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M & Ain 60 jurisdictions worldwide
Contributing editor: Casey Cogut 2011
Published byGetting the Deal Through
in association with:Aab-Evensen & Co Advokatfirma
LEX
Arendt & MedernachArias, Fbrega & FbregaBaio, Castro & Associados | BCS Advogados
Bersay & AssocisBiedecki
bizconsult law LLCBowman Gilfillan Inc
Carey y CaCorpus Legal Practitioners
Coulson HarneyDebarliev, Dameski & Kelesoska Attorneys at Law
Divjak, Topic & BahtijarevicELIG Attorneys-at-Law
Estudio Trevisn AbogadosFreshfields Bruckhaus Deringer LLP
Gleiss LutzGrata Law Firm
Harneys Aristodemou Loizides Yiolitis LLCHeadrick Rizik Alvarez & Fernndez
Herzog Fox & NeemanHoet Pelez Castillo & Duque AbogadosHomburger AG
Hoxha, Memi & HoxhaIason Skouzos & Partners
JA Trevio AbogadosJade & Fountain PRC LawyersJose Lloreda Camacho & Co
Kettani Law FirmKhaitan & CoKim & Chang
Kimathi & Kimathi, Corporate AttorneysLaw Office of Mohanned bin Saud Al-Rasheed
in association with Baker Botts LLPLAWIN
LAWIN Lideika, Petrauskas, Valiunas ir partneriaiMadrona Hong Mazzuco Brando Sociedade de Advogados
Mello Jones & MartinNagashima Ohno & Tsunematsu
NautaDutilhNielsen NragerOdvetniki elih & partnerji, op, doo
Prez-LlorcaSalomon Partners
SchnherrSetterwalls Advokatbyr
Simont Braun SCRLSimpson Thacher & Bartlett LLP
Slaughter and MayStikeman Elliott LLP
Thanathip & PartnersUghi e Nunziante
Vlasova Mikhel & PartnersVoicu & Filipescu SCA
Weil, Gotshal & Manges LLPWolf Theiss
Wong Beh & TohWongPartnership LLP
Wu & Partners, Attorneys-at-Law
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IiRbirJhujhuwlBhrta
Khaitan & Co
1 Typesoftrsctio
How may businesses combine?
The principal modes of businesses combinations in India are thefollowing:
assetcquisitios
It is common for companies to acquire or sell entire businesses orundertakings. For example, in 2010, Orchid Chemicals and Pharma-ceuticals Ltd, a publicly listed entity, sold its entire injectable phar-maceutical business to Hospira Inc. Alternatively, an acquirer maywish to cherry-pick certain key assets (eg, IP and employees) andleave certain assets (eg, trade debts) behind. Both forms of businesscombinations are popular in India. For example, asset acquisitionsmay be preferred where the acquirer is wary of past liability issuesand prefers to acquire segregated assets rather than acquire the targetcompany as a whole.
Shrecquisitios
Often, it is simpler for an acquirer to take over 100 per cent of the
share capital of the target company than seek to acquire key assetsor the whole of the targets business undertakings. Indias foreignexchange control regime has been considerably liberalised to allow100 per cent foreign ownership in most sectors of the economy, bar-ring a small negative list (eg, retail trading and insurance sectors)where there are restrictions on the level of foreign investment (seebelow for details). Share deals may be preferred in sectors where keyoperating licences or assets cannot be transferred easily or in a timelymanner (eg, telecoms and asset management companies).
Joitvetures
Joint ventures are another popular form of investment for many foreigninvestors wishing to enter India. Following the recent Mumbai HighCourt judgment in the Ruia case (2010) 159 CompCas 29 (Bom)),which seems to recognise pre-emption rights in shareholders agree-ments as enforceable obligations between the contracting parties, it ishoped that the currently prevailing question mark over the enforce-ment of shareholders agreements in general may be lifted. Since theRuia case is now pending adjudication before the Supreme Court, itis too early to take a definitive view and the practice of incorporatingthe shareholders agreement into the target companys articles of asso-ciation continues to prevail. Moreover, the Securities Exchange Boardof India (SEBI) has taken a negative view of pre-emption rights andput-call arrangements in shareholders agreements and share purchaseagreements. The Reserve Bank of India (RBI) has also clarified that putoptions are unenforceable. These views have been taken despite a gov-ernment notification in 1961 (which subsists today) that pre-emption
and similar rights are important and necessary for trade, commerceand economic development in India. Therefore, the position on theseimportant provisions in shareholders agreements and acquisition con-tracts remains hazy. It is hoped that the Supreme Court will put thesematters to rest with a definitive judgment.
