Company Secretaryship Training Project Report

PROJECT TOPIC: Amalgamations & Mergers –

A Detailed Analysis

Prepared By: Mr. Malcolm K. Shroff

Company Secretaryship ApprenticeshipTrainee Student Registration Number : WG0123230 / 08 / 1998.

Company Secretary under whom Trained: Mrs. Jayshree S. Joshi,

Jayshree Dagli & Associates, Company Secretaries, Mumbai – 400 023. FCS.:1451 CP.: 487

PREFACE

As per the Company Secretaryship Regulations, 1982, an Apprenticeship Trainee is required to prepare a Project report in the Final Quarter of his/her training period. The said project report should be prepared in consultation with the Company Secretary under whom he/she has trained.

Keeping in view this requirement, I have prepared this project report in consultation with my Principal, Mrs. Jayshree S. Joshi under whom I have trained. The topic chosen by me has had a significant impact in the current corporate scenario, especially after the changing policy of the Government of India which stresses upon Globalisation & Liberalisation. Further, with the relaxation in the Foreign Exchange Policy of the Government of India, the repeal of the Foreign Exchange Regulation Act, 1973 and the introduction of the Foreign Exchange Management Act, 1999, there has been a sudden inflow of Foreign Collaborators and other foreign companies which not only set up shop in India, but also later on amalgamate with the Indian collaborated company or take over the same.

The Project Report has been prepared by me after taking into consideration all the possible areas which may have an impact on amalgamations and mergers, such as the Companies Act, 1956, Income Tax Act, 1961, Central Excise Rules, 1944, SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 1997, the Accounting Standards issued by the Institute of Chartered Accountants of India, the Sick Industrial Companies (Special Provisions) Act, 1985, the Foreign Exchange Management Act, 1999 and the Regulations framed by the Reserve Bank of India thereunder and the Industrial Policy framed by the Government of India.

The said Project has been prepared after referring various Books on the topic and the Statutory Legislations enacted by the Parliament.

-- Malcolm K. Shroff C.S. Apprenticeship Trainee

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ACKNOWLEDGEMENT

This project is a culmination of the constant endeavour to learn while working and training , while pursuing a professional course such as the Company Secretaryship Course. At the outset I would like to express my sincere acknowledgements to my parents who have always encouraged me to pursue the Company Secretaryship Course as well as all my other family members. Further, I would also like to thank my Principal Mrs. Jayshree S. Joshi , who has always trained me with great enthusiasm and sincerity.

Further, I would also like to express me gratitude to my professional collegues at work who have always helped me while I was pursuing my apprenticeship training and last but not least to the Almighty, who has given me the strength, courage, perseverance and the power to grasp knowledge which are all essential attributes to pursue a professional course such as the Company Secretaryship Course.

-- Malcolm K. Shroff. C.S. Apprenticeship Trainee

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METHODOLOGY

The Training Project Report has been prepared by following a “learn while you work ’’ approach to learning. The project has been prepared primarily by referring to various reference books, professional journals, various bare acts of the statutory legislations, reference to various case laws, guidelines issued by the professional bodies such as The Institute of Chartered Accountants of India, regulations framed by the Securities and Exchange Board of India and the Reserve Bank of India.

The basic approach in the preparation of this project has been the constant reference to various professional journals and the ever changing corporate and fiscal legislations as well as discussion with my fellow professional collegues and fellow students who are pursuing the Company Secretaryship Course.

The best of efforts have been made to make this project as lucid and simple as possible. Reference to the relevant sections of corporate and fiscal legislations and case laws has been made at appropriate places to explain the relevant topics thoroughly.

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INTRODUCTION

The Indian Economy is fast changing to adapt itself to the Global Economy and to bring in foreign capital by relaxing the exchange control norms. This has witnessed new companies emerging in the corporate scenario either from existing companies or by the floatation of new companies. However, the amalgamation of companies as well as the merging of various corporate bodies has been on the rise recently. However, the process of amalgamation is tedious and elaborate due to the various statutory compliances that have to be adhered to in the process, such as obtaining the approval of the shareholders of the amalgamating as well as the amalgamated company. Further, acquisition of shareholding and takeover of companies has been made possible, but under the supervision of the Securities and Exchange Board of India.

At the onset it is necessary to understand the meaning of the term ‘amalgamation’. It is interesting to note that the Companies Act, 1956, has not defined the said term. However as per common business parlance, the term ‘amalgamation’ is understood as the process by which the undertakings of two or more companies are brought under the ownership of one company, which may be one of the amalgamating companies or may be a new company altogether, formed for the purpose of amalgamation. Thus, amalgamation is the blending of substantially two or more undertakings into one undertaking the shareholders of each blending company becoming substantially the shareholders of the company which holds the blended undertakings. Amalgamation may be in the nature of purchase or by the pooling of interest method. These methods have been discussed in detail later on at the appropriate places.

The term ‘merger’ is just an extension of the process of amalgamation. In a ‘merger’ two or more companies merge their entities and the acquiring company takes over all the assets and liabilities of the transferor company. Further, the consideration for amalgamation is received by the equity shareholders of the transferor company in the form of equity shares in the transferee company and in no other form ( as per Accounting Standard 14, issued by the Institute of Chartered Accountants of India ). In a merger, the transferor company loses its identity and it merges itself with the transferee company. Thus, the transferee company takes over the transferor company and continues to remain in existence, which is not necessarily the position in the case of amalgamation.

Amalgamations have been in vogue in the United States of America since a long time , but it is only recently that the Indian corporate sector has realised the importance of amalgamations and mergers in the process of corporate restructuring, diversification and expansion. The main advantage of amalgamating two or more companies is that by acquiring the business of the transferor company, the transferee company obtains possession of not only the assets of the former, but also obtains the existing know how or may be able to capture a dominant market share which was previously held by the transferor company. Amalgamation may also be resorted to by a loss- making company by following the provisions of Section 72A of the Income Tax Act, 1961, whereunder the accumulated losses and unabsorbed depreciation of the amalgamating company can be set off against the profits of the amalgamated company within a period of 8 assesssment years commencing from the

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relevant assessment year in which the amalgamation took place. Further there are various provisions in the Income Tax Act, 1961, whereunder the relevant losses, expenses, etc., of the amalgamating company are allowed as deductions in computing the business income of the amalgamated company, such as capital expenditure on family planning by the amalgamating company under Section 36(1)(ix) of the Income Tax Act, 1961, or amortisation of preliminary expenses during the relevant period after the incorporation of the amalgamating company under Section 35D of the said Act.

Amalgamations and mergers also help to secure synergistic effects by merging of two entities which may be able to function better together, than as individual entities. Synergy implies the effect when a merged entity (comprising of two corporate entities) is able to function better as such, rather than functioning individually.

