Mergers & Acquisitions

Assignment 1

Regulatory Framework of M&A Deals in India

Submitted by:
Mayur Kumar
Roll No:28KA
 Introduction:
A growing economy and continuous efforts by Indian government to remove regulatory
hurdles and to attract foreign investments continue to drive deal momentum in India. The
value of corporate deals in India has seen an extraordinary growth in 2018 compared to 2017
with value of announced M&A deals increasing to more than $100 billion.
Recently passed amendments to the insolvency and bankruptcy codes by Indian parliament
will provide further momentum to M&A deals in sectors such as real estate, infrastructure,
power and cement.
It’s been a record year for M&A and PE deals in India with highest ever half yearly deal tally of
USD75 billion across 638 transactions which almost double the value witnessed in 1st half of 2018.

TOP M&A TRANSACTIONS H1 2018:

Acquirer Target Sector Deal Value (USD Deal type

Million)
Flipkart Online Services Walmart Inc. E commerce 16,00 Majority
Pvt Ltd. 0 Stake
Tata Steel Ltd. Bhushan Steel Ltd. Manufacturin 5,515 Controlli
g ng Stake
IDFC Bank Ltd Capital First Ltd Banking & 1460 Merger
financialService
s
Oil and Natural Gas Hindustan Petroleum Energy 5,780 Controlli
Corporation Ltd. Corporation Ltd. ng stake

Bharti Infratel Ltd Indus Tower Ltd Telecom 14,60 Merger

0

Source: Grant Thorton India LLP, Grant Thorton Deattracker, 2018

 Pure Domestic Deals

SEBI REGULATION IN RELATION TO MERGERS & ACQUISITION

1. Takeover and listing agreement exemption clauses 40A and 40B of listing agreement.
i) Clause 40A of Listing Agreement: It deals with substantial acquisition of shares and requires the
offeror and the offeree to inform the stock exchange when such acquisition results in an increase in
the shareholding of the acquirer to more than 10%

ii) Clause 40B of Listing Agreement: It deals with takeover efforts. It refers to change in
management. Where there is no change in management, clause 40B of listing agreement will not
be applied. However sub clause 13 of amendment of clause 40B also provides an exemption to the
scheme approved by BIFR. There is no provision under clause 40B for exemption of non BIFR
companies.

2. SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 1997

On the basis of recommendations of the Committee, the SEB1 announced on
Febuary20,1997 the revised takeover codes as per Securities and Exchange Board
of India (Substantial Acquisitions of shares and Takeovers) Regulations, 1997.
The objective of these regulations is to provide an orderly framework within
which substantial acquisitions and takeovers can take place. Salient features of
this new takeover codes (Regulations 1997) may be enumerated as follows:
(i) Any person, who holds more than 5% shares or voting rights in any
company, shall within two months of notification of these Regulation
 disclose his aggregate shareholding in that company, to the company which
in turn, shall disclose to all the stock exchanges on which the shares of the
company are listed, the aggregate number of shares held b y each such person.