Mergersemergers
In India it is possible to either combine two distinct entities into asingle entity or to split two distinct undertakings into separate entitiesthrough a court-sanctioned scheme.
2 Sttutesregultios
What are the main laws and regulations governing business
combinations?
The following principal laws play an important role in establishingthe structure and form of business combinations:
Compiesact1956(theact)
Under the Act, the sale of an undertaking needs shareholder consent(section 293(1)(a)) by way of a simple majority vote.
Authorisations under the Act
Where an Indian entity is the acquirer, it should be noted that: undersection 292(1)(d) of the Act, the power to invest funds must be exer-cised at a meeting of the board specifying the total amount of fundsthat may be invested, and the nature of the investments which maybe made; and under section 372A of the Act, where the amount ofinvestments by an Indian entity exceeds 60 per cent of paid-up sharecapital and free reserves, or 100 per cent of free reserves, whichever ismore, a special resolution (75 per cent majority) of the shareholdersin general meeting is required.
Schemes of amalgamation
Under Indian law (sections 391 to 394 of the Act), it is possible tomerge two entities such that all of the assets, liabilities and under-takings of the transferor entity are transferred to and vested in thetransferee undertaking with the transferor company being wound-up. A scheme of amalgamation must be approved at a duly convened
meeting by a majority in number and three-quarters in value of thecreditors (or class of creditors) and members (or class of members),present and voting and thereafter sanctioned by the court.
demerger
Where the business of an entity comprises two distinct undertak-ings, it is possible to split up the entity into two entities. Generally,shareholders of the original entity would be issued shares of the newentity. Where a demerger is completed through a court process, itwill not result in capital gains or sales tax liability for the seller (sec-tion 2(19AA), Income Tax Act 1961). In addition, tax losses carryforward to the acquirer.
Tkeovers
SEBI regulates the Indian securities market. Under the SEBI TakeoverRegulations 1997 (Takeover Code), where an acquirer acquires 15per cent or more of the shares or voting rights of a listed company,the acquirer is required to make an offer to the public to acquire at
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least 20 per cent of the voting capital of the company at the mini-mum offer price. Under the Takeover Code, an indirect acquisitionof shares or control of a parent or holding company of an Indianlisted company could potentially trigger a mandatory bid obligationin India. Therefore, great care has to be taken while structuring trans-actions where the target has an Indian listed subsidiary.
Listiggreemet
The listing agreement specifies various disclosure obligations. Inparticular, listed companies must ensure that all unpublished pricesensitive information (UPSI) is disclosed. Dealing in securities oflisted companies based on UPSI is punishable under the SEBI InsiderTrading Regulations.
Competitioact2002
Pursuant to the notification of the Competition Act 2002, businesscombinations that exceed the thresholds under section 5 wouldbe subject to the mandatory pre-merger notification regime of theCompetition Act 2002. Combinations broadly include mergersand acquisition activity, certain acquisitions by private equity fundsand also court-approved mergers and amalgamations. The thresh-olds vary depending upon the nature of the transaction and partiesinvolved, as below:
Scerio1:Combitioofstloecquirertrget
(Iipreseceoly)
Combined assets* >1,500 crores
rupees (c US$333.33 million)
or Combined turnover** >4,500 crores
rupees (c US$1 billion)
Scerio2:Combitioofstloecquirertrget
(worlwiewithIipresece)
Combined assets >US$750 million
Including India presence of 750
crores rupees (c US$166.67 million)
or
Combined turnover >US$2,250
million
Including India presence of 2,250
crores rupees (c US$500 million)
Scerio3:Combitioofgroup***cquirertrget(Iipreseceoly)
Combined assets >6,000 crores
rupees (c US$1.33 bilion)
or Combined turnover >18,000 crores
rupees (c US$4 billion)
Scerio4:Combitioofgroupcquirertrget
(worlwiewithIipresece)
Combined assets >US$3 billion
Including India presence of 750
crores rupees (c US$166.67 million)
or
Combined turnover >US$9 billion
Including India presence of 2,250
crores rupees (c US$500 million)
* assets are explained under section 5 of the Competition Act.
