The new Act on company law has been lauded by corporate organizations for its business-
friendly corporate regulations, enhanced disclosure norms and providing protection to investors
and minorities, among other factors, thereby making M&A smooth and efficient. Its recognition
of interest shareholder rights takes the law one step forward to an investor-friendly regime. The
2013 Act seeks to simplify the overall process of acquisitions, mergers and restructuring,
facilitate domestic and cross-border mergers and acquisitions, and thereby, make Indian firms
relatively more attractive to PE investors.

The term ‘merger’ is not defined under the Companies Act, 1956 and under Income Tax Act,
1961. However, the Companies Act, 2013 without strictly defining the term explains the concept.
A ‘merger’ is a combination of two or more entities into one; the desired effect being not just the
accumulation of assets and liabilities of the distinct entities, but organization of such entity into
one business.

On 7th November, 2016 Central Government issued a notification for enforcement of section
230-233, 235-240, 270-288 w.e.f. 15th December, 2016. But still rules were not available till
date for CAA.

MCA vide notification dated 14th Dec, 2016 has issued rules i.e. The Companies (Compromises,
Arrangements and Amalgamations) Rules, 2016. These rules will be effective from 15th
December, 2016. Consequently, w.e.f. 15.12.2016 all the matters relating to Compromises,
Arrangements, and Amalgamations (hereafter read as “CAA”) will be dealt as per provisions of
Companies Act, 2013 and The Companies (Compromises, Arrangements, and Amalgamations)
Rules, 2016.

Where a compromise or arrangement is proposed for the purposes of or in connection with

scheme for the reconstruction of any company or companies, or for the amalgamation of any two
or more companies, the petition shall pray for appropriate orders and directions under section
230 read with section 232 of the Act.

Who can file the application for Merger & Amalgamation propose: Section 230(1):
An application for Merger & Amalgamation can be file with Tribunal (NCLT). Both the
transferor and the transferee company shall make an application in the form of petition to the
Tribunal under section 230-232 of the Companies Act, 2013 for the purpose of sanctioning the
scheme of amalgamation.

Joint Application: Rule 3(2):

Where more than one company is involved in a scheme, such application may, at the discretion
of such companies, be filed as a joint-application. However, where the registered office of the
Companies are in different states, there will be two Tribunals having the jurisdiction over those,
companies, hence separate petition will have to be filed.

Process

It must be ensured that the companies under amalgamation should have the power in the object
clause of their Memorandum of Association to undergo amalgamation though the absence may
not be an impediment, but this will make matters smooth.

A draft scheme of amalgamation shall be prepared for getting it approved in Board meeting of
each company.

1. Format of Application

Application to the tribunal for Merger & Amalgamation will be submitted in form no. NCLT-1
along with following documents: Rule 3(1)

a) A notice of admission in Form No. NCLT-2

b) An affidavit (on the decision of the board)

c) A copy of Scheme of C&A (Merger & Amalgamation)

d) A disclosure in form of affidavit including following points Section 230(2)

– All material facts relating to the company, such as

i. the latest financial position of the company,

ii. The latest auditor’s report on the accounts of the company and

iii. The pendency of any investigation or proceedings against the company

Responsibility towards Creditors:

To ensure the safeguard against the creditors following are the steps to be taken by respective
partners of the arrangement,

1. Sending a report to the NCLT made 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;

2. Where the company proposes to adopt the corporate debt restructuring guidelines
specified by the Reserve Bank of India, a statement to that effect;

3. 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.

4. The applicant shall also disclose to the Tribunal in the application, the basis on which
each class of members or creditors has been identified for the purposes of approval of the
scheme.

Calling of Meeting:

Upon hearing of the application Tribunal shall, unless it thinks fit for any reason to dismiss the
application, give such directions / order as it may think necessary with respect to conduct the
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 prescribed in rule 5 of CAA Rules,
2014, which shall include following:

i. Fixing the time and place of the meeting or meetings;

ii. Appointing a Chairperson and scrutinizer for the meeting or meetings to be held, as the case
may be and fixing the terms of his appointment including remuneration;
iii. Fixing the quorum and the procedure to be followed at the meeting or meetings, including
voting in person or by proxy or by postal ballot or by voting through electronic means;

iv. Determining the values of the creditors or the members, or the creditors or members of any
class, as the case may be, whose meetings have to be held;

v. Notice to be given of the meeting or meetings and the advertisement of such notice.

vi. Notice to be given to sectoral regulators or authorities as required under sub-section (5) of
section 230;

vii. The time within which the chairperson of the meeting is required to report the result of the
meeting to the Tribunal; and

viii. Such other matters as the Tribunal may deem necessary.

Notice of Meeting:

The Notice of the meeting pursuant to the order of tribunal to be give in Form No. CAA-2. Rule
6

Person entitled to receive the notice: The notice shall be sent individually to each of the
Creditors or Members and the debenture-holders at the address registered with the company.
Section 230(3)

Person authorized to send the notice:

Chairman of the Company, or

If tribunal so direct- by the Company or its liquidator or by any other person

Modes of Sending of notice:

By Registered post, or by Speed post, or by courier, or

By e-mail, or by hand delivery, or by any other mode as directed by the tribunal

Documents to be sent along with notice:

The notice of meeting send with (i) Copy of Scheme of C&A and (ii) Following below
mentioned details of C&A if not included in the said scheme:

a. Details of the order of the Tribunal directing the calling, convening and conducting of the
meeting:-

-Date of the Order;

-Date, time and venue of the meeting.

b. Details of the company including:

Corporate Identification Number (CIN) or Global Location Number (GLN) of the company;

Permanent Account Number (PAN);

Name of the company;

Date of incorporation;

Type of the company (whether public or private or one person company);

Registered office address and e-mail address;

Summary of main object as per the memorandum of association; and main business carried on by
the company;

Details of change of name, registered office and objects of the company during the last five
years;

Name of the stock exchange (s) where securities of the company are listed, if applicable;

Details of the capital structure of the company including authorized, issued, subscribed and paid
up share capital; and

Names of the promoters and directors along with their addresses.

c. Details of Board Meeting:

 1. The date of the board meeting at which the scheme was approved by the board of
directors

2. The name of the directors who voted in favour of the resolution,

3. The name of the directors who voted against the resolution and

4. The name of the directors who did not vote or participate on such resolution

Explanatory Statement disclosing details of the scheme of compromise or arrangement

including: Parties involved in such compromise or arrangement; Appointed date, effective date,
share exchange ratio (if applicable) and other considerations, if any; Summary of valuation
report (if applicable) including basis of valuation and fairness opinion of the registered valuer, if
any, and the declaration that the valuation report is available for inspection at the registered
office of the company; Details of capital or debt restructuring, if any; Rationale for the
compromise or arrangement; Benefits of the compromise or arrangement as perceived by the
Board of directors to the company, members, creditors and others (as applicable); Amount due to
unsecured creditors.

d. Disclosure about the effect of the Merger & Amalgamation on: [Section 230(3)]

Key Managerial Personnel;

Directors;

Promoters;

Non-Promoter Members;

Depositors;

Creditors;

Debenture holders;

Deposit trustee and debenture trustee;

Employees of the company:

Shareholders of the Company

e. A report adopted by the directors of the merging companies explaining effect of compromise
on each class of shareholders, key managerial personnel, promoters and non-promoter
shareholders laying out in particular the share exchange ratio, specifying any special valuation
difficulties;

f. Below Mentioned Details: Following below mentioned details Investigation or proceedings, if

any, pending against the company under the Act. Details of approvals, sanctions or no-
objection(s), if any, from regulatory or any other governmental authorities required, received or
pending for the proposed scheme of compromise or arrangement A statement to the effect that
the persons to whom the notice is sent may vote in the meeting either in person or by proxies, or
where applicable, by voting through electronic means A copy of the [6]valuation report, if any
Section 230(3)

g. Details of availability of documents: Details of the availability of the following documents for
obtaining extract from or for making or obtaining copies of or for inspection by the members and
creditors, namely

Latest audited financial statements of the company including consolidated financial statements;

Copy of the order of Tribunal in pursuance of which the meeting is to be convened or has been
dispensed with;

Copy of scheme of Merger & Amalgamation

Contracts or agreements material to the Merger & Amalgamation;

The certificate issued by Auditor of the company to the effect that the accounting treatment, if
any,

Proposed in the scheme of Merger & Amalgamation is in conformity with the Accounting
Standards prescribed under Section 133 of the Companies Act, 2013; and
Such other information or documents as the Board or Management believes necessary and
relevant for making decision for or against the scheme;

h. Some Other documents: Where an order has been made by the Tribunal under section 232(1),
merging companies or the companies in respect of which a division is proposed, shall also be
required to circulate the following:

The draft of the proposed terms of the scheme drawn up and adopted by the directors of the
merging company;

Confirmation that a copy of the draft scheme has been filed with the Registrar;

The report of the expert with regard to valuation, if any;

At the instance of getting approval from the NCLT, both the companies (transferor and
transferee) will need to file a declaration of solvency with the RoC and issue a compliance
certificate.
Buy back of the shares:

Buy-back of shares relates to the company buying back its shares which it has issued earlier from
the market. Buy-back of shares is nothing but reverse of issue of shares by a company. It means
the purchase of its own shares or other specified securities by a company.

❖ Reasons behind companies going for buy back of shares:

(1) Return the surplus cash to shareholders Returning to shareholders the surplus cash not
required in the foreseeable future and when there are no investment opportunities with good
returns is one of the objectives of buy-back. The announcement of the repurchase serves as a
signal that the firm’s investment is declining and to reassure investors that 18 management will
not squander resources and investment in unreliable and sub optimal projects. The flexibility of
open market buy-back potentially allows firms to time their buy-back and to take advantage of
changes in share price and the availability of free cash. Besides, holding such surplus cash pulls
down the company’s rate of return on total assets and ultimately the shareholder value. Returning
it back to the shareholders through share buy-back will allow the shareholders to invest this idle
capital more profitably.

(2) Enhance the earning per share (EPS) Earnings per share equals to earnings after
taxes/number of shares. A company’s total earnings are expected to be maintained but due to
buy-back the number of outstanding shares will get reduced. Buy-back of shares is expected to
increase the earnings per share.

(3) Convey the management’s view to investors Share buy-back programmes convey to
investors the management’s view that the market is currently undervaluing the company’s share
in relation to its intrinsic value and that the proposed buy-back will facilitate recognition of the
true value. Such announcements followed by repurchases may create increased demand for
shares thus raising the share price. Besides, share buy-back is also a management tool to convey
information to the market about the promising company future. (4) Stabilize the market price
of the company’s share: Share buy-back programs effectively represent exchange options that
provide the firm with the flexibility to exchange its market value for its “true” value at the
management’s discretion. Efficient markets ensure price stability.
(5) Provide an exit route to shareholders in case of illiquid shares: This is very peculiar to
India because a very high percentage of listed shares are not traded for long periods. Since the
buy-back price is determined at a premium above market price, the shareholders are able to
liquidate their shares which otherwise are seldom traded in the market. Thus buy-backs provide
an exit route to those shareholders who are not able to sell their shares in the market at a fair
value

(6) Raise the promoters’ voting power without spending any amount: The return of shares by
non-promoters automatically increases the shareholding percentage of the promoters and hence
provides a route to raise voting power.

❖ Indian Scenario:
Around 1996, the Indian Government and business houses became greatly concerned about
prolonged depression in the stock market. Business houses lobbied share buy-backs as a
possible way of reviving the Capital market, as it would inject buoyancy into share prices and
the Government readily accepted it and decided to implement it on urgent basis through an
ordinance. The ordinance was promulgated on 31st October 1998 adding new sections 77A,
77AA, and 77B in the Companies Act and later Companies (Amendment) Act 1999 was
enacted. Traditionally subject only to a few exceptions specified above, companies were not
permitted to purchase their own shares. When share buyback by companies was permitted in
1998, it appeared from the lobbying pressure of Indian business houses that a large number
of companies were waiting in the wings to buy-back their shares. However, share buyback
activity in India remained very low, much below the expectations at the time when share
buyback was introduced. Except for the two years, 2001-02 and 2002-03, the number of
listed companies announcing share buybacks in a year was only 14. The companies bought
back shares from the existing shareholders through tender offers. The small number of actual
buybacks may have been the reason which led the government to relax the rules, specially in
view of the sagging market situation created in the aftermath of the stock market crisis of
March 2001.The relaxation of share buyback rules in October 2001 gave a temporary fillip to
share buyback activity, raising the number of buyback offers to 29 during the fiscal year
2001-02 and to 35 during 2002-03. However, the subsequent period witnessed a substantial
decline in share buyback activity. Out of the 11 tender offers declared, only 4 tender offers
 were completed and out of 6 buy-back offers through open market 5 were completed. The
buy-back 4 activity remained dampened from 2003 to 2007 and only 30 open market
buybacks and 18 tender offer buy-backs were announced during this phase. Again during
2007 to early 2009, there was an increase in buy-back activities and surprisingly there were
28 open market buy-backs and 4 buy-backs through tender offers announced during this
period.

❖ Legal implications of buy back of shares in India:

Section 77A brought in by the Companies Amendment Act, 1999, has caused this structural
change in the theme and philosophy of company law that, subject to the restrictions envisaged in
the section, a company may Buy-back its own shares. Thus now it falls under the exceptions
where no confirmation by the court is necessary. Buy-back is governed by SEBI guidelines 1998.
Section 77A, 77AA and 77B of the Companies Act contains the regulations regarding buy-back
of securities.

Sources of buy back:

Section 77A (1) of the Act provides that buy-back of shares can be financed only out of, a. free
reserves- where a company purchases its own shares out of free reserves, then a sum equal to the
nominal value of the share so purchased is required to be transferred to the capital redemption
reserve and details of such transfer should be disclosed in the balance-sheet; or b. securities
premium account; or c. proceeds of any shares or other specified securities. It is provided that no
Buy-back of any kind of shares or other specified securities can be made out of the proceeds of
the same kind of shares or same kind of other securities as it will frustrate the purpose sought to
be achieved by an issue and will make no sense. It can however be used for buy-back of another
kind of security.

Pre-requisites of a valid buy-back:

Section 77A (2) Section 77A (2) of the Companies Act provides that a company can buy-back its
shares only when,

(a) It is authorized by its Articles of Association. If no such provision exists, the Articles should
be amended following the procedure laid down in Section 31.
(b) A special resolution has been passed in general meeting of the company authorizing the buy-
back.

(c) Buy-back of the total paid-up capital and the free reserves has been made by the Board of
Directors by means of a Board resolution passed at its meeting not exceeding 10% of the total
paid-up equity capital and free reserves of the company and the Board exercises this power only
if it had not made an offer for the buy-back of the share on its authority during the preceding 365
days.

(d) The overall limit to which buy-back of securities may be resorted to by a company is
restricted to 25% of the company’s paid-up capital and free reserves.

(e) The buy-back debt-equity ratio is within the permissible 2:1 range. The Central Government
is empowered to relax the debt-equity ratio in respect of a class of companies but not in respect
of any particular company.

(f) The impugned shares/securities must be fully paid-up.

(g) The buy-back of the shares or other specified securities listed on any recognized stock
exchange is in accordance with the SEBI (Buy-back of Securities) Regulations, 1998.

