Mergers & Acquisitions: Regulatory Considerations

MERGERS &
ACQUISITIONS
REGULATORY CONSIDERATIONS
Future and Reliance deal
 Future Group entered into an agreement with Reliance Retail, to
sell its retail, wholesale, logistics and warehousing to the latter
 Future Retail will sell its supermarket chain Big Bazaar,

premium food supply unit Foodhall and fashion and clothes
supermart Brand Factory’s retail as well as wholesale units to
Reliance Retail
 Future Group was under immense pressure from its lenders, led
by the State Bank of India, to manage its debt, and the deal in
seen as a bid by the group to cut down on the same
https://indianexpress.com/article/explained/explained-why-future-group-has-taken-amazon-to-court-what-the-court-said-7113612/
Future and Reliance deal
 Before sale to Reliance, Biyani had been wooing several business
groups to sell shares in several companies of Future Group in an
attempt to cut down on the debt, but had not seen much success
 Following the nationwide lockdown in March, to contain the

spread of Covid-19 the retail business of Future Group had come
under more stress
 Sales in many of its premium food sales arm Foodhall and Brand
Factory had come to a near halt in the lockdown, which lasted
more than two months
Why is Amazon objecting to the Future-
Reliance deal?
 Biyani’s Future Retail had signed another deal with global e-
commerce giant Amazon
 As part of the deal, Amazon had acquired 49 per cent stake in

Future Coupons, the promoter firm of Future Retail in a deal
worth nearly Rs 2,000 crore
 The deal had also given Amazon a ‘call’ option, which

enabled it to exercise the option of acquiring all or part of
Future Coupon’s promoter, Future Retail’s shareholding in
the company, within 3-10 years of the agreement
Why is Amazon objecting to the Future-
Reliance deal?
 After Future’s agreement with Reliance, Amazon said the
deal was a violation of a non-compete clause and a right-
of-first-refusal pact it had signed with the Future Group
 The deal also required Future Group to inform Amazon

before entering into any sale agreement with third parties
 On its part, the Future Group has said that it had not sold
any stake in the company, and was merely selling its
assets and had therefore not violated any terms of the
contract
What Amazon did?
 Amazon also sent a letter to the Securities and Exchange
Board of India (SEBI), the Bombay Stock Exchange and the
National Stock Exchange (NSE) asking them not to approve
the Future-Reliance deal as there was an interim stay order on
the same
 Asking the agencies to take note of the stay order, Amazon is

learnt to have said that if the deal went ahead, it would show
companies across the world that orders by reputed tribunals
such as the Singapore International Arbitration Centre (SIAC)
were not respected in India
Why did FRL move the Delhi High Court?
 The company had moved a plea in the Delhi High

Court seeking appropriate relief against
Amazon.com’s NV Investment Holdings to stop the
latter from interfering in its deal with Reliance
Industries Limited’s (RIL) Reliance Retail Ventures
Limited
Tax issue: Vodafone and Hutch deal
 Vodafone-Hutch deal involved Vodafone Plc., a

UK-based telecommunication company and
Hucthison Essar or Hutch India
 The deal closed in 2007, and was followed by the

Indian Revenue department
 Pursued Vodafone to make tax payment

 This was a cross-border share transfer deal between

the two groups
 This deal was not subject to tax liability as per

Indian tax laws
 Transfer of shares by a non-resident company to

another non-resident entity is not subject to any tax
in India
 The Indian Revenue Department was sure that the

case involved transfer of beneficial interest of
shares of an Indian entity
 So, tax was payable
 Vodafone paid partial tax of USD 0.5 billion in

early 2011
 Vodafone fought the case and won

Mergers and Acquisitions
 Elevate the functional performance of the entity
 M & A have potential to create monopolistic power
 Process is carried out meticulously
 Interests of all the stakeholders protected

M&A
 It is inevitable to understand the legal aspects that
regulate the process
 How to legally complete a M & A procedure
 How to regulate hostile takeover
 How to regulate monopoly power created by acquisitions

