LAWS GOVERNING MERGERS & ACQUISITIONS
Under the Companies Act, 2013 a ‘merger’ is a combination of two or more corporate entities
into one; the effect being not just the accumulation of assets and liabilities of the distinct
entities, but organization of such entity into one business.
Merger is also defined as “amalgamation”. All assets, liabilities and the stock of one
company stand transferred to Transferee Company in consideration of payment in the form
➢ Shares in the transferee company,
➢ Debentures in the transferee company,
➢ Cash, or
➢ A combination of the above methods
The Income-tax Act, 1961 defines the analogous term ‘amalgamation’ as: the merger of one
or more companies with another company, or the merger of two or more companies to form
The ITA specifies certain other conditions that must be satisfied for an ‘amalgamation’ to
benefit from beneficial tax treatment.
4.2 Laws Regulating Merger and Acquisitions
Following are the laws which regulate the merger of the company:-
4.2.1.The Companies Act , 2013-
Section 230-234 govern mergers and schemes of arrangements between a company, its
shareholders and/or its creditors.
A merger essentially is an arrangement between the merging companies and their respective
shareholders, each of the companies proposing to merge with the other(s) must file an
application with NCLT having jurisdiction over such company for calling the meetings of its
respective shareholders and/or creditors.
NCLT may order a meeting of the creditors/shareholders of the company. If the majority in
number representing 3/4th of the creditors and shareholders’ present and voting at such
meeting agrees to the merger and if it is sanctioned by NCLT, it is binding on all
creditors/shareholders of the company.
If corporate restructuring proposed by the company includes reduction of share capital, then
NCLT has the power to approve and sanction such reduction in share capital.
In such a case, separate proceedings for reduction of share capital would not be necessary.
Merger Provisions and foreign companies-
Sections 230 - 234 of Companies Act, 2013 recognize and permit a merger/reconstruction of
a foreign company into an Indian company.
The Merger Provisions do not, however, permit an Indian company to merge into a foreign
company. The merger provisions under Section 234 stipulate that such mergers shall be
subject to regulations to be formulated by the Government of India.
According to the recent amendments made in the 2016, the prior approval of the RBI is also
required for a foreign company to merge with a company registered under the Companies
4.2.2. Securities and Exchange Board of India (Takeover Code), 2011-
The Securities and Exchange Board of India (SEBI) is the authority regulating entities that
are listed and to be listed on stock exchanges in India.
The Securities and Exchange Board of India (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011 (also called the “Takeover Code”) regulates the acquisition of
shares, voting rights and control in listed companies.
Acquisition of shares or voting rights of a listed company, entitling the acquirer to exercise
25% or more of the voting rights in the target company mandates the acquirer to make an
offer to the remaining shareholders of the target company.
The offer must be to further acquire at least 26% of the voting capital of the company.
However, this is subject to the exemptions provided under the Takeover Code. Exemptions
from open offer requirement under the Takeover Code inter alia include acquisition pursuant
to a scheme of arrangement that is approved by NCLT.
SEBI Takeover Regulations permit consolidation of shares or voting rights beyond 15% up to
55%, provided the acquirer does not acquire more than 5% of shares or voting rights of the
target company in any financial year.
However, acquisition of shares or voting rights beyond 26% may attract the notification
procedure under the Act. However, the notification to CCI will not be required for
consolidation of shares or voting rights permitted under the SEBI Takeover Regulations.
Similarly, the acquirer, who has already acquired control of a company, after adhering to all
requirements of SEBI Takeover Regulations and also the Act, should be exempted from the
Act for further acquisition of shares or voting rights in the same company.
4.2.3. Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009-
If the acquisition of an Indian company that is lifted involves the issue of new equity shares
or securities convertible into equity shares (“Specified Securities”) by the target to the
acquirer, Chapter VII (“Preferential Allotment Regulations”) contained in ICDR Regulations
will apply (in addition to company law requirements mentioned above).