(ii) Any acquirer, who acquires shares or voting rights which (taken together with
shares or voting rights, if any, held by him) would entitle him to more than
5% shares or voting rights in a company- (a) in pursuance of a public issue,
or (b) by one or more transactions, or (c) in any other manner not covered
by (a) and (b) above, shall disclose the aggregate of his shareholding or
voting rights in that company, to the company within four working days of the
acquisition of shares or voting rights, as the case may be.
(iii) Every person, who holds more than 10% shares or voting rights in any company,
shall, within 21days from the end of the financial year, make yearly
disclosures to the company, in respect of his holdings as on 31st March each
year.
(iv) No acquirer shall agree to acquire, of acquire shares or voting rights which
(taken together with shares or voting rights, if any, held by him or by persons
acting in concert with him), entitle such acquirer to exercise 10% or more of the
voting rights in a company, unless such acquirer makes a public announcement
to acquire shares of such company in accordance with the Regulations.
(v) No acquirer holding, not less than 10% but not more than 25% of the shares or
voting rights in a company, shall acquire, additional shares or voting rights
entitling him to exercise more than 2% of the voting rights, in any period of 12
months, unless such acquirer makes a public announcement to acquire shares in
accordance with the Regulations.
(vi) The minimum offer price shall be the highest of- (a) the negotiated price under
the agreement; (b) average price paid by the acquirer for acquisitions including
by way of allotment in a public or rights issue, if any, during the twelve month
period prior to the date of public announcement; (c) the price paid by the acquirer
under a preferential allotment made to him, at any time during the twelve month
period up to the date of closure of the offer: (d) the average of the weekly high
and low of the closing prices of the shares of the target company during the 26
weeks preceding the date of public announcement.
(vii) The public offer shall be made to the shareholders of the target company to
acquire from them an aggregate minimum of 20% of the voting capital of the
company provided that acquisition of shares from each of the shareholders shall
not be less than the minimum marketable lot or the entire holding if it is less than
the marketable lot.
(viii) Within 14 days of the public announcement of the offer, the acquire must send a
copy of the draft letter to the target company at its registered office address, for
being placed before the Board of Directors and to all the stock exchanges where
the shares of the company are listed.
(ix) Any person other than the acquirer who had made the first public announcement,
who is desirous of making any offer, shall, within 21 days of the public
 announcement of the first offer, make a public announcement of his offer for
acquisition of some or all of the shares of the same target company. Such offer
shall be deemed to be a competitive bid. No public announcement for an offer or
competitive bid shall be made during the offer period except during 21days
period from the public announcement of the first offer.
(x) Upon the public announcement of a competitive bid or bids, the acquirer(s) who
had made the public announcement (s) of the earlier offer(s), shall have the
option to make an announcement revising the offer or withdrawing the offer with
the approval of the SEBI.

B. PROVISION OF THE INDIAN COMPANIES ACT 1956 IN RELATION TO MERGER

AND ACQUISITION
Sec 390, Sec 392, Sec 393, Sec 394, Sec 395 and Sec 396 of the Indian Companies Act 1956
govern the merger in India. The provisions of the above stated sections are outlined below..
Sec 390- This section provides that the expression “arrangement” includes a reorganization of the
share capital of a company by the consolidation of shares of different classes or by both these
methods.
Sec 391- This section deals with the meeting of creditors/members and National Company Law
Tribunal (NCLTs) sanction to scheme.
If majority of the number representing at least three-fourths in value of creditors or members of
that class present and voting agree to compromise or arrangement , the NCLT may sanction the
scheme. NCLT will make order of sanctioning the scheme only if it is satisfied that company or
any other person who has made application has disclosed all material facts relating to the
company.
Sec 392- This section contains the powers of NCLT to enforce compromise and arrangement.
Sec 393- This section contains the rules regarding notice and conduct of meeting.
Sec 396- This section contains the power to Central Government to order amalgamation.

C. REGULATION OF COMBINATIONS (SEC 6, THE COMPETITION ACT,

2002)

1. No person or enterprise shall enter into a combination which causes or is likely to

cause an appreciable adverse effect on competition within the relevant market in
India and such a combination shall be void.

2. Subject to the provisions contained in sub-section(1), any person or enterprise

who or which proposes to enter into a combination, shall at his or it’s option give
notice to the commission, in the form as may be specified, and the fee which may
be determined by regulations, disclosing the details of the proposed combinations,
within thirty days of –

D. PROVISION OF THE INCOME TAX ACT, IN RELATION TO MERGER &

ACQUISITIONS

Income Tax Act, 1961 is vital among all tax laws which affect the merger of firms
from the point view of tax savings/liabilities. However, the benefits under this act
are available only if the following condition mentioned in Section 2 (1B) of the Act
are fulfilled:

a) All the amalgamating companies should be companies within the meaning of the
section 2 (17) of the Income Tax Act. 1961.

b) All the properties of the amalgamating company (i.e.. the target firm) should be
transferred to the amalgamated company (i.e., the acquiring firm).

c) All the liabilities of the amalgamating company should become the liabilities of
the amalgamated company, and

d) The shareholders of not less than 90% of the share of the amalgamating company
should become the shareholders of amalgamated company.

