MODULE_4

MERGERS &
ACQUISITIONS

CERTIFICATE COURSE

DEVELOPED BY
Corp Comm Legal

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MODULE - 4

LAWS GOVERNING MERGERS &
ACQUISITIONS

4.1 INTRODUCTION

Under the Companies Act, 2013 a ‘merger’ is a The Income-tax Act, 1961 defines the analogous term
combination of two or more corporate entities into one; ‘amalgamation’ as: the merger of one or more
the effect being not just the accumulation of assets and companies with another company, or the merger of two
liabilities of the distinct entities, but organization of such or more companies to form one company.
entity into one business.
The ITA specifies certain other conditions that must be
Merger is also defined as “amalgamation”. All assets, satisfied for an ‘amalgamation’ to benefit from beneficial
liabilities and the stock of one company stand tax treatment.
transferred to Transferee Company in consideration of
payment in the form of:

Ø Shares in the transferee company,
Ø Debentures in the transferee company,
Ø Cash, or
Ø A combination of the above methods

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4.2 LAWS REGULATING MERGER &
ACQUISITIONS

Following are the laws which regulate the merger of the power to approve and sanction such reduction in share
company: - capital.

4.2.1. The Companies Act, 2013- In such a case, separate proceedings for reduction of
share capital would not be necessary.
Section 230-234 govern mergers and schemes of
arrangements between a company, its shareholders Merger Provisions and foreign companies-
and/or its creditors.
Sections 230 - 234 of Companies Act, 2013 recognize and
A merger essentially is an arrangement between the permit a merger/reconstruction of a foreign company
merging companies and their respective shareholders, into an Indian company.
each of the companies proposing to merge with the
other(s) must file an application with NCLT having The Merger Provisions do not, however, permit an Indian
jurisdiction over such company for calling the meetings company to merge into a foreign company. The merger
of its respective shareholders and/or creditors. provisions under Section 234 stipulate that such mergers
shall be subject to regulations to be formulated by the
NCLT may order a meeting of the creditors/shareholders Government of India.
of the company. If the majority in number representing
3/4th of the creditors and shareholders’ present and According to the recent amendments made in the 2016,
voting at such meeting agrees to the merger and if it is the prior approval of the RBI is also required for a foreign
sanctioned by NCLT, it is binding on all company to merge with a company registered under the
creditors/shareholders of the company. Companies Act, 2013.

If corporate restructuring proposed by the company
includes reduction of share capital, then NCLT has the

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4.2.2. Securities and Exchange Board of India (Takeover the acquirer does not acquire more than 5% of shares or
Code), 2011- voting rights of the target company in any financial year.

The Securities and Exchange Board of India (SEBI) is the However, acquisition of shares or voting rights beyond
authority regulating entities that are listed and to be 26% may attract the notification procedure under the
listed on stock exchanges in India. Act. However, the notification to CCI will not be required
for consolidation of shares or voting rights permitted
The Securities and Exchange Board of India (Substantial under the SEBI Takeover Regulations.
Acquisition of Shares and Takeovers) Regulations, 2011
(also called the “Takeover Code”) regulates the Similarly, the acquirer, who has already acquired control
acquisition of shares, voting rights and control in listed of a company, after adhering to all requirements of SEBI
companies. Takeover Regulations and also the Act, should be
exempted from the Act for further acquisition of shares
Acquisition of shares or voting rights of a listed company, or voting rights in the same company.
entitling the acquirer to exercise 25% or more of the
voting rights in the target company mandates the 4.2.3. Securities and Exchange Board of India (Issue of
acquirer to make an offer to the remaining shareholders Capital and Disclosure Requirements) Regulations,
of the target company. 2009-

The offer must be to further acquire at least 26% of the If the acquisition of an Indian company that is lifted
voting capital of the company. involves the issue of new equity shares or securities
convertible into equity shares (“Specified Securities”) by
However, this is subject to the exemptions provided the target to the acquirer, Chapter VII (“Preferential
under the Takeover Code. Exemptions from open offer Allotment Regulations”) contained in ICDR Regulations
requirement under the Takeover Code inter alia include will apply (in addition to company law requirements
acquisition pursuant to a scheme of arrangement that is mentioned above).
approved by NCLT.
Important provisions of the Preferential Allotment
SEBI Takeover Regulations permit consolidation of Regulations-
shares or voting rights beyond 15% up to 55%, provided

