The changing regulatory mechanics of M&A

By Ravi Singhania, Singhania & Partners

Mergers and Amalgamations (M&A) are regulated through the provisions of the Companies Act, 1956, the Foreign Exchange Management Act, 1999, and the Income Tax Act, (ITA) 1961. Regulations have also been issued by the Security and Exchange Board of India (SEBI) to govern the takeover of public listed companies.

In addition, proposals have been made to bring M&A under the ambit of the new competition law, which is expected to be implemented in India by 2009.

Statutory provisions

Within the companies act, mergers and amalgamations are synonymous. Section 391 to section 394 of the act deals, among other things, with the reconstruction and amalgamation of companies, or what is commonly referred to as mergers.

Ravi Singhania Partner Singhania & Partners
Ravi Singhania
Singhania & Partners

The said provisions of the act envisage a “single window clearance” by providing a complete code for facilitating M&A, which obviates the need for making multiple applications under the act, and ensures that interested entities are not put through an unnecessary and cumbersome procedure. It confers on the court wide discretionary powers to grant approval to schemes which seem fair and just.

Amalgamation is defined under section 2(1B) of the ITA, as the merger of one or more companies with another, or the merger of two or more companies to form a new company, so that all the assets and liabilities of the merging companies are transferred to the amalgamated company.

In addition, the definition states that shareholders holding no less than three-fourths in value of the shares in the merging companies are required to become shareholders of the amalgamated company.

Procedural aspects

The statutory provisions relating to the amalgamation of companies are contained in section 390 to 396 A of the ITA and the procedural aspects are covered by Rules 67 to 87 of the Companies (Court) Rules, 1959.

In terms of procedural aspects, a merger is only possible when it is permitted by an object clause specified under a memorandum of association between two or more companies. The transferee company should also obtain permission through its object clause, to carry on the business of the transferor company.

The board of directors of each company is required to approve the scheme of amalgamation and authorize officials of the individual companies to further pursue the proposal.

In addition, the transferor and transferee companies are expected to inform the stock exchange (if they are listed) about the decision to merge.

The high court concerned should also be notified through the submission of an application for an approval of the merger, which involves seeking directions to call, hold and conduct shareholder and creditor meetings.

The individual companies must hold separate meetings with their shareholders and creditors in order to approve the scheme of amalgamation. At least 75% of shareholders and creditors in their separate meetings, voting in person or by proxy, must accord their approval to the scheme before it can be executed.

After merger approval by shareholders and creditors has been obtained, the high court passes an order sanctioning the scheme as long as it has been deemed fair and reasonable. The date of the court’s hearing is published in two newspapers, and the regional director of the company law board is intimated.

Following the court order, its certified true copy is filed with the Registrar of Companies.

The assets and liabilities of the transferor company are then directed to the transferee company in accordance with the approved scheme, with effect from the date specified.

In line with the merger agreement, and once the scheme has been executed, the transferee company will finally issue its shares to the shareholders of the transferor company.

Mergers have become very popular over the years owing to rapid changes that have taken place in the global business milieu. Indian companies are expanding through corporate combinations due to intensely competitive business environments, globalization, liberalization, and technological developments.

These combinations are in the form of mergers, acquisitions, amalgamations and takeovers and have now become important features of corporate restructuring. The main object of these schemes is to maximize the wealth of shareholders by gains in terms of synergy, better financial management and marketing advantages.

Meticulous pre-merger planning, including conducting proper due diligence, effective communication, and committed leadership are the prerequisites for the success of these mergers.

Ravi Singhania is the managing partner at Singhania & Partners. The firm is headquartered in Noida and has offices in New Delhi, Mumbai, Bangalore and Hyderabad.


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