Additional requirements:

➢ According to Section 77A (3) the notice containing the special resolution should be
passed and should be accompanied by an explanatory statement stating:
a. All material facts, fully and completely disclosed:

b. The necessity for buy-back;

c. The class of security intended to be purchased by the buy-back;

d. The amount to be invested under buy-back;

e. The time limit for completion of buy-back. The company is also required to pass a special
resolution in its general meeting.
➢ Section 77A (4) provides that every buy-back is required to be completed within 12
months from the date of passing the special resolution or the Board resolution, as the case
may be or where the resolution is passed through postal ballot, the date of declaration of
the result of the postal ballot, as the case may be.
➢ A company after the completion of buy-back is required to physically extinguish and
destroy its securities within 7 days of the last day on which the buy-back process is
completed.
➢ On completion of the buy-back process, the company shall within a period of 30 days file
with SEBI and the Registrar a return containing the particulars prescribed.
➢ Section 77B restricts modes of Buy-back. The companies are restricted to buy-back its
shares,
a. Through any subsidiary company including its own subsidiary company.
b. Through any investment companies or group of investment companies.
c. Moreover, a listed company is prohibited from buying back its securities through
negotiated deals, spot transactions, private arrangements and insider dealings
STUDY MATERIAL ON MINORITY BUYOUT OF SHARES

Squeezing-out minority shareholders in a company is always a difficult task because of inter alia
time-consuming court procedures and uncertainties involved in exit share valuation. Section 395
of the Companies Act, 1956 permits majority shareholders to do so to a limited extent but given
the need for prior consent of majority shareholders whose transfer is involved along with
dissenting shareholders’ consent and other practical difficulties and ambiguities under this
provision, the ability to compel a ‘squeeze out’ becomes redundant. Considering the practical
difficulties under this section, companies have chosen to use the route of a ‘selective’ reduction
of share capital under Section 100 of the 1956 Act, to squeeze-out minority shareholders.

The 2013 Act in this regard has introduced an exit mechanism for minority shareholders with the
intent of reducing litigation with minority shareholders. The Act grants access to the acquirer or
person acting in concert or a person or a group of persons becoming registered shareholders of
90% or more of the issued equity share capital of the target company (listed or unlisted) by virtue
of amalgamation, share exchange, conversion, securities or for any other reason. Such an
acquirer, person or a group of persons will notify minority shareholders about their intention of
buying the remaining equity shares. In addition, minority shareholders may also offer their
shares suo moto to majority shareholders.

As provided in the Rules, the price mechanism for the minority buy-back in the case of a listed
company will be the price according to SEBI’s regulations, but this needs to be carried out by a
registered valuer. Whereas, for an unlisted company, various factors are taken into consideration,
i.e. the highest price paid for an acquisition during the last 12 months and the fair price of shares
to be determined after taking into account valuation parameters as prescribed. In addition, a
registered valuer will provide a valuation report to the board of directors of a company, justifying
the methodology of arriving at such a price. On the other hand, the shares of minority
shareholders need to be acquired by majority shareholders and not by the company and will
entail outflow of funds in the hands of the majority shareholders. The provisions virtually
recognize minority squeeze out as a legal option. This has been undertaken by corporate
organizations through various corporate restructuring means in the past.
This provision differs from earlier minority buy-out provisions in many ways-

1. In terms of who is covered as the acquiring entity – this includes ‘acquirer’ or ‘persons acting
in concert’ as defined under the takeover code as against the earlier provision covering only
‘companies’.

2. The provision elaborates and specifies that the acquisition could stem from ‘an amalgamation,
share exchange conversion of securities or for any other reason’ and not merely an acquisition
pursuant to a ‘transfer of shares’ as the current buy-out provisions indicate. A welcome change is
the requirement of an exit price determination by a registered valuer. This removes ambiguity
that existed in squeeze-outs under Section 100 applications. 3. Setting a time-limit of 60 days for
disbursal of proceeds on determination of exit price, to the minority shareholders will help
expedite the buy-out process. The minority shareholders are also entitled to a share in
any additional compensation received by shareholders on a sale subsequent to the minority buy-
out, if such sale is at a higher price than the minority buy-out price.

The provisions virtually recognize minority squeeze out as a legal option. This has been
undertaken by corporate organizations through various corporate restructuring means in the past.
However, there is not much clarity on whether this is a mandatory exit mechanism and a scenario
where one minority shareholder desires to exit would the acquirer be forced to buy out all.
 STUDY MATERIAL ON FAST-TRACT AND CROSS-BORDER
MERGERS AND ACQUISITIONS UNDER COMPANIES ACT,
2013

A.FAST-TRACK MERGERS
As in some overseas jurisdictions, the 2013 Act has introduced the new concept of fast- track
mergers and demergers. These provide the option of a simplified and fast-track merge/ demerger
process, which can be used for the following and is an option for companies:

1. Merger of two or more specified small companies

2. Merger between holding company and its wholly owned subsidiary
3. Such other classes of companies as may be prescribed

In this case, the merger will have to be approved by Central Government and there will be no
requirement to approach NCLT.

Process of Getting Approval:

Under this process, the schemes approved by the boards of directors of companies will need to
be sent to the Registrar of Companies (RoC) and the Official Liquidator (OL) for their
suggestions or objections within 30 days. The scheme will then be considered in the meetings of
shareholders or creditors, along with their suggestions or objections, and will have to be
approved by the following classes of persons:

1. Shareholders holding 90% of the total number of shares at a general meeting

2. Majority creditors (representing nine-tenth in value) in a meeting convened with 21 days’

notice

Under the 1956 Act, the criterion of “present and voting” was essential for the conduct of
shareholders’ and creditors’ meetings. However, the similar concept of “present and voting” has
not been included in the 2013 Act.
After the approval mentioned above, the scheme will have to be filed with the OL, RoC and the
Central Government. In the event of there being “No Objection,” this will be deemed as
approved. However, in the event of objections from the RoC or OL, the scheme may be referred
by the Central Government to the NCLT for it to consider the scheme under the normal process
of a merger. In this case, the NCLT can either mandate that the scheme is to be considered a
normal merger or it may confirm the scheme by passing an order to this effect. Therefore, a
company is at risk of the process being considered a normal merger process instead of a fast-
track merger.

In addition to the above, both the companies (transferor and transferee) will need to file a
declaration of solvency with the RoC.

Among the various features of fast-track mergers of companies, one is the exemption from the
need to obtain auditors’ certificates of compliance with applicable accounting standards.

This is a welcome step that will result in reduction in the administrative burden, timelines and
costs of smaller companies that fall within threshold limits. However, on the flip side, there is no
clarity on whether fast-track mergers will be allowed prior to NCLT becoming operational.
Moreover, under existing tax laws, there is no need for a company to seek the approval of a court
to prove the tax neutrality of a merger or demerger.

However, clarity in this regard will be required in the case of fast -track mergers involving non-
court approved schemes.

B. CROSS-BORDER MERGERS
With businesses no longer limited by borders, cross-border M&A transactions present significant
opportunities for economic gain and increased shareholder or investor value. Various factors
influence the spurt in recent cross-border mergers and acquisitions, including the ever-increasing
need of companies to tap new markets and set up global operations in these, achieve cost
reduction and synergies and secure natural resources.

Cross-border M&A is also supported by technological advancements, low cost financing

arrangements and robust market conditions, which have made deal-makers confident and think
more creatively about their global growth strategies.

The flow of transactions could be inbound (non-residents investing in India) or outbound (Indian
businesses making investments abroad). Companies Act, 1956 used to permit inbound mergers
(foreign companies merging with Indian ones) and not the other way round. The 2013 Act
though allows both — inbound and outbound cross-border mergers between Indian companies
and foreign ones. It provides for the merger of an Indian company into a foreign one, whether its
place of business is in India or in certified jurisdictions (to be notified by the Central
Government from time to time), subject to the NCLT’s and RBI’s approval.

The consideration of a merger, which will also be subject to the approval of the RBI, could either
be in cash or depository receipts, or partly in cash and partly in depository receipts. The
provisions mentioned above could have a far-reaching impact that will facilitate cross-
bordertransactions and increase their flexibility. Cross-border mergers could have ground-
breaking significance in plotting India on the global M&A landscape, since corporate deals have
fallen through or failed to meet their desired objectives in the past due to the lack of such
provisions in the 1956 Act.

Enabling of cross-border mergers is expected to help Indian companies in more ways than one,
including in the following:

1. Restructuring their shareholdings, wherein they can migrate ownership to an international

holding structure
2. Facilitating listing of entities, which may have Indian assets in overseas jurisdictions
3. Providing exit routes to current investors in overseas jurisdictions.
However, corresponding amendments are required in existing laws including the Income Tax
Act, Exchange Control Regulations (relating to ownership of real estate in India, sectoral caps,
definitions of overseas holdings, etc.), security-related laws (change in rules regarding dual
listings), etc. Currently, tax laws do not provide any tax-neutral provisions to enable such cross-
border mergers. The debate on whether cross border mergers should be taxable or not is an
interesting one, since in some mergers, companies may be moving some value outside India. If
they are operating companies, they will need to move out their Indian operations before the
mergers, to avoid operational and tax-related complications. Furthermore, the impact of payment
of cash/depository receipts or any other modes on the tax neutrality of the amalgamations will
need deep analyses.

A key aspect to look for will be notification of the “specified jurisdictions” for cross-border
mergers and the amendment of Exchange Control Regulations. This may restrict the scope of
outbound mergers as well as inbound ones, which are currently allowed from any jurisdiction
that allow cross-border mergers under their domestic laws. Moreover, the requirement of
approval from the RBI is expected to play a major role in such cross-border mergers.

Study Material on Inter-Corporate Loans and Transactions

The Companies Act, 2013 has come up with a change in the concept of ‘Loan and Investment
by Company.

The new Act provides that inter-corporate investments not to be made through more than two
layers of investment companies. The 2013 Act states that companies can make investments only
through two layers of investment companies subject to exceptions which includes company
incorporated outside India. There are no such restrictions which were imposed under the 1956
Act. Further, the exemption available from the provisions of Section 372A of the 1956 Act to
private companies as well as loans or investment given or made by a holding company to its
subsidiary company are no longer available under the 2013 Act.

In pursuance to the provisions of Section 186(1) of the Act, a Company shall make investment
through not more than two layers of investment companies.

‘Layer’ according to explanation (d) of Section 2(87) of the Act in relation to a holding
Company means its subsidiary or subsidiaries.

‘Investment Company’ means a Company whose principal business is the acquisition of shares,
debentures or other securities”. The provisions of Section 186 (1) shall not have effect in the
following cases:

– If a company acquires any company which is incorporated outside India and such company
has investment subsidiaries beyond two layers as per the laws of such country.

– A subsidiary company from having any investment subsidiary for the purposes of meeting the
requirement under any law/ rule/ regulation framed under any law for the time being in force.

Limits for Loans /Guarantee/Security/Investment under Sec-186(2):

In pursuant to provisions of Section 186(2) of the Act, 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 to any other body corporate or
person and
– acquire by way of subscription, purchase or otherwise, the securities of any other body
corporate exceeding 60% of its paid-up share capital plus free reserves plus securities premium
account or 100% of its free reserves plus securities premium account, whichever is more.

Approval from Members According to Section 186(3):

Though the Section 186(2) makes restriction as above, Section 186(3), empowers a Company to
give loan, guarantee or provide any security or acquisition beyond the limit but subject to prior
approval of members by a special resolution passed at a general meeting.

Disclosure of Particulars of Loan, Guarantee Given and Security Provided [Section 186(4)]
:

Section 186(4) of the Act provides that the Company shall disclose following details to the
members in the financial statement

– The full particulars of the loans given, investment made or guarantee given or security
provided.

– The purpose for which the loan or guarantee or security is proposed to be utilised by the
recipient of the loan or guarantee or security.

The notice of the general meeting for passing resolution shall indicate that

(a) The limits that will be required in excess of the prescribed limits involved in the proposal;

(b) The particulars of the body corporate in which the investment is proposed to be made or to
which the loan or guarantee or security proposed to be given.

(c) The purpose of the investment, loan, guarantee or security;

(d) The source of funding for meeting the proposal; and

(e) Other details as may be specified.

Approval Of Board And Public Financial Institution [Section 185(5)]:

In pursuant to provisions of Section 186(5) of the Act, every company shall take consent of all
the directors present at the board meeting before making any investment, giving loan and
guarantee and providing security. In case of company has already taken loan etc., from any
Public Financial Institutions, and then it is mandatory to take prior approval from such Public
Financial Institution. Exception: Provided that prior approval of Public Financial Institution shall
not be required where the aggregate loan, investment, guarantee and security proposed is within
the limits as specified under Section 186(2) and there is no default in repayment of loan
instalments or interest thereon to the Public Financials Institution.

Rate of Interest on Loan [Section 186 (7)]:

No loan shall be given under this section at a rate of interest lower than the prevailing yield of
one year, three year, five year or ten year Government Security closest to the tenor of the loan.

No Loan by Defaulter Company [Section 186 (8)]:

No company which is in default in the repayment of any deposits accepted before or after the
commencement of this Act or in payment of interest there on, shall give any loan or give any
guarantee or provide any security or make an acquisition till such default is subsisting.

Register Of Loan [Section 186 (9 And 10)]:

Section 186(9) of the Act mandates every Company to maintain a register which shall contain
particulars of loan or guarantee given or security provided or investment made. Every company
giving loan or giving guarantee or providing security or making an acquisition of securities shall,
from the date of its incorporation, maintain a register and entered therein separately, the
particulars of loan and guarantee given, securities provided and acquisitions made as aforesaid.
This register shall be kept at registered office of the company and the register shall be preserved
permanently and shall be kept in the custody of company secretary of the company or any person
authorized by the Board for the purpose. The entries in the register (either manual or electronic)
shall be authenticated by the company secretary of the company or by any other person
authorized by the Board for the purpose. The extracts of the register may be opened for
inspection and copies may be furnished to members who demands for the same on payment of
prescribed fee as mentioned in the Articles which shall not exceed ten rupees for each page.
Non-Applicability of Section 186:

Section 186 (except Sub Section 1) of the Companies Act, 2013 does not apply to the
following:

(a) to a loan made, guarantee given or security provided by a banking company or 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 the
Reserve Bank of India Act, 1934 and whose principal business is acquisition of securities:
Provided that exemption to non-banking financial company shall be in respect 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.

Penalty for contravention of Section 186:

For Company: Every Company which contravenes the provisions of this Section shall be liable
to a penalty which shall not be less than Rupees twenty five thousand but which may extend to
Rupees five lakhs.

For Officers: Every officer of the Company who is default shall be punishable with
imprisonment for a term which may extend to two years and fine which shall not be less than
Rupees twenty five thousand but which may extend to Rupees One lakh.
 MATERIAL FOR MODULE 3

TOPIC: Revival and Rehabilitation of Companies

STUDY MATERIAL ON REVIVAL AND REHABILITAION OF SICK COMPANIES

India as such has never been an industrial country and its economy also mainly revolves around
agriculture-particularly before independence. However, industries got their due attention during
the first and second terms of five-year plans. Both the government and some private bodies
started establishing big scale industries at that time which added its strong flavour in the
economy.