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Ø Pricing of the Issue- Ø Exemption to NCLT approved merger-
The Preferential Allotment Regulations do not
The Preferential Allotment Regulations set a floor price apply in the case of a preferential allotment of
for an issuance. The floor price of shares is linked to the shares pursuant to merger / amalgamation
average of the weekly high and low closing price of the approved by NCLT under the “Merger
stock of the company over a 26 week period or a 2 week Provisions”.
period preceding the relevant date
4.2.4. Securities and Exchange Board of India
Ø Lock-in- (Prohibition of Insider Trading) Regulations, 1992, now
replaced with SEBI (Prohibition of Insider Trading)
Securities issued to the acquirer are locked-in for a Regulations, 2015
period of 1 year from the date of trading approval.
Under the SEBI Act, 1992, the penalty for insider trading
The date of trading approval is the latest date when is at least INR 10,00,000 and may extend to INR
trading approval is granted by all stock exchanges on 25,00,00,000 or three times the amount of profits made
which the securities of the company are listed. out of insider trading, whichever is higher.

Further, if the acquirer holds any equity shares of the SEBI replaced the SEBI (Prohibition of Insider Trading)
target prior to such preferential allotment, then such Regulations, 1992 with the SEBI (Prohibition of Insider
prior holding will be locked in for a period of 6 months Trading) Regulation, 2015 (“PIT Regulations”).
from the date of the trading approval.
In respect of a listed company (or a company that is
If securities are allotted on a preferential basis to proposed to be listed), the PIT Regulations prohibit-
promoters/ promoter groupi, they are locked in for 3
years from the date of trading approval subject to a limit Ø An insider from communicating Unpublished Price
of 20% of the total capital of the company. Sensitive Information (“UPSI”),

The locked-in securities may be transferred amongst Ø Any person from procuring UPSI from an insider, and
promoter/ promoter group or any person in control of Ø An insider from trading in securities when in
the company, subject to the transferee being subject to
the remaining period of the lock in. possession of UPSI.

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Therefore, the PIT prohibits the provision as well as the Unpublished Price Sensitive Informationiii (“UPSI”)
receipt of UPSI. means any information relating to a company or its
securities, directly or indirectly, that is not generally
Under the PIT Regulations, an ‘insider’ is a person, who available, and which upon becoming available is likely to
is, materially affect the price of the securities.

Ø A connected person; or It includes- financial results; dividends; change in capital
Ø In possession of or having access to UPSI. structure; mergers, demergers, acquisitions, delisting’s,
disposals and expansion of business and such other
A connected person is a person who is directly or transactions; changes in key managerial personnel; and
indirectly associated with the company, material events in accordance with the Listing
Agreement.
Ø By reason of frequent communication with its
officers; or The term ‘generally available’iv means information that is
accessible to the public on a non-discriminatory basis.
Ø By being in a contractual, fiduciary or
employment relationship; or The communication of UPSI by an Insider and the
procurement of UPSI by a person from an insider are
Ø By holding any position including a professional permitted, if such communication, procurement is in
or business relationship with the company furtherance of legitimate purposes, performance of
whether temporary or permanent that allows duties or discharge of legal obligations.
such person, directly or indirectly, access to UPSI
or is reasonably expected to allow such access. 4.2.5. The Competition Act ,2002

Therefore, any person who has any connection with the The Competition Actvprimarily covers
company that is expected to put him in possession of
UPSI is connected. Ø Anti-competitive agreements (Section 3),

Even persons who do not seemingly occupy any position The Competition Act contemplates two kinds of anti-
in a company but are in regular touch with the company competitive agreements – horizontal agreements i.e.
will also be covered. Certain categories of persons are all agreements between entities engaged in similar trade of
deemed to be connected, such as ‘immediate relativesii’,
a holding, associate or subsidiary company, etc.

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goods or provisions of services, and vertical agreements A tie-in arrangement would include any agreement
i.e. agreements between entities in different stages / requiring a purchaser of goods, as condition of such
levels of the chain of production, in respect of purchase to purchase some other goods.
production, supply, distribution, storage, sale or price of
goods or services. An example of this on a global scale may be Microsoft’s
bundling of its web browser Internet Explorer along with
Anti-competitive agreements that cause or are likely to the Windows operating system, thus limiting Netscape’s
cause an appreciable adverse effect on competition web browser, Navigator, from having a significant
(AAEC) within India are void under the Competition Act. presence in the market.