** turnover is defined under section 2 of the Competition Act.
*** group is defined under section 5 of the Competition Act.
The final combination regulations notified by the CompetitionCommission of India (CCI) provide certain exemptions to thisrequirement to notify and there is also an exemption for transactionsinvolving small targets, ie, targets with assets less than 250 croresrupees (about US$55.55 million) or turnover less than 750 croresrupees (about US$166.67 million).
The final regulations also mention certain transactions that mayqualify for a simpler notification under Form I (part I or part II). Allother combinations would have to be notified under Form II of theCCIs combination regulations.
3 Goveriglw
What law typically governs the transaction agreements?
Typically, Indian law is the governing law of transaction agreementswhere the target is based in India or the assets are based in India. Insome cases (eg, project documents or foreign currency-denominatedloans), it is possible to negotiate some other governing law.
4 Filigsfees
Which government or stock exchange filings are necessary in
connection with a business combination? Are there stamp taxes or
other government fees in connection with completing a business
combination?
Exchgecotrolregultio
India has a strict and highly prescriptive exchange control regimewhich applies to acquisitions with a cross-border element. For exam-ple, in case of a transfer of shares by an Indian resident to a non-resident, shares must not be transferred at a price less than the pricedetermined in accordance with the pricing norms of the RBI, Indiascentral bank. Broadly, this means that the price per share must notbe less that the discounted cashflow price as certified by a charteredaccountant or a merchant banker. In case of a share transfer, a reportmust be filed in the prescribed form (Form FC-TRS) within 60 daysof the remittance of proceeds. Several local practitioners take theview that, based on the relevant regulations, completion of thesefiling formalities is necessary to enable registration of the transfer ofshares in favour of the acquirer.
Stockexchgereportig
In the case of companies whose shares are publicly listed in India,under the SEBI (Insider Trading Regulations) 1992, informationregarding amalgamation, mergers or takeovers is deemed to be price-sensitive information and must be disclosed by the target companyto the exchange.
Stmputy
Stamp duty is payable on the transfer of shares at 0.25 per cent ofthe value (or consideration) of the shares transferred.
Competitio
As mentioned above (see question 2), if the specified thresholds aretriggered, a filing will have to be made with the CCI.
5 Iformtiotobeisclose
What information needs to be made public in a business
combination? Does this depend on what type of structure is used?
In contrast to public listed companies where the extent of disclosureis relatively high due to dealings taking place on the stock exchangeand related reporting obligations, in case of private acquisitions,there is no mandatory requirement to make any public disclosures.However, in our experience, details of private deals often leak.
6 disclosureofsubsttilshreholigs
What are the disclosure requirements for owners of large
shareholdings in a company? Are the requirements affected if the
company is a party to a business combination?
Under the Takeover Code, an acquirer must disclose his shareholdingif it acquires more than 5, 10, 14, 54 or 74 per cent of the shares orvoting rights of the listed target company. Such disclosures must bemade at each stage of acquisition and are to be made to the companyand to the stock exchanges on which the shares of the company arelisted.
Under the SEBI (Insider Trading Regulations) 1992 a personholding 5 per cent or more of the share capital of a public listed com-pany must disclose changes in shareholding exceeding 2 per cent ofthe share capital of the target company or resulting in its sharehold-ing falling below 5 per cent. Furthermore, directors or officers mustdisclose changes in holding exceeding 500,000 rupees (in value) or25,000 shares or 1 per cent of the voting rights (whichever is lower)to the company and the exchange.
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7 dutiesofirectorscotrolligshreholers
What duties do the directors or managers of a company owe to
the companys shareholders, creditors and other stakeholders in
connection with a business combination? Do controlling shareholders
have similar duties?
directorsuties
Directors duties under Indian law are similar (but not identical)to English law. So, under Indian law, a directors relationship withthe company is that of a fiduciary. Directors must act bona fide inwhat they consider are in the interests of the company and for aproper purpose. A director must avoid any actual or potential con-flict between his own and the companys interests. If a companyproposes to enter into any arrangement or contract in which thedirector is directly or indirectly concerned or interested, the directoris under a statutory obligation to declare such interest at a meetingof the board. Normally the declaration of an interest must be madeat the first such meeting at which the matter is considered. In thecase of a public company (or a private company which is the hold-ing company or subsidiary of a public company) interested directorscannot constitute or form part of a quorum or vote on matters inwhich they are interested.
