M &A – interface of Companies Act and SEBI Act
Symbiosis Law School, NOIDA
The objective is to study whether there is any interface between Companies Act, 1956 & SEBI Act, 1992 in Mergers & Acquisitions.
Yes, there is an interface between Companies Act, 1956 & SEBI Act, 1992 in terms of Mergers and Acquisitions.
Research will be based on secondry data provided in books journals and Interpretation of Companies Act, 1956 & SEBI Act, 1992.
Following the economic reforms in India in the post – 1991 period, there are trends among promoters and established corporate groups towards consolidation of market share and diversification into new areas through acquisition & takeover of companies but in a more pronounced manner through mergers & amalgamations. Although the economic considerations in terms of motive and effect of these are similar, the legal procedures involved are different. The merger and amalgamation of corporate constitutes a subject matter of the Companies Act, the courts and law and there are well laid down procedures for valuation of shares and rights of investors. The terms mergers and amalgamations on the one hand and acquisitions and takeovers on the other are treated here synonymously or interchangeably. Section one of the chapter covers the framework of mergers & amalgamations including financial evaluation. The regulatory framework governing acquisition & takeovers is described in Section two. The main points are summarized in Section three. The terms merger and amalgamation are used interchangeably as a form of business organization to seek external growth of business. A merger is a combination of two or more firms in which only one firm would survive and the other would cease to exist, its assets / liabilities being taken over by the surviving firm. An amalgamation is an arrangement in which the assets / liabilities being taken over by the surviving firm. An amalgamation is an arrangement in which the assets / liabilities of two or more firms become vested in another firm. As a legal process, it involves joining of two or more firms to form a new entity or absorption of one/ more firms with another. The outcome of this arrangement is that the amalgamating firm is dissolved / wound-up and loses its identifying and its shareholders become shareholders of the amalgamated firm.
Although the merger / amalgamation of firms in India is governed by the provisions of the companies Act, 1956, it does not define these terms. The Income Tax Act, 1961, stipulates two pre-requisites for any amalgamation through which the amalgamated company seeks to avail the benefits of set-off / carry forward of losses and unabsorbed depreciation of the amalgamating company against its future profits under Section 72-A, namely:
- all the property and liabilities of the amalgamated company / companies immediately before amalgamation should vest with / become the liabilities of the amalgamated company and
- the shareholders other than the amalgamated company / its subsidiary(ies) holding at least 90 percent value of shares / voting power in the amalgamating company should become shareholders of the amalgamated company by virtue of amalgamation. The scheme of merger, income tax implications of amalgamation and financial evaluation are discussed in this section.
The basis of merger / amalgamation in the scheme should be the reports of the values of assets of both the merger partner companies. The scheme should be prepared on the basis of the value’s report, reports of chartered accountants engaged for financial analysis and fixation of exchange ratio, report of auditors and audited accounts of both the companies prepared up to the appointed date. It should be ensured that the scheme is just and equitable to the shareholders, employees of each of the amalgamating company and to the public.
- Companies Act, 1956
Sections 390 to 394 of the Companies Act govern a merger of two or more companies under Indian law. The Merger Provisions are in fact worded so widely, that they would provide for and regulate all kinds of corporate restructuring that a company may possibly undertake; such as mergers, amalgamations, demergers, spin-off / hive off, and every other compromise, settlement, agreement or arrangement between a company and its members and / or its creditors.
Scheme of Mergers and Acquisitions
Procedure for merger and amalgamation is different from takeover. Mergers and amalgamations are regulated under the provisions of the Companies Act, 1956 whereas takeovers are regulated under the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations.
Although chapter V of the Companies Act, 1956 comprising sections 389 to 396-A deals with the issue and related aspects covering arbitration, compromises, arrangements and reconstructions but at different times and under different circumstances in each case of merger and amalgamation application of other provisions of the Companies Act, 1956 and ruled made there-under may necessarily be attracted. So, the procedure does not remain simple or literally con- fined to chapter V.
A scheme of compromise or arrangement must be approved by a resolution passed by not less than three-fourths in value of the total creditors (or class of creditors) or members (or class of members), as the case may be, present and voting either in person or through proxies. There is no rigid formula for determining a class of creditors or members. It is the discretionary power of the court to determine these classes. Essentially, ‘class’ means persons whose rights are so similar that they can be combined together with a view to achieve a common interest. Generally, secured creditors and unsecured creditors could form distinct classes of creditors and members can be categorized into preference shareholders and common equity shareholders.