 How to avail tax advantages
Some of the large M & A activities
 Walmart’s USD 16 billion acquisition of Flipkart (2018)
 the USD 13 billion acquisition of Essar Oil by a Rosneft-led Russian

consortium (2017)
 Adani Transmission’s USD 3 billion acquisition of Reliance

Infrastructure’s integrated Mumbai power distribution business (2018)
 Reliance and Future group deal (2020)
 HDFC ltd. And HDFC Bank (2022)

M & A regulatory framework
 Company law compliance
 Licenses and permits involved in business operations
 Intellectual property rights
 Financing regulation requirement such as foreign

equity, foreign currency loans, external commercial
borrowings, bonds etc.
 Tax laws and compliance
 Import and export licenses and permits, breach if any
 Shareholding pattern and valid issuance of securities
 Special provisions in articles of association, giving

room inn M & A
 Contracts entered with directors, promoters, key managerial
personnel etc.
 The validity, enforceability, and authorization involved in

the contracts entered with different parties
 Evaluation of employment contracts (general) and special

employment contracts of key personnel, union, etc.
 Insurance coverage taken and terms involved

 Loan contract terms and compliance with

obligations, pledge, collateral, and hypothesis of
assets and guarantees
 Litigation involved and defense taken

M & A: Indian regulatory system
Mergers &
Acquisitions
Domestic
Amalgamation Takeover
Consolidatio SEBI
Absorption
n Foreign entity
Companies Act
1956/2013
Income Tax Act

1961 FDI guidelines FEMA
Insolvency and (FIPB & DIPP) guidelines (RBI)
bankruptcy code 2016
Competition Act
2002
 Merger/ Amalgamation
 In India, M&A is either amalgamation or takeover
 The word merger is not defined under Indian

Companies Act 1956 or Income Tax 1961
 The CA 2013 attempts to explain the word as

 “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”
 However, it is the word amalgamation that describes

merger in India
 It is defined by ITA 1961

 Merger implies that two firms merging to form a
new entity or one in which an acquirer completely
absorbs the target company
 The former is known as consolidation while the

latter is termed as absorption
 In India, the term merger is analogous to

amalgamation
 Amalgamation is regulated by CA as it involves
restructuring of participating companies
 It is a scheme of rearrangement of share capital with the

promoters
 Amalgamation or scheme of rearrangement of

companies involves regulatory framework provided by
the CA 1956/2013, ITA 1961 and Competition Act 2002
The Companies Act provisions
 Observing MOA of transferee company
 Convening board meeting and preparation of

valuation report and scheme document
 Application to High court
 Notice to be given to stock exchange

The Companies Act provisions
 Court approves time, date, venue of the board meeting for
merger
 General meeting convened for passing of scheme document
 Results reported
 Court approval sought
 Certified copy filed with registrar of companies

The scheme of amalgamation is expected to
consist of
 The particulars about the transferor (target) and the transferee
(acquirer)
 Main terms and conditions for transfer of assets and liabilities

from transferor to the transferee
 The proposed date for the scheme
 Share capital of transferor and the transferee in terms of

authorized capital, issued capital, subscribed capital, and paid
up capital
The scheme of amalgamation is expected to
consist of
 The proposed payment in terms of cash component and
exchange ratio for target shareholders. In context of exchange
ratio, the target shares are extinguished and new shares are
issued
 The proposed conditions pertaining to dividend distribution,

ranking of equity, etc.
 The proposed conditions pertaining to provident fund,

gratuity, super annuity funds of the employee of the transferor
company, etc.
Key changes made under Companies Act 2013
 Notice of meeting
 Treasury shares
 Approval of scheme through postal ballot
 Valuation of target
 Compliance with accounting standards

Key changes made under Companies Act 2013
 Objective to merger scheme
 Merger with foreign company
 Merger of listed company into unlisted company
 Fast track merger