However, problem started coming in during 70s and 80s when certain changes have been taken
place in the policy of governance in India. Such a situation created long lasting impact on
industrial sector and at the same time negated the due growth of the economy. During that time
period, the problem of industrial sickness has been growing at an annual rate of about 28% and
13% respectively in terms of number of units and outstanding number of bank credit. It seems
that the deterioration of the sick industries appears to be faster than the growth of sick industries.
It may be because of the faulty industrial policy or may be due to the faulty management of
Indian companies.

Industrial sickness especially in small-scale Industry has been always a demerit for the Indian
economy, because more and more industries like – cotton, Jute, Sugar, and Textile small steel
and engineering industries are being affected by this sickness problem. Loss making industries,
both in the private sector and public sector are contributing for the downfall of industrial
economy. There has been an increase in industrial sickness, both in the large and small sectors,
in India. By consoling that this is, to some extent, a corollary of industrial growth, one shall not
belittle the seriousness of the problem. Industrial sickness affects not only the owners, employees
and creditors but also causes wastage of national resources and social unrest. It is, therefore,
considered very much essential to devise suitable measures for dealing with sick units as well as
to make suitable arrangements for detecting symptoms of industrial sickness at an early stage so
as to take measures to prevent sickness.

Historical background of industrial sickness:

Pre-Independence Position
Before 1947, the Indian economy was predominantly agricultural in nature. The development of
producers was almost negligible and was inadequate to meet the demands of the market. Only
those industries survived who served the interests of the British. There was dearth of private
players in the market. The market was unorganized because of the reluctant attitude of the British
and due to lack of proper communication facility as well as the shortage of power. This issue was
further aggravated with the lack of any proper bank or financial institutions to finance the
industrial projects. And, if at all, any help was available from the money lenders, they charged
exorbitant rates of interest along with arbitrary terms and conditions. There was also minimal
intervention of the Government in the promotion of the industries. As a result, it was difficult for
any trader to survive in the market on a long terms basis. Also there were no proper
implementation of any policy in regard to the efforts of the Government in the revival and
rehabilitation of sick industries.

Post-Independence Period

After the independence, the main aim was to convert India from a colonial country to a socialist
welfare society, as envisaged in the Preamble and the Directive Principles of State Policy. The
Government was prompted to go for rapid industrialization of basic and heavy industries to
convert India from agricultural to industrial economy. Soon, the Government realized that a large
number of units are turning sick. In order to check the growth of the sick units, the Government
adopted strategies to takeover of the sick industrial units and restrict the problem if
unemployment, labour unrest and social unrest. The Government also took the initiative of
taking over the management of sick industrial undertakings for a brief period and returning it
back to the owners once the sickness is removed. The Government in its aim of preventing the
growth of sickness was given support by various agencies such as RBI, IDBI etc.

In the wake of sickness in the country’s industrial climate prevailing in the 80s the Government
of India set up in 1981, a Committee of Experts under the Chairmanship of T. Tiwari to examine
the matter and recommend suitable remedies therefore. Based on the recommendations of the
Committee, the Government of India enacted a special legislation namely, the Sick Industrial
Companies (Special Provisions) Act, 1985 commonly known as the SICA.
The main objective of SICA is to determine sickness and expedite the revival of potentially
viable units or closure of unviable units (unit here in refers to a Sick Industrial Company). It was
expected that by revival, idle investments in sick units will become productive and by closure,
the locked up investments in unviable units would get released for productive use elsewhere. The
Sick Industrial Companies (Special Provisions) Act, 1985 (hereinafter called the Act) was
enacted with a view to securing the timely detection of sick and potential sick companies owning
industrial undertakings, the speedy determination by a body of experts of the preventive,
ameliorative, remedial and other measure which need to be taken with respect to such companies
and the expeditious enforcement of the measures so determined and for matters connected
therewith or incidental thereto. The Board of experts named the Board for Industrial and
Financial Reconstruction (BIFR) was set up in January, 1987 and functional with effect from
15th May 1987. The Appellate Authority for Industrial and Financial Reconstruction
(AAIRFR) was constituted in April 1987. Government companies were brought under the
purview of SICA in 1991 when extensive changes were made in the Act including, inter-alia,
changes in the criteria for determining industrial sickness.

The legislation is basically and predominantly remedial and ameliorative. It empowers a quasi-
judicial authority, viz.; The Board for Industrial and Financial Reconstruction (BIFR) to take
appropriate measures for revival and rehabilitation of potentially viable sick Industrial
Companies and for liquidation of non-viable companies. The legislation is regulatory only to a
limited extent. This aspect is reflected in the provision of the Act providing for obligation of Sick
Industrial Companies and Potentially Sick Industrial Companies to make references / reports to
the Board within the prescribed time limits and make non compliance punishable offences. The
proceedings before BIFR are not adversarial in nature. The right of appeal by a person aggrieved
by the Board’s order has been provided to avoid arbitrariness on the part of the Board. The
statute provides for exclusion of jurisdiction of Civil Courts with respect to matters decided by
the Board.

Supreme Court in Namit R Kamani v. R.R. Kamani (1988) 4 SCC 387 (1989) had explained the
object of SICA as

(a) Affording maximum protection to employment

(b) Optimising the use of funds and available production assets

(c) Realising amounts due to banks, institutions, creditors and

(d) Providing efficient authority consisting of experts for expeditious determination of measures
to avoid time consuming procedures.

The major constraint of the SICA was that it was applicable only to sick industrial companies
keeping away other companies which are in trading, service or other activities. The Act was
modified in 1991 to include within its purview the Government companies by Industrial
Companies (Special Provisions) Amendment Act, 1991.

A genesis of SICA:

❖ Industrial sickness had started right from the pre-Independence days.

❖ Government had earlier tried to counter the sickness with some ad-hoc measures.
❖ Nationalisation of Banks and certain other measures provided some temporary relief.
❖ RBI monitored the industrial sickness.
❖ A study group came to be known as Tandon Committee was appointed by RBI in 1975.
❖ In 1976, H.N. Ray Committee was appointed for the same purposes.
❖ In 1981, Tiwari Committee was appointed to suggest a comprehensive special
legislation designed to deal with the problem of sickness laying down its basic objectives
and parameters, remedies necessary for revival of sick Units.
❖ The committee submitted its report to the Govt. in September 1983 and suggested the
following:
➢ Need for a special legislation
➢ Need for setting up of exclusive quasi-judicial body.
Thus the SICA came into existence in 1985 and BIFR started functioning from 1987.

Applicability of SICA:

SICA applies to companies both in public and private sectors owning industrial undertakings:-
(a) Pertaining to industries specified in the First Schedule to the Industries (Development and
Regulation) Act, 1951, (IDR Act) except the industries relating to ships and other vessels drawn
by power.

(b) Not being "small scale industrial undertakings or ancillary industrial undertakings" as defined
in Section 3(j) of the IDR Act.

(c) The criteria to determine sickness in an industrial company are

(i) The accumulated losses of the company to be equal to or more than its net worth i.e. it’s paid
up capital plus its free reserves

(ii) The company should have completed five years after incorporation under the Companies
Act, 1956

(iii) It should have 50 or more workers on any day of the 12 months preceding the end of the
financial year with reference to which sickness is claimed.

(iv) It should have a factory license.

Definition of Sick Industries:

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.

Board of Industrial and Financial Reconstruction:

When an industrial company has become sick, the Board of Directors of the company shall,
within 60 days from the date of finalization 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
of Industrial and Financial Reconstruction (BIFR) for determination of measures to be adopted
with respect to the company. If the Board of Directors had sufficient reason even before such
finalization to form opinion that the company had become a sick unit after the Board of Directors
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.

The enactment provided for the establishment of the Board for Industrial and Financial
Reconstruction by the Central Govt. to exercise the jurisdiction and powers and discharge the
functions and duties conferred or imposed thereon by or under the provisions of the Act. The
board consisted of Chairman and not less than 12 members, who were either the High Court
Judge or qualified to be High Court Judge, or persons of ability, integrity and standing who had
special knowledge or professional experience of not less than 15 years in science, technology,
economics, banking, industries, law, legal matters, industrial finance, Industrial management or
reconstruction, administration, investment accountancy or marketing; which according to the
Central Govt. was required for the adjudication of the issues concerning the sick industries
companies.

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. However, the State
Government can make a reference in respect of any industrial undertaking which is situated in
such state only. Similarly, a public financial institution or state level institution or a scheduled
bank can make a reference only if it has provided any financial assistance or some obligation
rendered by it or undertaking by it in respect of the referred company.

Provision of Inquiry:

The salient features of the inquiry into the status of sick industrial companies contained in
Section 16 of SICA are as follows:

1. BIFR, upon receipt of a reference with respect to such company under Section 15; or upon
information received with respect to such company or upon its own knowledge as to the financial
condition of the company, may make such inquiry as it may deem fit for determining whether the
industrial company has become a sick industrial company.
2. BIFR may require, by order, any operating agency to enquire into and make a report and
complete its inquiry as expeditiously as possible.

3. Endeavour should be made to complete the inquiry within sixty days from the commencement
of the inquiry.

4. As per the explanation given under this section, an inquiry shall be deemed to have
commenced upon the receipt by BIFR of any reference or information or upon its own
knowledge reduced to writing by BIFR.

5. BIFR has powers to appoint one or more persons to be a special director or special directors of
the company if it deems it necessary to make an inquiry or to cause an inquiry as mentioned
above to be made into any industrial company.

6. BIFR may issue necessary directions to special directors for proper discharge of duties.

7. The appointment of a special director referred to in Sub-section (4) shall be valid and effective
notwithstanding anything to the contrary contained in the Companies Act, 1956, 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.

8. Any provision regarding share qualification, age limit, number of directorships, removal from
office of directors and such like conditions contained in any such law or instrument aforesaid,
shall not apply to any special director appointed by BIFR.

9. The special director will hold office only during the pleasure of BIFR. He does not incur any
obligation or liability by reason only 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 or anything in relation thereto. He is
not liable to retirement by rotation and shall not be taken into account for computing the number
of directors liable to such retirement. He is not liable to be prosecuted under any law for anything
done or omitted to be done in good faith in the discharge of his duties in relation to the sick
industrial company.

Preparation and sanction of scheme for revival:

If the Board appoints an operating agency 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:

(a) The financial reconstruction of the sick industrial company;

(b) The proper management of the sick industrial company by change in, or takeover of, the
management of the sick industrial company;

(c) The amalgamation of—

(i) the sick industrial company with any other company, or

(ii) any other company with the sick industrial company.

(d) the sale or lease of a part or whole of any industrial undertaking of the sick industrial
company;

(e) the rationalisation of managerial personnel, supervisory staff and workmen in accordance
with law;

(f) such other preventive, ameliorative and remedial measures as may be appropriate;

(g) such incidental, consequential or supplemental measures as may be necessary or expedient in

connection with or for the purposes of the measures specified in clauses (a) to (e).

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”.

Where the scheme relates to preventive, ameliorative, remedial and other measures with respect
to any sick industrial company, the scheme may provide for financial assistance by way of loans,
advances or guarantees or reliefs or concessions or sacrifices from the Central Government, a
State Government, any scheduled bank or other bank, a public financial institution or State level
institution or any institution or other authority(here in after referred as person required by the
scheme to provide financial assistance) to the sick industrial company.
On the sanction of the scheme, the financial institutions and the banks required to provide
financial assistance shall designate by mutual agreement a financial institution and a bank from
amongst themselves which shall be responsible to disburse financial assistance by way of loans
or advances or guarantees or reliefs or concessions or sacrifices agreed to be provided or granted
under the scheme on behalf of all financial institutions and banks concerned. The financial
institution and the bank designated shall forthwith proceed to release the financial assistance to
the sick industrial company in fulfilment of the requirement in this regard. Where in respect of
any scheme consent is not given by any person required by the scheme to provide financial
assistance, the Board may adopt such other measures, including the winding up of the sick
industrial company, as it may deem fit.

Appellate Authority for Industrial and Financial Reconstruction:

Under the SICA, the Central Government shall constitute an appellate authority to be called the
Appellate Authority for Industrial and Financial Reconstruction consisting of a Chairman and not
more than three other Members, to be appointed by that Government, for hearing appeals against
the orders of BIFR. The Chairman shall be a person who is or has been a Judge of the Supreme
Court or who is or has been a Judge of a High Court for not less than five years. A Member of
the Appellate Authority shall be a person who is or has been a Judge of a High Court or who is
or has been an officer not below the rank of a Secretary to the Government of India or who is or
has been a Member of the Board for not less than three years. SICA provides for an appeal
against the order of the BIFR before the AAIFR. Once the appeal is admitted by the AAIFR, it
assumes the jurisdictional powers and can conduct further enquiry in respect of the Sick
Industrial Company and can confirm modify or set aside the order of the BIFR or remand the
matter back to BIFR for fresh consideration. The proceedings before the BIFR and the AAIFR
are deemed to be judicial proceedings.
STUDY MATERIAL ON REVIVAL UNDER COMPANIES ACT
2013

Companies Act, 2013, like all other important matters, has made certain changes in respect to the
revival and rehabilitation of companies as well. The concept of industrial company/undertaking
and criterion of Net Worth (as was there in SICA) has been dropped under the Companies Act
2013. Sickness has been linked with cash flows and the rights of majority Secured Creditors are
being protected under these provisions. If any Company has failed to pay/secure/compound their
debt within 30 days of notice to company, they may file an application to Tribunal for
determination of company as sick company. Where the Tribunal is satisfied that a company has
become sick company, it shall after considering all the relevant facts and circumstances of the
case, decide, as soon as may be, by an order in writing, whether it is practicable for the company
to make the repayment of its debts within a reasonable time. On the determination of sickness by
the tribunal, the applicant shall make an application within 60 days of determination, for
measures to be adopted for revival or rehabilitation.

The 2013 Act therefore, does not recognise the role of all stakeholders in the revival and
rehabilitation of a sick company, and provisions predominantly revolve around secured creditors.
The fact that the 2013 Act recognises the presence of unsecured creditors is felt only at the time
of the approval of the scheme of revival and rehabilitation. To speed up the revival and
rehabilitation process, the 2013 Act provides a one year time period for the finalisation of the
rehabilitation plan.

Determination of Sickness of Company:

According to Section-253(1) of the Companies Act, 2013 Where on the demand by the secured
creditors representing 50% or more of its outstanding amount of debt, company fail to pay the
debt within a period of 30 days from the date of notice of demand, any secured creditor may file
an application to tribunal for determination of sickness of the company.

As per Section-253(2) and (4), the applicant (secured creditor) or company, may also make an
application for determination of sickness and for the stay of any proceeding for the winding up of
the company or; for execution, distress or the like against any property and assets of the
company or; for the appointment of a receiver in respect thereof and that no suit for the recovery
of any money or for the enforcement of any security against the company shall lie or be
proceeded with.

The tribunal may pass an order which shall be operative for 120 days

Section-253(5) provided that, the Central Government or the Reserve Bank of India or a State
Government or a public financial institution or a State level institution or a scheduled bank may,
if it has sufficient reasons to believe that any company has become a sick company, make a
reference in respect of such company to the Tribunal for determination of the measures which
may be adopted with respect to such company:

As per Section-253(6) Where an application under sub-section (1) or (4) has been filled the
company shall not dispose of or otherwise enter into any obligation with regard to, its properties
or assets except as required in the normal course of business the Board of Directors shall not take
any steps likely to prejudice the interests of the creditors.