The importance of amalgamations and mergers in the fast-changing corporate scenario can in no way be undervalued as it is of far reaching consequences. Mergers and Amalgamations (more popularly known as M & As, for brevity sake in international legal and corporate parlance) are now quite prevailant in the Indian Corporate Scenario. They help in restructuring the corporate bodies as well as help in tapping previously untapped resources and markets. They are a tool for economic and corporate growth as well as expansion.

It may thus be summed up that corporate mergers and amalgamations have come of age and are an essential ingredient for successful corporate expansion and diversification as well. They not only help in attaining synergistic effects, but also help in tapping the untapped market potential. They are thus a key tool for corporate restructuring and growth.

Amalgamations & Mergers – Meaning, Nature & Types.

The term ‘amalgamation’ has not been defined anywhere in the Companies Act, 1956 even though the Act has provided for reconstruction and amalgamation of companies under Section 394 of the Companies Act, 1956. In a layman’s parlance one can understand that the term ‘amalgamation’ is a business terminology which indicates the process by which two or more companies are brought under the ownership of one company, which may be a new company altogether or may be one of the amalgamating companies itself. The purpose of amalgamation may be to acquire the business of the transferor company for the purpose of diversification, capturing a dominant market share and reduction of competition, or to take over a loss-making company to set off its losses against the profits of the transferee company and try to revive the same.

It is essential to differentiate the term amalgamation from the term ‘acquisition ’. In case of the latter, there is a purchase by one company (referred to as the acquiring company) of the whole or a part of the shares, or the whole or a part of the assets, of another company (referred to as the acquired company) in consideration for the payment in cash or by the issue of shares or other securities in the acquiring company or partly in one form and partly in the other. The distinguishing feature of an acquisition is that the acquired company is not dissolved and its separate entity continues to exist.

The process of amalgamation is quite a tedious one. It commences with the transferee company making an offer to the transferor company to acquire its shareholding, valuation of the shares of the amalgamating company for the purpose of issuing shares to the shareholders of the transferor company and ends with the process of actually transferring the undertaking of the transferor company after obtaining the Court’s sanction, if the amalgamation has been effected by a compromise or an arrangement, u/s 391 and 394 of the Companies Act, 1956. It is generally known that when a compromise or an arrangement has been proposed in connection with a scheme of amalgamation, the petitioner company has to make an application to the Court for the purpose of convening a meeting of the creditors, or any class of them, or a meeting of the members or any class of them for the purpose of sanctioning the said scheme by not less than three-fourths of the value of the creditors or the members, as the case may be. In this connection it must be noted that when both the transferor and transferee companies are situated in the same state, a joint application to the High Court may be permitted for the purpose of amalgamation under Section 394 (by transfer of undertaking). This was held so in a case decided by the madras High Court in W.A. Beardsell & Co.Ltd., and Mettur Industries Ltd., as well as in the case of Mohan Exports India Ltd. vs. Tarun Overseas (Pvt.) Ltd.

An amalgamation may be in the nature of purchase or may be in the nature of merger, as prescribed in Accounting Standard (AS) – 14 , issued by The Institute of Chartered Accountants of India. In the case of a ‘ merger ’ the acquiring company continues to exist and the prime feature of a merger is that the corporate identity of the merged company is the same as that of the transferee / acquiring company. As per AS-14, in case of amalgamations where there is a genuine pooling of not only assets and liabilities, but also of the shareholders’ interest and of the business of these companies.

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The essential distinguishing accounting feature in case of a ‘merger’ is that the resulting figures of assets, liabilities, capital and reserves represent the sum total of the relevant figures of both the amalgamating companies. Further, the business of the amalgamating company is intended to be carried on by the transferee company. Further in the case of a merger, shareholders holding not less than 90 % of the face value of the equity shares of the transferor company (other than the equity shares already held therein immediately before the amalgamation, by the transferee company or its subsidiaries or their nominees) should become equity shareholders of the transferee company by virtue of the amalgamation.

A merger is basically an addition of the assets and liabilities of the amalgamating companies, whereby all assets and liabilities of the transferor company before the amalgamation become the assets and liabilities of the transferee company on amalgamation. Further, the consideration receivable by the equity shareholders of the transferor company is received only in the form of equity shares in the transferee company, except for the fractional shares which may be discharged in cash. In the case of a merger, adjustment in the book value of assets and liabilities of the transferor company, taken over by the transferee company, is not allowed, except to ensure the uniformity in accounting policies.

Thus, amalgamation in the nature of merger is suited only when the business of the transferor company is intended to be carried on by the transferee company and the equity shareholders of the former receive only equity shares in the latter as consideration for the merger. Thus, amalgamation may be said to be the genus, while merger is a specie of the former.

Amalgamations – Its Types.

Amalgamations are basically of two types, viz, amalgamation in the nature of merger and amalgamation in the nature of purchase (as per Accounting Standard – 14 issued by The Institute of Chartered Accountants of India). These types are briefly explained herein below:

1. Amalgamation in the Nature of Merger :- In the case of amalgamation in the nature of merger, as already discussed above, it can be so called only when all the following conditions are fulfilled:-

1. All the assets and liabilities of the transferor company become the assets and liabilities of the transferee company, after amalgamation.

2. Shareholders holding not less than 90 % of the face value of equity shares of the transferor company become the equity shareholders of the transferee company by virtue of the amalgamation.

3. The business of the transferor company is intended to be continued or carried on, after the amalgamation, by the transferee company.

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4. The consideration for the amalgamation receivable by the equity shareholders of the transferor company is discharged by the transferee company wholly by the issue of equity shares in the transferee company, except for cash that any be paid in respect of fractional shares.

5. No adjustments, in the book value of the assets and liabilities of the transferor company, are intended to be made when they are incorporated in the financial statements of the transferee company, except to ensure uniformity in accounting policies.

2. Amalgamation in the Nature of Purchase :-

In the case of amalgamation in the nature of purchase, if the said amalgamation does not satisfy any of the above criteria, as is mentioned in the case of amalgamation in the nature of merger, it will be an amalgamation in the nature of purchase. In this case, if all individual assets and liabilities are not taken over at the existing or agreed value , or if at least 90 % of the equity shareholders do not become the equity shareholders of the transferee company, or if the other criteria are not fulfilled, it would be an amalgamation in the nature of purchase.

Mergers & Takeovers – Its Types.