The Income Tax Act provisions
 Normally, ITA levies tax on capital gain, which is

realized on transfer of capital assets
 Capital assets are fixed assets, generally property

of any kind
 ITA levies capital gain tax on capital gains arising

on transfer of capital assets
 Normal business transactions other than

amalgamation involving transfer of assets,
immovable property of any kind is subject to capital
gain tax
 Capital assets may be short-term and long-term
 Held for 36 months or more are long term and held

for less than 36 months are short term capital assets
 Condition 1: All the property of the amalgamating company or companies

immediately before the amalgamation becomes the property of the
amalgamated company by virtue of the amalgamation
 Condition 2: All the liabilities of the amalgamating company or companies

immediately before the amalgamation becomes the liabilities of the
 Condition 3: Shareholders holding not less than 75% in value of the shares in
the amalgamating company or companies (other than shares already held
therein immediately before the amalgamation by, or by a nominee for, the
amalgamated company or its subsidiary) become shareholders of the
 Section 47 states that where capital gain arises due to
transfer of shares held in Indian company by amalgamating
foreign company to amalgamated foreign company, the tax is
exempted if:
 25% of the shareholders of amalgamating foreign company

continue to remain shareholders of the amalgamated foreign
company
 Such a transfer is not subject to any tax on capital gain in the

country where the amalgamated company is incorporated
 Section 72A of the ITA states that when sick and

poorly performing companies merge with a healthy
company
 The amalgamated company can avail the benefit of

carrying forward the loss and the unabsorbed
depreciation of the amalgamating company.
Competition Act provisions
 To encourage healthy competition and discouraging
creation of monopoly
 The MRTP Act was abolished and Competition Act 2002

came in existence
 Become operational in May 2009
 CCI regulates the law and Competition Appelate (CA)

tribunal that operates the law are operational since 2011
Competition Act provisions
 CA regulates anti-competitive agreements
 Abuse of domination position in the market
 Consolidation leading to monopoly creation
 Any agreement between companies regarding activities

related to procurement, production, distribution of goods and
services
 Acquisition or control of knowledge and information

Acquisition/Takeover
 Regulated by SEBI Act 1992
 Through substantial acquisition of shares and

takeover regulation 1997
 When an entity or a person acquires the control of the

target company, it is termed as takeover
 Control means substantial acquisition of shares or

voting rights of the target company
Acquisition/Takeover: control
 Substantial acquisition or voting right is explained

in two context
 Threshold limit of disclosure
 Threshold limit for open offer

 When an acquirer acquires shares or voting rights that

increase his shareholding to 5%, 10% or 24.99% in the
target company
 Required to disclose at every stage the aggregate of his

shareholding to the concerned target firm
 To the stock exchange where shares of the target company

are listed within two days of acquisition
 When a person holds shares or voting rights of

about 25% or more but less than 55% engages in
the trading of the shares of about 2% or more
 Required to disclose his cumulative shareholding

every year to the target company and concerned
stock exchange
 Any person holding 25% or more shares or voting rights

of about of a target company
 Required to disclose his ownership to the target company

within 21 days from financial year ending 31 st March for
the purpose of dividend declaration
 The target company needs to submit every year, to

concerned stock exchanges
 Threshold limit for making an open offer
 When an acquirer acquires shares that increase his

ownership to 25% or more of shares or voting
rights in the target company
 Required to make a minimum public offer of

additional 26% of the remaining shareholders of
the target company
 When an acquirer holds more than 25% but less

than 55% of the shares or voting rights in a target
company, then for any additional purchase of more
than 5% shares or voting rights
 One is entitled to make an open offer of additional

26% of the remaining shareholders of the target
company
 When an acquirer holds more than 55% but less

than 75% of the shares or voting rights in a target
company, then for any additional purchase shares
 One is entitled to make an open offer of additional

26% of the remaining shareholders of the target
company
Cross border M&A
 In case a foreign entity is involved, then M&A is
also regulated by Foreign Exchange Management
Act 1999 (FEMA)
 FEMA is governed by RBI
 A foreign entity can invest in India through FDI

route or FPI route
Foreign Investment
Foreign
Foreign direct Foreign venture
portfolio
investment capital investment
investment
Automatic route FIIs SEBI Regd.