Important provisions of the Preferential Allotment Regulations-
➢ Pricing of the Issue-
The Preferential Allotment Regulations set a floor price for an issuance. The floor price of
shares is linked to the average of the weekly high and low closing price of the stock of the
company over a 26 week period or a 2 week period preceding the relevant date
Securities issued to the acquirer are locked-in for a period of 1 year from the date of trading
The date of trading approval is the latest date when trading approval is granted by all stock
exchanges on which the securities of the company are listed.
Further, if the acquirer holds any equity shares of the target prior to such preferential
allotment, then such prior holding will be locked in for a period of 6 months from the date of
the trading approval.
If securities are allotted on a preferential basis to promoters/ promoter group1, they are locked
in for 3 years from the date of trading approval subject to a limit of 20% of the total capital of
The locked-in securities may be transferred amongst promoter/ promoter group or any person
in control of the company, subject to the transferee being subject to the remaining period of
the lock in.
➢ Exemption to NCLT approved merger-
The Preferential Allotment Regulations do not apply in the case of a preferential
allotment of shares pursuant to merger / amalgamation approved by NCLT under the
4.2.4. Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations,
1992, now replaced with SEBI (Prohibition of Insider Trading) Regulations, 2015
Under the SEBI Act, 1992, the penalty for insider trading is at least INR 10,00,000 and may
extend to INR 25,00,00,000 or three times the amount of profits made out of insider trading,
whichever is higher.
SEBI replaced the SEBI (Prohibition of Insider Trading) Regulations, 1992 with the SEBI
(Prohibition of Insider Trading) Regulation, 2015 (“PIT Regulations”).
1The terms ‘promoter’ and ‘promoter group’ are defined by the Regulations, Generally, promoters would be the
persons in over-all control of the company or who are named as promoters in the prospectus of the company.
The term promoter group has an even wider connotation and would include immediate relatives of the promoter.
If the promoter is a company, it would include, a subsidiary or holding company of that company, any company
in which the promoter holds 10% or more of the equity capital or which holds 10% or more of the equity capital
of the promoter, etc.
In respect of a listed company (or a company that is proposed to be listed), the PIT
➢ An insider from communicating Unpublished Price Sensitive Information (“UPSI”),
➢ Any person from procuring UPSI from an insider, and
➢ An insider from trading in securities when in possession of UPSI.
Therefore, the PIT prohibits the provision as well as the receipt of UPSI.
Under the PIT Regulations, an ‘insider’ is a person, who is,
➢ A connected person; or
➢ In possession of or having access to UPSI.
A connected person is a person who is directly or indirectly associated with the company,
➢ By reason of frequent communication with its officers; or
➢ By being in a contractual, fiduciary or employment relationship; or
➢ By holding any position including a professional or business relationship with the
company whether temporary or permanent that allows such person, directly or
indirectly, access to UPSI or is reasonably expected to allow such access.
Therefore, any person who has any connection with the company that is expected to put him
in possession of UPSI is connected.
Even persons who do not seemingly occupy any position in a company but are in regular
touch with the company will also be covered. Certain categories of persons are all deemed to
be connected, such as ‘immediate relatives2’, a holding, associate or subsidiary company, etc.
Unpublished Price Sensitive Information3 (“UPSI”) means any information relating to a
company or its securities, directly or indirectly, that is not generally available, and which
upon becoming available is likely to materially affect the price of the securities.
It includes- financial results; dividends; change in capital structure; mergers, demergers,
acquisitions, delisting’s, disposals and expansion of business and such other transactions;
2PIT Regulations supra note 13 at Reg 2(n).
3PIT Regulations supra note 13 at Reg 2.
changes in key managerial personnel; and material events in accordance with the Listing
The term ‘generally available’4 means information that is accessible to the public on a non-
The communication of UPSI by an Insider and the procurement of UPSI by a person from an
insider are permitted, if such communication, procurement is in furtherance of legitimate
purposes, performance of duties or discharge of legal obligations.
4.2.5. The Competition Act ,2002
The Competition Act5primarily covers
➢ Anti-competitive agreements (Section 3),
The Competition Act contemplates two kinds of anti-competitive agreements – horizontal
agreements i.e. agreements between entities engaged in similar trade of goods or provisions
of services, and vertical agreements i.e. agreements between entities in different stages /
levels of the chain of production, in respect of production, supply, distribution, storage, sale
or price of goods or services.