Section-253(7) again says that, the Tribunal shall, within a period of 60 days of the receipt of an
application under determine whether the company is a sick company or not.

According to Section-253(8) and (9) if the Tribunal is satisfied that a company has become a sick
company, it shall, after considering all the relevant facts and circumstances of the case, decide,
by an order in writing, whether it is practicable for the company to make the repayment of its
debts referred to in sub-section (1) within a reasonable time.

The tribunal shall by order in writing give such time to the company as it may deem fit to make
repayment of the debt.

Detailed process of the revival:

Once a company is assessed to be a sick company, an application could be made to the Tribunal
under Section 254 of the Companies Act, 2013 for the determination of the measures that may
be adopted with respect to the revival and rehabilitation of the identified sick company either by
a secured creditor of that company or by the company itself. The application thus made must be
accompanied by audited financial statements of the company relating to the immediately
preceding financial year, a draft scheme of revival and rehabilitation of the company, and with
such other document as may be prescribed. Subsequent to the receipt of the application, for the
purpose of revival and rehabilitation, the Tribunal, not later than seven would be required to fix a
date for hearing and would be appointing an interim administrator under Section 256 of Act to
convene a meeting of creditors of the company in accordance with the provisions of Section 257
of the 2013 Act. In certain circumstances, the Tribunal may appoint an interim administrator as
the company administrator to perform such functions as the Tribunal may direct.

Appointment of the interim administrator:

According to Section 256, on the receipt of an application under Section 254, the Tribunal shall,
not later than 7 days from such receipt:

1. Fixes a date for hearing not later than 90 days from date of its receipt

2. Appoint an interim administrator (PCS can be appointed) to convene a meeting of creditors to

be held not later than 45 days from receipt of the order of the Tribunal.

3. Issue such other directions to the interim administrator as the Tribunal may consider necessary
to protect and preserve the assets of the sick company

Interim administrator has to consider whether on the basis of the documents furnished and draft
scheme filed, it is possible to revive and rehabilitate the sick company.

Interim administrator is to ascertain and submit a report to Tribunal, within 60 days from date of
the order whether it is possible to adopt measures for the revival and rehabilitation of the sick
company.

Where no draft scheme is filed by the company and a declaration has been made to that effect by
the Board of Directors, the Tribunal may direct the interim administrator to take over the
management of the company.

Appointment of the Committee of Creditors:

The interim administrator shall appoint a Committee of creditors with not more than 7 members
giving representation to each class of creditors.
The holding of the meeting of the committee of creditors and the procedure to be followed at
such meetings, including the appointment of its chairperson, shall be decided by the interim
administrator. The interim administrator may direct any promoter, director or any key managerial
personnel to attend any meeting of the committee and to furnish such information as may be
considered necessary.

Order of the Tribunal:

Section-258 provided that, on the date of hearing fixed by the Tribunal and on consideration of
the report of the interim administrator filed under sub-section (1) of Section 256, if the Tribunal
is satisfied that the secured creditors representing 3/4th in value of the amount outstanding
against the sick company present and voting have resolved that:

1. It is not possible to revive and rehabilitate such company; Tribunal shall record such opinion
and order that the proceedings for the winding up of the company be initiated.

2. It is possible to revive and rehabilitate such company by adopting certain measures; Tribunal
shall appoint a company administrator for the company & cause such administrator to prepare a
scheme of revival and rehabilitation.

Appointment, duties and powers of the Administrator:

A company administrator shall be appointed by the Tribunal from a data bank maintained by

- The central government; or

- any institute or agency authorized by the central government ; in a manner as may be

prescribed consisting of the names of company secretaries, chartered accountants, cost
accountants and such other professionals. The terms and conditions of the appointment of interim
and company administrators shall be such as may be ordered by the Tribunal.

Section-260 of the Act provides for the duties of the administrator as follows-

1. The company administrator shall perform such functions as the Tribunal may direct.

2. Company administrator shall prepare with respect to the company:

(a) A complete inventory of all assets & liabilities and all books of account, registers, maps,
plans, records, documents of title.

(b) List of shareholders, a list of creditors & a list of workmen of the company

(c) A valuation report in respect of the shares and assets in order to arrive at the reserve price for
the sale of any industrial undertaking of the company

(d) An estimate of the reserve price, lease rent or share exchange ratio

(e) Audited accounts of the company.

Following are powers of such an administrator:

1. To have an office at the registered office of the company.

2. To visit all offices, branches of company in case necessary.

3. To assess all information & inspect all books, papers, documents, registers of sick company.

4. To issue notices to director, secretary, officers, manager, creditors etc. and call for all
information needed

5. To obtain from any central or state government, court, tribunal copy of any document related
to the company.

6. To appoint experts with approval of Tribunal for ascertaining measures necessary for revival
of company.

7. To apply to executive magistrate of the district for protection to safeguard assets, properties
etc. of the sick company.

Scheme of Revival & Rehabilitation:

The company administrator shall prepare or cause to be prepared a scheme of revival and
rehabilitation of the sick company after considering the draft scheme filed along with the
application under Section 254.
Scheme prepared in relation to any sick company may provide for any one or more of the
following measures:

1. The financial reconstruction of the sick company

2. The proper management of the sick company by any change in, or by taking over, the
management of such company

3. The amalgamation of the Sick Company with another company

4. Takeover of the sick company by a solvent company

5. The sale or lease of a part or whole of any asset or business of the sick company

6. The rationalization of managerial personnel, supervisory staff and workmen

7. Repayment or rescheduling or restructuring of the debts or obligations of the sick company to

any of its creditors or class of creditors

8. Such other preventive, ameliorative and remedial measures.

Sanction of the Scheme:

The scheme prepared by the company administrator; shall be placed before the creditors of the
sick company in a meeting convened for their approval by the company administrator within the
period of 60 days from his appointment, the time may be extended by the Tribunal up to a period
not exceeding 120 days.

Company administrator shall convene separate meetings of secured and unsecured creditors &
submit the scheme to the Tribunal;

-If scheme is approved by the unsecured creditors representing 1/4th in value of the amount
owed by the company and

-the secured creditors representing 3/4th in value of the amount outstanding against financial
assistance disbursed by such creditors
Scheme prepared by administrator shall be examined by Tribunal & a copy of it with
modifications, if any, made by Tribunal shall be sent to sick company, company administrator &
other company (in case of amalgamation) for suggestions;

Tribunal may publish or cause to be publish the draft scheme in at least once in a vernacular
newspaper in the principal vernacular of the district of the registered office of the company and
at least once in English in an English Daily within 15 days prior to the date of hearing, for
suggestions & objections.

Complete draft scheme shall be kept at registered office of company.

The Tribunal may make such modifications, if any, in the draft scheme as it may consider
necessary in the light of the suggestions and objections received.

On the receipt of the scheme under sub-section (3), the Tribunal shall within 60 days there from,
pass an order sanctioning the scheme. Where a sanctioned scheme provides for the transfer of
any property or liability of the sick company to any other company; or where such scheme
provides for the transfer of any property or liability of any other company in favour of the sick
company; Such transfer shall be valid on and from the date of coming into operation of the
sanctioned scheme.

The Tribunal may review any sanctioned scheme and make such modifications, as it may deem
fit, or may by order in writing direct company administrator, to prepare a fresh scheme. The
sanction accorded by the Tribunal under sub-section (4) shall be conclusive evidence that all the
requirements of the scheme relating to the reconstruction or amalgamation or any other measure
specified therein have been complied with.

A copy of the sanctioned scheme referred to in sub-section (4) shall be filed with the Registrar
by the sick company within a period of 30 days from the date of receipt of a copy there of.

Section 263 of the act says, on and from the date of the coming into operation of the sanctioned
scheme, the scheme or such provision shall be binding on the sick company, the transferee
company & any other company( in case of amalgamation) and also on its shareholders, creditors
etc.
Insolvency Fund:

As per Section 269 of the act,

There shall be formed a Fund to be called the Rehabilitation and Insolvency Fund for the
purposes of rehabilitation, revival and liquidation of the sick companies;

The Fund shall be managed by an administrator to be appointed by the Central Government.

There shall be credited to the fund from:

1. Grants by Central Government;

2. Income from investment of amount in fund

3. Deposits by company

4. Other Sources

A company which has contributed to the Fund shall, in the event of proceedings initiated in
respect of such company under this Chapter or Chapter XX, may make an application to the
Tribunal for withdrawal of funds not exceeding the amount contributed by it.

5. The Companies Act 2013 provides for a new comprehensive regime for revival and
rehabilitation of companies under Chapter XIX: unlike SICA which applied to specified
industrial companies only, the Companies Act 2013 for corporate rescue is applicable to all
companies. The procedure under the Companies Act 2013 in relation to corporate rescue shall be
administered by the NCLT, a quasi-judicial body. The NCLT shall consist of both judicial and
non-judicial members.94 The following features of Chapter XIX Companies Act 2013 make it
significantly better than SICA: (i) greater involvement of the creditors in the rehabilitation
process, (ii) reference criteria based on a liquidity test (instead of erosion of net worth), (iii) no
automatic moratorium (the moratorium under the Companies Act 2013 will be available only on
application to the NCLT, and is available only for a fixed duration of 120 days), (iv) provision
for a committee of creditors (with representatives from every class of creditors) that will have a
say in determining whether a company should be liquidated or rescued, (v) requirement of
creditor consent for approving a scheme of rescue (that gives rights to both secured and
unsecured creditors), (vi) provision for appointment of administrators (as against operating
agency under the SICA) - appointed from a databank of authorised practitioners (company
secretaries, chartered accountants, cost accountants and such other professionals) maintained by
the government – who can even take-over the management of the debtor company under the
NCLT‟s directions, (vii) provision for a „Rehabilitation and Insolvency Fund‟ for the purpose of
liquidation and rescue of sick companies. Additionally, as under the SICA, it is possible for
SARFAESI Act action to defeat the commencement of rescue proceedings altogether (see the
provisos to Section 254 of CA 2013).
MATERIAL FOR MODULE 4

TOPIC: Mergers/Acquisitions and

Compliance to various

Laws
STUDY MATERIAL ON DOMESTIC TAXATION ISSUES IN MERGER AND
ACQUISITIONS

The ITA contemplates and recognizes the following types of mergers and acquisitions activities:
-Amalgamation (i.e. a merger which satisfies the conditions mentioned below)

-Demerger or spin-off;

-Slump sale/asset sale; and

-Transfer of shares

The ITA defines an ‘amalgamation’ as the merger of one or more companies with another
company, or the merger of two or more companies to form one company. The ITA also requires
that the following conditions must be met by virtue of the merger, for such merger to qualify as
an ‘amalgamation’ under the ITA:

All the property of the amalgamating company becomes the property of the amalgamated
company;

All the liabilities of the amalgamating company become the liabilities of the amalgamated
company; and

Shareholders holding not less than 75% of the value of the shares of the amalgamating company
become shareholders of the amalgamated company.

A. Tax on Capital Gains:

Section 45 of the ITA levies tax on capital gains arising on the transfer of a capital asset. Section
2(47) of the ITA defines the term ‘transfer’ in relation to a capital asset to include:

1. The sale, exchange or relinquishment of the asset; or

2. The extinguishment of any rights therein; or

 3. The compulsory acquisition thereof under any law; or

4. In a case where the asset is converted by the owner thereof into, or is treated by him as,
stock– in–trade of a business carried on by him, such conversion or treatment; or

5. Any transaction involving the allowing of the possession of any immovable property to
be taken or retained in part performance of a contract of the nature referred to in section
53A of the Transfer of Property Act, 1882; or

6. Any transaction (whether by way of becoming a member of, or acquiring shares in, a co-
operative society, company or other association of persons or by way of any agreement or
any arrangement or in any other manner whatsoever), which has the effect of transferring,
or enabling the enjoyment of, any immovable property.

7. Further, under Section 9(1) (i) of the ITA, capital gains arising to a non-resident is
considered taxable in India if they are earned directly or indirectly through the transfer of
a capital asset situated in India.

Thus, if a merger or any other kind of restructuring results in a transfer of a capital asset (as
defined above) for a resident or a capital asset that is situated in India for a non-resident, it would
lead to a taxable event.

Tax Implications and exemptions thereof in events of capital gains-

Section 47 of the ITA sets out certain transfers that are exempt from the provisions of Section 45
(the charging provision for tax on capital gains) and such transfers are exempt from tax on
capital gains. The relevant exemptions are provided below:

A. Section 47(vi): The transfer of a capital asset in a scheme of amalgamation by the

amalgamating company to the amalgamated company is exempt from tax on capital
gains, provided the amalgamated company is an Indian company. Please note that for this
exemption to be applicable to a merger, it is essential that the merger falls within the
definition of ‘amalgamation’ provided above. Special exemptions have also been
included in case of amalgamations involving banking companies.

B. Section 47(vi a): When a foreign holding company transfers its shareholding in an Indian
company to another foreign company as a result of a scheme of amalgamation, such a
transfer of the capital asset i.e. shares in the Indian company, would be exempt from tax
on capital gains in India for the foreign amalgamating company, if it satisfies the
following conditions: (a) At least 25% of the shareholders of the amalgamating foreign
company continue to be the shareholders of the amalgamated foreign company, and (b)
such transfer does not attract capital gains tax in the country where the amalgamating
company is incorporated. It may be noted that while the definition of ‘amalgamation’
under Section 2(1B) requires that 75% (in terms of value of shares) of the shareholders of
the amalgamating company should become the shareholders in the amalgamated
company, this section specifies 25% of the number of shareholders as the corresponding
figure. The above provisions also indicate that an Indian company may not amalgamate
into a foreign company without attracting capital gains tax liability in India.

C. Section 47(vii): Transfer by the shareholders of amalgamating company, in a scheme of

amalgamation, of shares of the amalgamating company (the capital asset) as
consideration for the allotment of shares of the amalgamated company, is exempt from
tax on capital gains, provided that the amalgamated company is an Indian company. The
exemption from tax on capital gains would only be to the extent that the transfer is for the
 consideration for shares of the amalgamated company. If any consideration other than
shares of the amalgamated company, such as cash or bonds, was paid to the shareholders
of the amalgamating company, it may be considered liable to tax on capital gains. If any
of the conditions specified above are not satisfied (including the conditions specified in
the definition of ‘amalgamation’), the transfer of capital assets in a merger would be
subject to tax on capital gains.

D. The Finance Act, 2015 has added Sections 47(vi ab) and 47(vi cc) to the ITA by which
transfer by the shareholders, in a scheme of amalgamation, of shares/interests of a foreign
amalgamating company (the capital asset) that derive their value ‘substantially’ from
Indian assets as consideration for the allotment of shares of the amalgamated company, is
exempt from tax on capital gains, if it satisfies the following conditions: (a) At least 25%
of the shareholders of the amalgamating foreign company continue to be the shareholders
of the amalgamated foreign company, and (b) such transfer does not attract capital gains
tax in the country where the amalgamating company is incorporated.