Subsequent to the scheme being approved by the members and/or creditors, a petition for sanctioning of the scheme is filed with the appropriate court within whose jurisdiction the registered office of the transferor and the transferee company is situated. The approved arrangement is, unless prejudicial to public interest or interest of the creditors, sanctioned by the court and a certified copy of the order is required to be filed with the Registrar of Companies.
- Procedure under the Merger Provisions
Since a merger essentially involves an arrangement between the merging companies and their respective shareholders, each of the companies proposing to merge with the other must make an application to the Company Court having jurisdiction over such company for calling meetings of its respective shareholders and/or creditors. The Court may then order a meeting of the creditors/shareholders of the company. If the majority in number representing 3/4th in value of the creditors/shareholders present and voting at such meeting agrees to the merger, then the merger, if sanctioned by the Court, is binding on all creditors/ shareholders of the company. The Court will not approve a merger or any other corporate restructuring, unless it is satisfied that the company has disclosed all material facts. The order of the Court approving a merger does not take effect until the company with the Registrar of Companies files a certified copy of the same.
The Merger Provisions constitute a comprehensive code in themselves, and under these provisions Courts have full power to sanction any alterations in the corporate structure of a company that may be necessary to effect the corporate restructuring that is proposed. For example, in ordinary circumstances a company must seek the approval of the Court for effecting a reduction of its share capital. However, if a reduction of share capital forms part of the corporate restructuring proposed by the company under the Merger Provisions, then the Court has the power to approve and sanction such reduction in share capital and separate proceedings for reduction of share capital would not be necessary.
- Applicability of Merger Provisions to Foreign Companies.
Section 394 vests the Court with certain powers to facilitate the reconstruction or amalgamation of companies, i.e. in cases where an application is made for sanctioning an arrangement that is:
- For the reconstruction of any company or companies or the amalgamation of any two or more companies; and
- Under the scheme the whole or part of the undertaking, property or liabilities of any company concerned in the scheme (referred to as the ‘transferor company’) is to be transferred to another company (referred to as the transferee company’). Section 394 (4) (b) makes it clear that:
As per the ICDR Regulations, if the acquisition of an Indian listed company involves the issue of new equity shares or securities convertible into equity shares by the target to the acquirer, the provisions of Chapter VII contained in ICDR Regulations will be applicable in addition to the provisions of the Companies Act mentioned above. We have highlighted below some of the relevant provisions of the Preferential Allotment Regulations.
Approvals for the Scheme
The scheme of merger / amalgamation is governed by the provisions of Section 391-394 of the Companies Act. The legal process requires approval to the schemes as detailed below.
Approvals from Shareholders
In terms of Section 391, shareholders of both the amalgamating and the amalgamated companies should hold their respective meetings under the directions of the respective high courts and consider the scheme of amalgamation. A separate meeting of both preference and equity shareholders should be convened for this purpose. Further, in terms of Section 81(1A), the shareholders of the amalgamated company are required to pass a special resolution for issue of shares to the shareholders of the amalgamating company in terms of the scheme of amalgamation.
Approval from Creditors / Financial Institutions / Banks
Approvals are required from the creditors, banks and financial institutions to the scheme of amalgamation in terms of their respective agreements / arrangements with each of the amalgamating and the amalgamated companies as also under Section 391.
Approval from Respective High Court
Approvals of the respective high court(s) in terms of Section 391-394, confirming the scheme of amalgamation are required. The courts issue orders for dissolving the amalgamating company without winding-up on receipt of the reports from the official liquidator and the regional director, Company Law Board, that the affairs of the amalgamating company have not been conducted in a manner prejudicial to the interests of its members or to public interests.
Report of Chairman to the Court
The chairman of the meeting must within the time fixed by the court or where no time is fixed within 7 days of the date of the meeting, report the result of the meeting to the court. The report should state accurately the number of creditors or class of creditors or the numbers of members or class of members, as the case may be, who were present and who voted at the meeting either in person or by proxy, their individual values and the way the voted.
Top M&A in 2010
Tata Chemicals buys British salt
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Reliance Power and Reliance Natural Resources merger
Airtel’s acquisition of Zain in Africa
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Abbott’s acquisition of Piramal healthcare solutions
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- Ramakrishnan,Dr (2006),Corporate Restructuring Related to M & A, Amalgamations, Takeovers, etc.
