m&a Regulations

8/13/2019 m&a Regulations

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Regulatory aspects of M&A



• Major Laws Involved in M&A :• Major Laws Involved in M&A SEBI (substantial Acquisition of shares

&Takeovers) Regulations 2011.• Securities and Exchange Board of India (Issue of Capital and

Disclosure Requirements) Regulations, 2009• The Securities and Exchange Board of India Act,1992 .• Security Contract Regulation Act ,1956 .• The Depositories Act,1956.• SEBI Disclosure and Investor Protection Guidelines 2000.• Securities and Exchange Board of India (Prohibition of Insider

Trading Regulation ),1992.• Securities and Exchange Board of India (Merchant Bankers)

Rules/Regulation 1992.• SEBI (Delisting of Securities )Guidelines,2003.• Foreign Exchange Management Act,1999.• Companies Act,1956.• Income Tax Act



Key Regulatory Aspects of M&A1. SEBI Takeover Regulations/Company Law in

M&A2. Due Diligence in M&As3. Contractual Issues in M&As

4. Intellectual Property Law and M&As5. Exchange Control Issues6. Monopolies and Restrictive Trade Practices Act,

1969 (“MRTP Act”) and Competition Act, 2002(“CA02”) 7. Tax Implications in M&As



1. SEBI Takeover Regulations/Company Law in M&A: • Mergers are primarily supervised by the High Court(s) and the

Ministry of Company Affairs. The SEBI regulates takeovers ofcompanies that have shares listed on any stock exchange inIndia. The main corporate and securities law provisionsgoverning mergers and takeovers are:

• Sections 108A to 108I of CA56, which place restrictions on thetransfer and acquisition of shares where the shareholdings ofthe bidder or transformer would either:

– Result in a dominant undertaking; or – In case of a pre-existing dominant undertaking, result in an

increase in the production, supply, distribution or controlof goods and services by it.



• Section 390 to 394 of CA56, which govern the schemes ofarrangement between companies and their respective

shareholders and creditors, under the supervision of therelevant High Court.

• The Takeover Code, which sets out procedures governing anyattempted takeover of a company that has its shares listed on

one or more recognized stock exchange(s) in India. Regulation10, 11, and 12 of the Takeover Code, which deal with publicoffers, do not apply to a scheme framed under the SickIndustrial Companies (Special Provisions) Act, 1985 (“ SICA”),or to an arrangement or reconstruction under any Indian orforeign law ( Regulation 3 (1) (j), Takeover Code ).



The Takeover Code, however, does not apply to thefollowing acquisitions:• Allotment of shares made in public issue or in right issue;• Allotment of shares to underwriters in pursuance of underwriting

agreement;• Inter-se transfer between group, relative, foreign collaborators and

Indian promoters who are shareholders, acquirer and personsacting in concert with him;

• Acquisition of shares in the ordinary course of business by aregistered stockbroker on behalf of his client, market maker, publicfinancial institutions in their own account, banks and financialinstitutions as pledgees, international financial institutions, andmerchant banker or promoter of the target company under ascheme of safety net;

• Exchange of shares received in a public offer made under theTakeover Code;

• Transmission of shares in succession or inheritance;



• Acquisition of shares by government companies and statutorycorporations. However, acquisition in a listed public sectorundertakings, through the process of competitive bidding process

of the Central Government is not exempted;• Transfer of shares by state level financial institutions to co-promoters under an agreement;

• Transfer of shares venture capital funds or registered venturecapital investors to a venture capital undertaking or to its promoterspursuant to an agreement;

• Acquisition of shares in pursuance of a scheme of rehabilitation of asick company, amalgamation, merger or demerger;

• Acquisition of shares of an unlisted company. However, if suchacquisition results in acquisition or change of control in a listedcompany, the exemption will not be available;

•

Acquisition of global depository receipts and American depositoryreceipts so long as they are not converted into shares carryingvoting rights.



• Section 17, 18 and 19A of the SICA, which regulate schemesformulated by the Board for Industrial and FinancialReconstruction, a statutory body established under theSICA, for the reconstruction and amalgamation of “sick” companies (that is, any company which, at the end of anyfinancial year, has accumulated losses equal to orexceeding the entire net worth). The Sick IndustrialCompanies (Special Provisions) Repeal Act 2003 (“SICARepeal ”), which repeals the SICA, has been enacted but hasnot yet come into force. Similarly, while the Companies(Second Amendment) Act, 2002 has introduced ChapterVIA in the CA56, which makes substantial amendments tothe regime governing sick companies, these provisions arealso yet to come into effect (there is no indication as to

when these provisions are likely to come into force). As aresult, SICA continues to be valid and binding.• There are also rules governing the acquisition of shares in

an Indian company by a non- resident.



