legal regulations on mergers

8/7/2019 Legal Regulations on Mergers

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3. Legal Mechanism of Mergers and Amalgamations in India

There are various legislations dealing with mergers and amalgamations in India. They

are companies act, competition act, the foreign exchange management act, the income tax act,

etc. which regulates the mergers and amalgamations in India.

3.1 Provisions under Companies act

Mergers and Amalgamations are substantially regulated by the companies act. 1The

term merger or amalgamation is not defined under the companies act. However as far Indian

law is concerned, use of the term amalgamation is more prevalent. The basis law related to

mergers is codified in the Indian Companies Act, 1956 which works in tandem with various

regulatory policies. The general law relating to mergers, amalgamations and reconstruction is

embodied in sections 391 to 396 of the Companies Act, 1956 which jointly deal with the

compromise and arrangement with creditors and members of a company needed for a

merger.2

Section 390(a) defines the expression company as any company liable to be wound

up under the act. Under section 390(b), the expression arrangement is defined to include a

reorganisation of the share capital of the company by any or both of the following methods

Consolidation of shares of different classes

By the division of shares into shares of different classes.

Under section 390C, unsecured creditors who may have filed suit or obtained decrees

shall be deemed to be of the same class as other unsecured creditors.

The word arrangement has a very wide meaning, and is wider than the word

compromise. There can be no compromise unless there is first a dispute but a scheme,

which is not a compromise may nonetheless be an arrangement within section 391.

1 Sections 391 396A, chapter V - Arbitration, compromises, arrangements and reconstructions, The

Companies Act, 1956.2

Avtar Singh, Company Law 14th

Ed. Pg 515.

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Section 391- Power to compromise or make arrangements with creditors and members3

(1) Where a compromise or arrangement is proposed-

(a) between a company and its creditors or any class of them; or

(b) between a company and its members or any class of them,

the Tribunal may, on the application of the company or of any creditor or member of the

company or, in the case of a company which is being wound up, of the liquidator, order a

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 the Tribunal directs.

(2) If a majority in number representing three-fourths in value of the creditors, or class of

creditors, or members, or class of members as the case may be, present and voting either in

person or, where proxies are allowed [under the rules made under section 643], by proxy, at

the meeting, agree to any compromise or arrangement, the compromise or arrangement shall,

if sanctioned by the Tribunal, be binding on all the creditors, all the creditors of the class, all

the members, or all the members of the class, as the case may be, and also on the company,

or, in the case of a company which is being wound up, on the liquidator and contributories of

the company:

(3) An order made by the Tribunal under sub-section (2) shall have no effect until a certified

copy of the order has been filed with the Registrar.

(4) A copy of every such order shall be annexed to every copy of the memorandum of the

company issued after the certified copy of the order has been filed as aforesaid, or in the case

of a company not having a memorandum, to every copy so issued of the instrument

constituting or defining the constitution of the company.

(5)If default is made in complying with sub-section (4), the company, and every officer of the

company who is in default, shall be punishable with fine which may extend to one hundred

rupees for each copy in respect of which default is made.

3 The Indian Companies Act, 1956.

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(3) The provisions of this section shall, so far as may be, also apply to a company in respect

of which an order has been made before the commencement of the Companies (Amendment)

Act, 2001 sanctioning a compromise or an arrangement.

This section gives the power to the Tribunal to enforce and/ or supervise such compromises

or arrangements with creditors and members.

Section 393: Information as to compromises or arrangements with creditors and

members5

(1) Where a meeting of creditors or any class of creditors, or of members or any class ofmembers, is called under section 391,-

(a) with every notice calling the meeting which is sent to a creditor or member, there shall be

sent also a statement setting forth the terms of the compromise or arrangement and explaining

its effect; and in particular, stating any material interests of the directors, managing director

or manager of the company, whether in their capacity as such or as members or creditors of

the company or otherwise, and the effect on those interests of the compromise or arrangement

if, and in so far as, it is different from the effect on the like interests of other persons; and

(b) in every notice calling the meeting which is given by advertisement, there shall be

included either such a statement as aforesaid or a notification of the place at which and the

manner in which creditors or members entitled to attend the meeting may obtain copies of

such a statement as aforesaid.

(2) Where the compromise or arrangement affects the rights of debenture-holders of the

company, the said statement shall give the like information and explanation as respects the

trustees of any deed for securing the issue of the debentures as it is required to give as

respects the company's directors.

(3) Where a notice given by advertisement includes a notification that copies of a statement

setting forth the terms of the compromise or arrangement proposed and explaining its effect

5

The Indian Companies Act, 1956.

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can be obtained by creditors or members entitled to attend the meeting, every creditor or

member so entitled shall, on making an application in the manner indicated by the notice, be

furnished by the company, free of charge, with a copy of the statement.

(4) Where default is made in complying with any of the requirements of this section, the

company, and every officer of the company who is in default, shall be punishable with fine

which may extend to fifty thousand rupees and for the purpose of this sub-section any

liquidator of the company and any trustee of a deed for securing the issue of debentures of the

company shall be deemed to be an officer of the company:

Provided that a person shall not be punishable under this sub-section if he shows that the

default was due to the refusal of any other person, being a director, managing

director, manager or trustee for debenture holders, to supply the necessary particulars as to

his material interests.