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:

a. Depreciation U/S 32: The amalgamated company continues to claim

depreciation on the basis of written down value of fixed assets t ransferred 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.

b. 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.

c. 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.

d. 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 fake 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:

I. The amalgamating company is an Indian company.

II. The amalgamating company should not be financially viable.
III. The amalgamation should be in public interest.
IV. The amalgamation should facilitate the revival of the business of the
amalgamating company.
V. The scheme of amalgamation is approved by a specified authority, and
VI. The amalgamated company should continue to carry on the business of the
amalgamating company without any modification.
e. Amalgamation Expenses: In case 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.

GOVERNMENT REGULATORS AND AGENCIES:

Following government regulators and agencies play key roles in the process of merger and
acquisition in India:
1. Registrar of Companies and Regional Director under Ministry of Corporate Affairs
2. National Company Law Tribunal (NCLT)
3. Competition Commission of India (CCI)
4. Securities and Exchange Board of India (SEBI)
5. Reserve Bank of India (RBI)
6. The Income Tax Department (ITD)

COMPETITION COMMISSION OF INDIA:

A transaction that causes appreciable adverse effect on competition is void under the
Competition Act 2002 (“Act”). Any acquirer entering into a transaction above a specified
threshold is required to give a notice to the Competition Commission of India (‘CCI’)
disclosing the details of such transaction. If the CCI is of the view that the transaction
might cause an appreciable adverse effect on competition, it will direct that the transaction
not to take effect. Where the CCI feels that certain modifications in the transaction might
prevent an appreciable adverse effect on the competition, it shall direct the acquirer to
make such modifications. The acquirer may accept the modification or make amendments
which will have to be approved by the CCI. Further, the CCI has power to make inquiries in
case of certain agreements, abuse of dominant position or any combination thereof.
Additionally, the CCI has the power to impose penalties in case of any offence under the
Act.
Inbound Deals

Inbound Merger:
A cross-border merger in which the resultant company is an Indian company is called an
inbound merger. A resultant company means a company, either Indian or Foreign which
takes over the assets and liabilities of the companies involved in the cross-border merger.

REGULATORY FRAMEWORK:

In India, Cross border is majorly regulated under (i) the Companies Act 2013; (ii) SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations 2011; (iii) Competition Act
2002;
(iv) Insolvency and Bankruptcy Code 2016; (v) Income Tax Act 1961; (vi) The
Department of Industrial Policy and Promotion (DIPP); (vii) Transfer of Property Act
1882; (viii) Indian Stamp Act 1899 (ix) Foreign Exchange Management Act 1999 (FEMA)
as well as other allied laws that may be applicable depending on that particular M&A deal.

Under FEMA, from a M&A perspective, the two most crucial regulations are Foreign
Exchange Management (Transfer or Issue of Security by a Person Resident Outside India)
Regulations, 2000 (the FDI Regulations) and Foreign Exchange Management (Transfer or
Issue of any Foreign Security) Regulations, 2004 (the ODI Regulations). In addition to
this, the Reserve Bank of India (the RBI) has notified Foreign Exchange Management
(Cross-Border Merger) Regulations, 2018 (the Cross-Border Regulation) under the
Foreign Exchange Management Act, 1999 to include enabling provisions for mergers,
demergers, amalgamations and arrangements between Indian companies and foreign
companies covering Inbound and Outbound Investments. This is an extremely significant
move as this will cause a massive surge in FDI with the enactment of new laws and
tweaking of existing policies.