Mergers or takeovers are basically horizontal, vertical and conglomerate mergers. These types or classifications of mergers are explained in brief in the following paragraphs :

1. Horizontal Mergers :-

A horizontal merger or takeover is one which takes place between two companies which are essentially operating in the same kind of market . Their products may or may not be identical. For example, the merger of Tata Oil Mills Company Ltd., (TOMCO) with Hindustan Lever Ltd., is a horizontal merger. Both these companies have similar products and their market is also of the same kind. This method is resorted to by both companies for achieving optimum size, carving out greater size of market, curbing the competition, gaining economies of scale, increasing the competitiveness and reducing the competition and to utilise the previously untapped capacities.

2. Vertical Mergers :-

A vertical merger or takeover refers to a combination of one or more companies engaged in production of a particular product at different levels of its product process. Under this type of merger, two corporate bodies which are vertically linked to each other either forward or backward, come together. Vertical merger is generally resorted to for achieving operating efficiencies through reliability of imports, better management control, gaining competing power through controlling input

prices and to create an entry barrier in terms of market and technology. Vertical mergers may further be classified as forward and backward mergers.

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a) Backward Mergers :-

It refers to merging of a firm with another firm engaged in earlier stages of production. The merger of Reliance Petrochemicals Limited with Reliance Industries Limited is a good example of a vertical merger with backward linkage, so far as reliance Industries is concerned.

b) Forward Mergers :-

This kind of merger refers to the merging of a firm with another engaged in the subsequent stages of production. For example, if a cement manufacturing company acquires a company engaged in civil construction activities, it will be a case of vertical takeover or merger with forward linkage.

3. Conglomerate Mergers :-

Conglomerate mergers or takeovers are also called concentric mergers/takeovers. Under this type, the concerned companies are in totally unrelated lines of business or markets. For example, Mohta Steel Industries merged with Vardhaman Mills Limited. Conglomerate mergers are expected to bring about stability of income and profits since the two units belong to different industries. Adverse fluctuations in sales and profit arising due to trade cycles may not hit uniformly all the industries at the same time.

Reasons for Mergers or Takeovers . There are several reasons for companies to go in for mergers or takeovers. Some of the major reasons for such merging or takeovers include the following :-

1. Economies of Scale :-

When two or more companies combine, the larger volume of operations of the merged entity results in various economies of scale. These economies arise because of the intensive utilisation of the combined production capacities, distribution channels, research and development facilities, and a range of other economies. These economies of scale are more pre-dominant in horizontal mergers as the same kind of resources are available in the merged entity which can be utilised intensively. In vertical mergers the principal economies are increased efficiency and control over the production process, better co-ordination of activities and lower inventory levels.

2. Synergy :- When two companies merge together, the combined effect of their courses of action is greater than the sum of the individual companies. The concept of synergy can be explained in symbolic terms as under:

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V(AB) > V(A) + V(B) Where, V(AB) = Value of the merged entity. V(A) = Independent Value of Company / Firm A. V(B) = Independent Value of Company / Firm B.

The greater value results in higher earnings per share (EPS) for the merged entity.

3. Growth & Diversification :-

Growth and diversification are important corporate objectives. Growth implies expansion of a firm’s operation in terms of sales, profit and assets. Diversification on the other hand, means expansion of operation through the merger of the firm in unrelated lines of business. The company may want to diversify to reduce risks involved with a seasonal business. Acquisition of a firm engaged in another industry may help the company to reduce the risks involved with floatation and initial teething problems which are generally faced by new companies. A merger may be a pre-emptive move to prevent a competitor from establishing a similar position in that industry. For example, the merger of Tata Oil Mills Company Limited and Hindustan Lever Limited. It may entail less risk and even less loss.

4. Tax Savings :-

A profit-making company can acquire a loss-making company and can set-off the accumulated losses and unabsorbed depreciation of the loss-making company under Section 72A of the Income Tax Act, 1961. Subject to the acquiring company fulfilling certain conditions the healthy company’s profits can be set-off against the losses of the loss-making company. However, the acquiring company is required to carry on the business of the loss- making company for at least 5 years from the date on which it amalgamates with the latter. The healthy company besides saving on tax acquires the manufacturing capacity of the sick company also. 5. Acquisition of Patents, Brand Names, etc. :-

Mergers and takeovers are a relatively easy way to acquire valuable brand names, patents, technical knowhow, etc. For instance, one of the attractions for Hindustan Lever Limited in acquiring Tata Oil Mills Company Limited, is the latter’s brand name “ HAMAM ” which had around 15 percent market share and is a highly popualr soap brand, in the family soap segment.

6. Higher Debt Capacity :-

A company can enhance its borrowing capacity significantly through a merger. A merged firm will enjoy a higher debt capacity because the earnings of the merged entity are more stable than the independent earnings of the merging entities. A higher debt capacity means advantage and thus higher value of the firm.

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7. Avoiding Unhealthy Competition :-

Mergers and takeovers may enable companies to avoid unhealthy competition in a situation where there are too many players aiming at capturing a limited market. It may be a short cut to reduce monopolistic or unfair trade practices which are not in the interest of the public at large.

8. Higher Price Earnings Ratio (P/E Ratio) of Stock :-

The net income of a new company may be capitalised at a low rate, resulting in high market value for its stock. The stock of large companies is usually more marketable than that of a small one. These attributes may result in a high price earnings ratio for the stock. 9. Fund raising capacity :-

Mergers or acquisitions open the fund raising capacity of the company to meet its increasing financial requirements for expansion, diversification and modernisation. A company may improve its ability to raise funds when it combines with other companies having a higher liquid assets and low debts.

10. Reduction in Flotation Costs :-

When two firms merge, they can save on the flotation cost of future equity, preference and debt issues. In general, these costs decrease with the increase in size of the issue, in terms of percentage.

11. Deployment of Surplus Funds :-

A profit-making company may be having surplus funds which it is not in a position to deploy profitably. In the present context, many of the companies having a good track record of profitability are approaching the capital market for raising resources. Funds are being raised by the issue of debt or equity at a substantial premium. This enables the companies to reduce the average cost of capital. At the same time, there are companies which are starved of funds either due to low profitability or rapid rate of expansion. Mergers and acquisitions enable a company having surplus funds to invest the same in another company which is starved of the same.

Thus, one can notice that the reasons for the corporate sector being so keen to acquire good brands and companies with a good market standing or those engaged in a competing line of business is not without sound reasoning. Acquisition and mergers help a company to be better

equipped to face the challenges of competition and enable competing firms to achieve synergy of resources and also help in the healthy growth of the market. Therefore, it can be very aptly said that amalgamations and mergers have enabled companies to take a short cut to achieving higher profitability and growth. They are an essential feature in the current corporate scenario.

Amalgamations under the Companies Act, 1956.

Amalgamation of Companies by way of Transfer of Undertaking under Section 394.