Sttutoryrestrictiosoirectors
Board and central government approval is required for a director(or certain persons connected with the director) to contract with thecompany in relation to the sale, purchase or supply of goods andservices or for underwriting subscription to shares/debentures of thecompany (section 297 of the Act). However, contracts with a valueof less than 5,000 rupees and companies with a paid up capital ofless than 10 million rupees are exempt from this requirement. Fur-thermore, contracts for purchase and/or sale for cash at prevailingmarket price and any transaction by a banking or insurance companyin the ordinary course of business will not require the board andcentral government approval.
Shreholersuties
Under Indian law, controlling shareholders are not subject to similarduties as directors. However, as in English law, controlling sharehold-ers are obliged not to deal with the minority in an unfairly prejudicialor oppressive manner (section 397 of the Act). Courts have wide-ranging powers in case a claim of unfair prejudice is successfullymade.
8 approvlpprislrights
What approval rights do shareholders have over business
combinations? Do shareholders have appraisal or similar rights in
business combinations?
Shareholder approval (simple majority vote) is necessary where acompany proposes to dispose an undertaking. In case of a merger ordemerger, shareholder approval is necessary provided that a majorityin number and three-quarters in value of the shareholders and credi-tors approve such transaction.
It should be noted that listed Indian companies tend to be closelyheld by an individual or a family. Therefore, deal protection can beachieved by ensuring that the controlling shareholders are committedto the proposed transaction.
9 Hostiletrsctios
What are the special considerations for unsolicited transactions?
Historically, unsolicited transactions in case of publicly listed entitieshave been scarce in India due to the concentration of controllinginterests in a few individuals or families. Most public deals involve adegree of due diligence by the acquirer and fairly robust representa-tions and warranties package backed by the seller. Accordingly, pub-
lic takeovers closely resemble private M&A transactions, with theexception of the acquirer having to complete an open offer processin accordance with the Takeover Code.
However, recently certain assets have been subject to competingbids for a variety of reasons. In case a potential business combinationmay develop into a competitive transaction, the following considera-tions may be kept in mind: timing: in the case of a publicly listed target, the Takeover Code
provides that a competitive bid must be made within 21 work-ing days from the date of the public announcement;
true shareholding: it is important to carry out a thorough duediligence on the controlling stake held or influenced by the exist-ing controlling shareholders (or promoters) so that a greaterlevel of deal certainty can be achieved;
directors: an acquirer is entitled to appoint a director on thetargets board following 21 days from the date of announce-ment provided it deposits the entire offer consideration in escrowupfront. Interestingly, the target can vary its board during theoffer period provided it does not appoint any person connectedwith the acquirer; and
due diligence: there is no statutory duty on the targets board toprovide equal information, although the targets board may bereasonably expected to do so having regard to its duties. Mostnegotiated deals in India are based on some business and opera-tional due diligence.
The regulation of hostile bids is expected to change if the TakeoverCode is modified based upon the recommendation of the TakeoverRegulations Advisory Committee.
10 Brek-upfeesfrustrtioofitiolbiers
Which types of break-up and reverse break-up fees are allowed?
What are the limitations on a companys ability to protect deals from
third-party bidders?
Although much more common in relation to private deals (especiallywhere financial investors are involved or in case of termination dueto non-satisfaction of a condition), deal protection devices such asbreak fees (payable by the target or promoters to the bidder) andreverse break fees (payable by the bidder to the target or promot-ers) are extremely rare in connection with public deals India. It isnot clear whether SEBI would approve an offer letter involving suchpayments, especially if these arrangements cast a potential paymentobligation on the target company.
Under the Act, it is unlawful for any company to give financialassistance in connection with the acquisition of shares (section 77 ofthe Act). However, the consequences of a breach are also relativelyminor and liability of the company, and every officer of the companywho is in default, is limited to a fine of maximum 10,000 rupees.
11 Govermetifluece
Other than through relevant competition regulations, or in specific
industries in which business combinations are regulated, may
government agencies influence or restrict the completion of business
combinations, including for reasons of national security?
Yes. If there is a perceived risk to national security, the governmentcan influence or restrict the completion of a business combination.For example, although there is no formal record, it is reported thatthe central government had rejected certain investment proposalsowing to political or national security reasons in sectors such astelecoms. The government is likely to introduce a more elaborate
security screening process for sectors like refineries, civil aviation,defence production, telecoms and real estate.
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12 Coitioloffers
What conditions to a tender offer, exchange offer or other form of
business combination are allowed? In a cash acquisition, may the
financing be conditional?