Government
route
NRIs, PIOs
Restricted route
https://www.moneycontrol.com/news/business/economy/explained-how-did-india-get-
record-fdi-in-fy21-despite-the-pandemic-6619301.html
Foreign investment in India
 FDI can be done by a foreign entity in the form of
wholly owned subsidiary formed in India under CA
1956 or as a joint venture firm
 A foreign company can also setup a liaison office,

project office, or branch office in India
 Certain activities are permitted under FEMA

regulations 2000
Foreign Investment
Indian company Joint venture

Wholly owned Liaison office
subsidiary
Branch office
Project office
 Option1: Operating as an Indian company
 Wholly owned subsidiary
 Joint venture with Indian partner

 Option 2: Operating as Branch/Liaison/Project office
 Brach office: the financial consideration required for

opening these offices in India has been categorized for
each
 BO setup is sanctioned only when the foreign company

has a consistent profitability record for preceding 5 years
 The parent foreign company should have a net worth of

not less than USD 100,000 or it’s equivalent
 Liaison office
 A liaison office setup is sanctioned only when the foreign

company has a consistent profitability record for preceding 3
years
 The parent foreign company should have a net worth of not less
than USD 50,000 or it’s equivalent
 Allowed to carry out liaison activities
 Can not carryout any business operations in India

 Project office
 A project office is set up to execute activities of parent foreign

company a specific project undertaken
 A foreign company should have secured a contract from an

Indian company to execute a project in India
 Funding capital should be remitted by foreign parent company
 Project has sought a formal approval by a competent authority

Foreign direct investment
 FDI is a tool for foreign ownership restriction in

India, especially in different sectoral investments
 FDI is governed by RBI’s regulations
 FEMA guidelines
 FDI regulations
Ministry of Ministry of
RBI Finance Commerce and
Industry
FIPB DIPP
FEMA FDI regulation

 FDI allowed by Indian government by foreign
companies falls under 3 categories
 Automatic route of investment
 Restricted investment
 Prohibited investment
 FDI: India's foreign direct investment inflows grew by

81 percent in November 2020 to $10 billion - The Econ
Automatic route of investment
 It may be 100% investment or subject to sectoral

limits
 The foreign entity does not require any prior

approval either from Government or RBI
 Need to comply with the RBI’s pricing guidelines

Automatic route of investment
 Pricing guidelines state about price of the shares
 If transferred by an Indian resident to foreign resident

should be at least equal to market price of the share in case
of a listed company
 In case of private company, the transfer price of shares of

price should not be less than the fair value of the shares
 Will be determined by a chartered accountant according

to prescribed guidelines
Restricted investment
 These may be 100% ownership or subject to sectoral cap
on FDI as proposed by government
 Defence equipment, electronics, aerospace equipment,

print media, broadcasting and courier service, tobacco
substitutes, manufacture of cigars, cigarettes of tobacco
and tobacco substitutes
 Require formal prior approval of the FIPB
 LIST OF RESERVED ITEMS

Prohibited investment
 The Indian government prohibits non-Indian, that
is, foreign entity to invest in certain sectors
 Atomic energy and Railway transport (other than

Mass rapid transport system)
 Lottery business
 Agriculture with some exclusion

Prohibited investment
 Housing and real estate development except township
development or as specified in FEMA
 Trading in transferable development rights (TDRs)
 Retails trading (except single brand product retail trading)
 Business of chit fund, nidhi company
 Manufacturing of cigars, cigarettes of tobacco or tobacco

substitutes
Instruments of FDI
 Foreign investment in Indian companies can be in form of FIIs or NRI
 Depository receipts and foreign currency convertible bonds and debentures
 Taxes levied on foreign entity investments are as follows
 Capital gain tax
 Dividend tax
 Stamp duty
 VAT
 Security transaction tax