As per the provisions of Section 394 of the Companies Act, 1956, when an application is made to the Court under Section 391, for the purpose of a compromise or an arrangement proposed between a company and any of its creditors or a class of them, or the members or a class of them and it is shown to the Court that;

1) the compromise or arrangement has been proposed for the purpose of a scheme for the reconstruction of any company or companies or the amalgamation of any two or more companies, and

2) under the scheme the whole or any part of the undertaking, property or liabilities of any company concerned in the scheme (known as the transferor company) is to be transferred to another company (known as the transferee company) ;

the Court may either by the order sanctioning the compromise or arrangement, or by a separate order make provision for all or any of the following:

1) The transfer of the whole or any part of the undertaking, property or liabilities of the transferor company to the transferee company.

2) The allotment or appropriation by the transferee company of any shares, debentures, policies or any like interests in that company which, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person.

3) The continuation by or against the transferee company of any legal proceedings pending by or against any transferor company.

4) The dissolution of the transferor company, without its being wound- up.

5) The provision to be made for any persons who dissent from the scheme of compromise or arrangement, within such time and in such manner as the Court directs.

6) Such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be effectively carried out.

However, it should be noted that no compromise or arrangement proposed for or in connection with a scheme of amalgamation of a company, which is being wound up, with any other company or companies, shall be sanctioned unless the Court has received a report from the Company

Law Board or the Registrar of Companies that the affairs of the Company have not been conducted in a manner which is prejudicial to the interest of its members or to the public at large. Moreover, an order for the dissolution of any transferor company shall not be made unless the Official Liquidator

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has made a report to the Court that the affairs of the company have not been conducted in a manner prejudicial to the interest of its members or to the public at large. The Official Liquidator will make such a report after scrutinising the books and papers of the company.

When an order is made by the Court for the transfer of any property or any liabilities, then, by virtue of that order, that property or liabilities, as the case may be, shall be transferred to the transferee company. Another important consideration to be kept in mind is that within 30 days’ after making of the order, every company in relation to which an order is made under this Section shall cause a certified true copy of the order to be filed with the Registrar of Companies for registrartion.

A transferor company may or may not be a company within the meaning of the Companies Act, 1956, but, the transferee company should only be a company within the meaning of Section 3 (1) (i) of the Companies Act, 1956.

Jurisdiction of the Court in a Scheme of Arrangement under Section 391 of the Companies Act, 1956.

The Court has no jurisdiction to sanction a scheme of arrangement under Section 391 of the Companies Act, 1956, which does not have the approval of the company, either through the Board, or, if appropriate, by the means of a simple majority of the members in a general meeting. This, was the decision held in Re., Savoy Hotel Limited. Further when two amalgamating companies are under the jurisdiction of two different High Courts, it is not necessary that both of them should come before the same High Court., as was decided in Telesound India Limited. When two companies are under the jurisdiction of two different High Courts and no proceedings were commenced in the High Court which had jurisdiction over the transferee company, such company has no locus standi to intervene in the petition of the transferor company so as to compel it to transfer shares. Further, when in a case of amalgamation, there is an identity of interest between the transferor company and the transferee company, approval; of the shareholders to the scheme should be accorded by the shareholders of both companies. Both the transferor and the transferee companies should make an application to the High Court to sanction the scheme of amalgamation under Section 394 of the Companies Act, 1956. This was as per the decision of the Madras High Court’s ruling in W.A. Beardsell and Company Limited and Mettur Industries Limited. Thereafter, the department of Copmpany Affairs had issued a circular affirming the decision of the Madras High Court. Further, a joint petition by the transferor company and the transferee company would be sufficient where both the companies have their Registered Offices in the same State. A joint petition for the amalgamation would be sufficient, because neither the Companies act, 1956, nor the Companies (Court) Rules, 1959,

prohibit filing of a joint petition by the two companies when the subject matter of the petition is the same and a common question of fact and law arises.

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Procedure to be followed for Reconstruction or Amalgamation of a company by the transfer of undertaking under Section 394 of the Act.

When a scheme of reconstruction or arrangement is devised for the amalgamation of a company with another company, by way of transfer of undertaking under the provisions of Section 394 of the Companies Act, 1956, then the procedure to be followed for the purpose of effecting such a scheme should be as detailed below :-

1.) The Board of directors of the two companies should consider the proposal of reconstruction or amalgamation by the transfer of undertaking and accord approval to the proposal subject to the necessary approvals.

2.) The companies should exchange the resolution passed by the respective Boards.

3.) The Board of the two companies shall appoint one or more Chartered Accountants as may be mutually decided to value the shares of the two companies and to suggest a formula for the exchange of the shares of the transferee company to the shareholders of the transferor company.

4.) The Boards of the two companies shall consider and approve for the ratio of exchange of shares and the draft scheme of amalgamation or reconstruction. The Boards will also authorise the moving an application before the High Court and also authorise the managing director and the secretary to move the application and take all the necessary action including appointing advocates.

5.) In response the High Court, pursuant to Section 391, will direct the calling and holding the meeting of the members of the company or separate meetings if there are different classes of shareholders and will appoint the Chairman or Chairmen to conduct the said meeting or meetings.

6.) The notice for the meeting or meetings and the explanatory statement will be approved by the Registrar of the Court. Notices will also be published in newspapers as directed by the Court.

7.) The majority in numbers of members representing 75 % of the value of shares or above should approve the resolution at the meetings held on the direction of the Court. The voting will be by ballot.

8.) The Chairman of the meeting or meetings, as the case may be, will submit his report to the Court. The company will also file a petition to the Court for sanctioning the scheme of amalgamation or reconstruction.

9.) The transferor company has to notify the fact to the public before seeking the sanction of the Court that a petition has been made to the Court under section 394 of the Companies Act, 1956 and any person interested therein may raise objection, if any, before the Court on the date as notified on which the petition is to be heard. When there are no objections, or if there are any, they are either flimsy or ruled out by satisfying the persons raising them, the Court will issue the order sanctioning the scheme.

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10) After this, within 30 days of the receipt of the copy of the order, the company concerned should file a certified true copy thereof with the Registrar of Companies.

11) The transferor company will then transfer its undertaking to the transferee company according to the order of the Court and the transferee company then begins the work of alloting shares and debentures to the shareholders of the transferor company.

Amalgamation by way of a Take-over Offer under Section 395 of the Companies Act, 1956.

Another way of acquiring the shares of another company is by way of acquiring the shares of a target company without going in for the transfer of the undertaking of the transferee company. This method of amalgamation is done without approaching the Court in most cases. Section 395 of the Companies Act, 1956, provides that when a company wants to acquire shares of another company with a view of acquiring its control, then the scheme of such acquisition has to be accepted by not less than nine-tenths in value of the shares whose transfer is involved. This acceptance has to be made by the shareholders of the transferor company within four months after making of the offer by the transferee company to the transferor company.