In the case of a private deal, the parties are free to negotiate theconditions to completion. However, we have rarely seen financingconditions even in the case of private deals.
In the case of public transactions there is much less flexibility. Ingeneral, SEBI does not allow acquirers to rely on any pre-conditionsother than Indian statutory approvals. So, for example, if an offer istriggered in India as a result of a global acquisition, it would not beopen to launch a conditional offer in India subject to completion ofthe global acquisition.
Prior to launch of a public offer, the acquirer has to satisfy themerchant bankers that it has requisite funds to complete the offer.Therefore, financing conditions would not be permitted in India.
Exchange offers are rare in India there is a view that SEBIwould permit exchange offers if the offerors shares are also publiclylisted and traded in India.
13 Ficig
If a buyer needs to obtain financing for a transaction, how is this dealt
with in the transaction documents? What are the typical obligations of
the seller to assist in the buyers financing?
Pure leverage cross-border deals are not common in India. Wherea transaction is debt-financed outside India, normally an offshoresecurity package is put in place by the acquirer as taking security overIndian assets needs prior approval from the RBI. In such a scenario,funds are normally drawn down and available at the time of signingthe acquisition documents and making the public announcement inorder to satisfy the merchant banker that necessary financing is avail-able. Even in case of purely domestic deals, financing conditions arerarely sought for, or accepted.
14 Mioritysqueeze-out
May minority stockholders be squeezed out? If so, what steps must
be taken and what is the time frame for the process?
India does not have an effective squeeze-out regime. Under theAct, in order to implement a squeeze-out, the acquirer must receiveacceptances from over 90 per cent (in value) of the outstanding sharecapital. If the acquirer holds more than 10 per cent of the shares,acceptances from 90 per cent of the outstanding share capital andconsisting of at least 75 per cent in number of the targets sharehold-ers must be received. So, for example, where an acquirer holds 60per cent of the share capital of a target, it must receive acceptancesfrom at least 36 per cent of the outstanding shares (in value terms)
and such shareholders must make up at least 75 per cent in numberof the targets shareholders.
The offer to acquire shares needs to be open for a minimumof four months. Dissenting shareholders have the right to makean application to the court within one month from the date of thenotice, if they are aggrieved by the terms of the offer. However, theinter relationship between the Takeover Code and the squeeze-outregime under the Act is unclear and these provisions have not beensuccessfully used in conjunction with an open offer. Some acquirershave implemented court schemes (as a part of their overall control-seeking strategies), which may result in a reduction in overall minorityshareholding.
Another possible method of squeeze-out for listed companies isdelisting the shares from the stock exchange. For this, delisting mustbe approved by a special resolution of the company in a generalmeeting by a two-thirds majority of shareholders present and vot-ing. The pricing of shares for the delisting process is determined bythe reverse book-building process with a minimum floor price of the
two-week average of the stock price on the stock exchange prior tointimation of the exchange that the company desires to delist. Forthe delisting offer to be successful, the shareholding of the promoterafter the closure of the offer must be the higher of: 90 per cent of the total shares; and the aggregate pre-offer shareholding of the promoter and 50 per
cent of the offer size.
15 Cross-borertrsctios
How are cross-border transactions structured? Do specific laws and
regulations apply to cross-border transactions?
Generally, prior to consummating a share acquisition in India, off-shore buyers typically incorporate a holding company in a jurisdic-tion with a friendly tax treaty with India (eg, Mauritius, Singapore,the Netherlands or Cyprus, etc) in order to secure favourable taxtreatment at the time of exit.
Apart from tax considerations, Indias exchange control regimeapplies to cross-border deals. Thus, foreign investors cannot acquirelisted shares directly on-market unless they are registered as foreigninstitutional investors with SEBI. As mentioned above, special pric-ing and reporting requirements apply in connection with the issueand transfer of shares to a non-Indian-resident investor by a personresident in India.
16 Witigorotifictioperios
Other than as set forth in the competition laws, what are the relevant
waiting or notification periods for completing business combinations?
Where an acquisition relates to a sector where foreign investmentis restricted and therefore needs prior regulatory approval fromthe central government, the waiting period for such approvals canrange from six to eight weeks. The central government has delegatedauthority to the Foreign Investment Promotion Board (FIPB) underthe aegis of the Ministry of Finance to grant such approvals on its
behalf. In practice, delays are not uncommon and the definitive tim-ing to obtain FIPB approval is hard to predict.