Foreign portfolio investment
 FPI is done through FIIs
 Regulated by SEBI (FII) regulations and FEMA

guidelines and required to register
 SEBI FPI regulation, 2014 has replaced SEBI FIIs

regulations 1995 and QFI (Qualified foreign
investors) framework
 All existing FIIs and QFIs are to be merged into FPI

 FIIs include
 Asset management companies (AMCs)

 Pension funds
 Mutual funds
 Investment trusts
 University funds
 Endowment funds
 Charitable trusts and societies
 The new FPI regulations categorize FPI under 3 categories
 Government and government related investors like central banks,

government agencies, and sovereign wealth funds
 Appropriately regulated broad-based funds like MFs, investment

trusts, insurance/reinsurance companies; appropriately regulated
persons such as banks, AMCs, investment manager/advisors,
portfolio managers, university funds and pension funds
 All others not eligible in category I and II, like endowments,

charitable societies, charitable trusts, individual and family, offices,
hedge funds etc.
Foreign venture capital investment
 All foreign venture capital investors (FVCIs) need to register
 FVCIs can invest through equity, equity linked and debt

instruments
 Through IPO or private placement
 FVCI registered outside India can now register as FPI in India to

invest in startup ventures
 Also allowed to invest in Indian venture capital fund or Indian

unlisted company

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MERGERS &

 Future Retail will sell its supermarket chain Big Bazaar,

 Following the nationwide lockdown in March, to contain the

 As part of the deal, Amazon had acquired 49 per cent stake in

 The deal had also given Amazon a ‘call’ option, which

 The deal also required Future Group to inform Amazon

 Asking the agencies to take note of the stay order, Amazon is

 The company had moved a plea in the Delhi High

 Vodafone-Hutch deal involved Vodafone Plc., a

 The deal closed in 2007, and was followed by the

 Pursued Vodafone to make tax payment

 This was a cross-border share transfer deal between

 This deal was not subject to tax liability as per

 Transfer of shares by a non-resident company to

 The Indian Revenue Department was sure that the

 So, tax was payable

 Vodafone paid partial tax of USD 0.5 billion in

 Vodafone fought the case and won

 Elevate the functional performance of the entity

 M & A have potential to create monopolistic power

 Process is carried out meticulously

 Interests of all the stakeholders protected

 How to legally complete a M & A procedure

 How to regulate hostile takeover

 How to regulate monopoly power created by acquisitions

 the USD 13 billion acquisition of Essar Oil by a Rosneft-led Russian

 Adani Transmission’s USD 3 billion acquisition of Reliance

 Reliance and Future group deal (2020)

 HDFC ltd. And HDFC Bank (2022)

 Licenses and permits involved in business operations

 Intellectual property rights

 Financing regulation requirement such as foreign

 Import and export licenses and permits, breach if any

 Shareholding pattern and valid issuance of securities

 Special provisions in articles of association, giving

 The validity, enforceability, and authorization involved in

 Evaluation of employment contracts (general) and special

 Insurance coverage taken and terms involved

 Loan contract terms and compliance with

 Litigation involved and defense taken

Income Tax Act

 In India, M&A is either amalgamation or takeover

 The word merger is not defined under Indian

 The CA 2013 attempts to explain the word as

 However, it is the word amalgamation that describes

 It is defined by ITA 1961

 The former is known as consolidation while the

 In India, the term merger is analogous to

 It is a scheme of rearrangement of share capital with the

 Amalgamation or scheme of rearrangement of

 Convening board meeting and preparation of

 Application to High court

 Notice to be given to stock exchange

 General meeting convened for passing of scheme document

 Court approval sought

 Certified copy filed with registrar of companies

 Main terms and conditions for transfer of assets and liabilities

 The proposed date for the scheme

 Share capital of transferor and the transferee in terms of

 The proposed conditions pertaining to dividend distribution,

 The proposed conditions pertaining to provident fund,

 Approval of scheme through postal ballot

 Compliance with accounting standards