A horizontal agreement that- Ø Abuse of dominance (Section 4)

1. determines purchase / sale prices, or An entity is considered to be in a dominant position if it
2. limits or controls production supply, is able to operate independently of competitive forces in
India, or is able to affect its competitors or consumers or
markets, technical development, investment the relevant market in India in its favour.
or provision of services, or
3. shares the market or source of production or The Competition Act prohibits an entity from abusing its
provision of services, by allocation of dominant position.
geographical areas/type of goods or services
or number of customers in the market, or The term Abuse of dominance means imposing unfair or
4. results in bid rigging / collusive bidding discriminatory conditions or prices in purchase/sale of
goods or services and predatory pricing, limiting or
are presumed to have an AAEC. restricting production / provision of goods/services,
technical or scientific development, indulging in
But, vertical agreements (such as tie- in arrangements), practices resulting in denial of market access etc.
are anti-competitive only if they cause or are likely to
cause an appreciable adverse effect on competition in Ø Combinations (Section 5, 6, 20, 29, 30 and 31)
India.
The Combination Regulations are the regulations
through which the Competition omission of India (CCI)

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regulates combinations such as mergers and The CCI’s approval is required only for combinations. Via
acquisitions. a notification dated March 4, 2016, the CCI has increased
the thresholds for the purposes of Section 5 of the
Under Section 32 of the Competition Act, the CCI has Competition Act.
been conferred with extra-territorial jurisdiction.
A transaction that satisfies any of the following tests is a
This means that any acquisition where assets / turnover combination.
are in India (and exceed specified limits) would be
subject to the scrutiny of the CCI, even if the acquirer and An acquisition where the parties to the acquisition, i.e.
target are located outside India. the acquirer and the target, jointly have:

A “Combination”, for the purposes of the Competition i. Test 1: India Asset Test and India Turnover Test
Act means: – in India
a) assets higher than INR 2,000 crore; or
i. an acquisition of control, shares or voting rights b) turnover higher than INR 6,000 crore; or
or assets by a person;
ii. Test 2: Global Asset Test and Global Turnover
ii. an acquisition of control of an enterprise where Test - Total assets in India or outside
the acquirer already has direct or indirect
control of another engaged in similar or a) higher than USD 1 billion of which assets in
identical business; or India should be higher than INR 1,000 crores;
or
iii. a merger or amalgamation between or among
enterprises; that exceed the ‘financial b) total turnover in India or outside is higher
thresholds’ prescribed under the Competition than USD 3 billion of which turnover in India
Act. should be higher than INR3,000crores; OR

Ø Financial thresholds- The acquirer groupvi would have –

The Competition Act prescribes financial thresholds i. Test 1: India Asset Test and India Turnover Test -
linked with assets / turnover for the purposes of in India
determining whether a transaction is a ‘combination’ or a) assets higher than INR 8, 000 crores; or
not. b) turnover higher than INR 24,000 crores; or

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ii. Test 2: Global Asset Test and Global Turnover The FI Regulations segregate foreign investments into
Test – various types: foreign direct investments (FDI), foreign
a) Total assets in India or outside higher portfolio investments (FPI), investments by non-resident
than USD 4 billion of which assets in Indians (NRI) or, by foreign venture capital investments.
India are higher than INR 1,000 crores;
or i. Foreign Direct Investment (FDI)
b) Total turnover in India or outside is
higher than USD 12 billion of which Foreign Direct Investment (FDI) is the investment
turnover in India should be higher than through capital instruments by a person resident
INR 3,000 crores. outside India-
(a) in an unlisted Indian company; or
4.2.6. Foreign Exchange Management Actvii,1999 (b) in 10 percent or more of the post issue paid-up
equity capital on a fully diluted basis of a listed Indian
Foreign entities’ investments in, and acquisitions of, company.ix
Indian companies are governed by the terms of the
Foreign Exchange Management (Transfer or Issue of Section 15 of the FI regulation, 2017 sets out the sectors
Security by a Person Resident outside India) Regulations, in which FDI is prohibited. This list includes sectors such
2017 (the “FI Regulations”) and the Industrial Policy and as lottery, gambling etc.
Procedures issued by the Secretariat for Industrial
Assistance (SIA). A foreign investor can acquire shares or convertible
debenturesx in an Indian company up to the investment
Bhumesh : The FI regulations have been reissued in (or sectoral) caps for each sector provided in the FDI
2017, please check all references to these regulations Scheme.
and specific regulation, annexures etc. mentioned
throughout this Section 4.2.6. Investment in certain sectors requires the prior approval
of the Government of India (through the concerned
These regulations provide general guidelines on issuance administrative ministry), which is granted on a case to
of shares or securities by an Indian entity to a person case basis.
residing outside India or recording in its books any
transfer of security from or to such personviii.