(5) Every director, managing director, or manager of the company, and every trustee for

debenture holders of the company, shall give notice to the company of such matters relatingto himself as may be necessary for the purposes of this section; and if he fails to do so, he

shall be punishable with fine which may extend tofive thousand rupees.

This section provides for the availability of the information required by the creditors and

members of the concerned company when acceding to such an arrangement. Under this

section, every notice calling the meeting of the creditors or members should be accompanied

by a statement setting forth the terms of compromise or arrangement and explaining its effect.

The statement should contain any material facts of the directors, managing directors etc. of

the company. In case the notice is advertised, then it should specify the venue and the manner

in which members attending the meeting can obtain copies of the statement of compromise or

arrangement.

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Further, it provides that every creditor or member on making an application in the manner

indicated in the notice of advertisement, be furnished with a copy of the statement free of

charge. The refusal to supply particulars is punishable with fine.

Section 394: Provisions for facilitating reconstruction and amalgamation of companies6

According to section 394, where an application is made to the Tribunal under section 391 for

the sanctioning of a compromise or arrangement proposed between a company and any such

persons as are mentioned in that section, and it is shown to the Tribunal

(a) that the compromise or arrangement has been proposed for the purposes of, or in

connection with, a scheme for the reconstruction of any company or companies, or the

amalgamation of any two or more companies; and

(b) that under the scheme the whole or any part of the undertaking, property or liabilities of

any company concerned in the scheme (in this section referred to as a "transferor company")

is to be transferred to another company (in this section referred to as "the transferee

company");

The Tribunal may, either by the order sanctioning the compromise or arrangement or by a

subsequent order, make provision for all or any of the following matters:-

(i) The transfer to the transferee company of the whole or any part of the undertaking,

property or liabilities of any transferor company.

(ii) the allotment or appropriation by the transferee company of any shares, debentures

policies, or other like interests in that company which, under the compromise or arrangement,

are to be allotted or appropriated by that company to or for any person;

(iii) the continuation by or against the transferee company of any legal proceedings pending

by or against any transferor company

(iv) the dissolution, without winding up, of any transferor company. However no order for

dissolution of any transferor company can be made unless the official liquidator if of opinion

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that the affairs of the company have not been conducted in a manner prejudicial to the interest

of its members or public interest Shankaranarayana Hotels (P.) Ltd v. Official Liquidator7

(v) the provision to be made for any persons who, within such time and in such manner as the

Court directs dissent from the compromise or arrangement; and

(vi) such incidental, consequential and supplemental matters as are necessary to secure that

the reconstruction or amalgamation shall be fully and effectively carried out:

However, the tribunal shall not sanction any compromise or arrangement for the

amalgamation of a company which is being wound up with any other company unless the

tribunal has receives a report from the registrar that the affairs of the company have not been

conducted in a manner prejudicial to the interest of its member or the public interest.

Similarly the tribunal will not make an order for dissolution of any transferor company

unless the official liquidator has, on scrutiny of the books and paper of the company, made a

report to the tribunal that the affairs of the company have not been conducted in a manner

prejudicial to the interest of its member or to public interest.

(2) Where an order under this section provides for the transfer of any property or liabilities,

then, by virtue of the order; that property shall be transferred to and vest in and those

liabilities shall be transferred to and become the liabilities of the transferee company and in

the case of any property, if the order so directs, freed from any charge which is, by virtue of

the compromise or arrangement, to cease to have effect.

(3) Within thirty days after the making of an order under this section, every company in

relation to which the order is made shall cause a certified copy thereof to be filed with the

Registrar for registration.

If default is made in complying with this sub-section, the company, and every officer of the

company who is in default, shall be punishable with fine which may extend to [five hundred

rupees].

(4) In this section-

7

[1992] 74 Comp. Cas. 290 (Kar.)

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(a) "property" includes property rights and powers of every description; and "liabilities"

includes duties of every description; and

(b) "Transferee company" does not include any company other than a company within the

meaning of this Act; but "transferor company" includes any body corporate, whether a

company within the meaning of this Act or not.

Section 394 makes provisions for facilitating reconstruction and amalgamation of companies,

by making an appropriate application to the Tribunal.

Section 395: Power and duty to acquire shares of shareholders dissenting from scheme

or contract approved by majority8

Section 395 lays down that

1. Where the transferee company has offered to acquire the shares or any class of shares

of the transferor company, the scheme or contract embodying such offer has to be

approved by the shareholders concerned within four months. The approval must be

given by the holders of not less than 9/10ths in value of the shares whose transfer is

involved. In computing 9/10th value of shares, the shares already held by the

transferee company or its nominee or subsidiary are excluded.

2. If the offer is approved, the transferee company may, at any time within two months

of the expiry of the said four months, giving a notice to the dissenting shareholders

that it desires to acquire their shares. The transferee company is entitled and bound to

acquire the shares of dissenting shareholders on the same terms on which the shares of

approving shareholders were approved unless on the application of the dissenting

shareholders within one month of such notice, the tribunal orders otherwise.

3. If the transferee company already holds in the transferor company shares of the classwhose transfer is involved, of a value more than 1/10th of the total value of the shares

of that class in that company, then the above provisions will not apply and the

transferee company cannot acquire the shares of the dissenting members. However, it

may still acquire the shares if:

(a) It offers the same terms to all the shareholders of the same class, and

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(b)The shareholders who approve of the scheme, besides holding not less than 9/10ths in

value of the shares other than those already held by the transferee company by itself or

through nominees, are also not less than 3/4ths in number of the holders of those shares.