When the shareholders of the transferee company have accepted the offer within the stipulated period of four months, the transferee company should, within two months after the expiry of the aforesaid period of four months, give notice in the prescribed manner to the dissenting shareholders, if any, that it desires to acquire his shares. If the dissenting shareholder does not agree to the transferee company acquiring his shares, he must within one month from the date on which the notice was given to him, approach the Court to set aside the scheme of acquisition of his shares. If the shareholders dissenting from the acquisition do not make an application to the Court within one month from the date of giving the notice , the transferee company will be entitled to acquire the shares of the dissenting shareholders, on the terms on which the shares of the approving shareholders are to be transferred to the transferee company.

However, when the transferee company already holds shares greater than one-tenth of the aggregate value of all the shares in the company of the same class as the shares whose transfer is involved, then the following additional provisions have to be complied with :-

1. The transferee company offers the same terms to all the holders of shares of that class (other than those already held as aforesaid) whose transfer is involved, and

2. The holders who approve the scheme besides holding not less than nine-tenths in value of the shares (other than those already held as aforesaid) whose transfer is involved are not less than three-fourths in number of the holders of those shares.

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Acquisition of nine-tenths of the value of shares of the Transferor Company by the Transferee Company.

Where as a result of a scheme or contract, shares or shares of any class, in a company are transferred to another company or its nominee, so that the shares so transferred along with the shares already held by the transferee company before the scheme or contract comprise nine-tenths in value of the shares, or the shares of that class, in the transferor company, the transferee company must, within one month from the date of such transfer, give notice of that fact in the prescribed manner to the holders of the remaining shares who have not assented to the scheme or contract. Any such holder of shares may within three months of such notice, may require the transferee company to acquire the shares in question. Where the shareholder gives notice, the transferee company shall be entitled and bound to acquire those shares on the terms on which, under the scheme or contract, the shares of the approving shareholders were transferred to it, or on such terms as may be agreed, or as the Court on the application of either the transferee company or the shareholder thinks fit to order.

Acquisition of the shares of the Dissenting Shareholders of the Transferor Company by the Transferee Company.

Where the transferee company has given notice to the dissenting shareholders and the Court has rejected the application of the dissenting shareholder against the scheme, the transferee company must, on the expiry of one month from the date of its notice, transmit a copy of the notice to the transferor company together with an instrument of transfer executed on behalf of the shareholder by any person appointed by the transferee company and on its own behalf by the transferee company. The transferee company shall also pay or transfer to the transferor company the amount or other consideration representing the price payable by the transferee company for the shares which that company is entitled to acquire.

The transferor company then must,

a) thereupon register the transferee company as the holder of these shares and

b) within one month of the date of such registration, inform the dissenting shareholders of the fact of such registration and of the receipt of the amount or other consideration representing the price payable to them by the transferee company.

It is to be noted that an instrument of transfer is not required for any share for which a share warrant is for the time being outstanding. Any sum received by the transferor company from the transferee company must be paid into a separate bank account and held in trust for the several persons entitled to the shares in respect of which the said sums or other consideration were respectively received. The term “ dissenting shareholder ’’ includes a shareholder who has not assented to the scheme or contract or any shareholder who has failed or refused to transfer his shares to the transferee company in accordance with the scheme or contract.

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Offer or Circular to be given to the Members of the Transferor Company by its Board of Directors.

With a view to prevent certain malpractices in relation to takeover bids and acquisition of shares of dissenting shareholders under the scheme approved by the majority, sub-section (4A) to Section 395 was added to the said Section by the Amendment Act in 1965. The following provisions are applicable to every offer of a scheme or contract involving the transfer of shares or any class of shares in the transferor company to the transferee company :-

a) Every such offer or every circular containing such offer or every recommendation to the members of the transferor company by its directors to accept such offer shall be accompanied by such information as may be prescribed by the Central Government. This is to ensure that adequate information is disclosed in a take-over offer to the shareholders so that they could be allowed to judge for themselves whether or not to accept the offer.

b) Every such offer shall contain a statement by or on behalf of the transferee company, disclosing the steps it has taken to ensure that necessary cash will be available for payment of consideration for the shares to be acquired.

c) Every circular containing or recommending acceptance of such offer shall be prescribed to the Registrar of Companies for registration and no such circular shall be issued unless it is registered.

d) The Registrar has the power to refuse to register any such circular which does not contain the prescribed information in a manner likely to give a false impression.

e) An appeal shall lie to the Court against an order of the Registrar, refusing to register any such circular. If the circular containing an offer to purchase shares is not registered as aforesaid, then whosoever issues it, shall be punishable with fine which may extend to Rs.5000.

The provisions of section 395 of the Companies Act, 1956 apply only when an offer to acquire shares is made by one company and they do not apply to a scheme or contract involving the transfer of shares to two or more companies jointly, even if the offer to acquire only a fraction of shares by each company (as held in Blue Metal Industries Limited vs. Dilley).

Amalgamation by Order of the Central Government in Public Interest [Section 396] .

In cases the Central Government may feel it necessary to amalgamate two or more companies in the interest of the public at large. For such a case, to follow the procedure as discussed aforesaid would be detrimental to the interest of the public. Thus, where the Central Government is satisfied that it is in the interest of the public to do so, it may under the provisions of Section 396 of the Companies Act, 1956, by an order notified in the Official Gazette, provide for the amalgamation of, the aforesaid, two or more companies into a single company. The order will specify the constitution, property, powers, rights, interests, authorities, privileges, liabilities, duties and

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obligations of the resulting amalgamated company. The order will also provide for the consequential, incidental and supplemental provisions deemed necessary to give effect to the amalgamation. The order must also provide that the old members, debenture holders and other creditors will have, as nearly as may be, the same interests in and rights against the company as a result of the amalgamation as they had in their original companies. The old members will be entitled to compensation, assessed by the prescribed authority, if their rights or interests fall short of their rights and interests against the original companies. The compensation will have to be paid by the company resulting from the amalgamation.

Before making the order for amalgamation, the Central Government should send a draft copy of the proposed order to each of the companies concerned for their suggestions and objections. If any company, within two months after receipt of the notice, makes some suggestions or raises any objections, the Central Government may, before issuing the order, modify the draft in the light of those suggestions or objections received from the company, its creditors or the shareholders. Any person aggrieved by an order of the prescribed authority [i.e., the Joint Director (Accounts) in the Department of Company Affairs] may, within 30 days from the date of publication of such assessment in the Official Gazette, prefer an appeal to the Company Law Board and thereupon the assessment of compensation shall be made by the Company Law Board.