17 Sector-specificrules
Are companies in specific industries subject to additional regulations
and statutes?
Yes. For example, foreign investment in the insurance sector isrestricted to 26 per cent of the share capital of the Indian insurancecompany. In addition, the Indian insurance company is required toobtain a licence from the Insurance Regulatory and DevelopmentAuthority (IRDA) and adhere to several reporting, solvency andaccounting requirements. Accordingly, in addition to exchange con-trol laws, it is important to evaluate the local industry-specific regula-tions prior to finalising any investment proposal in India.
18 Txissues
What are the basic tax issues involved in business combinations?
Shresles
Under Indian tax laws, any gain arising out of transfer of Indianshares is liable to tax in India. Accordingly, it is important to deter-mine whether the gains are long-term or short-term capital gains(depending upon whether the shares are held for a duration exceed-ing 12 months or less). The currently prevailing rates for resident andnon-resident corporate sellers are as follows:
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Pr ticulrs O-mrketsle Off-mrketsle
Resident Non-resident Resident Non-resident
Long-term
capital gain
Nil Nil 21.63%* 21.01%*
Short-termcapital gain
16.22% 15.76% 32.45% 42.02%
* Note: In the case of listed securities there is an option to pay tax at the base
rate of 10 per cent (plus applicable surcharge and education cess), ie, 10.82 per
cent for resident and 10.51 per cent for a non-resident corporate seller, without
taking the benefit of indexation (so as to take care of inflationary changes).
However, the availability of this option to a non-resident is not free from doubt.
assetsles
Ordinarily, asset sales also involve the sellers being liable for capitalgains. In the case of assets held for more than 36 months, the capitalgains tax rate for a non-resident corporate seller is 21.01 per centand in the case of assets held for up to 36 months, the capital gainstax rate is 42.02 per cent. In addition, sales tax or value-added tax
may be levied, unless the transaction is structured as the sale of anundertaking on a going-concern basis.
demerger
In order to ensure that a demerger of an undertaking is tax-neutral,following conditions need to be satisfied: transfer of all assets and liabilities of the undertaking; transfer of assets and liabilities at book value; consideration for transfer settled solely by issue of shares in the
resulting company; shareholders holding at least three-quarters in value of the
demerged company to become shareholders in the resultingcompany; and
transfer on a going-concern basis.
19 Lbouremployeebeefits
What is the basic regulatory framework governing labour and
employee benefits in a business combination?
Transfer of employees is automatic in case of transfer of anundertaking from one owner to another. The Industrial DisputesAct 1947 (ID Act) defines an undertaking as a unit of an industrialestablishment carrying out any business, trade or manufacture.The ID Act provides for compensation to workmen in the eventof transfer of ownership or management of undertakings from oneemployer to another by agreement or by operation of law. The termworkmen applies to those employed in an industry to carry out
manual, unskilled, technical, operational, clerical or supervisorywork for hire or reward. It also includes persons employed in asupervisory capacity who earn less than a specified amount (currently10,000 rupees per month). Other employees are governed by theterms of their employment contract, but in the case of a business
combination involving the transfer of employees, it is mandatory toensure that employees consent (in writing) to their transfer and arehired by the transferee on terms no less favourable than their originalterms of employment.
In the event of a transfer of an undertaking all workmen who
have been in continuous service for a period of at least one year areentitled to one months notice and compensation equivalent to 15days average pay for every completed year of continuous service orany part thereof in excess of six months, as if such workmen havebeen retrenched.
However, compensation need not be paid when: the service of the workman is not interrupted by such transfer; the terms and conditions of service applicable to the workman
after a transfer are not in any way less favourable than his termsand conditions prior to the transfer; and
the new employer, under the terms of such transfer or otherwise,is liable to pay compensation, in the event of his retrenchment,on the basis that his service has been continuous and has not
been interrupted by the transfer.
The above exceptions are cumulative and all the conditions mustbe met if the current employer is to be released from his liability tocompensate the workmen on the transfer of the undertaking. The newemployer will be responsible for paying compensation to a workmanin such circumstances.
20 Restructurig,bkruptcyorreceivership
What are the special considerations for business combinations
involving a target company that is in bankruptcy or receivership or
engaged in a similar restructuring?
