Mergers and Acquisitions in Indian Law

Shatakshi Agarwal, a 2nd-year student from Vivekananda Institute of Professional Studies has written this Article on “Mergers and Acquisitions in Indian Law”.

Introduction

Mergers and acquisitions are manifestations of an inorganic growth process. While mergers can be defined to mean the unification of two players into a single entity, acquisitions are situations where one player buys out the other to combine the bought entity with itself. It may be in the form of a purchase, where one business buys another, or a management buyout, where the management buys the business from its owners.

Mergers and acquisitions are used as instruments of momentous growth and are increasingly getting accepted by Indian businesses as a critical tool of business strategy. They are widely used in a wide array of fields such as information technology, telecommunications, and business process outsourcing as well as in traditional business to gain strength, expand the customer base, cut competition, or enter into a new market or product segment. Mergers and acquisitions may be undertaken to access the market through an established brand, to get a market share, to eliminate competition, to reduce tax liabilities or to acquire competence, or to set off accumulated losses of one entity against the profits of another entity.^[1]

Examples of Merger in India-

• Indus Towers and Bharti Infratel merged in 2020
• National Institute of Miners’ Health (NIMH) and ICMR – National Institute of Occupational Health (NIOH) merged in 2019
• Bank of Baroda and Vijaya Bank and Dena Bank merged in 2019

Examples of Acquisition in India-

• Infosys acquired Kaleidoscope Innovation in 2020
• Reliance Retail acquired Future Group’s Retail Business in 2020
• Zomato acquired Uber Eats in 2020 

Laws governing Merger and Acquisitions in India

The Companies Act, 2013

The 2013 Companies Act’s Chapter XV, Sections 230–240, governs mergers and acquisitions. These are a unique category of compromise and arrangements. The Companies (Compromises, Arrangements, and Amalgamations) Rules, 2016, were released by the Ministry of Corporate Affairs, Government of India, by notification on December 14, 2016.^[2]

• Section 230 of the companies act 2013 talks about Making Compromises and Arrangements with Creditors and Members
• Section 231 talks about the Power of the Tribunal to enforce compromise or arrangement under Section 230
• Section 232 of the companies act 2013 deals with the Broad Provisions Governing Mergers and Amalgamations of Companies
• Section 233 of the companies act 2013 talks about the companies that can adopt the Fast Track Merger route.
• Section 234 of the companies act 2013 talks about a Merger or amalgamation of a company with a foreign company
• Section 235 talks about the Power to acquire shares of shareholders dissenting from the scheme approved by the majority
• Section 236 deals with the Purchase of minority shares
• Section 237 talks about the Power of the Central Government to provide for Amalgamation in the public interest
• Section 238 deals with the Registration of offer of schemes involving the transfer of shares
• Section 239 deals with the Preservation of books and papers of the Amalgamated company
• Section 240 talks about the Liability of officers in respect of offenses committed before the merger or amalgamation.

The Competition Act, 2002

The Competition Act regulates combinations such as mergers and acquisitions of companies. It prohibits anti-competitive agreements which have or likely to have an adverse effect on competition in India. While Section 3 of the Act covers anti-competitive agreements, Section 4 deals with the abuse of a dominant position. Other sections including Sections 5, 6, 20, 29, 30, and 31 deal with various types of combinations.

• Section 3 of the Competition Act prohibits agreeing to any kind – of composition, supply, distribution, storage, possession, or administration of goods or prerequisite assistance.
• Section 4 of the Competition Act contains a condition regarding the exploitation of a commanding position by an industry.
• Section 5 of the Competition Act deals with the Combination which causes or is likely to cause an appreciable adverse effect on competition (AAEC) within the relevant market in India shall be void.
• Section 6 Of the Competition Act presents the prerequisites for managing the sequence. Following this section, the Competition Act sets limits on penetrating any arrangement that creates a significant adverse effect on competition within a significant business in India.

The Indian Income Tax Act, 1961

Section 2(1B) of this Act has defined Amalgamation as a merger of one or more companies into another company or two or more companies merged to form a new company. This Act also has the concept of capital gain. Which means gains or profits that one receives after the sale of capital assets.  Any gain from the sale of assets is income and hence one needs to pay tax for that income in the year in which one has purchased it.

Section 47 exempts the following transactions from capital gain tax in an amalgamation-

• If the amalgamated company is an Indian company. Any assets transferred by amalgamating company towards amalgamating company shall be exempted.
• Where the transfer of shares is made by the shareholder has been made by an amalgamated company which is an Indian Company along with that allotment of shares is also made by the amalgamated company.
• If two foreign companies are amalgamated no tax is levied. When an Indian company and a foreign company are amalgamated, the resultant company is in India. This will result in a capital gain for shareholders.

Foreign Exchange Management Act, 1999

The concept of Cross border mergers is dealt with by FEMA. It means any merger, amalgamation, or arrangement between Indian and Foreign companies. FEMA regulations provide that any transaction taken concerning cross-border transactions will take place through RBI, as per the 25th rule of CAA Rules, 2016.