Foreign Exchange Management Act, 1999

 The resultant company may issue or transfer any security and/or a foreign
security, as the case may be, to a person resident outside India in accordance
with the pricing guidelines, entry routes, sectorial caps, attendant conditions
and reporting requirements for foreign investment as laid down in Foreign
Exchange Management (Transfer or Issue of Security by a Person Resident
outside India) Regulations, 2017.

Provided that,

a) where the foreign company is a joint venture (JV)/ wholly owned

subsidiary (WOS) of the Indian company, it shall comply with the conditions
 prescribed for transfer of shares of such JV/ WOS by the Indian party as
laid down in Foreign Exchange Management (Transfer or issue of any foreign
security) Regulations, 2004;
b) where the inbound merger of the JV/WOS results into acquisition of
the Step-down subsidiary of JV/ WOS of the Indian party by the resultant
company, then such acquisition should be in compliance with Regulation 6
and 7 of Foreign Exchange Management (Transfer or issue of any foreign
security) Regulations, 2004.
 An office outside India of the foreign company, pursuant to the sanction of
the Scheme of cross border merger shall be deemed to be the branch/office
outside India of the resultant company in accordance with the Foreign
Exchange Management (Foreign Currency Account by a person resident in
India) Regulations, 2015. Accordingly, the resultant company may undertake
any transaction as permitted to a branch/office under the aforesaid
Regulations.
 The guarantees or outstanding borrowings of the foreign company from
overseas sources which become the borrowing of the resultant company or
any borrowing from overseas sources entering into the books of resultant
company shall conform, within a period of two years, to the External
Commercial Borrowing norms or Trade Credit norms or other foreign
borrowing norms, as laid down under Foreign Exchange Management
(Borrowing or Lending in Foreign Exchange) Regulations, 2000 or Foreign
Exchange Management (Borrowing or Lending in Rupees) Regulations, 2000 or
Foreign Exchange Management (Guarantee) Regulations, 2000, as applicable.
 Provided that no remittance for repayment of such liability is made from India
within such period of two years;
 Provided further that the conditions with respect to end use shall not apply.
 The resultant company may acquire and hold any asset outside India which an
Indian company is permitted to acquire under the provisions of the Act, rules
or regulations framed thereunder. Such assets can be transferred in any
manner for undertaking a transaction permissible under the Act or rules or
regulations framed thereunder.
 Where the asset or security outside India is not permitted to be acquired or
held by the resultant company under the Act, rules or regulations, the
resultant company shall sell such asset or security within a period of two years
from the date of sanction of the Scheme by NCLT and the sale proceeds shall
be repatriated to India immediately through banking channels. Where any
liability outside India is not permitted to be held by the resultant company,
the same may be extinguished from the sale proceeds of such overseas assets
within the period of two years.
 The resultant company may open a bank account in foreign currency in the
overseas jurisdiction for the purpose of putting through transactions
incidental to the cross-border merger for a maximum period of two years from
the date of sanction of the Scheme by NCLT.

FDI Policy

 For establishment of branch office, liaison office or project office or any other
place of business in India if the principal business of the applicant is Defence,
 Telecom, Private Security or Information and Broadcasting, approval of
Reserve Bank of India is not required in cases where Government approval or
license/permission by the concerned Ministry/Regulator has already been
granted.
 Downstream investments by eligible Indian entities/LLPs will be subject to
the following conditions:

a) Such an entity is to notify RBI and Foreign Investment Facilitation

Portal of its downstream investment in the form available at
www.fifp.gov.in within 30 days of such investment, even if capital
instruments have not been allotted along with the modality of investment
in new/existing ventures (with/without expansion programme);
b) Downstream investment by way of induction of foreign investment in
an existing Indian Company to be duly supported by a resolution of the
Board of Directors as also a share-holders agreement, if any;
c) Issue/transfer/pricing/valuation of capital shall be in accordance with
applicable SEBI/RBI guidelines;
d) For the purpose of downstream investment, the eligible Indian entities
making the downstream investments would have to bring in requisite funds
from abroad and not leverage funds from the domestic market. This would,
however, not preclude downstream companies/LLPs, with operations, from
raising debt in the domestic market.
Companies Act, 2013