4. Where the transferor company or its nominee or subsidiary already holds in the

transferor company at least 9/10ths in value of shares of the class agreed to be

transferred in pursuance of the scheme, then the transferee company must give

notice of the fact to the remaining dissenting shareholders of the transferor company

within one month of the date of transfer already made. On receipt of such notice, the

dissenting shareholders may, within three months, require the transferee company toacquire the shares. Then the transferee company will be entitled and bound to acquire

such shares on the same terms as that of the approving shareholders or on such other

terms as may be agreed or as ordered by the tribunal, on the application of the

transferee company or the shareholder.

5. Where notice has been given by the transferee company to the dissenting

shareholder(s) expressing its desire their shares and the tribunal has not made an order

on the application of the dissenting shareholders modifying the scheme of transfer,

then the transferee company must send a copy of the notice to the transferor company

on the expiry of one month of the date of notice, together with an instrument of

transfer executed by the transferee company itself through any of its persons and the

deal also completed by the transferee company in the instrument. This time period of

one month shall also run in case where a tribunal reference was made by thedissenting shareholder and the tribunal disposed of the petition only after the notice

was given, then from the date of petition was disposed of. The transferee company

must also pay or transfer to the transferor company the amount or consideration

representing the price of the shares which it is entitled to acquire under the section.

Thereupon, the transferor company shall register the transferee company as the holder

of those shares and inform the dissenting shareholder of the fact within one month of

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The transferor company will also deposit the amount so received in a separate bank

account to be held in trust for the holders of shares in respect of which amount has been

received.

Disclosure of information: As per sub section (4A) of section 395, the following

provisions are to apply in relation to every officer or a scheme or contract involving the

transfer of shares or any class of shares in the transferor company to the transferee

company:

(a) Every such officer or every circular containing such offer, or every recommendation

by the directors of the transferor company to its shareholders to accept such offer must

be accompanied by such information as may be prescribed by the central government.

(b) Every such offer must contain a statement by or on behalf of the transferee company

disclosing the steps it has taken to ensure that necessary cash will be available.

(c) Every circular containing or recommending acceptance of such offer must be

presented to the registrar for registration, and no such circular can be issued until it is

so registered.

(d) The registrar may refuse to register any such circular which does not contain the

prescribed information as per the clause (a) above, or which sets out such information

in a manner likely to give a false impression.

(e) An appeal may be made to the tribunal against an order of the registrar refusing to

register such circular.

Any person responsible for issue of a circular containing an offer involving transfer of shares

under a scheme or contract without getting the same registered shall be punishable with fine

upto rupees five thousand.

Section 396: power of central government to provide for amalgamation of companies in

national interest.9

9 The Indian Companies Act, 1956.


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Notwithstanding anything contained in section 394 and 395, where the central government is

satisfied that it is essential in the public interest that two or more companies should

amalgamate, then the c

ntral government may order the amalgamation of those companies into a single company

with such constitution, with such property, powers, rights, interests, authorities and privileges

and with such liabilities, duties and obligation as may be specified in the order. The order of

the central government shall be notified in the official gazette.

Sub section (3) of section 396 makes provisions for payment of compensation to any

member or creditor who stands to lose by the amalgamation. The amount of compensation is

to be assessed by the central government and has to be published in official gazette. The sub

section provides shall have, as nearly as may be, the same interest in or rights against the

company resulting from the amalgamation as he had in the company of which he was

originally a member or creditor. To the extent the rights or interest of such member or

creditor against or in the original company, he shall be entitled to compensation which shall

be assessed by such authority as may be prescribed. The compensation so assessed shall be

paid to the member or creditor concerned by the company resulting from amalgamation.

Any person aggrieved by any assessment of compensation made by the prescribed authority

under sub section (3) may, within 30 days from the date of publication of such assessment

in the official gazette, prefer an appeal to the tribunal and thereupon the assessment of the

compensation shall be made by the tribunal.

The government, before making the order, must:

(a) Send a draft copy of the proposed order to each of the companies concerned,

(b) have considered and made such modifications, if any, in the draft order as may seem

to it desirable in the light of any suggestions and objections which may be received by

it from the companies concerned, or from the shareholders therein, or from any

creditors thereof.

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Copies of every order made under section 396 must, after it has been made, be laid before

both houses of parliament as soon as possible.

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Section 396A: Preservation of books and papers of amalgamated company10

Section 396A requires that the books and papers of a company, which has been amalgamated

with, or whose shares have been acquired by, another company, must not be disposed of

without the prior permission of the central government. The central government, before

granting such permission, may appoint a person to examine the books and papers for the

purpose of ascertaining whether they contain any evidence of the commission of an offence

in connection with the promotion or formation, or the management of the affairs, of the first

mentioned company or its amalgamation or the acquisition of its shares.