E. Capital gain can also arise in cases of slump sale. A slump sale is a transaction by way of
‘sale’ as a result of which the transferor transfers one or more of its undertakings on a
going concern basis for a lump sum consideration, without assigning values to the
individual assets and liabilities of the undertaking. For the purpose of computing capital
gains, the cost of acquisition would be the ‘net worth’ of the undertaking on the date of
the transfer. The ‘net worth’ of the undertaking shall be determined by calculating the
difference between the aggregate value of total assets and aggregate value of total
liabilities as per the books of accounts of the seller.

Implications of Service Tax:

In an asset purchase or a slump sale, where the object is to acquire the business of the seller,
there may be a covenant in the asset purchase agreement that the seller will procure that its
employees accept offers of employment with the acquirer. Part of the consideration payable to
the seller may be contingent on the number of employees who join the acquirer. It is possible that
such a covenant could amount to the provision of manpower recruitment services by the seller on
which service tax at the rate of 15% (including surcharge and education cess) may be payable as
per Finance Act.

Sales Tax (VAT) Implications:

Value added tax (“VAT”) or sales tax, as the case may be, may be payable on a purchase of
movable assets or goods of the target by the acquirer. Most Indian states have in the last few
years replaced their state sales tax laws with laws levying VAT on the sale of goods.

We can analyze some of the relevant provisions of the Karnataka Value Added Tax Act, 2003
(“KVAT”), in connection with the sale of goods in an asset purchase.

Under the KVAT, VAT is payable on a ‘sale’ of goods. The term ‘sale’ is defined to inter alia
include a transfer of property in goods by one person to another in the course of trade or business
for cash, deferred payment or other valuable consideration etc. Therefore, the sale must be in the
course of trade or business in order to attract VAT. Since the seller would usually not be in the
business of buying or selling the assets proposed to be acquired, and the sale of a business does
not amount to a sale of goods, it could be said that a transfer of goods in connection with the sale
of the business of the seller, is not a sale attracting VAT under the KVAT.

However this argument may be applied only in the case of a slump sale where the business is
transferred as whole and not in the case of an itemized sale of assets.

Stamp Duties:
Stamp duty is a duty payable on certain specified instruments / documents. Broadly speaking,
when there is a conveyance or transfer of any movable or immovable property, the instrument or
document effectuating the transfer is liable to payment of stamp duty.

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 Court 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.

Stamp duty on share transfers

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. However, if the shares are in
dematerialized form, the abovementioned stamp duty is not applicable.

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 transfer form.
Study Material on Double Taxation Issues in Mergers:

Double taxation is the enforced duty of two or more taxes on the same property or monetary
transactions. Double taxation may occur when the legal authority associations, used by different
nations, overlap or it may occur when the taxpayer has links with more than one country.

Double taxation may arise when the jurisdictional connections, used by different countries,
overlap or it may arise when the taxpayer has connections with more than one country. A person
earning any income has to pay tax in the country in which the income is earned (as source
Country) as well as in the country in which the person is resident. As such, the said income is
liable to tax in both the countries.

To avoid this hardship of double taxation, Government of India and other governments across
the world has entered into Double Taxation Avoidance Agreements (DTAAs) with various
countries. DTAAs provide for the following reduced rates of tax on dividend, interest, royalties,
technical service fees, etc., received by residents of one country from those in the other. The
Double Tax Avoidance Agreement (DTAA) is essentially a bilateral agreement entered into
between two countries. The basic objective is to promote and foster economic trade and
investment between two Countries by avoiding double taxation.

Objectives:

1. Protection against double taxation: These Tax Treaties serve the purpose of providing
protection to tax-payers against double taxation and thus preventing any discouragement which
the double taxation may otherwise promote in the free flow of international trade, international
investment and international transfer of technology;

2. Prevention of discrimination at international context: These treaties aim at preventing

discrimination between the taxpayers in the international field and providing a reasonable
element of legal and fiscal certainty within a legal framework;

3. Mutual exchange of information: In addition, such treaties contain provisions for mutual
exchange of information and for reducing litigation by providing for mutual assistance
procedure.
A typical DTA Agreement between India and another country usually covers persons or
corporate bodies, who are either residents of India or is registered in India. A person, who is not
resident either of India or of the other contracting country, would not be entitled to benefits
under DTA Agreements.

International double taxation has adverse effects on the trade and services and on movement of
capital and people. Taxation of the same income by two or more countries would constitute a
prohibitive burden on the tax-payer. The domestic laws of most countries, including India,
mitigate this difficulty by affording unilateral relief in respect of such doubly taxed income
(Section 91 of the Income Tax Act). But as this is not a satisfactory solution in view of the
divergence in the rules for determining sources of income in various countries, the tax treaties try
to remove tax obstacles that inhibit trade and services and movement of capital and persons
between the countries concerned. It helps in improving the general investment climate. The need
for Agreement for Double Tax Avoidance arises because of conflicting rules in two different
countries regarding chargeability of income based on receipt and accrual, residential status etc.
As there is no clear definition of income and taxability thereof, which is accepted internationally,
an income may become liable to tax in two countries. Double taxation occurs when an individual
is required to pay two or more taxes for the same income, asset, or financial transaction in
different countries. Double taxation occurs mainly due to overlapping tax laws and regulations of
the countries where an individual operates his business. In such a case, the two countries have an
Agreement for Double Tax Avoidance, in which case the possibilities are:

1. The income is taxed only in one country.

2. The income is exempt in both countries.

3. The income is taxed in both countries, but credit for tax paid in one country is given against
tax payable in the other country.

In India, Under Section 90 and 91 of the Income Tax Act, relief against double taxation is
provided in two ways:
UNILATERAL RELIEF: Under Section 91, an individual can be relieved from double taxation
by Indian Government irrespective of whether there is a DTAA between India and the other
country concerned. Unilateral relief to a tax payer may be offered if:

The person or company has been a resident of India in the previous year.

In India and in another country with which there is no tax treaty, the income should have been
taxed.

The tax has been paid by the person or company under the laws of the foreign country in
question.

BILATERAL RELIEF: Under Section 90, the Indian government offers protection against
double taxation by entering into a DTAA with another country, based on mutually acceptable
terms.

Choice of beneficial provisions under DTAA/tax laws: The Provisions of DTAA override the
general provisions of taxing statute of a particular country. It is now well settled that in India the
provisions of the DTAA override the provisions of the domestic statute. Moreover, with the
insertion of Sec.90 (2) in the Indian Income Tax Act, it is clear that assesse have an option of
choosing to be governed either by the provisions of particular DTAA or the provisions of the
Income Tax Act, whichever are more beneficial.

For example under DTAA between Indian and Germany, tax on interest is specified @ 10%
whereas under Income Tax Act it is 20%. Hence, one can follow DTAA and pay tax @ 10%.
Further if Income tax Act itself does not levy any tax on some income then Tax Treaty has no
power to levy any tax on such income. Section 90(2) of the Income Tax Act recognizes this
principle.
Study Material on Merger Control in India:

Regulatory framework

The Competition Act 2002 (Competition Act) is the principal legislation that regulates
combinations (acquisitions, mergers, amalgamations and de-mergers) in India. Sections 5 and 6
of the Competition Act, which deal with the regulation of combinations, have been in force since
1 June 2011.

The procedure for notifying combinations is set out in:

The Competition Commission of India (Procedure in regard to the transaction of business

relating to combinations) Regulations 2011 (as last amended on 7 January 2016) (Combination
Regulations), The Competition Commission of India (General) Regulations 2009 (General
Regulations).

Regulatory authority

The Competition Commission of India (CCI) is the statutory authority responsible for reviewing
combinations and assessing whether or not they cause or are likely to cause an appreciable
adverse effect on competition within the relevant market(s) in India. CCI approval is required for
combinations where the parties involved exceed the assets/turnover thresholds set out in section
5 of the Competition Act.

The Director General (DG) is the investigative wing of the CCI. The DG can conduct a Phase II
investigation of combinations when directed by the CCI.

Triggering events:

The acquisition of shares, voting rights, assets or control in one or more enterprises, or a merger
or amalgamation of enterprises, that meets the following thresholds constitutes a combination
that must be pre-notified to, and obtain the approval of, the Competition Commission of India
(CCI) before the transaction can be completed:
 1. Where the acquirer and the enterprise whose shares, assets, voting rights or
control being acquired have either: combined assets in India of INR20 billion; or
a combined turnover in India of INR60 billion.
2. Where the acquirer and the enterprise whose shares assets, voting rights or control
being acquired have either: combined worldwide assets of US$1 billion, including
combined assets in India of INR10 billion; or a combined worldwide turnover of
US$3 billion, including a combined turnover in India of INR30 billion.
3. Where the group to which the target enterprise would belong a􀁸er the acquisition
has either: assets in India of INR80 billion; or a turnover in India of INR240
billion.
4. Where the group to which the target enterprise would belong a􀁸er the acquisition
has either: worldwide assets of US$4 billion, including assets in India of INR10
billion; or a worldwide turnover of US$12 billion, including a turnover in India of
INR30 billion.

Timeline:

The Combination Regulations provide that the CCI will "endeavor" to pass an order or issue
directions within a period of 180 days from the date of notification. The Competition Act
provides for a deemed clearance if the CCI does not pass an order within 210 days from the date
of notification.

Mandatory or voluntary:

If the jurisdictional thresholds are met and exemptions are unavailable, it is mandatory to notify
the Competition Commission of India (CCI) of the combination.

Pre-notification formal/informal guidance:

The CCI provides informal, verbal and non-binding pre-notification consultations for seeking
clarifications on procedural and substantive issues before filing a notice. It is generally advisable
to obtain pre-notification guidance from the CCI on issues that have not been addressed by it.
Generally, the CCI completes a pre-notification consultation within a week from the date of
request.
Filing fee:

The filing fees are INR1.5 million for Form I and INR50 million for Form II. There is no filing
fee for Form III. The acquirer or the parties to a merger/amalgamation, as the case may be, are
responsible for paying the filing fees. For joint notifications, the fees are payable jointly or
severally (according to the parties' agreement).

Obligation to suspend:

The Indian merger control regime is suspensory in nature. Combinations subject to review by the
CCI cannot be completed until merger clearance is obtained or a review period of 210 calendar
days (as calculated under the legislation) passes, whichever is the earlier.

Procedure and timetable:

The investigation into combinations by the Competition Commission of India (CCI) is in two
phases, Phase I and Phase II.

Phase I

The CCI must form its prima facie opinion on whether the combination is likely to cause or has
caused an appreciable adverse effect on competition (AAEC) within the relevant market in India
within 30 calendar days of receiving the notice.

The CCI can require the parties to clear defects file additional information or accept
modifications offered by the parties, before the CCI has formed a prima facie opinion. The time
taken by the parties in clearing defects, furnishing additional information or offering
modification(s) is excluded for the purposes of calculating the 30 calendar-day period.

For modifications offered during Phase I, the 30-day review period is extended by 15 additional
calendar days.

Phase II

If the CCI forms a prima facie opinion that a combination is likely to cause, or has caused, an
AAEC within the relevant market in India, it issues a show cause notice to the parties asking for
an explanation as to why an investigation in the combination should not be conducted. The
parties are given 30 days to reply to this notice.

After the reply is filed by the parties, the CCI can either direct the Director General (DG) to
conduct an investigation or conduct the investigation itself. Further to the receipt of the parties'
response, or the report of the DG, whichever is later, the CCI can direct the parties to publish
details of the combination within ten working days. At this stage, the CCI can invite any person
or member of the public, affected or likely to be affected by the combination, to file their written
objections before the CCI within 15 working days from the date on which the details of the
combination are published.

Thereafter, within 15 working days from the expiry of the period, the CCI can ask the parties to
the combination to furnish additional information within a further 15 calendar days.

After all information is received, the CCI passes orders either approving or disapproving or
suggesting modifications to the combination within a period of 45 working days. The time taken
to accept modifications (up to 60 working days) is excluded from the 210-day review period.

To date, the CCI has only initiated three Phase II investigations. In other cases, it had decided to
close proceedings after the parties had resolved concerns raised in Phase I.

Outcomes:

Either at the end of Phase I or Phase II, the CCI can either:

Unconditionally clear the combination or approve it subject to appropriate modifications

(remedies).

Block the transaction if it believes that the combination is likely to cause an AAEC in the
relevant markets in India (which cannot be suitably addressed by modifications).

Publicity:

There is no requirement on the Competition Commission of India (CCI) to make any information
public at the time of notification and during Phase I.
If the CCI initiates a Phase II investigation, it can direct the parties to publish details to bring the
combination to the knowledge of the public and persons affected or likely to be affected.

Automatic confidentiality:

As a general rule, no information relating to any enterprise is disclosed without the prior written
permission of the enterprise concerned (section 57, Competition Act). However, this does not
apply to information disclosed in compliance with or for the purposes of the Competition Act (or
any other law in force). Parties must therefore request confidential treatment of the
information/documents they supply.

Confidentiality on request:

Regulation 35 of the General Regulations allows parties to claim confidentiality on commercially

sensitive information. The test for the grant of confidentiality by the CCI is to determine if the
disclosure of that information will result in the disclosure of trade secrets, or destruction or
appreciable diminution of the commercial value of any information, or can be reasonably
expected to cause serious injury. If satisfied, the CCI or the Director General passes an order
directing that those documents or parts of them be kept confidential for a specified time period.

Substantive test:

The substantive test for assessing a combination is whether it has caused or is likely to cause an
appreciable adverse effect on competition (AAEC) within the relevant market in India.

To determine the effect on competition of a combination, the Competition Commission of India

(CCI) can consider all or any of the following factors (section 20(4), Competition Act):

-Market share in the relevant market;

-Extent of barriers to entry.

-Level of combination in the market.

-Degree of countervailing power.

-Extent to which substitutes are available.

-Extent of effective competition likely to sustain in a market.

-Actual and potential level of competition through imports.

-Likelihood that the combination will result in removal of a vigorous and effective competitor.

-Possibility of a failing business

-Nature and extent of innovation.

-Relative advantage, by way of the contribution to the economic development, of any

combination having or likely to have an AAEC.

-Whether the benefits of the combination outweigh the adverse impact of the combination, if
any.

Some Relevant Case Studies With Respect to Competitiveness in Indian Markets:

In the case of JK Tyres Limited and Cavendish Industries Limited, the CCI approved the
proposed combination in phase I despite high post-transaction combined market shares in several
markets. The CCI considered the presence of strong competitors like Apollo, CEAT and MRF in
all markets as an important factor before approving the transaction. While assessing if there is an
appreciable adverse effect on competition in India, the CCI also considered it relevant whether
there were available substitutes from other suppliers. The CCI found that that the manufacturers
could easily switch to making tyres for different vehicles and vehicle segments.

The CCI has also passed some important decisions in relation to gun jumping cases, including
the following:

In Hindustan Colas Private Limited and Shell India Markets Private Limited, the acquirer paid
a sum of INR40 million to the other party as partial consideration on the date of signing the sale
and purchase agreement (SPA). The CCI held this to be consummation of the transaction before
it was notified or approved by the CCI and imposed a penalty of INR500,000.

In Baxter and Baxalta, the CCI (in its order imposing fine for a delayed filing) concluded that
the parties to global combinations must notify the combination on executing the global
agreement, and not after execution of a later local agreement. This is because the independent
market behaviour of the parties might have ceased before the CCI carried out its assessment of
the combination. The CCI made it clear that parties cannot carve out the India-related part of a
global transaction and implement a global closing before obtaining the approval from the CCI.