Anti-competitive agreements that cause or are likely to cause an appreciable adverse effect on
competition (AAEC) within India are void under the Competition Act.
A horizontal agreement that-
1. determines purchase / sale prices, or
2. limits or controls production supply, markets, technical development, investment
or provision of services, or
3. shares the market or source of production or provision of services, by allocation of
geographical areas/type of goods or services or number of customers in the
4. results in bid rigging / collusive bidding
are presumed to have an AAEC.
4PIT Regulations supra note 13 at Reg 4(1).
5 The Competition Act, 2003, No. 12, Acts of Parliament, 2003.
But, vertical agreements (such as tie- in arrangements), are anti-competitive only if they
cause or are likely to cause an appreciable adverse effect on competition in India.
A tie-in arrangement would include any agreement requiring a purchaser of goods, as
condition of such purchase to purchase some other goods.
An example of this on a global scale may be Microsoft’s bundling of its web browser Internet
Explorer along with the Windows operating system, thus limiting Netscape’s web browser,
Navigator, from having a significant presence in the market.
➢ Abuse of dominance (Section 4)
An entity is considered to be in a dominant position if it is able to operate independently of
competitive forces in India, or is able to affect its competitors or consumers or the relevant
market in India in its favour.
The Competition Act prohibits an entity from abusing its dominant position.
The term Abuse of dominance means imposing unfair or discriminatory conditions or prices
in purchase/sale of goods or services and predatory pricing, limiting or restricting production
/ provision of goods/services, technical or scientific development, indulging in practices
resulting in denial of market access etc.
➢ Combinations (Section 5, 6, 20, 29, 30 and 31)
The Combination Regulations are the regulations through which the Competition omission of
India (CCI) regulates combinations such as mergers and acquisitions.
Under Section 32 of the Competition Act, the CCI has been conferred with extra-territorial
This means that any acquisition where assets / turnover are in India (and exceed specified
limits) would be subject to the scrutiny of the CCI, even if the acquirer and target are located
A “Combination”, for the purposes of the Competition Act means:
i. an acquisition of control, shares or voting rights or assets by a person;
ii. an acquisition of control of an enterprise where the acquirer already has direct or
indirect control of another engaged in similar or identical business; or
iii. a merger or amalgamation between or among enterprises; that exceed the ‘financial
thresholds’ prescribed under the Competition Act.
➢ Financial thresholds-
The Competition Act prescribes financial thresholds linked with assets / turnover for the
purposes of determining whether a transaction is a ‘combination’ or not.
The CCI’s approval is required only for combinations. Via a notification dated March 4,
2016, the CCI has increased the thresholds for the purposes of Section 5 of the Competition
A transaction that satisfies any of the following tests is a combination.
An acquisition where the parties to the acquisition, i.e. the acquirer and the target, jointly
i. Test 1: India Asset Test and India Turnover Test – in India
a) assets higher than INR 2,000 crore; or
b) turnover higher than INR 6,000 crore; or
ii. Test 2: Global Asset Test and Global Turnover Test - Total assets in India or outside
a) higher than USD 1 billion of which assets in India should be higher than INR
1,000 crores; or
b) total turnover in India or outside is higher than USD 3 billion of which
turnover in India should be higher than INR3,000crores; OR
The acquirer group6 would have –
i. Test 1: India Asset Test and India Turnover Test - in India
6 A ‘group’ would mean two or more enterprises which, directly or indirectly, are in position to –
i) Exercise of not less than 50% or more of the voting rights in the other enterprise; or
ii) Appoint more than fifty per cent of the members of the board of directors in the other enterprise, or iii
Control the management or affairs of the other enterprise.
a) assets higher than INR 8, 000 crores; or
b) turnover higher than INR 24,000 crores; or
ii. Test 2: Global Asset Test and Global Turnover Test –
a) Total assets in India or outside higher than USD 4 billion of which assets in
India are higher than INR 1,000 crores; or
b) Total turnover in India or outside is higher than USD 12 billion of which
turnover in India should be higher than INR 3,000 crores.