Section 234 of the act talks about a cross-border merger. Cross-border mergers can be divided into two types:

• Inbound Merger- means where a foreign company merges with an Indian company. Accordingly, all the assets and liabilities are transferred to the Indian Company.
• Outbound Merger- means where an Indian company is merging with a foreign company and all the assets and liabilities are transferred to a foreign company. These mergers comply with both FEMA and Foreign rules.

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011

This regulation is important for the merger, acquisition, amalgamation, compromise, and arrangement of the listed companies. It prescribes that an acquirer acquiring substantial offers or casting a ballot right i.e., 25% or more, should make an open proposal to every one of the public shareholders of the objective organization. Independent of the offers or casting a ballot right gained, the acquirer likewise should make an open proposal after obtaining control of the objective organization. It, in this way, becomes vital to considerably comprehend the significance of the word ‘control’ and its suggestions.

Be that as it may, because of the clashing meanings of ‘control’ by Indian enactment and courts just as the uncertain understandings of the word, there is a shortfall of a thorough meaning of the word. Perceiving this vagueness and its likely effect on financial backers in the public space in India. The Protections Trade Leading body of India (Hereinafter “SEBI”) looked to characterize ‘control’ and start a public discussion process. This paper endeavors to clarify the idea of ‘control’.

Insolvency And Bankruptcy Code, 2016

Before IBC we had the Sick Industrial Companies Act, 1985 i.e., SICA legislation.  This act was enacted to detect the sick units and revive them through mergers and acquisitions, if possible, if not then pass the order for winding up of sick companies. The main reason why this act came into being was to release the investment which has been locked up so that resources can be used differently and efficiently. The Act also had two quasi-judicial bodies which have now been repealed.  After that in 2003 SICA legislation was repelled, and newly amended legislation was enacted. It had more stringent provisions and covered all loopholes which were there in the 1885 act.

In 2016 SICA was fully repealed as it overlapped with provisions of the companies act. With the enactment of IBC, companies act sections 253-269 were omitted. Now Section 255 and Schedule XI deal with it. It is administered by NCLT and helps in auctioning the assets whose value has been depreciated. To start the process under the corporate insolvency resolution process one needs to apply to NCLT. Many amendments have been made timely. Recently in 2020 and 2021, it was made.^[3]

Mandatory permission by the courts

Any scheme for mergers has to be sanctioned by the courts of the country. The company act provides that the high court of the respective states where the transferor and the transferee companies have their respective registered offices have the necessary jurisdiction to direct the winding up or regulate the merger of the companies registered in or outside India.

The high courts can also supervise any arrangements or modifications in the arrangements after having sanctioned the scheme of mergers as per section 392 of the Company Act. Thereafter the courts would issue the necessary sanctions for the scheme of mergers after dealing with the application for the merger if they are convinced that the impending merger is “fair and reasonable”.

The courts also have a certain limit to their powers to exercise their jurisdiction which has essentially evolved from their rulings. For example, the courts will not allow the merger to come through the intervention of the courts, if the same can be effected through some other provisions of the Companies Act. Furthermore, the courts cannot allow for the merger to proceed if there was something that the parties themselves could not agree to; if the merger, if allowed, would be in contravention of certain conditions laid down by the law, such a merger also cannot be permitted. The courts have no special jurisdiction concerning the issuance of writs to entertain an appeal over a matter that is otherwise “final, conclusive, and binding” as per section 391 of the Company Act.

The Indian Stamp Act, 1899

Schedule 7 of this act has divided the powers among central and state governments. Stamp acts vary from state to State. As per the Bombay Stamp Act, conveyance includes an order in respect of amalgamation; by which property is transferred to or vested in any other person. As per this Act, the rate of stamp duty is 10 percent.^[4]

Additional regulations

• The Indian Contract Act, of 1872 governs contracts and the rights that parties can agree to contractually under Indian laws.
• The Specific Relief Act, of 1963 prescribes remedies available to private parties for breach of contract.
• The Foreign Exchange Management ( cross border merger) regulations, 2018 govern mergers between Indian Companies and Foreign companies.^[5]

Conclusion

In conclusion, mergers and acquisitions are strategic management tools that are used by companies, especially those operating in highly competitive industries, to consolidate their resources and face the market with a huge competitive advantage over the other competing firms. The merger in the automotive industry is an example of such an arrangement. It benefits merging companies by reducing their costs of operations and increasing their market share.

Also Read: Independent Directors under the Companies Act, 2013. Click Here!

^[1] Ministry of Corporate Affairs, https://www.mca.gov.in/MinistryV2/mergers+and+acquisitions.html (last visited April 1, 2023)

^[2] LAWYERSCLUBINDIA, https://www.lawyersclubindia.com (last visited April 1, 2023)

^[3] iPleaders, Laws regulating mergers and acquisitions in India – iPleaders ( last visited April 1, 2023)

^[4]Legalserviceindia,https://www.legalserviceindia.com/article/l463-Laws-Regulating-Mergers-&-Acquisition-In-India.html (last visited April 1, 2023) 

^[5] ICLG.com, https://iclg.com/practice-areas/mergers-and-acquisitions-laws-and-regulations/india ( last visited April 1, 2023)