In Avago - Broadcom, in an order imposing fines, the CCI adopted a strict statutory
interpretation of "turnover" for the purposes of the applicability of the de minimis exemption.
The CCI observed that "turnover" includes "value of sale of goods or services" and that goods or
services provided to group entities are not excluded. Therefore, the value of turnover is taken as
per the accounts of the enterprise concerned.

With all circumstances and the explanations submitted by Avago in mind, the CCI imposed a
penalty of INR1 million.
 Porter’s Theory of Competitive Advantage
Michael Porter’s theory of the competitive advantage of nations provides a sophisticated
tool for analyzing competitiveness with all its implications. Porter’s theory contributes to
understanding the competitive advantage of nations in international trade and production. Its
core, however, focuses upon individual industries, or clusters of industries, in which the
principles of competitive advantage are applied. His theory begins from individual industries and
builds up to the economy as a whole. Since firms, not nations, compete in international markets,
understanding the way firms create and sustain competitive advantage is the key to explaining
what role the nation plays in the process. Therefore, the essence of his argument is that “the
home nation influences the ability of its firms to succeed in particular industries”1. Given this
interdependence, it appears that in order to draw conclusions on the competitiveness of the
particular industry, consideration of the different facets of the competitive diamond of the whole
nation is needed.
Michael Porter considers the competitiveness of a country as a function of four major
determinants:
• factor conditions;
• demand conditions;
• related and supporting industries; and,
• firm strategy, structure, and rivalry.
Even though these determinants influence the existence of competitive advantage of an
entire nation, their nature suggests that they are more specific of a particular industry rather than
typical of a country. The reason for this is that in Porter’s theory the basic unit of analysis for
understanding competition is the industry. “The industry is the arena in which the competitive
advantage is won or lost.”2 So, seeking to isolate the competitive advantage of a nation means to
explain the role played by national attributes such as a nation’s economic environment,
institutions, and policies for promoting firms’ ability to compete in a particular industry.

1
Porter, M, The Competitive Advantage of Nations, THE FREE PRESS, A Division of McMillan, Inc., New York, 1990,
p. xii
2
Ibid., p. 34
 1. Factor Conditions
Factor conditions being the inputs which affect competition in any industry comprise a
number of broad categories:
• Human resources: the quantity, skills, and cost of personnel (including
management);
• Physical resources: the abundance, quality, accessibility, and cost of the nation’s
land, water, mineral, or timber deposits, hydroelectric power sources, fishing
grounds, and other physical traits.
• Knowledge resources: the accumulated scientific, technical, and market knowledge
in a nation in the sphere of goods and services
• Capital resources: the stock of capital available in a country and the cost of its
deployment;
• Infrastructure resources: the characteristics (including type, quality) and the cost of
using the infrastructure available.3
While analyzing these factors as a prerequisite for building competitive advantage, it is
relatively unimportant to emphasize just their quantity or involvement in a particular industry.
What determines their influence on competitiveness is the degree of efficiency and effectiveness
of the way they are deployed within an industry.
This in turn affects directly their potential for influencing the establishment of
competitive advantage. Nevertheless, productivity in deployment does not automatically
translate into international success. This is achieved only under the condition that the other
determinants in the “diamond” are in a position to influence favorably the utilization of
production factors. With a view of isolating the factors which are most significant for the
creation of competitive advantage in the context of the whole “diamond”, a hierarchy among
factors has been established.
Depending on the degree of investment required for the possession of a particular factor, factors
of production are divided into two groups: basic and advanced. Basic factors are passively
inherited, that is, their creation requires relatively modest or unsophisticated private and social
investment.4 They can include natural resources, climate, location, unskilled or semi-skilled

3
Ibid., p. 74 - 75
4
Ibid., p. 77
labor, and debt capital. Unlike them, advanced factors which can comprise highly educated
personnel, modern digital data communications infrastructure, etc. require large and often
sustained investments for their development. Factor development which has been achieved
through substantial investment, in turn, provides for the creation of a higher-order competitive
advantage and, therefore, assumes greater significance for competitiveness.
Distinguishing among factors for he purpose of isolating those which account for the
establishment of competitive advantage most, yields another division: generalized and
specialized factors. Generalized factors derive their name from the feature that they could be
deployed in a wide range of industries. Specialized factors, on the other hand, are characterized
by a narrow field of application due to a high degree of customization to the needs of a particular
industry. Compared to the generalized factors, specialized factors require more focused, and
often riskier, private and social investment. This, together with their specifically tailored
characteristics to the nature of the particular industry, determines their superiority over
generalized factors in terms of influencing the creation of competitive advantage. With respect to
the relation between advanced and specialized factors, the latter do not necessarily comprise the
former, but at any rate the more constantly upgrading and developing advanced and specialized
factors of production exist in an industry, the better is the basis for a significant and sustainable
advantage in a given field.

2. Demand Conditions
The importance of demand conditions as a factor influencing competitive advantage
stems from the fact that in a market economy the direction of production, that is, the kinds of
goods which are produced, is determined by the needs of buyers. What this means is that,
regardless of the state of the other determinants in the “diamond”, competitiveness in an industry
is impossible to be achieved unless demand conditions allow for the successful realization of
firms’ products. Underlying this dependence is the dynamic influence of home demand which
shapes the rate and character of improvement and innovation by a nation’s firms. The sources of
this influence within the context of home demand are divided into three broad attributes: the
composition of home demand, the size and pattern of growth of home demand, and the
mechanisms by which a nation’s domestic preferences are transmitted to foreign markets.
 • Home Demand Composition: The composition of home demand determines the way
firms perceive, interpret, and respond to buyer needs.5 Three characteristics of the
composition of home demand play a particularly significant role for the achievement
of competitive advantage. One of them refers to the segment structure of demand. It is
quite favorable for enhancing competitiveness provided that the relevant segment of
the market represents a highly visible share of home demand but accounts for a less
significant share in other nations. An even more important feature of home demand
composition is the level of buyers’ sophistication. Its significance stems from the fact
that sophisticated and demanding buyers exert pressure on firms to excel in quality of
the product, features, and service and thus help for sustaining the acquired advantage.
A final attribute of home demand composition which could spur the establishment of
competitive advantage relates to anticipatory buyer needs. They give priority of firms
over their international competitors by indicating early what will become widespread
later.
• Demand Size and Pattern of Growth: In order for a clear relationship between this
attribute of home demand and competitive advantage to be established, a number of its
characteristics should be considered. One of them is the size of home demand. Its
importance is expressed in the fact that depending on the magnitude of the home
market a nation's firms could be encouraged, with a view of reaping economies of
scale and learning, to invest aggressively in large-scale facilities, technology
development, and productivity improvement.6. Another important factor which could
spur activities intended to create or upgrade competitive advantage is the rate growth
of home demand. The latter could lead firms to adopt new technologies faster and to
make changes for increased efficiency without fearing that there would be no response
on the part of consumers. The effect of these two factors is further enhanced provided
that home demand is characterized by early saturation as well. The underlying logic is
that early saturation, like early penetration, directs a nation’s firms to products and
product features that are desired abroad.

5
Ibid., p. 86
6
Ibid., p. 92
 • Internalization of Domestic Demand: While the source for creating national
advantage is rooted in the composition of home demand, its sustainability is accounted
for by the size and pattern of growth of home demand, the transfer of a nation’s
products and services abroad relates to a third attribute of home demand – its capacity
of becoming internalized. This attribute refers to the existence of mobile or
multinational local buyers which could create an advantage for a nation’s firms since
domestic buyers are also foreign buyers. It hints on the other aspect of this attribute:
the influence exerted on foreign needs. The latter presents another way through which
domestic demand conditions can pull through foreign sales and relates to the cases
when domestic needs and desires get transmitted to or inculcated in foreign buyers.

3. Related and Supporting Industries

When trying to determine the sources of competitive advantage in an industry, the latter
should not be considered separately but rather in the context of the whole economy. Special
account should be taken of the industries which are directly related or support the one whose
competitiveness is a subject of investigation. The reason for this requirement is that, provided
supplier industries possess an international advantage, downstream industries could benefit from
it in several ways. One of them refers to the access that competitive supplier industries provide
access to cost-effective inputs. Given the increasingly significant globalization process, which
makes inputs available on global markets, emphasis should be put not on the availability of the
inputs but on their effective utilization. Therefore, a more important aspect in which the presence
of competitive advantage in supplier industries could influence the creation of one in the
downstream industries is the provision of coordination on the part of the former in terms of
linkages with the value chains of the latter. Perhaps the most important benefit of home-based
suppliers, however, is expressed in the process of innovation and upgrading. It refers to a mutual
influence between firms and their suppliers. On the one hand, suppliers help firms to perceive
new methods and opportunities to apply new technology. A spur to innovation could, on the
other hand, be given from firms to their suppliers by influencing suppliers’ technical efforts in a
direction of testing new developments and ideas. Other factors such as exchange of R&D, joint
problem solving or transmitting of information through suppliers to different firms contribute to
the establishment of a fast pace of innovation within the entire national industry.
 In regard to related industries, they could also be a source of competitive advantage to the
industry in question. “Related industries are those in which firms can coordinate or share
activities in the value chain when competing, or those which involve products that are
complementary.”7 Technology development, manufacturing, distribution, marketing or service
are all areas in which sharing of activities could occur. This process is especially beneficial,
given that the related industry is internationally successful, which means that it stimulates the
establishment of competitive advantage in other industries through providing opportunities for
information flow and technical interchange. Another way through which related industries could
influence competitiveness is by means of pulling through demand for complementary products
and services. The greater the number of related industries which possess competitive advantage
in a nation, the greater is the possibility for this nation to achieve sustained success in an
industry. This, however, depends to a significant extent on the state of the factors forming the
rest of the “diamond” because it is only when the facets are working in a system that the
conditions for building a true competitive advantage are ensured.

4. Firm Strategy, Structure, and Rivalry

Closing the circle of factors which determine the existence of competitive advantage it is
necessary to consider the context in which firms are created, organized and managed as well as
the nature of domestic rivalry. The goals, strategies, and ways of organizing firms in industries
are widely influenced by national circumstances. The achievement of national advantage
depends on the degree to which these choices correspond to the sources of competitive advantage
in an industry. Firm strategy and structure are reflective of company goals and individual goals
as well as national prestige and national priority. Company goals are most strongly determined
by ownership structure, the motivation of owners and holders of debt, the nature of the corporate
governance, and the incentive processes that shape the motivation of senior managers. 8 Provided
that the goals of owners and managers match the needs of the industry, the opportunities for
success are greatly enhanced. As far as the goals of individuals who work in firms are concerned,
they also have a significant role for creating and upgrading competitive advantage. The
achievement of the latter depends on the motivation of people to develop their skills as well as

7
Ibid., p. 105
8
Ibid., p. 110
to expend the necessary effort needed for the company’s success. Another source of powerful
influence on the way firms are organized is national prestige or national priorities. These factors
affect the process of attracting qualified human resources to particular industries as well as the
strength of individuals’ and shareholders’ motivation. Provided that the latter is quite
pronounced it also turns into an important conductor of corporate success. The reason for it is
that it assures sustained commitment of capital and human resources to an industry, to a firm,
and for employees, to a profession. This in turn enhances productivity and effectiveness.
The stimuli for increased productivity and effectiveness should also be traced at a
higher level which encompasses not only the manner of a firm’s organization but also its
performance as influenced by the behavior of its competitors. In this respect, an important
correlation based on empirical findings has been established. It concerns the association between
vigorous domestic rivalry and the creation and persistence of competitive advantage in an
industry.9 The underlying logic is that competition at home pressures firms to improve and
innovate. Having once established the manner for constant upgrading of their competitive edge at
home, companies easily transfer their strategy for success on a worldwide scene. Vigorous local
rivalry can also stimulate competitiveness through bringing fourth the need for enlarging the
firms’ markets and selling abroad in order to grow. This is particularly likely in the presence of
economies of scale when local competitors force each other to direct their activities abroad in the
pursuit of greater efficiency and higher profitability. Domestic rivalry not only creates pressures
to innovate but to innovate in ways that upgrade the competitive advantages of a nation’s firms.
The presence of rivals lowers the significance of advantages created through little effort and
investment (e. g. those which stem simply from being in a nation). It, therefore, forces a nation’s
firms to seek higher and ultimately more sustainable sources of competitive advantage. So,
contrary to the wrongly perceived notion of “national champions” reaping economies of scale in
the home market, the existence of strong domestic rivalry keeps from reliance on factor
advantages as well as conditions their more efficient deployment.
Apart from the major determinants Porter considers two additional variables which are
not as important as the determinants in influencing the creation of a competitive advantage but
are significant in shaping the direction of the influence. These are chance and government.
Chance events are developments beyond the control of firms, such as pure inventions,

9
Ibid., p. 117
breakthroughs in basic technologies, etc. They can play an important role in shifting competitive
advantage in many industries. Government, being the other variable, is important to the extent to
which its policies can influence the entire system of determinants either in the direction of
undermining or enhancing competitive advantage.
Important in understanding the determinants’ power to foster competitiveness in an
industry is the condition for their being interrelated. What this means is that the determinants
should form a mutually reinforcing system, referred to as a “diamond”10, and the effect of one of
them should be contingent on the state of others. This implies not only the inadequacy of one
favorable national attribute to induce competitive advantage itself but also the possibility that an
advantage in one determinant can create or upgrade advantages in others.
.

10
Ibid., p. 72
Cross-border Mergers and Issues relating to Foreign Exchanges and Tax
Implications

Merger & Acquisitions are increasingly been recognized as most important business tools over
the world. The most widely practiced business strategy i.e. organic growth story - involving steps
that a company would take to augment its human resource, clients, infrastructure resources etc
thus resulting in organic growth of its revenues and profits. The M&A route interchangeably
used as inorganic growth story would provide immediate extension of company’s human
resource, clientele, infrastructure thus catalysing the growth. Given the fact that the economies
are globalizing, more and more M&A are happening. M&A are now driven more with business
consideration rather than dominated by regulations. Yet the local legislations do play in role in
shaping the M&A and this is basically because of the fact that, when ever two corporations
become integrated, certain changes are also taken place in the surroundings. Government needs
therefore to take care of those changes and that’s precisely the reason behind binding all the
companies with laws, rules and regulations. There is absolutely no difference in this regard,
when it comes to India as we also have various rules made by legislators to safeguard the
interested parties in cases of mergers and acquisitions.

Exchange control regulations which are critical to the cross border mergers and acquisitions in
India are defined under the Foreign Direct Investment guidelines. FDI in India are governed by
the FDI Policy announced by the Government of India and the provisions of the Foreign
Exchange Management Act (FEMA), 1999. Besides, the Ministry of Commerce and Industry
issues series of press notes outlining certain criteria’s for the FDI guidelines.

Under the present FDI policy, foreign investments are allowed in an Indian company under the
automatic route in almost all sectors except:

(i) Retail Trading (except single brand product retailing)

(ii) Atomic Energy

(iii) Gambling and Betting, Lottery Business

(iv) Certain Financial Entities

(v) Trading in Transferable Development Rights

(vi) Activity/sector not opened to private sector investment

For other sectors, there are two routes for foreign investment in India:

(i) Automatic Route - the foreign investor does not require any approval from the Reserve
Bank of India (RBI) or Government of India for the foreign investment.