3.2 Provisions under Income Tax Act

Merger has not been defined under the Income Tax Act but the term 'amalgamation' as

defined in section 2(1B) of the Act.11 Amalgamation in relation to companies, means the

merger of one or more companies with another or the merger of two or more companies to

form one company in such a way that a way that:

i. all the property of the amalgamating company or companies immediately before the

amalgamation becomes the property of the amalgamated company by virtue of

amalgamation;

ii. all the liabilities of the amalgamating company or companies immediately before theamalgamation become liabilities of the amalgamated company.

iii. Shareholders holding not less than three fourths in value of shares in the

amalgamating company or companies become shareholders of the amalgamated

company by virtue of amalgamation.12

10 The Indian Companies Act.11 Taxmanns, Income Tax Act, P 1.1.12http://business.gov.in/growing_business/mergers_acq.php last visited on 25.08.2010.
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In case of mergers and amalgamations, a number of issues may arise with respect to tax

implications. Some of the relevant provisions may be summarized as follows:

Depreciation: The amalgamated company continues to claim depreciation on the basis of

written down value of fixed assets transferred to it by the amalgamating company. The

depreciation charge may be based on the consideration paid and without any re-valuation.

However, unabsorbed depreciation, if any, cannot be assigned to the amalgamated company

and hence no tax benefit is available in this respect.13

Capital Expenditures: If the amalgamating company transfers to the amalgamated company

any asset representing capital expenditure on scientific research, then it is deductible in the

hands of the amalgamated company under section 35 of Income Tax Act, 1961.14

Exemption from Capital Gains Tax: The transfer of assets by amalgamating company to

the amalgamated company, under the scheme of amalgamation is exempted for capital gains

tax subject to conditions namely (i) that the amalgamated company should be an Indian

Company, and (ii) that the shares are issued in consideration of the shares, to any shareholder,

in the amalgamated company. The exchange of old share in the amalgamated company by the

new shares in the amalgamating company is not considered as sale by the shareholders and

hence no profit or loss on such exchange is taxable in the hands of the shareholders of the

amalgamated company.15

Carry Forward Losses of Sick Companies: Section 72A(1) of the Income Tax Act, 1961

deals with the mergers of the sick companies with healthy companies and to take advantage

of the carry forward losses of the amalgamating company. But the benefits under this section

with respect to unabsorbed depreciation and carry forward losses are available only if the

followings conditions are fulfilled:

1. The amalgamating company is an Indian company.

2. The amalgamating company should not be financially viable.

3. The amalgamation should be in public interest.

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13http://www.mbaknol.com/legal-framework/laws-governing-merger-in-india/ last visited on 25.08.2010.14Ibid.15

Ibid.

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4. The amalgamation should facilitate the revival of the business of the amalgamating

company.

5. The scheme of amalgamation is approved by a specified authority, and

6. The amalgamated company should continue to carry on the business of the

amalgamating company without any modification

Amalgamation Expenses: In case an expenditure is incurred towards professional charges of

Solicitors for the services rendered in connection with the scheme of amalgamation, then

such expenses are deductible in the hands of the amalgamated firm.16

3.3 Provisions under the Competition Act

On August 28 2009 the Ministry of Corporate Affairs issued a notification pursuant to which

the Monopolies and Restrictive Trade Practices Act 1969 was repealed and replaced by the

Competition Act 2002 with effect from September 1 2009. The Competition Act attempts to

make a shift from curbing monopolies to curbing practices that have adverse effects on

competition both within and outside India. The competition act governs only those Mergers

which satisfy the threshold limits prescribed under the act and are referred to as

combinations.17 The act does not prohibit combinations of enterprises and individuals but

seeks to regulate such combinations. The provisions relating to merger control under the act

are given below:

Section 3 of the act governs anti-competitive agreements and prohibits:

"Agreements involving production, supply, distribution, storage, acquisition or control of

goods or provision of services, which cause or are likely to cause an 'appreciable adverse

effect on competition' in India."18

Section 4 of the act prohibits the abuse of a dominant position by an enterprise. There shall

be an abuse of dominant position if an enterprise or a group

(a) directly or indirectly, imposes unfair or discriminatory

16http://www.mbaknol.com/legal-framework/laws-governing-merger-in-india/ last visited on 25.08.2010.17http://www.lexvidhi.com/article-details/merger-amalgamation-and-competition-act-2002-317.html last visitedon 25.08.2010.18 The Competition Act, 2002.

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http://www.mbaknol.com/legal-framework/laws-governing-merger-in-india/http://www.lexvidhi.com/article-details/merger-amalgamation-and-competition-act-2002-317.htmlhttp://www.mbaknol.com/legal-framework/laws-governing-merger-in-india/http://www.lexvidhi.com/article-details/merger-amalgamation-and-competition-act-2002-317.html


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(i) condition in purchase or sale of goods or service; or

(ii) price in purchase or sale (including predatory price) of goods or service.

(b) limits or restricts

(i) production of goods or provision of services or market therefor; or

(ii) technical or scientific development relating to goods or services to the prejudice of

consumers; or

(c) indulges in practice or practices resulting in denial of market access in any manner; or

(d) makes conclusion of contracts subject to acceptance by other parties of supplementary

obligations which, by their nature or according to commercial usage, have no connection with

the subject of such contracts; or

(e) uses its dominant position in one relevant market to enter into, or protect, other relevant

market.19

Section 6 of the competition Act states that no person or enterprise will enter intoCombination which causes or is likely to cause an appreciable adverse effect on competition

within the relevant market in India and such a combination will be void. A combination is

either a merger of two enterprises or the acquisition of the control, shares, voting rights or

assets of an enterprise or an enterprise that belongs to a group if it meets the jurisdictional

requirements set forth below. Although the Act does not expressly so state, the term

combination include horizontal, vertical and conglomerate mergers.20

Criteria under Section 5

Section 5 of the competition act defines combination by providing threshold limits on assets

and turnovers. At present, any acquisition, merger or amalgamation falling within the ambit

of the thresholds constitutes a combination. The following transactions will constitute a

combination:21

19 The Competition Act, 2002.20 Ibid.21

Ibid.