Copies of every order under this Section shall, as soon as may be after it has been made, be laid before both Houses of the Parliament.

Preservation of Books and Papers of the Amalgamated Company.

With a view to preventing the practice of destroying incriminating accounts and records of the company which has been amalgamated with another company, Section 396A of the Act provides that, the books and papers of the company which has been amalgamated with or whose shares have been acquired by another company, shall not be disposed off without the prior permission of the Central Government. Before granting such permission, the Central Government shall appoint a person to examine books and papers or any of them for the purpose of ascertaining whether they contain any evidence of the commission of an offence in connection with the promotion or formation, or the management of the affairs of the company or amalgamation or the acquisition of shares of the company being amalgamated with the other company.

Provision prohibiting Reconstruction or Amalgamation void.

As per the provisions of Section 376 of the Companies Act, 1956, any provision contained in the Memorandum or Articles of Association of a company, or by the resolution of the Board of Directors or of the company in the general meeting, in the deed of agreement between the company and its managing director or manager, which prohibits, or has the effect of prohibiting reconstruction of the company or its amalgamation with another company or companies absolutely or

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conditionally such that the managing director or manager will be appointed to such office in the reconstructed or amalgamated company, shall be void. Reconstruction or Amalgamation by Sale of Assets / Property under Section 494 of the Companies Act, 1956.

Sometimes it may happen that a company wants to wind itself up voluntarily merely for the purpose of reconstruction or amalgamation with another company, by the transfer of the whole or a part of its business or property to the latter. In that case, the company, may, by way of a Special Resolution confer a general or special authority to the Liquidator of the company, to do any of the following:

1. Receive, by way of compensation or part compensation for the transfer or sale, any shares, policies, or other like interests in the transferee company, for distribution among the members of the transferor company, or

2. Enter into any other arrangement whereby the members of the transferor company may, in lieu of receiving cash, shares, policies or other like interests or in addition thereto, participate in the profits of, or receive any other benefits from, the transferee company.

Any sale or arrangement in pursuance of this section shall be binding upon the members of the transferor company, as per sub-section (2) to Section 494 of the Companies Act, 1956.

The liquidator will give notice to the shareholders of the transferor company as regards the number of shares to which they are entitled, the amount payable by them thereafter and the time within which they must apply for the shares. The sale or arrangement under this provision is binding on all members as already mentioned earlier. However, if any member or members does or do not vote in favour of the Special resolution, he may address to the Liquidator his dissent in writing within 7 days after the passing of the said Special Resolution and require him to,

1. abstain from carrying out the resolution into effect, or

2. purchase his interest at a price to be determined by an agreement or arbitration.

The Liquidator has the right to exercise either of the two options . Should he elect to purchase the interest of the dissenting shareholders, he must raise money in such a manner as is determined by the company. It must be paid before the company is dissolved.

The transferor company may pass the Special Resolution either before or concurrently with the resolution for voluntary winding up or for the appointment of a liquidator. However, if an order for winding up of a company by or under the supervision of the Court has been passed within one year, the Special Resolution will not be valid unless sanctioned by the Court. Section 494 does not make any provision as regards the rights of creditors, who may feel that they have been affected by the scheme of transfer. As such, the only remedy available to them is to present

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a petition for compulsory winding up under the supervision of the Court within one year of the passing of the Special Resolution.

According to Section 507 of the Act, the provisions of Section 494 will apply to a creditors’ voluntary winding up as well as to members’ winding up, but with the modification that the liquidator shall have to exercise the power only with the sanction of the Court or that of the Committee of Inspection.

Provisions for Amalgamation, Mergers and Acquisitions under the Foreign Exchange Management Act, 1999 and the Regulations framed thereunder by the Reserve Bank of India.

Issue and Acquisition of Shares after Merger or de-merger or Amalgamation of Indian Companies.

As per the provisions of the regulations framed by the Reserve Bank of India, under the authority conferred upon it vide Section 47 of the Foreign Exchange Management Act, 1999, where a scheme of merger or amalgamation of two or more Indian companies or a reconstruction by way of a de-merger or otherwise of an Indian company, has been approved by a Court in India, the transferee company or, as the case may be, the new company may issue shares to the shareholders of the transferor company resident outside India, subject to the following conditions, namely; a) The percentage of shareholding of persons resident outside India in the transferee or new company

does not exceed the percentage specified in the approval granted by the Central Government or the Reserve Bank of India, or specified in the regulations. However, where the percentage is likely to exceed the percentage specified in the approval or Regulations, the transferor company or the transferee or new company may, after obtaining an approval from the Central Government, apply to the Reserve Bank of India for its approval under these Regulations, i.e., the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 1999.

b) The transferor company or the transferee or new company shall not be engaged in the agriculture, plantation or real estate business or trading in TDRs.

c) The transferee or new company files a report, within 30 days with the Reserve Bank of India, giving full details of the shares held by persons resident outside India in the transferor and the transferee company, before and after the merger or de-merger or amalgamation, as the case may be, and also furnishes a confirmation that all the terms and conditions stipulated in the scheme approved by the Court have been complied with.

Thus, it is evident that an Indian Company which merges with or amalgamates with another Indian Company can issue shares to persons resident outside India, being shareholders of the transferor company, provided the scheme of amalgamation or reconstruction is sanctioned by the High Court concerned and further, such issue is not in excess of the upper limit specified by the Central Government or the Reserve Bank of India.

The Central Government has specified various percentages for different types of industries, such as telecommunications, software, coal and lignite, hotel and tourism, films, advertising, mining and trading activities. If an Indian company accepts foreign investment upto the

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specified limits, there is no need of obtaining the approval of the reserve Bank of India nor is there any need of obtaining the Central Government’s approval. For instance, in the case of software sector, the limit of foreign investment is 100 % of the capital of the company; in the case of telecommunications it is 49 % for basic, cellular mobile, paging and value added services and 100 % for manufacturing services, in the case of drugs and pharmaceuticals and hotel and tourism it is 51 %, in the case of films and exploration and mining of gold and silver it is 100 %, in the case of coal and lignite it is 49 % for investment in Public Sector Undertakings (PSUs) and 50 % for other than PSUs.

Acquisition of / Investment in Foreign Securities by way of Stock Swap or Exchange of Shares of an Indian Company.

An Indian Company engaged in the business of Information Technology (IT) and Entertainment Software, Pharmaceutical Sector or the Biotechnology Sector, may acquire shares of a foreign company engaged in similar activity in exchange of American Depository Receipts (ADRs) or Global Depository Receipts (GDRs) issued to the latter in accordance with the scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993 and the guidelines issued thereunder, from time to time, by the Central Government, for the shares so acquired.