By way of background, under Indian law, a company is regarded
to be potentially sick where accumulated losses at the end of afinancial year have eroded 50 per cent of its net worth during theimmediately preceding four financial years. The board of directorsof a potentially sick company can make a reference to the Board forIndustrial and Financial Reconstruction (BIFR) within 60 days fromthe date of finalisation of the audited accounts for the financial yearwith reference to which sickness is claimed.
Foreign investors are permitted to invest in sick units, providedthat prior approval of the BIFR is obtained. While acquiring assetsfrom a company in the BIFR, it is vital to ensure that no proceed-ings are pending against any order by the BIFR that could possiblyencumber title to the assets.
In addition, it may be noted that the Act contains detailed
provisions as to preferential payments in the winding-up of acompany. Proceeds realised at the time of winding-up must be paid toworkmen, secured creditors, taxes and rates due to the government,wages or salary of any employees, accrued holiday remuneration andcontributions under employees benefit schemes.
There is continued activity at the top end of the M&A market intraditionally hot sectors like IT (eg, Apax and I-Gates offer for PatniComputers worth over US$1 billion). New sectors seeing M&A activityinclude Pulp & Paper (International Papers bid for Andhra Paper worthover US$500 million), Hotels (eg, Reliances acquisition of an interest
in the Oberoi Group promoted EIH) and Oil Exploration.
Hopefully, with the Government of India finally putting theinfamous press note 1 (which required a foreign investor to obtainprior consent of its Indian partner while making a subsequentinvestment in the same field) to rest and clarifying the regime
regarding the use of convertible instruments issued to investorsoutside India, the Indian regulatory regime is finally showing somesigns of being more sensitive to the needs of foreign investors,although severe challenges remain in areas such as tax (eg, the
Vodafone Case), transfer pricing, labour and employment and generaldelays in enforcement of legal rights in India.
RBI continues to liberalise the avenue for foreign investment inIndia and has just issued a circular allowing foreign investments to bemaintained in an Indian escrow account until all procedural formalities
for investment are completed. Further, foreign investors are also
allowed to pledge their Indian shares for overseas financing. Suchfinancing cannot be used for fur ther investment in India.Corporate India continues its march for offshore assets,
technology and markets fuelled partly by an appreciating Indian rupee
and access to funding given the robust states of Indian banks whowere largely unaffected by the credit crunch as compared to theirinternational counterparts. This is a trend likely to remain in theupswing.
Update and trends
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Under section 531A of the Act, any transaction relating toproperty of the company consummated within one year prior to thecommencement of its winding-up, other than in the ordinary courseof business or in good faith for valuable consideration, is invalid.Furthermore, transactions with creditors preceding six monthsprior to the commencement of a winding-up can be challenged as afraudulent preference.
21 ati-corruptiosctios
What are the anti-corruption and economic sanctions considerations
in connection with business combinations?
There is no single comprehensive legal framework in India to dealwith anti-corruption and economic sanctions considerations in rela-tion to business combinations such as the Foreign Corrupt PracticesAct 1977 (in the United States) or Bribery Act 2010 (in the UnitedKingdom). In India, the anti-corruption and economic sanctionsregime in relation to business combinations is largely covered by theAct, Indian Penal Code 1860 (IPC), Prevention of Corruption Act1988 (POCA), Prevention of Money Laundering Act 2002 (PMLA)and foreign exchange laws and regulations. A corrupt practice orbribe by any public servant, company or its officers may amount toa criminal offence (breach of trust, cheating, fraud, etc) under the IPC
and is punishable with imprisonment and/or fine. Corporate liabil-ity for bribery offences under POCA is a grey area. We have beeninformed that although there is no reported case where a companyhas been held liable under POCA on account of offences committedby its directors and/or other officers, the imposition of such liabilityis technically possible and fines would be higher against a companythan an individual.
PMLA forms the core of the legal framework put in place by
India to combat money-laundering. PMLA and rules notified there-under impose obligations on banking companies, financial institu-tions and intermediaries to verify the identity of clients, maintainrecords and furnish information to the relevant authorities. PMLAdefines money-laundering offences and provides for the freezing, sei-zure and confiscation of the proceeds of crime. Where a company hascommitted a money-laundering offence under PMLA, every personin charge of and responsible to the company for the conduct of itsbusiness at the time of commission of the offence is deemed to beguilty unless he proves that the contravention took place withouthis knowledge or that he exercised all due diligence to prevent suchcontravention. This effectively reverses the burden of proof as far asthe individual is concerned.
India is also a signatory to the United Nations Conventionagainst Corruption, but has not yet ratified it.
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