2. Due Diligence in M&As:

• The purpose of the due diligence exercise is to identify any issues that mayaffect the bid including, but not limited to, the price of the bid. Generally,the bidder (in case of recommended as well as hostile bids) will want todetermine the following about the target company:

• Its capital structure including shareholding pattern.• The composition of its board of directors.• Any shareholders’ agreement or restrictions on the shares, for example,

on voting rights or the right to transfer the shares.• Its level of indebtedness.• Whether any of its assets have been offered as security for raising any

debt.• Any significant contracts executed by it.• The status of any statutory approvals, consents or filings with statutory

authorities.• Employee details.• Significant litigation, show cause notices and so on relating to the target

and/or its areas of business.• Any other liability, existing or potential.



Public Domain• Information on a target that is in the public domain

and is accessible to the bidder includes its:• Constitutional documents;• Annual reports and annual returns filed with statutory

authorities, giving information on shareholdings,

directors and so on.• Quarterly and half-yearly reports, in the case of listedcompanies (in accordance with the standard listingagreement prescribed by the SEBI).

•

A listed company must inform the stock exchanges ofimportant decisions taken by its board of directors.



3. Contractual Issues in M&As: • While economic and business reasons may be

the factors behind both M&As, contractualand legal formalities involved are ratherdifferent. Share sale and purchase/acquisitionagreement, asset and business transferagreements, representations and warranties,indemnity, non-compete and non solicitation,confidentiality, governing law, post completion

matters and indemnities are significantagreements and clauses to effectively executeM&As.



Contents of a Share Purchase Agreement • Condition precedent – The condition precedents incorporated

in a share purchase agreement may include obtainingnecessary approvals from various governmental regulatorybodies that may be necessary to effectively execute the sharepurchase agreement and the proper functioning of the targetcompany.

• Management and Control – The devising of an appropriategovernance structure of the target company is of greatimportance for effective management, growth and success ofthe target company. The share purchase agreement should

explicitly set out the participation of the acquirer and also therights, obligations and duties of the management of the targetcompany including that of the board of directors, nomineedirectors and the chairman.



• Intellectual Property Rights – If the merger involves a transfer,assignment or right to use an intellectual property such astrademark, copyright, know-how, etc. the same should beprotected in the share purchase agreement.

• Non-Competition/Conflict of Interest – The non-competeclause in a share purchase agreement is incorporated withintent to restrain the contracting party from carrying out anyindependent activity in competition to that of the targetcompany.

• Deadlock Provision – The parties may have similar ordissimilar thinking patterns. Therefore, there has to be a

mechanism for resolving any issues on which there is adeadlock between the parties. The chairman may be given acasting vote to avoid such a problem.



• Confidential Information – The share purchase agreement canmake all the provisions contained in or related to or arisingfrom the share purchase agreement to be confidential innature

• Survival Clause – It may be prudent to provide for certainobligations contained in or related to or arising from the sharepurchase agreement to survive pursuant to the termination ofthe share purchase agreement.



4. Intellectual Property Law and M&As:

• In case of M&A of companies, all the assets of the transferor

company including intellectual property assets such as patents,copyrights, trademarks and designs vest in the transferee. Wherethe transferor company owns the intellectual property assets, suchassets are transferred to the transferee company under the schemeof arrangement.

• Unregistered trademark/copyright is transferable as any other rightin a property under the scheme of arrangement framed undersection 394 of CA56. In case of registered trademarks/copyrightsand patents, the transferee company has to apply to the respectiveRegistry for registering its title pursuant to the order of the HighCourt sanctioning the scheme.

• The transmission/transfer of the trademark/copyright rights in thelicense may be permitted in an instance where the licensor himselfassents to such transfer of a license subsequent to a merger.



5. Exchange Control Issues:

• The Foreign Direct Investment (“FDI”) regime in India hasprogressively liberalized and the Government of Indiarecognizes the key role of FDI in economic development of acountry. With very limited exceptions, foreign entities cannow invest directly in India, either as wholly ownedsubsidiaries or as a joint venture. In an international jointventure, any proposed investment by a foreignentity/individual in an existing entity may be brought in either

through equity expansion or by purchase of the existingequity.