Corporate restructuring related to M & A, Amalgamations, Takeovers etc. Mergers & Acquisitions are an integral part of market oriented free enterprise economic system. Merger or Amalgamation is a combination of two or more companies into one company. Acquisition does not involve combination of companies. The control can be acquired though a friendly manner or through forced manner. The former was called Acquisition while the later was called Take over. There are many reasons for mergers like: Economics of scale; Operating economies; Synergy; Growth; Diversification; Tax shields; Increase in value; Elimination of competition; Better Financial Planning; Economic necessity. 
- Gunasekaran Indhumathi & M (2011) Impact of Mergers on Stock Return in Indian Stock Exchange with Reference to BSE.
Mergers, acquisitions and corporate control have emerged as major forces in the modern financial and economic environment. The mergers and acquisitions in India have changed dramatically after the liberalization of Indian economy. To assess the impact of an “event” announcement of a tender offer, share repurchase, amalgamation, and so on, on the gains and stock value of the shareholders, it was necessary to measure the total holding period gains around the day of announcement of the transaction. Therefore, to determine the impact of a merger the share price, it was to be ascertained if there was a gain from mergers.
- Bruner F. Robert, Renneboog Luc(January 2006) Applied Mergers and Acquisitions
As in previous decades, merger activity clusters by industry during the 1990s. One particular kind of industry shock, deregulation, has become a dominant factor, accounting for nearly half of the merger activity since the late 1980s. In contrast to the 1980s, mergers in the 1990s was mostly stock swaps, and hostile takeovers virtually disappear.
- Jensen Michael(1987) The Free Cash Flow Theory of Takeovers: A Financial Perspective on Mergers and Acquisitions and the Economy
Through dozens of studies, economists have accumulated considerable evidence and knowledge on the effects of the takeover market. Takeovers benefit shareholders of target companies. Premiums in hostile offers historically exceed 30 percent on average, and in recent times have averaged about 50 percent. Acquiring-firm shareholders on average earn about 4 percent in hostile takeovers and roughly zero in mergers, although these returns seem to have declined from past levels. Takeovers do not waste credit or resources. Instead, they generate substantial gains: historically, 8 percent of the total value of both companies.
- Shojai Shahin(2009)Economists’ Hubris – The Case of Mergers and Acquisitions
This article has reviewed some key studies of mergers and acquisitions that are representative for this field of study and assess their practical value for making business or policy decisions. I conclude that while this literature does provide a reasonable aggregate of what the markets are doing they form no basis whatsoever upon which judgments are made about acquisitions or mergers and they certainly are of little or no value when it comes to the strategic issues that are essential to the management. Consequently, this academic literature adds very little to our knowledge of how each specific case is to be handled.
Mergers and acquisitions in India are governed by two laws, The Company Act, 1956 and The SEBI (Substantial Acquisition of Shares and Take-overs) Regulations, 1997 . The merger and amalgamation of corporate constitutes a subject matter of the Companies Act, the courts and law and there are well laid down procedures for valuation of shares and rights of investors. The terms mergers and amalgamations on the one hand and acquisitions and takeovers on the other are treated here synonymously or interchangeably. One size doesn’t fit all. Many companies find that the best way to get ahead is to expand ownership boundaries through mergers and acquisitions. Additional capital can fund growth organically or through acquisition. Meanwhile, investors benefit from the improved information flow from de-merged companies. M&A comes in all shapes and sizes, and investors need to consider the complex issues involved in M&A. The most beneficial form of equity structure involves a complete analysis of the costs and benefits associated with the deals. A business may grow over time as the utility of its products and services is recognized. It may also grow through an inorganic process, symbolized by an instantaneous expansion in work force, customers, infrastructure resources and thereby an overall increase in the revenues and profits of the entity. Mergers and acquisitions are manifestations of an inorganic growth process. While mergers can be defined to mean 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 form of a purchase, where one business buys another or a management buys out, where the management buys the business from its owners.
The Companies Act is the statute primarily governing all matters relating to companies incorporated in India. Among other things, the Companies Act specifically provides for the manner in which mergers, demergers, amalgamations and/or arrangements may take place pursuant to an Indian court sanctioned scheme whereas the Securities and Exchange Board of India (SEBI) provides for the guidelines to regulate mergers and acquisitions. The SEBI (Substantial Acquisition of Shares and Take-overs) Regulations, 1997 and its subsequent amendments aim at making the take-over process transparent, and also protect the interests of minority shareholders. They both are not different laws but are used together during the process of mergers and acquisitions. Hence the Hypothesis done by me was correct in the respect that
- ICAI-ARF GROUP, PROCEDURE FOR MERGER AND AMALGAMATION, May 2004
- India,Negotiated M&A Guide Corporate and M&A Law Committee, 2011