4.2.6. Foreign Exchange Management Act7,1999
Foreign entities’ investments in, and acquisitions of, Indian companies are governed by the
terms of the Foreign Exchange Management (Transfer or Issue of Security by a Person
Resident outside India) Regulations, 2017 (the “FI Regulations”) and the Industrial Policy
and Procedures issued by the Secretariat for Industrial Assistance (SIA).
Bhumesh : The FI regulations have been reissued in 2017, please check all references to
these regulations and specific regulation, annexures etc. mentioned throughout this
These regulations provide general guidelines on issuance of shares or securities by an Indian
entity to a person residing outside India or recording in its books any transfer of security from
or to such person8.
The FI Regulations segregate foreign investments into various types: foreign direct
investments (FDI), foreign portfolio investments (FPI), investments by non resident Indians
(NRI) or, by foreign venture capital investments.
i. Foreign Direct Investment (FDI)
Foreign Direct Investment (FDI) is the investment through capital instruments by a person
resident outside India-
7 The Foreign Exchange Management Act, 1999, No. 42, Acts of Parliament, 1999
8 Prabhanshu, Laws Regulating Mergers and Acquisitions in India, Legalserviceindia.com,
visited Nov. 11, 2018) (hereinafter called ‘Prabhanshu’).
(a) in an unlisted Indian company; or
(b) in 10 percent or more of the post issue paid-up equity capital on a fully diluted basis of a
listed Indian company.9
Section 15 of the FI regulation, 2017 sets out the sectors in which FDI is prohibited. This list
includes sectors such as lottery, gambling etc.
A foreign investor can acquire shares or convertible debentures10 in an Indian company up to
the investment (or sectoral) caps for each sector provided in the FDI Scheme.
Investment in certain sectors requires the prior approval of the Government of India (through
the concerned administrative ministry), which is granted on a case to case basis.
ii. Portfolio Investment Scheme
Any investment made by a person resident outside India in capital instruments where such
(a) less than 10 percent of the post issue paid-up equity capital on a fully diluted basis of a
listed Indian company or
(b) less than 10 percent of the paid up value of each series of capital instruments of a listed
Foreign portfolio investors registered with the SEBI as per the SEBI (Foreign Portfolio
Investment) Regulations, 2014 and non-resident Indians (”NRI”), are permitted to invest in
shares / convertible debentures under the portfolio investment scheme. (Schedule 2)
This scheme permits investment in listed securities through the stock exchange.
iii. Foreign venture capital investors (“FVCI”)
An investor incorporated and established outside India and registered with Securities and
Exchange Board of India under Securities and Exchange Board of India (Foreign Venture
Capital Investors) Regulations, 2000 is called foreign venture capital investor.12
9 Reserve Bank of India, https://www.rbi.org.in/scripts/FAQView.aspx?Id=26 accessed on 28 November 2018.
10A foreign investor may also subscribe to preference shares. However, in order to fall under the automatic
route, the preference shares / debentures must be compulsorily convertible into equity, failing which the
investment will be treated as a debt and the External Commercial Borrowings (ECB) policy will be applicable.
11 Supra note 9.
An FVCI registered with the SEBI can invest in Indian venture capital undertakings, venture
capital funds or in schemes floated by venture capital funds under the terms of Schedule 7 of
the FI Regulations, 2017.
A benefit of investing as an FVCI is that an FVCI is not required to adhere to the pricing
requirements that are otherwise required to be met by a foreign investor under the automatic
route13when purchasing or subscribing to shares or when selling such shares
4.2.7. The Income Tax Act, 1961
The ITA contemplates and recognizes the following types of mergers and acquisitions
ii. Demerger or spin-off
iii. Slump sale/asset sale; and
iv. Transfer of shares.
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 one company.
The ITA requires that the following conditions must be met by the merger, for such merger to
qualify as an ‘amalgamation’ under Section 2(1B).