However, the following conditions have to be complied with, as per the Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme, 1993 ;-

1) The Indian Company has already made an ADR and/or GDR issue and that such ADRs and/or GDRs are currently listed on any stock exchange outside India.

2) The investment by the Indian company/ party in the issue of the ADRs and/or GDRs does not exceed :

a) an amount equivalent to US $ 100 million, orb) an amount equivalent to 10 times the export earnings of the Indian Party during the

preceeding financial year as reflected in its audited Balance Sheet, inclusive of all

investments made, including those made under clause (a) above, in the same financial year.

3) At least 80 % of the average turnover of the Indian Party in the preceeding three financial years is from the activities or sectors in which the Indian Party is engaged, or the Indian Party has an annual average export earnings of at least Rs.100 Crores in the previous three financial years from the activities/sectors mentioned hereinabove.

4) The ADR and/or GDR issue for the purpose of acquisition is backed by underlying fresh

equity shares issued by the Indian Party.

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5) The total holding in the Indian Party by persons resident outside India in the expanded capital base, after the new ADR and/or GDR issue, does not exceed the sectoral cap prescribed for the investment.

6) The valuation of the shares of the foreign company is made,

a) as per the recommendations of the Investment Banker if the shares are not listed on any stock exchange, or

b) based on the current market capitalization of the foreign company arrived at on the basis of monthly average price on any stock exchange abroad for the three months preceeding the month in which the acquisition is committed and over and above, the premium, if any, as recommended by the Investment Broker in its Due Diligence Report, in other cases.

Within 30 days from the date of issue of ADRs and/or GDRs in exchange for the acquisition of shares of the foreign company, the Indian Party/Company has to submit a report in Form ODG to the Reserve Bank of India. In case the Indian Party does not satisfy any of the conditions mentioned in the Scheme referred to above, the application will have to be made to the Reserve Bank of India in Form ODB.

Amalgamation of Sick Industrial Companies under the Sick Industrial Companies (Special Provisions) Act, 1985.

Though the Sick Industrial Companies (Special Provisions) Act, 1985, may have outlived its utility, it still provides a ray of hope to sick and potentially sick industrial companies. The provisions of Section 17 read with that of Section 18 of the said Act, provide that where the Board for Industrial and Financial Reconstruction (more commonly known as the BIFR) after making an inquiry under Section 16 thereto is satisfied that a company has become a sick industrial company, the BIFR shall, after considering the facts and circumstances of the case, decide whether it is possible to make the net worth of the company exceed the accumulated losses within a reasonable time.

Where the Board (BIFR) decides that it is not practicable for a sick industrial company to make its net worth exceed the accumulated losses within a reasonable time and that it is necessary in the interest of the public to do so, the Board shall by an order in writing, direct an operating agency specified in the order to prepare a scheme under Section 18 of the Act.

When an order is made by the Board, as stated above, the operating agency will prepare a scheme, as expeditiously as possible, within a period of 90 days from the date of the order which, among other schemes, provides for, under clause (c) of sub-section (1) to Section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985, the amalgamation of –

(i) the sick industrial company with any other company, or(ii) any other company with the sick industrial company.

The scheme formulated by the operating agency may provide for any one or more of the following, namely-

1) The constitution, name and registered office, the capital, assets, powers, rights, interests, authorities and privileges, duties and obligations of the sick industrial company or, as the case may be of the transferee company.

2) The transfer to the transferee company, of the business, properties, assets and liabilities of the sick industrial company on such terms and conditions as may be specified in the scheme.

3) The change in the Board of Directors, or the appointment of a new Board of Directors, of the sick industrial company and the authority by whom, the manner in which and other terms and conditions on which, such change or appointment shall be made, and in the case of appointment of a new Board of Directors or any director, the period for such appointment.

4) The alteration of the memorandum or articles of association of the sick industrial company or, as the case may be, the transferee company for the purpose of altering the capital structure thereof or for such other purposes as may be necessary to give effect to the reconstruction or amalgamation.

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5) The reduction of the interest or the rights which the shareholders have in the sick industrial company to such extent as the Board considers necessary in the interest of the reconstruction, revival or rehabilitation of the sick industrial company or for the maintenance of the business of the sick industrial company.

6) The allotment to the shareholders of the sick industrial company of shares in the sick industrial company or, as the case may be, in the transferee company and where any shareholder claims payment in cash and not allotment of shares, or where it is not possible to allot shares to any shareholder, the payment of cash to those shareholders in full satisfaction of their claims –

(a) in respect of their interest in shares in the sick industrial company before its reconstruction or amalgamation, or

(b) where such interest has been reduced, in respect of their interest as so reduced.

7) Any other terms and conditions for the reconstruction or amalgamation of the sick industrial company.

8) The continuation by, or against, the sick industrial company or, as the case may be, the transferee company of any action or other legal proceeding pending against the sick industrial company immediately before the date of the order made under sub-section (3) of Section 17 of the Act.

9) The method of sale of the assets of the industrial undertaking of the sick industrial company such as by public auction or by inviting tenders or in any other manner as may be specified and for the manner of publicity thereof.

10) Lease of the industrial undertaking of the sick industrial company to any person, including a co-operative society formed by the employees of such undertaking.

11) Transfer or issue of the shares in the sick industrial company at the face value or at the intrinsic value which may be at discount value or such other value as may be specified to any industrial company or any person including the executives and employees of the sick industrial company.

12) Sale of the industrial undertaking of the sick industrial company free from all encumbrances and all liabilities of the company or other such encumbrances and liabilities as may be specified, to any person, including a co-operative society formed by the employees of such undertaking and fixing of reserve price for such sale.

13) Such incidental, consequential and supplemental matters as may be necessary to secure that the reconstruction or amalgamation or other measures mentioned in the scheme are fully and effectively carried out.

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The scheme carried prepared by the operating agency shall be examined by the Board of Industrial and Financial Reconstruction (BIFR) and a copy of the scheme with or without modification made by the Board shall be sent, in draft, to the sick industrial company and the operating agency and in the case of amalgamation, also to any other company concerned, and the Board shall publish or caused to be published the draft scheme in brief in such daily newspapers as the Board may consider necessary, for suggestions and objections, if any, within such period as the Board may specify.

The Board may make such modifications as it may consider necessary in the light of the suggestions and objections received from the sick industrial company and the operating agency and also from the transferee company and any other company concerned in the amalgamation and from any shareholder or any creditors or employees of such companies. Where the scheme provides for the amalgamation of two or more companies, the scheme shall be laid before the company with which the sick industrial company is going to amalgamate, in the general meeting for the approval of the scheme by its shareholders and no such scheme shall be proceeded with unless it has been approved, with or without modification, by a special resolution passed by the shareholders of the transferee company.