• Where the transfer of shares is by way of sale under a private

arrangement, by a person resident in to a person resident outsideIndia the price of the shares will not be less than the ruling marketprice in case of shares listed on a stock exchange or the value of theshares calculated as per the guidelines issued by the erstwhileController of Capital Issues and certified by a Chartered Accountant.In either of the cases the sale consideration must be remitted into

India through normal banking channels. Lastly, to affect the transfer,a declaration in the form FC TRS should be filed with an authorizeddealer along with the a consent letter indicating the details oftransfer, shareholding pattern of the investee company after theacquisition of shares by a person resident outside India showingequity participation of residents and non residents, certificate

indicating fair value of shares from a chartered accountant or incase of a public listed company copy of the broker’s note and anundertaking from the buyer to the effect that he is eligible toacquire shares in accordance with the FDI policy.



6. Monopolies and Restrictive Trade Practices Act, 1969

(“MRTP Act”) and Competition Act, 2002 (“CA02”): • The MRTP Act aims towards controlling monopolistic,

restrictive and unfair trade practices, which curtailcompetition in trade and industry. Monopolistic tradepractice includes a trade practice unreasonably

preventing or lessening competition in the production,supply or distribution of any goods or in the supply ofany services. Sections 108A to 108I incorporated inCA56 restrict the transfer of shares by body or bodies

corporate under the same management holding 10%or more of the subscribed share capital of anycompany without intimating the Central government ofthe proposed transfer.



• The Competition Commission can investigate any combination, which is a mergeror acquisition where any of the following apply:

– The parties jointly have assets exceeding INR 10 billion (about US$ 227 million)or turnover of more than INR 30 billion (about US$682 million) in India, or

assets of US$ 500 million (about EUR 413 million) or turnover of more thanUS$ 1.5 billion (about EUR 1.2 billion) in India or outside India. – The group to which the company will belong after the acquisitions and the

company jointly have assets exceeding INR 40 billion (about US$ 909.6 million)or turnover of more than INR 120 billion (about US$ 2.7 billion) in India, orassets of US$ 2 billion (about EUR 1.7 billion) or turnover of more than INR120 billion (about US$ 2.7 billion) in India, or assets of US$ 2 billion (about

EUR 1.7 billion) or turnover of more than US$ 6 billion (about EUR 5 billion) inIndia or outside India. – The bidder already has direct or indirect control over another enterprise

engaged in the production, distribution or trading of a similar, identical orsubstitutable good or service, and the acquired enterprise and this otherenterprise jointly have assets exceeding INR 10 billion or turnover of morethan INR 30 billion in India, or assets of US$ 500 million or turnover of more

than US$ 1.5 billion in India or outside India. – The enterprise after the merger or acquisition has assets exceeding INR 10

billion or turnover of more than INR 30 billion in India, or assets of US$ 500million or turnover of more than US$ 1.5 billion in India or outside India.

•



• While investigating the combination, theCompetition Commission must examine whether

it is likely to cause, or causes, an adverse effecton competition within the relevant market inIndia. The Competition Commission has 90 daysfrom the date of publication of details of the

combination by the parties to pass an orderapproving, prohibiting or requiring modificationof the combination, or to issue further directions.If it does not do this, the combination is deemedapproved. There is no obligation to suspend thecombination while the investigation is takingplace.



7. Tax Implications in M&As:

• Amalgamations and Demergers attract the following taxes:-• Capital Gains Tax – Under the IT Act, gains arising out of the

transfer of capital assets including shares are taxed. However, if theresultant company in the scheme of amalgamation or demerger isan Indian Company, then the company is exempted from payingcapital gains tax on the Transfer of Capital Assets.

• Tax on transfer of Share – Transfer of Shares may attract SecuritiesTransaction Tax and Stamp Duty. However, when the shares are indematerialized form then no Stamp duty is attracted.

• Tax on transfer of Assets/Business – Transfer of property alsoattracts tax which is generally levied by the states.

– Immovable Property – Transfer of Immovable Property attracts Stamp

Duty and Registration fee on the instrument of transfer. – Movable Property - The transfer of Movable Property attracts VAT

which is determined by the State and also Stamp Duty on theInstrument of transfer.



• Transfer of tax Liabilities –

– Income Tax – The predecessor is liable for all Income Tax payable till

the effective date of restructuring. After the date of restructuring, theliability falls on the successor. – Central Excise Act – Under the Central Excise Act, when a registered

person transfers his business to another person, the successor shouldtake a fresh registration and the predecessor should apply forderegistration. In case the predecessor has CENVAT Credit, the samecould be transferred.

– Service Tax – As regards service tax, the successor is required to obtainfresh registration and the transferor is required to surrender hisregistration certificate in case it ceases to provide taxable services. Theprovisions regarding transferring the CENVAT credit are similar to theCentral Excise provisions.