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(a) any acquisition where

(i) the parties to the acquisition, being the acquirer and the enterprise, whose control, shares,

voting rights or assets have been acquired or are being acquired jointly have,

(A) either, in India, the assets of the value of more than rupees one thousand crores or

turnover more than rupees three thousand crores; or

(B) in India or outside India, in aggregate, the assets of the value of more than five hundred

million US dollars, including at least rupees five hundred crores in India, or turnover more

than fifteen hundred million US dollars, including at least rupees fifteen hundred crores in

India; or

(ii) the group, to which the enterprise whose control, shares, assets or voting rights have been

acquired or are being acquired, would belong after the acquisition, jointly have or would

jointly have,

(A)either in India, the assets of the value of more than rupees four thousand crores or

turnover more than rupees twelve thousand crores; or

(B)in India or outside India, in aggregate, the assets of the value of more than two billion US

dollars, including at least rupees five hundred crores in India, or turnover more than six

billion US dollars, including at least rupees fifteen hundred crores in India; or

(b) acquiring of control by a person over an enterprise when such person has already

direct or indirect control over another enterprise engaged in production, distribution or

trading of a similar or identical or substitutable goods or provision of a similar or

identical or substitutable service, if

(i) the enterprise over which control has been acquired along with the enterprise over which

the acquirer already has direct or indirect control jointly have,

(A) either in India, the assets of the value of more than rupees one thousand crores or


(B) in India or outside India, in aggregate, the assets of the value of more than five hundredmillion US dollars, including at least rupees five hundred crores in India, or turnover more


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India; or

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(ii) the group, to which enterprise whose control has been acquired, or is being acquired,

would belong after the acquisition, jointly have or would jointly have,

(A) either in India, the assets of the value of more than rupees four thousand crores or


(B) in India or outside India, in aggregate, the assets of the value of more than two billion US


billion US dollars, including at least rupees fifteen hundred crores in India; or

(c) any merger or amalgamation in which

(i) the enterprise remaining after merger or the enterprise created as a result of the

amalgamation, as the case may be, have,

(A) either in India, the assets of the value of more than rupees one thousand crores or


(B) in India or outside India, in aggregate, the assets of the value of more than five hundred

million US dollars, including at least rupees five hundred crores in India, or turnover more


India; or

(ii) the group, to which the enterprise remaining after the merger or the enterprise created as a

result of the amalgamation, would belong after the merger or the amalgamation, as the case

may be, have or would have,

(A) either in India, the assets of the value of more than rupees four-thousand crores or



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(B) in India or outside India, in aggregate, the assets of the value of more than two billion US


billion US dollars, including at least rupees fifteen hundred crores in India.

30

Filing of notice

Section 6 of the regulation makes it mandatory to give notice in form 1 and form 2 to the

commission within 30 days of the decision of the parties' boards of directors or of execution

of any agreement or other document for effecting the combination.22

As per section 10(2) In case of a merger or an amalgamation, all persons or enterprises to the

combination, who or which propose such merger or amalgamation, as the case may be, shall

jointly file the notice.23

Fee- as provided under regulation 12

(1) The notice, in Form 1 or Form 2, shall be accompanied with proof of payment of the

required fee in accordance with this regulation;

(2) The fee to be paid for any combination shall be:

(a) Rupees twenty lacs along with the notice in Form 1 or Form 2;

(b) Rupees twenty lacs along with the response to the communication to show cause of the

Commission received by the parties under sub-section (1) of section 29 of the Act; Providedthat where a notice has not been filed under regulation 6, Form 1 filed in response to show

cause under regulation 8 of the Act shall be accompanied by a fee of rupees forty lacs;

(c) Rupees twenty lacs along with the proof of publishing details of combination under sub

section (2) of section 29 of the Act;

22

The Competition ct, 2002.23 Ibid.

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(3) The fee payable shall be net of any charges, fees, or taxes, if any, payable by the parties

on its remittance to the Commission.

Waiting Period

The Competition Act provides for a post-filing review period of 210 days, during which the

merger cannot be consummated and within which the Competition Commission is required to

pass its order with respect to the notice received. If the commission fails to pass an order

within the time limit, the proposed combination will be deemed to be approved. The 210-day

period applies in case of cross-border transactions outside India where one of the contracting

parties has a substantial presence in India. Regardless of the size of the transaction,

notification is required where the combined asset value or turnover in India exceeds a certainvalue. This means that it is mandatory for a foreign company with assets of more than $500

million that has a subsidiary or joint venture in India with a substantial investment (above

$125 million) to notify the Competition Commission before acquiring a company outside

India.24

Exemptions

The Competition Commission of India (Combination) Regulations, provides for thirteen

Categories of transactions not likely to have appreciable adverse effect on competition in

India.