(ii) Prior government approval route- for foreign investment, in the following circumstances,
a company needs approval:

a) Activities which require prior government license

b) Proposal exceeding the sectoral caps or where provisions of Press Note 1 (2005 Series) issued
by the Government of India are attracted;

c) Where more than 24 per cent foreign equity is proposed to be inducted for manufacture of
items reserved for the Small Scale sector

d) Proposal for acquisition of shares of an Indian company in Financial Sector and where the
transactions attract the provisions of SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997.

Calculation of Foreign Investment in India:

Investment by Non-resident in Indian Companies is referred as Foreign Direct Investment

(FDI).

Investment by Foreign Institutional Investors (FIIs), Non Resident Indians (NRIs),

American Depository Receipts (ADRs), Global Depository Receipts (GDRs), Foreign
Currency Convertible Bonds (FCCBs), Compulsory Convertible Preference Shares and
Debentures are treated as FDI.

Besides Indian entities promoted by non-residents can also invest in Indian Entities. This may
result in Foreign In-direct Investment. Unlike the FDI, calculation of foreign indirect investment
requires analysis of the Investing Indian Company (IIC). Foreign investments are not treated
as FDI where the IIC is “Owned & Controlled” by resident Indians citizens and/or Indian
companies “Owned & Controlled” by resident Indian citizens. Otherwise, when the IIC is
“Owned or Controlled” by non-resident entities, the entire investment by the IIC into Indian
Domestic Company (IDC) would be considered as indirect foreign investment.

For the purpose of enforcement of sectoral caps, the sum total of direct and indirect foreign
investment would be relevant besides sectoral conditions.

Foreign Direct Investment through Tax Favourable Jurisdictions:

Tax implications have always been important issue in cases of cross border businesses, more so
in cases of mergers and acquisitions. India has entered into comprehensive Double Taxation
Avoidance Agreements (DTAA) with 84 countries, limited DTAA with 15 countries and other 3
agreement in the form of double taxation relief rules. DTAA assume significance where a tax
payer entity has transactions in more than one country and is liable to tax in more than one
jurisdiction. The DTAA provide a statutory guidance in solving the disputes arising out of the
transnational transactions of financial significance. DTAA provides for relief from the double
taxation in respect of incomes by providing exemption and also by providing credits for taxes
paid in one of the countries. These treaties are based on the general principles laid down in the
model draft of the Organisation for Economic Cooperation and Development (OECD) with
suitable modifications as agreed to by the other contracting countries. DTAA are based on an
underlying assumption that a taxpayer is liable to tax in at least one tax jurisdiction. Taxpayers
across the globe indulge in a number of methods to reduce the tax by careful and legal tax
planning and at times by indulging in tax avoidance. In international tax domain, the tax
avoidance devices misutilise the DTAA in the form of Transfer pricing, Treaty Shopping or
Misuse of DTAA’s in tax havens. MNC’s used Tax Heavens countries to minimize their total
group tax by effectively shifting profits from high tax jurisdictions to the tax haven countries.
This practice has considerably reduced due to the new transfer pricing regime in most tax
jurisdictions globally.

Methods of Cross-border Mergers and Acquisitions and Legal Implications Attached to

That:
With the FDI policies becoming more liberalized since the past many years, Mergers,
Acquisitions and alliance talks are heating up in India and are growing at an alarming rate. The
policies included opening for international trade and investment in to India allowing the
investors across the globe to enter the Indian market without restricting them to one particular
type of business. The list of past and anticipated mergers and acquisitions in India covers every
size and variety of business providing platforms for the small companies being acquired by
bigger ones. In the recent years, India has become a desired destination among the emerging
economies for foreign investors as the FDI inflow has seen an upward trend with countries like
Mauritius, Singapore topping the list due to the tax treaties signed by the Government of India
with the respective countries. The key factor in making a successful investment through FDI in
India lies in understanding the forms in which business can be set-up and comprehending the
regulatory framework and mode of operation. A foreign company planning to set-up its business
operations in India has the following options-

(i) As an incorporated entity by incorporating a company under the Companies Act, 2013

-through Joint Ventures; or

-Wholly Owned Subsidiaries

(ii) As an office of a foreign entity through any of the following modes:

-Liaison Office / Representative Office

-Project Office

-Branch Office

Foreign investors may follow different methodologies to invest in the Indian companies. The
interest in an Indian company can be acquired through

(i) Investing in the shares of an unlisted company

(ii) Investing in the shares of a listed company

(iii) Establishing a new company and transferring the defined business of the target to a new
company.. The primary objective of any investment would be to earn the expected return and to
receive any available tax advantages. The tax implications for a foreign investor depends on the
nature of investment made and the duration of holding the investment as prescribed by the Indian
income tax laws. Any company incorporated in India will be treated as a domestic company
irrespective of the foreign company holding. Corporate tax rates applicable to domestic company
are 33.22% (Base rate: 30%, surcharge 7.5%, cess 3%) on the profits earned. Dividend
distribution tax (DDT) at 16.61% (including surcharge) is further applicable on the distribution
of dividends by the domestic company to its investors. On the other hand, a foreign company can
also operate in India by setting up its project office or branch office and the said offices will be
treated as permanent establishments in India.

All foreign companies are liable to pay a corporate tax of 42.23% (40%+surcharge) on the profits
earned from Indian operations. The dividend distribution tax (DDT) is not applicable for a
project office or branch office of a foreign company in India. Under the proposed Direct Tax
Code (DTC), which may become effective from the financial year 2011, the rate of tax may get
reduced to 25% (inclusive of surcharge). However, an additional tax of 15% (inclusive of
surcharge) is payable under the proposed Direct tax Code (DTC) as branch profit tax.

Whilst the corporate taxes are paid by the domestic and foreign company on their incomes in
India, there might be tax implications on the foreign investors while selling their stake in the
Indian company.

On the sale of shares, a long term capital gain tax (if shares are held for more than one year) at
21.12% (including surcharge) is payable. Long term capital gain tax is not applicable if the
investee company is listed and security transaction tax (STT) at 0.125% is paid. Short term
capital gain tax (if shares are held for less than one year) at 15.84% (including surcharge) along
with STT at 0.125% is payable if company is listed. Normal corporate tax of 42.23% is
applicable to the foreign investors on short term capital gains if the company is unlisted.

Further, depending upon the applicable tax treaty provisions and the domestic tax rules
(discussed previously), credit for taxes paid in India (including underlying tax credit for tax paid
by Investee Company) may be available against the taxes payable by the investor in its country
of residence. The recent growth of FDI inflows into India has shown a lot promise and in the
coming years, the Indian government is considering to liberalize its FDI policy to allure more
foreign investments in to the Indian economy.
TATA-CORUS Deal in Brief

“There are not many opportunities for producers in emerging low-cost markets to gain access to
the markets of Europe other than by acquiring a company like Corus,”

John Quigley (Editor, Industry Publication Steel week)

Thousands of Indians didn’t offer prayers for Tata Steel to clinch the deal for the Anglo-Dutch
steel maker Corus, as they have for the recovery of hospitalized Bollywood superstars. Nor did
they erect 40-foot billboards of a smiling Ratan Tata, chairman of Tata Steel, after he won Corus.
And the stock markets were clearly concerned about the Tata Steel’s new debt load. But despite
all this, euphoria gripped the nation. Finance minister P. Chidambaram offered unspecified
help, if needed, to close the deal; fellow steel magnate Lakshmi Niwas Mittal cheered the
acquisition, and excited TV newsreaders gushed.

India’s first Fortune 500 MNC was born. Tata acquired Corus, which is four times larger than its
size and the largest steel producer in the U.K. The deal, which creates the world's fifth-largest
steelmaker, is India's largest ever foreign takeover and follows Mittal Steel's $31 billion
acquisition of rival Arcelor in the same year. Over the past five years, Indian companies had
made global acquisitions for over $10 billion. The Tata bid almost equals this amount. Most of
them have averaged $100 to 200 million.

"It is a two-way street now," Kamal Nath (Commerce Minister, India) said. "Not only India is
seeking foreign investment, but Indian companies are emerging investors in other countries."

Ratan Tata has said he is confident the two companies have “a cultural fit and similar work
practices.” Nearly 30 years ago J.R.D Tata had lured away a young engineer from Corus’s
predecessor company, British Steel, to work at Tata Steel. That young Sheffield-educated
engineer – Sir Jamshed J. Irani (knighted by the Queen 10 years ago) – was Tata Steel’s
managing director until six years ago.

Tata acquired Corus on the 2nd of April 2007 for a price of app. $13 billion making the Indian
company the world’s fifth largest steel producer. This acquisition process has started long back
in the year 2005.
The deal (between Tata & Corus) was officially announced on April 2nd 2007 at a price of 608
pence per ordinary share in cash. This deal is a 100% acquisition and the new entity will be run
by one of Tata’s steel subsidiaries. As stated by Tata, the initial motive behind the completion of
the deal was not Corus’ revenue size, but rather its market value. Even though Corus is larger in
size compared to Tata, the company was valued less than Tata (at approximately $6 billion) at
the time when the deal negotiations started. But from Corus’ point of view, as the management
has stated that the basic reason for supporting this deal were the expected synergies between the
two entities. Corus has supported the Tata acquisition due to different motives. However, with
the Tata acquisition Corus has gained a great and profitable opportunity to make an exit as the
company has been looking out for a potential buyer for quite some time.

The total value of this acquisition amounted to ₤6.2 billion (US$13 billion). Tata Steel, the
winner of the auction after a 6 round of bidding for Corus declares a bid of 608 pence per share
surpassed the final bid from Brazilian Steel maker Companhia Siderurgica Nacional (CSN) of
603 pence per share. Prior to the beginning of the deal negotiations, both Tata Steel and Corus
were interested in entering into an M&A deal due to several reasons. The official press release
issued by both the company states that the combined entity will have a pro forma crude steel
production of 27 million tons in 2007, with 84,000 employees across four continents and a joint
presence in 45 countries, which makes it a serious rival to other steel giants.

The acquisition by Tata amounted to a total of 608 pence per ordinary share or ₤6.2 billion (US
$13 billion) which was paid in cash. First of all, the general assumption is that the acquisition
was not cheap for Tata. The price that they paid represents a very high 49% premium over
the closing mid-market share price of Corus on 4 October, 2006 and a premium of over 68%
over the average closing market share price over the twelve month period. Moreover, since
the deal was paid for in cash automatically makes it more expensive, implying a cash outflow
from Tata Steel in the amount of £1.84 billion. Tata has reportedly financed only $4 billion of
the Corus purchase from internal company resources, meaning that more than two-thirds
of the deal has had to be financed through loans from major banks. The day after the
acquisition was officially announced, Tata Steel’s share fell by 10.7 percent on the Bombay
stock market. Despite its four times smaller size and smaller capacity, Tata Steel’s operating
profit for 2006, earning $840 million on sales of 5.3 million tones, were very close in amount to
those generated by Corus ($860 million in profits on sales of 18.6 million tons).

Tata’s new debt amounting to $8 billion due to the acquisition, financed with Corus’ cash flows,
is expected to generate up to $640 million in annual interest charges (8% annual interest cost).
This amount combined with Corus’ existing interest debt charges of $400 million on an annual
basis implies that the combined entity’s interest obligation will amount to approximately $725
million after the acquisition.

The debate whether Tata Steel has overpaid for acquiring Corus is most likely to be certain, since
just based on the numbers alone it turns out that at the end of the bidding conflict with CSN Tata
ended up paying approximately 68% above the average price of Corus ’shares. Another pressing
issue resulting for this deal that has created a dilemma between experts and analysts opinions is
whether this acquisition for the right move for Tata Steel in the first place. The fact that Tata has
managed to acquire a British steel maker that has been a symbol of Britain’s industrial power and
at the same time its dominion over India has been perceived as quite ironic. Only time will show
whether Tata will be able to truly benefit from the many expected synergies for the deal and not
make the typical mistakes made in many large M&A deal during this beginning period.

“I believe this will be the first step in showing that Indian industry can in fact step outside the
shores of India in an international marketplace and acquit itself as a global player.” Ratan
Tata
Lessons from Jindal’s Bolivian failure

¨Hermano… Yo tambien soy Indio ¨ ( “Brother …I am also an Indian”). This is how Bolivian President Evo
Morales greeted Naveen Jindal, when they first met in 2006. The two “Indians” signed an agreement in July
2007 for an integrated mining and steel project in eastern Bolivia. The iron ore was to be mined from “El
Mutun” which has one of the biggest iron ore reserves (40 billion tonnes) in the world. Jindal was allowed to
exploit 50% of the reserves and export annually over 10 million tonnes for a lease period of 40 years. The
company agreed to set up a pellet plant of 10 million tonnes per annum, a 6 million tone sponge iron unit, a 1.7
million tonne steel plant and a 450-MW power plant. The total investment was $2.1 billion, spread over a
period of eight years.

This was the largest foreign investment contract signed in the history of Bolivia. The government was to earn
$200 million annually from it, and generate 12,000 jobs. It was also the biggest ever contract secured by an
Indian company in Latin America. The project held the promise of other spin-off opportunities in gas,
railways, infrastructure, and export opportunities for Indian companies. Naturally it assumed a high profile in
India’s rapidly developing economic relations with Latin America.

But in July 2012, the contract was terminated by Jindal after the Bolivian government encashed the guarantee
of $18 million, saying that the company failed to adhere to its investment commitment. Jindal blamed Bolivia
of not honoring its commitment to supply natural gas for the project. Negotiations broke down and the
Bolivian government took some high-handed measures including ordering of the arrest of key Jindal
employees, who managed to leave the country in time. Now the matter is under arbitration. There is absolutely
no hope for Jindal to revive the project.

What happened? The most fundamental problem is that Jindal did not conduct a proper political risk analysis
before venturing into this project, and ended up becoming the victim of a local power tussle. In 2006, Evo
Morales became the first-ever native Indian president in the history of Bolivia, wresting power from the
European-origin oligarchs who controlled politics, business and media till then. Morales had an agenda
empowering the native Indians and he show-cased the first-ever steel plant project as a monument of his
glorious Indian government. His opponents and vested interests instead decided to sabotage the project and use
the failure to bring Morales down and return to power. The Jindal project thus became a high stakes game and
was caught in the crossfire.

Understandably, Morales attached great personal importance to the project and its completion during his term.
Its slow progress frustrated him. Initially the falling price of iron ore was thought to be the reason for the
delay. But later, as time went on with very little to show for it, he suspected the Indian company of not being
serious about the investment commitment. When asked, Jindal had no convincing explanations. Instead, the
company made the mistake of blaming Morales publicly for not providing gas, land and other infrastructural
support. This played right into the hands of the opposition who glessfully exploited the controversy. Instead of
a triumph, President Morales realized that the project might end up as his graveyard. Thereafter, limiting the
damage by terminating the contract and hence the project, became a priority.