– Value Added Tax – Usually statutes governing levy of VAT specify for anintimation of change of ownership and name to the relevant authority,but these statutes do not provide any specific guidelines with regardto the transfer of tax credit. The obligation of the predecessor and thesuccessor is joint and several.



There is a growing need to bring a change in

the present law but a coordinated approachshould be taken while bringing amendmentsin the CA56. The change is required to

provide for maximum flexibility and to provide equal opportunities to economic players in the global market. This would alsohelp in bringing Indian law in consonancewith the law regarding mergers in othercountries.



• Thank you



• M&A : Legal Provisions And Practices :Companies Act 1956 Sections 390 to 396-Aand section 111

• Sections 390 & 394 :Sections 390 & 394 Section 391 – 394 of the Companies Act,1956 deals with Compromises, Arrangements andReconstructions and other related issues through schemesof arrangement approved by the High Courts. A resolution

to approve the scheme of arrangement has to be passed bythe shareholders in the general meetings.The shareholders have to vote on the resolutions on theschemes of arrangement on the basis of the disclosures inthe notice/explanatory statement. Section 393 of the

Companies Act, 1956 specifies the broad parameters of thedisclosures which should be given to the shareholders /creditors, for approving a scheme of arrangement .



• Section 390 & 391:Section 390 & 391 s/390 – arrengement s/391- Power tocompromise or make arrangement with creditor ormembersCourt’s power under the section are very wide and hasdiscretion to allow any sort of arrangement between thecompany and members. Scope and ambit of theJurisdiction of the Court: The sanctioning court has to seeto it that all the requisite statutory procedure forsupporting any scheme has been complied with along withrequisite meetings. That the scheme put up for sanction ofthe court is backed up by the requisite majority vote. Thatthe concerned meetings of the creditors or members or any

class of them had the relevant material to enable the votersto arrive at an informed decision for approving the scheme.That the proposed scheme is not found to be violative ofany provision of law and is not contrary to public policy.



• SECTION 392:Under this section, the court has power to supervise the carrying out of the

compromise or an arrangement; and may, at the time of making such order or atany time thereafter, give such directions in regard to any matter or make suchmodifications in the compromise or arrangement as it may consider necessary forthe proper working of the arrangement. If the court is of the view that acompromise /arrangement sanctioned under section 391 cannot be workedsatisfactorily with or without modifications, it may on it own motion or on thebasis of an application made by an interested party may order winding up of thecompany under section 433 of the Act.

• Section 393:This section prescribes the procedure required for convening the meeting of the

members or creditors called under section 391. The notice for the meeting shouldbe sent along with a statement setting forth the terms of the compromise and orarrangement and explaining its effect and in particular, the statement must stateall material interest of the directors, managing directors of the company, whetherin their capacity as such or as members or creditors of the company or otherwise.

Where the compromise or arrangement affects the rights of debenture holders ofthe company, the statement shall give the information and explanation in respectsto the trustees of any deed for securing the issue of the debentures as it isrequired to give in respect of directors. Any default in complying with therequirements under this section may lead to a fine of Rs . 50, 000 against theconcerned official of the company, who is found guilty.

•



• Section 394:• Section 394 Where the court is of the view that the proposed

arrangement/scheme is of such nature that • the scheme is for thereconstruction of any company or for amalgamation of any two ormore companies; and • that under the scheme the whole or anypart of the undertaking property or liabilities of any concernedcompany is to be transferred to another company; the court maymake provision for all or any of the following matters. The transferto Transferee Company of the property or liabilities of transferorcompany.The allotment or appropriation by the transferee company of anyshares, debentures or other like interest in that company which,under the arrangement, are to be allotted or appropriated by thatcompany to. The continuation of any legal proceeding against thetransferee company by the transferor company. The dissolution,without winding up, of any transferor company. The provisions forany dissenting persons. Who are opposing such scheme or anyother matter, which the court deems fit



• Section 394-A & 395:Section 394-A & 395 Section 394-A - Notice to given to

the central government for applications given undersections 391 and 394. Section - 395 Power and dutiesto acquire shares of shareholders dissenting fromscheme or contract approved by majority.

• Section 396 & 396-A:Section 396 & 396-A Section 396 power of centralgovernment to provide for amalgamation of companies

in national interest. Section 396-A - papers and book ofamalgamated company shall not be disposed withoutprior permission of central government.



• Conclusion:Conclusion Mergers and Acquisitions playsimportant role in corporate restructuring anddevelopment of country. In India it is alsoplaying same role. But some times it representmarket and financial power. And after

liberalization it increased due to liberalgovernment policies

m&a Regulations

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