Extra Territorial Jurisdiction of the competition act

In the Indian Competition Act, 2002 has the extra territorial jurisdiction. Section 32 provides

that the commission shall have the power to Competition Commission shall have the power

to enquire into an agreement or abuse of dominant position or combination even if the act has

taken place outside India or the party or enterprise is outside India provided it has an

appreciable adverse effect on competition in India. Further the Commission is allowed under

proviso to section 18 to enter in to memorandum or arrangement with the prior approval of

the Central Government. Section 32 states that, notwithstanding that any restrictive

agreement, any party to such agreement, any enterprise abusing the dominant position, or any

combination or party to the combination is outside India, the Competition Commission of

24http://www.lexvidhi.com/article-details/merger-amalgamation-and-competition-act-2002-317.html last visited

on 26.09.2010.
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India has the power to enquire into if it has an anti competitive effect within the relevant

market in India.25

Thus the competition act does not seeks to eliminate combinations and only aims to eliminate

their harmful effects, so that mergers and amalgamations are not adversely affected. 26

3.4 Provisions under the Foreign Exchange Management Act

During recent years there has been substantial augment tin the figures of cross border mergers

in India resulting into truly global enterprise. Cross border merger takes place when two

companies of different countries merge together.

Under FEMA, general permission has been granted to any non-resident to purchase shares or

convertible debentures of an Indian company under Foreign Direct Investment Scheme,

subject to the terms and conditions specified in Schedule 1 thereto. However citizens of

Bangladesh, Pakistan or Sri Lanka resident outside India and entities in Bangladesh or

Pakistan are not permitted to purchase shares or debentures issued by Indian companies or

any other Indian security without the prior approval of the RBI.27

Further, persons resident outside India are permitted to purchase shares or convertible

debentures offered on a rights basis by an Indian company which satisfies the conditions

restated hereinbelow.

(i) The offer on right basis does not result in increase in the percentage of foreign equity

already approved, or permissible under the Foreign Direct Investment Scheme in

terms of FEMA 2000;

(ii) The existing shares or debentures against which shares or debentures are issued by

the company on right basis were acquired and are held by the person resident outside

India in accordance with FEMA 2000;

(iii) The offer on right basis to the persons resident outside India is at a price which is not

lower than that at which the offer is made to resident shareholders;

25 Ibid.26

T. Ramappa, Competition Law in India, policy issue and developments, 1

st

ed. 2006, P 190.

3227 Regulation 5 (1), FEMA 2000.


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The rights shares so acquired shall be subject to the same conditions regarding repatriation as

applicable to original shares.28 Further, under FEMA 20, an Indian company has been

permitted to issue shares to its employees or employees of its joint venture / subsidiary

abroad, who are non-resident, either directly or through a trust.29

Under Regulation 7 of FEMA 2000, once a scheme of merger, demerger or amalgamation has

been approved by the court, the transferee company (whether the survivor or a new company)

is permitted to issue shares to the shareholders of the transferor company who are persons

resident outside India, subject to the condition that the percentage of non resident holdings in

the company does not exceed the limits for which approval has been granted by the RBI or

the prescribed sectoral ceiling under the foreign direct investment policy set under the FEMA

laws. If the new share allotment exceeds such limits, the company will have to obtain the

prior approval of the FIPB and the RBI before issuing shares to the non residents.30

General permission has also been granted for transfer of shares / convertible debentures by a

non-resident as follows:31

(i) Non-residents other than non-resident Indians (NRIs) or Overseas Corporate

Bodies (OCBs)32 may transfer shares / convertible debentures to any non-resident,

provided that the transferee should have obtained permission of the CentralGovernment, if he had any previous venture or tie-up in India through investment in

any manner or a technical collaboration or trademark agreement in the same or allied

field in which the Indian company whose shares are being transferred is engaged;

(ii) NRIs or OCBs are permitted to transfer by way of sale, any shares or convertible

debentures of Indian companies to other NRIs or OCBs only;

(iii) Non-residents are permitted to transfer shares / debentures of any Indian company to

a resident by way of gift.

28 Regulation 6 (3), FEMA 2000.29 Regulation 8, FEMA 2000.

3330 Proviso to Regulation 7 (1) (a), FEMA 2000.31 Regulation 9, FEMA 2000.32 Overseas Corporate Body or OCB means a company, partnership firm, society and other corporate body

owned directly or indirectly to the extent of at least 60% by NRIs and includes overseas trust in which not lessthan 60% beneficial interest is held by NRIs, directly or indirectly, but irrevocably. See, MASTER CIRCULARON FOREIGN INVESTMENT IN INDIA, p. 4, Master Circular No.2/2009-10, dated 1 July 2009.


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FEMA 2000 further stipulates that any transfer of security by a resident to a non-resident

would require the prior approval of the RBI. For the transfer of existing shares/convertible

debentures of an Indian company by a resident to a non resident by way of sale, the transferor

will have to obtain the approval of the Central Government before applying to the RBI. 33In

such cases, the RBI may permit the transfer subject to such terms and conditions, including

the price at which the sale may be made .34

For the purpose of FEMA 2000, investment in India by a non-resident has been divided into

the following five categories and the regulations applicable have been specified in respective

schedules as under:

(i) Investment under the Foreign Direct Investment Scheme (the FDI Scheme).

(ii) Investment by Foreign Institutional Investors (FIIs) under the Portfolio Investment

Scheme (the Portfolio Investment Scheme).