The Jindal project may have lived up to its potential, had the company done its homework on four counts:

1. Ascertain the politics of the area. The El Mutun mine is located in the Santa Cruz province – fertile
ground for the tug of war between the federal government of Morales in La Paz and the provincial government
of Santa Cruz, the latter controlled by the European-origin elite. Prosperous Santa Cruz which produces 35%
of Bolivia’s GDP and attracts 40% of foreign direct investment, had long been threatening to cecede from the
centre and its new government dominated by the poorer native Indians who comprise 60% of Bolivia’s
population. The Santa Cruz politicians and businessmen used every opportunity to attack Morales and
manipulated and used the Jindal project. Had the mine been located in an Indian-dominated province, it would
not have had this fate.

2. Understand the leadership. Jindal underestimated Evo Morales, who rose from a poor coca farming
background with very little education and understanding of the world before becoming President. Jindal
assumed a superior knowledge of iron ore and steel, and that it would snare the contract by initially waving the
billion-dollar figure but later find a way to get out of the excessive investment commitment. Morales, however,
is different from the politicians in New Delhi that Jindal is used to. He is uncorrupt and deeply committed to
his people and the country. The nationalistic-leftist Morales was aware of the manner in which foreign
companies had managed to get sweetheart deals from the previous corrupt regimes in his country, and that
modus was unacceptable to him. He had already shown astuteness in picking an Indian company for the
project rather than a large western multinational or a Brazilian or Venezuelan company which would inevitably
bring their superior bargaining strength and the political influence of their governments, to the project. He also
understood that unlike western governments, New Delhi did not have a track record of supporting or rescuing
Indian companies abroad. In any case, Morales was already disappointed with the Indian government which
had failed to honor its commitment of providing a line of credit for the supply of Dhruv helicopters.

3. Size the investment wisely. The proposed investment of $2.1 billion in the poorest country of the region
(pop. 10 million, GDP $18 billion in 2007) was too much. It raised expectations all around, becoming the
target of intense public focus and media scrutiny in the politically charged and polarized atmosphere of
Bolivia. Had Jindal committed to a few hundred million dollars of investment, the controversy may not have
been outsize. The project would have been better broken into two parts: first, just mining and exports with a
reasonable royalty to the government, then expanding into the steel plant and other facilities, if feasible.

4. Ask the obvious question. In their eagerness to get the contract, Jindal didn’t ask the obvious question: If
El Mutun with its massive reserves, was such a prize, how did it stay so long without being captured by the
established global players such as Rio Tinto, BHP and Vale – which operates iron ore mines across the border
in Brazil? Or, more significant, the Chinese who have been acquiring mining assets around the world? There
are no answers yet, though some Bolivians whisper about a conspiracy by Vale and Brazil to prevent
competition from Mutun.

The first lesson for the Indian companies is that a brilliant business plan is not enough when venturing into
Latin America, a continent where people matter more than systems, rules and regulations. Political and cultural
understanding and sensitivity are equally important. A thorough political risk analysis is necessary.

Jindal was not the first Indian company to fail in Latin America. Dr. Reddy’s Laboratories’ joint venture in
Brazil – the very first Indian venture in Latin America in the nineties – failed because of a poor understanding
of Brazilian management culture. The made up for the loss by managing better their entry into Mexico with a
$60 million investment which is now doing well. TCS failed in Brazil during the same period; its contract
with a local bank was terminated for alleged unsatisfactory execution. TCS too learnt from its mistake, and is
now a success story in Latin America. Its key learning: hiring the right regional manager from Latin America
who understood well both the Latino and Indian mindset. Transporting Indian managerial talent, as many
Indian companies do, often fails; they do adjust well to the region and are unable to get the best out of their
investment and talented and skilled Latin American staff. Understanding local politics and culture is critical.

The second lesson: don’t announce disproportionately large investments in small countries. London-based
Indian metals commodity entrepreneur Pramod Agarwal is learning the hard way: he made the mistake of
announcing with big fanfare, a $2 billion iron ore project in Uruguay, a small country of 3 million people. His
project has, unsurprisingly, run into a storm of controversy between government, opposition, environment
activists, farmers and vested interests. At one stage Uruguayan President Mujica even talked of holding a
referendum on the project but fortunately did not. The company is now working with the government on the
environmental impact. Rumors swirled that Agarwal wanted to sell his project to Jindal – but the latter, burned
from Bolivia, has wisely declined the offer.

(This case is distinct from the previous case the group had involved in Latin America regarding investment
dispute)
Recent Trends in Mergers and Acquisitions:

In the past few years, India has seen a tremendous growth in number of mergers and acquisitions
with more than 1,000 M&As in the year 2017 alone. These digits are highest in the current
decade. Government’s initiative of ‘Make in India’ and thrive to improve its global ranking for
‘Ease of Doing Business’ has brought about many regulatory and judicial changes in the nation.
In order to improve the grey areas and improve the market conditions, steps have been taken to
liberalize the stricter norms and approval requirements in order to pave a way for fast and
efficient merger transactions.

Merger of LLP into Company (Cross-entity)

National Company law Tribunal, Chennai bench (“Tribunal”) recently passed a landmark order
in the matter of scheme of amalgamation between M/s. Real Image LLP with M/s. Qube Cinema
Technologies Private Limited which paved a way for merger of LLPs with a private company.
The current provisions for merger in both the Limited Liability Partnerships (“LLP”) Act, 2008
and the Companies Act, 2013 (“Act”) which are the governing statutes of LLPs and companies
respectively does not permit expressly such cross-entity mergers. Tribunal stated that “If the
intention of Parliament is to permit a foreign LLP to merge with an Indian company, then it
would be wrong to presume that the Act prohibits a merger of an Indian LLP with an Indian
company.” It further went upon to state “…the legislative intent behind enacting both the LLP
Act, 2008 and the Companies Act, 2013 is to facilitate the ease of doing business and create a
desirable business atmosphere for companies and LLPs.” to finally conclude that there does not
appear any express legal bar to allow/ sanction merger of an Indian LLP with an Indian
company.

Analysis: The merger order by Tribunal is much welcomed by the industry as it gives a thumbs-
up to cross-entity mergers in cases of LLPs and companies. Moreover, with no statutory backing,
the order per se could be further challenged at the appellate authority (in this case National
Company Law Appellate Tribunal) and without any clear provisions there can be problems (tax
implications, procedural delays, etc.) in implementing such schemes.
Reverse merger

When a large/healthier company merges into a smaller or weaker company, it is called a reverse
merger. The trend of reverse merger has been in picture with ICICI (Industrial Credit and
Investment Corp of India) and two of its wholly-owned subsidiaries, ICICI Personal Financial
Services and ICICI Capital Services, reverse-merged with ICICI Bank in 2002. With
Government’s approval of merger between Vodafone India and Idea Cellular, the concept and
structure of reverse merger has again taken up the limelight in the news. In this case, Vodafone
India will merge with Idea Cellular thus creating country’s largest mobile phone operator with
entity renamed as Vodafone Idea Ltd. The benefits of going public without raising money,
reducing competition and increasing the market share have been the determinant grounds of this
deal.

Analysis: Reverse mergers are found to be more attractive for companies intending to go public
without the need of raising money. They can avail the no-IPO way by simply getting reverse
merged with a listed company. Further the losses of weaker company can be carried forward
and will eventually help the entity to pay lower taxes. With increased competition and disruptive
telecom market in the country, Vodafone Idea merger is expected to start on a frail footing.

Matters relating to public interest

The compulsory merger order of 63 Moons Technologies Limited (“63 Moons”) formerly known
as Financial Technologies (India) Ltd. & Ors with National Spot Exchange (“NSEL”) is one of
the prominent merger order in the recent past. Section 396 of Companies Act, 1956 empowers
the Central Government to pass necessary orders with respect to amalgamating two or more
companies where it is satisfied that it is essential in public interest to do so. In this special order,
63 Moons was allowed to merge with NSEL (its fully owned subsidiary) to provide relief to
hundreds of investors who were stuck with an outstanding amount of more than 5000 Crores.
Ministry of corporate affairs ordered the said merger in the month of February 2016 which was
further upheld by Bombay High Court[1] which went on to conclude that “…If exchanges such
as these are permitted to be subverted or fail without honouring their obligations and
commitments, the confidence in national economic institutions is bound to suffer and the
repercussion to the national economy will be severe. In such situations, a negative perception
about the business environment of the country is created, which has grave repercussions on the
national economy. The Central Government, quite conscious of all such factors, has taken a
balanced decision in the facts and circumstances of the present case”.

Analysis: Government’s step to merge such entities is much welcomed as it brings relief to
investors by assuring that the holding company, Moons doesn’t go scot free from the losses faced
by its wholly owned subsidiary. This shows Government’s intervention in matters relating to
public interest and its intention to primarily help the investors of the said entity. Aggrieved by
the same order of Bombay High court, Moons along with its promoter(s) have appealed to
Supreme Court of India and the matter is listed in late September this year.

Special Approvals

Insurance Regulatory and Development Authority of India’s (“IRDAI”) Guidelines for Listed
Insurance Companies, 2016 restricts ownership of listed insurance companies to fifteen percent
of the paid-up capital of entities operating in the financial sector. An exception to this rule is
observed by Life Insurance Corporation (“LIC”) and Industrial Development Bank of India
(IDBI Bank) merger in which LIC is permitted to take 51% stake in the entity. IRDAI approved
the deal on a condition that LIC will reduce its stake in the coming years. This approval will
infuse capital in debt-laden bank and help both entities to strengthen financially as well as their
subsidiaries which offer financial products such as housing finance and mutual funds.

Analysis: Government’s special approval of merger of both these entities is a deviation from the
general rule which listed insurance companies are expected to follow. However, looking into the
wide-ranging synergy benefits for customers of both these entities, such merger would help LIC
to realize its vision of becoming a financial conglomerate.

Deemed approval for Cross-border mergers

Reserve Bank of India (“RBI”) vide its notification dated March 20th, 2018 provided for the
much awaited Foreign Exchange Management (Cross-Border Merger) Regulations
(“Regulations”) with explicit details with respect to both in-bound and out-bound mergers. Prior
to these Regulations, Section 234 of the Act required that a foreign company (incorporated under
notified jurisdictions) obtain prior approval from RBI before merging into a company registered
under the Act or vice versa. However, with the introduction of these Regulations, all merger
transactions which are compliant with it shall stand as ‘deemed approved’ by RBI.

Analysis: These regulations are the first foot steps towards a friendly regulatory environment in
the country with respect to cross-border mergers. The deemed RBI approval would be much
applauded by the market but somehow the advantage or relief proposed to be given by it seems
to be overshadowed by Regulation 7(2) of the Regulations. Regulation 7(2) provides that
companies involved in the cross-border merger shall ensure that regulatory actions, if any, prior
to merger, with respect to non-compliance, contravention, violation, or, of the Foreign Exchange
Management Act, 1999 or the rules or regulations framed thereunder shall be completed, thus,
in a way making a company compliant with rules and regulations by itself (without intervention
of RBI).

Conclusion

Government’s steps to strengthen Indian economy and improve global ranking in World Bank’s
Ease of Doing Business, have created a merger storm in the nation. With Alibaba’s acquisition
in Paytm and the much heated Walmart-Flipkart merger has shown the rise of foreign investors’
interest in the Indian market. Further, with time lined and eased procedures in merger laws in
the country, India will not only attract foreign investors but will also strengthen its position and
help in making India the hub for foreign cross-border mergers.
 SAMPLE QUESTION PAPERS

Q.1: Table A:

Companies S1 S2 S3 S4 S5 S6 S7 S8 S9
exist in the
market

Market 11% 11% 15% 15% 09% 07% 08% 09% 15%
Shares

Table B:

Companies SX(Merger S4 S5 S6 S7 S8 S9 S9Y

exist in the of S1, S2 & (Demerging) (Resulting
market S3 from S9)

Market 37% 15% 09% 07% 08% 09% 05% 10%

Shares

Refer to both the tables (A & B) mentioned above and try to find out the impact of corporate
restructuring of some of the companies exist in the Market on the competitiveness of the same
using “Herfindahl-Hirschman Index”

Q.2: Refer to the following arrangement and try to find out whether there were justifiable
grounds for Camlin Limited to go for demerger on the basis of total shareholders’ wealth
in both the situations.
Demerged Company: Camlin Limited

Resulting Company: Camlin Fine Chemical Limited

Effective Date: 17th December 2017

Scheme of Demerger: The shareholders will get the Equity shares of the Resulting Company i.e.
Great Offshore Ltd in the ratio of 1 equity share of Rs 10/- each credited as fully paid-up in cash
for every 5 equity shares of Rs 10/- each held by the members of the Company. Subsequently 5
Equity shares of the Company shall be reduced to 4 Equity shares of Rs 10/- each.

Eligibility Date: 19th February 2018

Shareholders’ Wealth:
A. Pre-demerger Shareholders’ Wealth in Camlin Limited
Company Equity Shares Average Pre-demerger
Share Price
Camlin Limited 900 Rs. 357.00

B. Post-demerger Shareholder’s Wealth in both the companies

Company Equity Shares Average Post-
demerger Share Price
Camlin Limited 675 Rs.280.00
Camlin Fine 225 Rs.320.00
Chemical Limited

Q.3: At the time of Japanese “Dai Ichi Shankyo Corporation’s” acquisition of “Ranbaxy
Pharmaceuticals India” the Japanese company had to pay 1 billion dollar extra than their pre-
determined/negotiated offer price to Ranbaxy to clear off the latter’s pending debts.
Briefly discuss the type of due diligence which was done inadequately by “Dai Ichi” that
brought such a huge financial loss to them.

Q.4: Managing Director (Ciceraa Banking Corporation): I don’t know what happened to you
people; we have got more than 9000 customers giving extremely negative feedback regarding
credit card services in this quarter.
Chief HR Director: Sir, why don’t you just disregard that; in any way after acquiring HML
Bank, number of our customers has been increased by more than 30%.
Managing Director: This is exactly what I was worrying about. I have seen biggest companies
vanished from the market after merging with other firms thinking in the same line, I don’t want
my company to be just another brick in the wall.
Go through the above mentioned conversation and discuss the negative phenomena that had
been referred regarding mergers and acquisitions.

Q5: Gryffindor Corporation, a reputed clothing line in India is all set to acquire one of their
competitors from the same market named Slytherin Pvt. Limited. The final negotiated price
fixed by both the corporations was Rs. 800 crores. While they have opened an escrow account
with Indian Overseas Bank, the Gryffindor Corporation had deposited a sum of Rs. 175 Crores
initially and asked their acquiring partner to start transferring their assets. However, SEBI in the
meantime intervened as a supervisory authority and stopped all the proceedings stating that, the
deposit made by the Gryffindor was in fact an irregular deposit. Discuss the veracity of the claim
made by SEBI referring the SEBI Takeover Code.

6. PCR Movies is one of the most reputed companies in India dealing with cinema hall chain in
North India. They were up to get into the Southern Indian market as well and approached one of
the reputed companies from Chennai, Kalakar Movies for the purpose. Both the companies have
amalgamated in 2019 and KPCR Ltd. was formed.
Government of Delhi has informed the KPCR Ltd. just after their amalgamation that, PCR was
due to pay Rs. 360 crore for their pending tax liability which now is due with KPCR.

As the counsel of KPCR Ltd. suggest the most suitable contention to avoid such a liability.