Amalgamation means merger of either one or more companies with another company or
merger of two or more companies to form one company in such a manner that14:
➢ All the property of the amalgamating company(ies) becomes the property of the
➢ All the liabilities of the amalgamating company(ies) become the liabilities of the
amalgamated company; and
➢ Shareholders holding not less than 75% of the value of the shares of the amalgamating
company become shareholders of the amalgamated company.
12 Reserve Bank of India, FEMA, 2017 notification,
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11161&Mode=0 accessed on 28 November 2018.
13The ‘automatic route’ means that investments do not need to any prior permissions / approvals under the FDI
14 Prabhanshu, supra note 8.
The following provisions would be applicable to merger only if the conditions laid down in
section 2(1B) relating to merger are fulfilled:
➢ The transfer of shares by the shareholders of the transferor company in lieu of shares
of the transferee company on merger is not regarded as transfer and hence gains
arising from the same are not chargeable to tax in the hands of the shareholders of the
transferee company. [Section 47(vii)]
➢ In case of merger, cost of acquisition of shares of the transferee company, which were
acquired in pursuant to merger will be the cost incurred for acquiring the shares of the
transferor company. [Section 49(2)]
4.2.8. NCLT permissions
All mergers have to be sanctioned by NCLT. The Companies Act, 2013 provides that the
concerned NCLT bench of the area where the transferor and the transferee companies have
their respective registered offices shall have the necessary jurisdiction to direct the winding
up or regulate the merger of the companies .\
4.2.9. Stamp duty
Stamp duty is a duty payable on certain specified instruments / documents.
Broadly speaking, when there is a conveyance or transfer of any movable or immovable
property, the instrument or document affecting the transfer is liable to payment of stamp duty.
➢ Stamp duty on NCLT order for mergers/demergers-
Since the order of the NCLT merging two or more companies, or approving a demerger, has
the effect of transferring property to the surviving /resulting company, the order of the NCLT
may be required to be stamped.
Most states require the stamping of such orders according to their respective stamp laws. The
amount of the stamp duty payable would depend on the specific stamp law.
➢ Stamp duty on share transfers-
The stamp duty payable on a share transfer form executed in connection with a transfer of
shares is 0.25% of the value of, or the consideration paid for, the shares.
However, if the shares are in dematerialised form, the abovementioned stamp duty is not
applicable. Shares of all public companies (whether listed or not) are not required to be in
➢ Stamp duty on shareholder agreements/joint venture agreements-
Stamp duty will be payable as per the state specific stamp law.
➢ Stamp duty on share purchase agreements-
Stamp duty may be payable on an agreement that records the purchase of shares/debentures
of a company.
This stamp duty is payable in addition to the stamp duty on the share transfer form.
4.2.10. Intellectual property in Mergers and Acquisitions
The increased profile, frequency, and value of intellectual property related transactions have
increased the need for legal experts and Intellectual Property (IP) owners to have a thorough
understanding of the assessment and the valuation of these assets, and their role in the
A detailed assessment of intellectual property asset is becoming an integrated part of
Due diligence is the process of investigating a party’s ownership, right to use, and right to
stop others from using the IP rights involved in sale or merger ---the nature of transaction and
the rights being acquired will determine the extent and focus of the due diligence review.
Due Diligence in IP for valuation helps in building strategy in the following way-
(a) If Intellectual Property asset is underplayed the plans for maximization would be
(b) If the Trademark has been maximized to the point that it has lost its cachet in the market
place, reclaiming may be considered.
(c) If mark is undergoing generalization and is becoming generic, reclaiming the mark from
slipping to generic status would need to be considered.
(d) Certain events can devalue an Intellectual Property Asset, in the same way a fire can
suddenly destroy a piece of real property.
These sudden events in respect of IP could be adverse publicity or personal injury arising
from a product.
An essential part of the due diligence and valuation process accounts for the impact of
product and company-related events on assets – management can use risk information
revealed in the due diligence.
(e) Due diligence could highlight contingent risk which do not always arise from Intellectual
Property law itself but may be significantly affected by product liability and contract law and
other non-Intellectual Property realms.
Therefore, Intellectual Property due diligence and valuation can be correlated with the overall
legal due diligence to provide an accurate conclusion regarding the asset present and future