(iii) Investment by NRIs/OCBs under the Portfolio Investment Scheme.

(iv) Purchase and sale of shares by NRIs/OCBs on non-repatriation basis.

(v) Purchase and sale of securities other than shares or convertible debentures of an

Indian company by non-residents.

The following are the prominent features of the schemes listed above:

FDI Scheme

Under the FDI Scheme, a non resident or a foreign entity, whether incorporated or not, may

purchase shares or convertible debentures of an Indian company. Any Indian company which

is not engaged in the activity or manufacture of items listed in Annexure A to the FDI

Scheme has been permitted to issue shares to a non resident up to the extent specified in

Annexure B to the FDI Scheme, on a repatriation basis, provided that:35

(i) The issuer company does not require an industrial licence;

33 Regulation 10A (b), FEMA 2000.

3434Regulation 10A (b), FEMA 2000.35

Schedule 1 to FEMA 2000.

35


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(ii) The shares are not being issued for acquiring existing shares of another Indian

company;

(iii) If the non resident to whom the shares are being issued proposes to be a collaborator,

he should have obtained the Central Governments approval if he had any previous

investment/collaboration/tie-up in India in the same or allied field in which the Indian

company issuing the shares is engaged.

Further, a trading company incorporated in India may issue shares or convertible debentures

to the extent of 51% of its capital, to persons resident outside India subject to the condition

that remittance of dividend to the shareholders outside India is made only after the company

has secured registration as an export/trading/star trading /super trading house from the

Directorate General of Foreign Trade, Ministry of Commerce, Government of India, New

Delhi.

It also prescribes a ceiling of 10% of the total paid-up equity capital or 10% of the paid-up

value of each series of convertible debentures, and provides that the total holdings of all

FIIs/sub-accounts of FIIs put together shall not exceed 24% of paid-up equity capital or paid

up value of each series of convertible debentures.36 A registered FII is also permitted to

purchase shares/convertible debentures of an Indian company through privateplacement/arrangement, subject to the prescribed ceiling.37

RBI may also permit a domestic asset management company or a portfolio manager

registered with SEBI as FIIs for managing the sub-account to make investment under the

Portfolio Investment Scheme on behalf of non-residents who are foreign citizens and bodies

corporate registered outside India, provided such investment is made out of funds raised or

collected or brought from outside India through normal banking channel. Such investment is

restricted to 5% of the equity capital or 5% of the paid-up value of each series of convertible

debentures within the overall ceiling of 24% or 40% as applicable for FIIs for the purpose of

the Portfolio Investment Scheme.38

The designated branch of an authorised dealer is authorised to allow remittance of net sale

proceeds (after payment of taxes) or to credit the net amount of sale proceeds of shares /

36 However, under the Proviso to Paragraph 4, the limit of 24% may be increased to 40% by the Indian company

concerned by passing a resolution by its Board of Directors followed by passing of a special resolution to that

effect by its general meeting.37 Paragraph 1(5) ofSchedule 2 to FEMA 2000.38 Paragraph 4 ofSchedule 2 to FEMA 2000.


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convertible debentures to the foreign currency account or a non-resident rupee account of the

registered FII concerned.39

Investment by NRIs/OCBs under the Portfolio Scheme

Under Schedule 3, a NRI/OCB is permitted to purchase/sell shares and/or convertible

debentures of an Indian company, through a registered broker on a recognised stock

exchange, subject to the following conditions:40

(i) The NRI/OCB designates a branch of an authorised dealer for routing his/its

transactions relating to purchase and sale of shares/ convertible debentures under the

Portfolio Investment Scheme, and routes all such transactions only through the branch

so designated;

(ii) The paid-up value of shares of an Indian company, purchased by each NRI/OCB both

on repatriation and on non-repatriation basis, does not exceed 5% of the paid-up value

of shares issued by the company concerned;

(iii) The paid-up value of each series of convertible debentures purchased by each

NRI/OCB both on repatriation and non-repatriation basis does not exceed 5% of the

paid-up value of each series of convertible debentures issued by the companyconcerned;

(iv) The aggregate paid-up value of shares of any company purchased by all NRIs and

OCBs does not exceed 10% of the paid up capital of the company and in the case of

purchase of convertible debentures the aggregate paid-up value of each series of

debentures purchased by all NRIs and OCBs does not exceed 10% of the paid-up

value of each series of convertible debentures.41

(v) The NRI/OCB takes delivery of the shares purchased and gives delivery of shares

sold;

39 Paragraph 3 ofSchedule 2 to FEMA 2000.

3640 Paragraph 1 ofSchedule 3 to FEMA 2000.41

Ibid.

37


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(vi) Payment for purchase of shares and/or debentures is made by inward remittance in

foreign exchange through normal banking channels or out of funds held in

NRE/FCNR account maintained in India if the shares are purchased on repatriation

basis and by inward remittance or out of funds held in

NRE/FCNR/NRO/NRNR/NRSR account of the NRI/OCB concerned maintained in

India where the shares/debentures are purchased on non-repatriation basis;

(vi) The OCB informs the designated branch of the authorised dealer immediately on the

holding/interest of NRIs in the OCB becoming less than 60%.