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ii. Portfolio Investment Scheme A benefit of investing as an FVCI is that an FVCI is not
required to adhere to the pricing requirements that are
Any investment made by a person resident outside India otherwise required to be met by a foreign investor under
in capital instruments where such investment is- the automatic routexiiiwhen purchasing or subscribing to
(a) less than 10 percent of the post issue paid-up equity shares or when selling such shares
capital on a fully diluted basis of a listed Indian company
or 4.2.7. The Income Tax Act, 1961
(b) less than 10 percent of the paid-up value of each
series of capital instruments of a listed Indian company.xi The ITA contemplates and recognizes the following types
of mergers and acquisitions activities-
Foreign portfolio investors registered with the SEBI as
per the SEBI (Foreign Portfolio Investment) Regulations, i. Amalgamation
2014 and non-resident Indians (”NRI”), are permitted to ii. Demerger or spin-off
invest in shares / convertible debentures under the iii. Slump sale/asset sale; and
portfolio investment scheme. (Schedule 2) iv. Transfer of shares.

This scheme permits investment in listed securities The ITA defines an ‘amalgamation’ as the merger of one
through the stock exchange. or more companies with another company, or the
merger of two or more companies to form one company.
iii. Foreign venture capital investors (“FVCI”)
The ITA requires that the following conditions must be
An investor incorporated and established outside India met by the merger, for such merger to qualify as an
and registered with Securities and Exchange Board of ‘amalgamation’ under Section 2(1B).
India under Securities and Exchange Board of India
(Foreign Venture Capital Investors) Regulations, 2000 is Amalgamation means merger of either one or more
called foreign venture capital investor.xii companies with another company or merger of two or
more companies to form one company in such a manner
An FVCI registered with the SEBI can invest in Indian thatxiv:
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.

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Ø All the property of the amalgamating 4.2.8. NCLT permissions
company(ies) becomes the property of the
amalgamated company; All mergers have to be sanctioned by NCLT. The
Companies Act, 2013 provides that the concerned NCLT
Ø All the liabilities of the amalgamating bench of the area where the transferor and the
company(ies) become the liabilities of the transferee companies have their respective registered
amalgamated company; and offices shall have the necessary jurisdiction to direct the
winding up or regulate the merger of the companies.
Ø Shareholders holding not less than 75% of the
value of the shares of the amalgamating 4.2.9. Stamp duty
company become shareholders of the
amalgamated company. Stamp duty is a duty payable on certain specified
instruments / documents.
The following provisions would be applicable to merger
only if the conditions laid down in section 2(1B) relating Broadly speaking, when there is a conveyance or transfer
to merger are fulfilled: of any movable or immovable property, the instrument
or document affecting the transfer is liable to payment
Ø The transfer of shares by the shareholders of the of stamp duty.
transferor company in lieu of shares of the
transferee company on merger is not regarded Ø Stamp duty on NCLT order for
as transfer and hence gains arising from the mergers/demergers-
same are not chargeable to tax in the hands of
the shareholders of the transferee company. Since the order of the NCLT merging two or more
[Section 47(vii)] companies, or approving a demerger, has the effect of
transferring property to the surviving /resulting
Ø In case of merger, cost of acquisition of shares of company, the order of the NCLT may be required to be
the transferee company, which were acquired in stamped.
pursuant to merger will be the cost incurred for
acquiring the shares of the transferor company. Most states require the stamping of such orders
[Section 49(2)] according to their respective stamp laws. The amount of

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the stamp duty payable would depend on the specific 4.2.10. Intellectual property in Mergers and
stamp law. Acquisitions