 The provisions of this Chapter unless otherwise provided under any other law
for the time being in force, shall apply mutatis mutandis to schemes of
mergers and amalgamations between companies registered under this Act and
companies incorporated in the jurisdictions of such countries as may be
notified from time to time by the Central Government:

Provided that the Central Government may make rules, in consultation with the
Reserve Bank of India, in connection with mergers and amalgamations
provided under this section.

 Subject to the provisions of any other law for the time being in force, a foreign
company, may with the prior approval of the Reserve Bank of India, merge
into a company registered under this Act or vice versa and the terms and
conditions of the scheme of merger may provide, among other things, for the
payment of consideration to the shareholders of the merging company in cash,
or in Depository Receipts, or partly in cash and partly in Depository Receipts,
as the case may be, as per the scheme to be drawn up for the purpose.

Income Tax Act, 1961

 As per Section 47 (vi) of the Income Tax Act, in a scheme of amalgamation,
any transfer of capital assets by a transferor company shall be exempt where
the resultant company is an Indian company.

 Section 72A of the IT Act provides for carry forward and set off of accumulated
loss in certain cases of amalgamation for companies which fall within the
ambit of 'Industrial undertaking'. Currently, there is no mechanism under the
IT Act to subsume the foreign tax losses (computed outside the purview of
Income tax laws) post-merger with the resulting Indian company. In such
circumstances, it may not be possible for the Indian company to prima facie
migrate such accumulated business losses into the Holding Companies and
carry forward the same in the tax computation.

 The ITA defines an Amalgamation as the merger of one or more companies

with another company or the merger of two or more companies to form a
new company. For the purpose of the ITA, the merging company is referred
to as the “amalgamating company” and the company into which it merges or
which is formed as the result of merger is referred to as the “amalgamated
company”.

 An Amalgamation must satisfy the following criteria: 1. All the properties

and liabilities of the amalgamating company must become the properties
and liabilities of the amalgamated company by virtue of the Amalgamation;
and 2. Shareholders holding at least 3/4th in value of the shares in the
amalgamating company (not including shares held by a nominee or a
subsidiary of the amalgamated company) become shareholders of the
amalgamated company by virtue of the Amalgamation.

 Where a merger qualifies as an Amalgamation, subject to fulfilling certain

additional criteria, the Amalgamation may be regarded as tax neutral and
exempt from capital gains tax in the hands of the amalgamating company
and also in the hands of the shareholders of the amalgamating company.

 In the context of a merger/Amalgamation, Section 47 of the ITA specifically

exempts the following transfers from liability to capital gains tax.

1. Transfer of capital assets by an amalgamating company to the

amalgamated company if the amalgamated company is an Indian company.
2. Transfer of shares in an Indian company by an amalgamating foreign
company to the amalgamated foreign company if both the criteria below are
satisfied:
At least 25% of the shareholders of the amalgamating company continue to
remain shareholders of the amalgamated company. Hence, shareholders of
amalgamating company holding 3/4th in value of shares who become
shareholders of the amalgamated company must constitute at least 25% of
the total number of shareholders of the amalgamated company. § Such
transfer does not attract capital gains tax in the amalgamating company’s
country of incorporation.
3. Transfer of shares in a foreign company in an amalgamation between two
foreign companies, where such transfer results in an indirect transfer of
Indian shares. Transfer of shares by the shareholders of the amalgamating
company in consideration for allotment of shares in amalgamated company
is not regarded as transfer for capital gains purpose. This exemption is
available if the amalgamated company is an Indian company.