Paragraph 2 of Schedule 3 further provides that the link office of the designated branch of an

authorised dealer is obliged to furnish furnish daily report to the Chief General Manager,

Reserve Bank of India (ECD) detailing the name of the NRI/OCB and the company wise

number of shares and/or debentures and paid-up value thereof, purchased and/or sold by each

NRI /OCB.

3.5 Provisions under Sick Industrial Companies (Special Provisions), Act 1985

This act facilitates the amalgamation of sick company with a healthy company through board

of industrial and financial reconstruction.42 BIFR has been granted immense powers under the

act to facilitate the rehabilitation of sick industries. It may conduct enquiry into the working

of the sick industrial companies and have various other powers.43 Under this act the sick

companies gets various benefits under the income tax act as well.

3.6 Provisions under Industries (Development and Regulation) Act, 1951

As per section 18FA of this act, the central government has enormous powers to amalgamate

or merge the companies.44

However the scope of this act is limited and is not applicable tomergers or amalgamations of the companies inter se.

3.7 Provisions under respective Stamp Act

42 Section 18 of the sick industrial companies (special provisions) act, 1985.43 Section 16 of the sick industrial companies(special provisions), act, 1985.44

Section 18FA of the industries(development and regulation) act, 1951.

38


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members as ordered under clause 201. The clause also provides that, if the Tribunal is

satisfied that such compromise or arrangement cannot be implemented satisfactorily with or

without modifications, and the company is unable to pay its debts as per the scheme, it may

make an order for winding up of the company.

Clause 203: Merger and Amalgamation of Companies48

This clause corresponds to section 394 of the Companies Act, 1956 and seeks to

provide powers to Tribunal to order for holding meeting of the creditors or the members and

to make orders on the proposed reconstruction, merger or amalgamation of companies. The

clause provides for the manner and procedure in which the meeting so ordered by the

Tribunal to be held. Where the Tribunal orders for transfer of any property or liability, thatproperty or liability shall be transferred to and become the property or the liabilities of the

transferee company and any property may, if the orders so directs, be freed from of any

charge by virtue of compromises or arrangement. Every company shall file a certified copy of

the order within thirty days with the Registrar for registration.

Clause 204: Merger and Amalgamation of certain Companies49

This is a new clause and seeks to provide for merger or amalgamation between two

small companies or between a holding company and its wholly owned subsidiary company

by giving a notice of the proposed scheme inviting comments or objections by both the

transferor and the transferee company. The scheme is to be approved by the respective

members at a general meeting by passing a special resolution and by three fourths in value of

the creditors of respective companies. Transferee Company shall file a copy of the approved

scheme with the Registrar and the Official Liquidator. If the Registrar is of the opinion that

such a scheme is not in public interest or in interest of the creditors, he may file anapplication before the Tribunal stating his objections and requesting it to consider the scheme

for reconstruction merger or amalgamation, etc., under clause 203. The Tribunal may direct

accordingly or it may confirm the scheme by passing such order as it deems fit. The

transferor company shall be deemed to be dissolved on registration of the scheme. This

clause also provides for effects of registration of the scheme with the Registrar.

48 Taxmann, Guide to Companies Bill 2008 and Limited liability Partnership bill 2008, Pg - 9849http://www.mca.gov.in/Ministry/actsbills/pdf/Companies_Bill_2009_24Aug2009.pdf last visited on

25.08.2010.

40
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Clause 205: Amalgamation by mutual Consent50

This is a new clause and seeks to provide the mode of merger or amalgamation

between registered companies under the proposed legislation and companies incorporated in

the jurisdictions of such countries, as notified from time to time by the Central Government,

by mutual agreement. This clause further provides that foreign company may merge or

amalgamate into a company or vice versa and the terms and conditions of the scheme of

merger or amalgamation may provide for the payment of consideration to the shareholders of

the merging company in cash or partly in cash or partly in Indian Depository Receipts.

Clause 206: Power to acquire shares of shareholders dissenting from scheme or contract

approved by majority51


provide the manner in which the transferee company shall acquire shares of the shareholders

dissenting from the scheme or contract as approved by the majority shareholders holding not

less than nine-tenths in value of the shares whose transfer is involved. The transferee

company shall send a copy of the notice to the transferor company together with an

instrument of transfer, to be executed and pay the consideration representing the price

payable by the transferee company for the shares. Such consideration received by transferor

company shall be paid into separate bank account and any other consideration shall be held

by company in trust and shall be disbursed to the entitled shareholders.

Clause 207: Purchase of Minority Shareholding52


provide the procedure and manner in which the registered holder of at least 90 per cent shares

of a company shall notify the company of their intention to buy the remaining equity shares

50http://www.mca.gov.in/Ministry/actsbills/pdf/Companies_Bill_2009_24Aug2009.pdflast visited on25.08.2010.51Ibid.52

Ibid.

41
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papers to ascertain whether they contain any evidence of commission of offence in

connection with promotion, formation, management, etc., of the company.

Clause 211: Liability of the officers in respect of offences committed prior to

Amalgamation, Transfer etc.56

This clause seeks to provide that the liability in respect of offences committed by the

officers in default of transferor company prior to its merger or amalgamation or acquisition

shall continue after such merger or amalgamation or acquisition.

56 Taxmanns, Guide to Companies Bill 2008 & Limited Liability Partnership Bill, 2008, Pg 29.

43

legal regulations on mergers

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