Ø Stamp duty on share transfers- The increased profile, frequency, and value of
intellectual property related transactions have increased
The stamp duty payable on a share transfer form the need for legal experts and Intellectual Property (IP)
executed in connection with a transfer of shares is 0.25% owners to have a thorough understanding of the
of the value of, or the consideration paid for, the shares. assessment and the valuation of these assets, and their
role in the commercial transaction.
However, if the shares are in dematerialized form, the
abovementioned stamp duty is not applicable. Shares of A detailed assessment of intellectual property asset is
all public companies (whether listed or not) are not becoming an integrated part of commercial transaction.
required to be in dematerialised form.
Due diligence is the process of investigating a party’s
Ø Stamp duty on shareholder agreements/joint ownership, right to use, and right to stop others from
venture agreements- using the IP rights involved in sale or merger ---the nature
of transaction and the rights being acquired will
Stamp duty will be payable as per the state specific determine the extent and focus of the due diligence
stamp law. review.

Ø Stamp duty on share purchase agreements- Due Diligence in IP for valuation helps in building strategy
in the following way-
Stamp duty may be payable on an agreement that
records the purchase of shares/debentures of a (a) If Intellectual Property asset is underplayed the plans
company. for maximization would be discussed.

This stamp duty is payable in addition to the stamp duty (b) If the Trademark has been maximized to the point
on the share transfer form. that it has lost its cachet in the market place, reclaiming
may be considered.

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(c) If mark is undergoing generalization and is becoming company-related events on assets – management can
generic, reclaiming the mark from slipping to generic use risk information revealed in the due diligence.
status would need to be considered.
(e) Due diligence could highlight contingent risk which do
(d) Certain events can devalue an Intellectual Property not always arise from Intellectual Property law itself but
Asset; in the same way a fire can suddenly destroy a may be significantly affected by product liability and
piece of real property. contract law and other non-Intellectual Property realms.

These sudden events in respect of IP could be adverse Therefore, Intellectual Property due diligence and
publicity or personal injury arising from a product. valuation can be correlated with the overall legal due
diligence to provide an accurate conclusion regarding the
An essential part of the due diligence and valuation asset present and future value.
process accounts for the impact of product and

iThe terms ‘promoter’ and ‘promoter group’ are defined by the vii The Foreign Exchange Management Act, 1999, No. 42, Acts
Regulations, Generally, promoters would be the persons in
over-all control of the company or who are named as promoters of Parliament, 1999
in the prospectus of the company. The term promoter group has viii Prabhanshu, Laws Regulating Mergers and Acquisitions in
an even wider connotation and would include immediate
relatives of the promoter. If the promoter is a company, it would India, Legalserviceindia.com,
include, a subsidiary or holding company of that company, any
company in which the promoter holds 10% or more of the http://www.legalserviceindia.com/article/l463-Laws-
equity capital or which holds 10% or more of the equity capital
of the promoter, etc. Regulating-Mergers-&-Acquisition-In-India.html (last visited

iiPIT Regulations supra note 13 at Reg 2(n). Nov. 11, 2018) (hereinafter called ‘Prabhanshu’).
iiiPIT Regulations supra note 13 at Reg 2. ix Reserve Bank of India,
ivPIT Regulations supra note 13 at Reg 4(1).
v The Competition Act, 2003, No. 12, Acts of Parliament, https://www.rbi.org.in/scripts/FAQView.aspx?Id=26 accessed
2003.
vi A ‘group’ would mean two or more enterprises which, on 28 November 2018.
directly or indirectly, are in position to – xA foreign investor may also subscribe to preference shares.
i) Exercise of not less than 50% or more of the voting rights in
the other enterprise; or However, in order to fall under the automatic route, the
ii) Appoint more than fifty per cent of the members of the board
of directors in the other enterprise, or iii Control the preference shares / debentures must be compulsorily
management or affairs of the other enterprise.
convertible into equity, failing which the investment will be

treated as a debt and the External Commercial Borrowings

(ECB) policy will be applicable.
xi Supra note 9.
xii Reserve Bank of India, FEMA, 2017 notification,

https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=1116

1&Mode=0 accessed on 28 November 2018.
xiiiThe ‘automatic route’ means that investments do not need to

any prior permissions / approvals under the FDI Scheme.
xiv Prabhanshu, supra note 8.

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