: Amit Saini :2 : EPGDIB 2010-12 : Assignment – Mergers & Acquisitions (3rd Sem)
Regulatory Framework for Mergers & Acquisitions in India
Overview M&A transactions are primarily regulated by the Companies Act, 1956 (‘Companies Act’). Sections 391 to 396 of the Companies Act govern schemes of arrangement and mergers etc. Section 494 of said Act provides for an alternative form of reconstruction where a liquidator is empowered to receive shares etc. in lieu of cash for the transfer of the whole/part of any undertaking. Certain restrictions on the acquisition/transfer of shares are also found in Section 108A to 108I involving undertakings which produce, supply or control 25% or more of the total quantity of relevant goods or services produced or rendered in India. Special norms for Producer Companies (i.e. companies having objects involving farmers’ produce) have also been stipulated. The Companies Act stipulates inter alia that in the case of transaction involving merger of companies, the transferee company should be a company incorporated under the Companies Act. In other words, the transferor company could be a company incorporated in India or outside of India, but the transferee company should be a company incorporated in India. The Securities and Exchange Board of India (‘SEBI’) Act, 1992, and the guidelines/rules/regulations made thereunder govern M&A transactions involving public companies listed on a recognized stock exchange. In particular, the SEBI (Substantial Acquisition of Shares and Acquisitions) Regulations, 1997, (‘Takeover Code’) regulates transactions involving acquisition of shares that are traded over the stock market (but exempts schemes of amalgamation approved under the provisions of the Companies Act). The Listing Agreement that companies enter into with recognised stock exchanges are relevant in M&A transactions in case of a merger of a company listed on the stock exchange(s). The Listing Agreement requires inter alia filing of the scheme of arrangement with the Stock Exchange prior to filing application with the High Court for seeking approval of the scheme of arrangement. The conditions applicable for continued listing stipulate inter alia norms for a minimum level of public shareholding and prior approvals of the Stock Exchange. Anti-trust issues are regulated by the Monopolies and Restrictive Trade Practices Act, 1969 (‘MRTPA’) which at present does not require pre-merger clearances. However, the Competition Act, 2002, which is soon to be fully operational, provides for repeal of the MRTPA. The Competition Act contains provisions for regulation of acquisition, takeover, merger, and combination etc. of companies. The Competition Commission of India (CCI), established under the Competition Act, has the power to regulate mergers or combinations and to reverse mergers or combinations if it is of the opinion that a merger or combination has or is likely to have an ‘appreciable adverse effect’ on competition in India. Other relevant sources of laws that regulate merger or acquisition transactions are the Income-tax Act, 1961, governing M&A transactions, and the Accounting Standard -14 which provides for Accounting for amalgamations.
Rules for different types of companies Listed public companies, as opposed to those that are not listed, would require compliance with applicable SEBI laws and the listing regulations. The Takeover Code is not applicable to companies, which are not listed on stock exchanges in India. The Sick Industrial Companies (Special Provisions) Act, 1985 (‘SICA’) regulates industrial companies that turn sick, and empowers the Board for Industrial & Financial Reconstruction (‘BIFR’) to order amalgamation of sick industrial companies with any other company or vice-versa. Special rules for foreign buyers Foreign buyers must comply with the provisions of the Foreign Exchange Management Act, 1999 (‘FEMA’) and the rules/regulations made thereunder. The...