The scheme shall then be sanctioned by the Board and shall come into force on such date as may be specified in this behalf. Different dates may be specified for different provisions of the scheme. Thus, the scheme providing for the amalgamation shall be effective from such date as may be specified by the Board after obtaining the approval of the shareholders, by special resolution, in the general meeting.

Where the sanctioned scheme provides for the transfer of any property or liability of the sick industrial company in favour of any other company or person or where such a scheme provides for the transfer of any property or liability of any other company or person in favour of the sick industrial company, then by virtue of, and to the extent provided in, the scheme, on and from the date of coming into operation of the sanctioned scheme or any provision thereof, the property shall be transferred to, and vest in, and the liability shall become the liability of, such other company or person or, as the case may be, the sick industrial company.

On and from the date of the coming into operation of the sanctioned scheme or any provision thereof, the scheme or such provision shall be binding on the sick industrial company and the transferee company or, as the case may be, the other company and also on the shareholders, creditors and guarantors and employees of the said companies. The Board may if it deems necessary or expedient so to do, by order in writing, direct any operating agency specified in the order to implement a sanctioned scheme with such terms and conditions and in relation to such sick industrial company as may be specified in the order.

Thus, the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985, provide for the amalgamation or reconstruction of a sick industrial company with a normal healthy company, in a scheme formulated by the operating agency, under Section 18 (1) (c) of the Act. The scheme has been formulated in order to save the winding up of the sick industrial company when it is

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not possible, in the opinion of the BIFR, to make its net worth exceed the accumulated losses within a reasonable period of time. As a last resort the BIFR may forward its opinion to the High Court concerned and the said High Court, having jurisdiction to wind up the sick industrial company, shall order the winding up of the said sick company in accordance with the provisions of the Companies Act, 1956, pursuant to Section 20(2) of the Sick Industrial Companies (Special Provisions) Act, 1985.

Takeovers – Their Types and Regulation of Acquisition of Shares and Takeovers by the Securities and Exchange Board of India (SEBI).

Takeovers – Its Meaning.

The term “takeover” has been defined as a business transaction whereby a person acquires control over the assets of the company, either directly by becoming the owner of those assets or indirectly by obtaining control of the management of the company. In the ordinary case, the company taken over is a smaller company, but in a “reverse takeover” a smaller company gains control over the larger company. This is different from “merger”, wherein the shareholding in the combined enterprise will be spread between the shareholders of the two companies.

Normally, the company which wants to take over the other company acquires the share of the target company either in a single transaction or a series of transactions. The regulatory framework for controlling the takeover activities of a company consists of the Companies Act, 1956, the Listing Agreement with the Stock Exchange and the SEBI’s Takeover Code.

Types of Takeovers.

There are two types of takeovers, namely, a friendly takeover and a hostile takeover. These are explained in brief hereinbelow:

1) Friendly Takeovers :A friendly takeover is done with the consent of the target company. There is an agreement between the management of the two companies through negotiations.

2) Hostile Takeovers :When the acquirer company does not offer to the target company the proposal to acquire its undertaking , but silently and unilaterally pursues efforts to gain the control against the wishes of the existing management, such acts of the acquirer are known as “takeover bids”. When

there is no understanding between the acquirer and the target company , the takeover is termed as a hostile takeover.

Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

The Securities and Exchange Board of India (more popularly known as SEBI, for convenience sake) has issued the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, to regulate the activities of takeovers by the acquirer and with “ persons acting in

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concert” with him of the target company. The main concepts/terms defined in the said Regulations have been explained hereinbelow:

1) Acquirer :An “acquirer” means any person who, directly or indirectly, acquires or agrees to acquire shares or voting rights in the target company, or acquires or agrees to acquire control over the target company, either by himself or with any person acting in concert with the acquirer.

2) Control :The term “control” ahs been defined in the SEBI Regulations as to include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner.

There are the following types of control:a) Complete ownership of the share capital.b) Majority control – on the basis of majority of voting power exercised by the controlling

person.c) Minority control – exercised through holding a block of shares while other shares are

dispersed to a large number of shareholders.d) Management control – control over the proxy gathering machinery, having regard to inertia of

shareholders, enables the existing management to maintain control, where shareholding is very widely dispersed.

3) Persons acting in concert :The term “persons acting in concert” is of vital significance for the purpose of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. The said expression has been explained in clause (e) of Regulation of the said Regulations as “persons acting in concert” comprises:

a) Persons who, for a common objective or purpose of substantial acquisition of shares or voting rights or gaining control over the target company, pursuant to an agreement or understanding (formal or informal), directly or indirectly co-operate by acquiring or agreeing to acquire shares or voting rights in the target company or control over the target company.

b) The following persons shall be deemed to be persons acting in concert with other persons in the same category, unless the contrary is established:

(i) A company, its holding company, or subsidiary of such company or company under the same management either individually or together with each other.

(ii) A company with any of its directors, or any person entrusted with the management of the funds of the company.

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(iii) Directors of companies referred to in sub-clause (i) above and their associates.(iv) Mutual funds with sponsor or trustee or asset management company (AMC).(v) Foreign Institutional Investors (FIIs) with sub-accounts.(vi) Merchant bankers with their client(s) as acquirer.(vii) Portfolio Managers with their client(s) as acquirer.(viii) Venture Capital Funds with sponsor.(ix) Banks with financial advisers, stock brokers of the acquirer, or any company

which is a holding company, subsidiary or the relative of the acquirer. However, this clause will not apply to a bank whose relationship with the acquirer or with any other company, which is the holding company or a subsidiary of the acquirer or with a relative of the acquirer, is by way of providing normal commercial banking services or such activities in connection with the offer, such as confirming availability of funds, handling acceptances and other registration work.

(x) Any investment company with any person who has an interest as director, fund manager, trustee, or as a shareholder having not les than 2 % of the paid up share capital of that company or with any other investment company in which such person or his associates holds not less than 2 % of the paid up capital of the latter company.

For the purpose of this clause the term “associate” means:a) any relative of that person within the meaning of Section 6 of the Companies Act,

1956, andb) family trust and Hindu Undivided Families (HUFs).

The persons acting in concert must have commonality of interest and objectives which could be acquisition of shares or voting rights beyond the threshold limit, or gaining control over the company and their act of acquiring the shares or voting rights in a company must serve this common objective. The burden of proof lies with those who are presumed to be acting in concert to prove otherwise, i.e., it is to be proved by the persons falling under this definition that they were not so

acting. The persons are grouped in such a manner in the same group or category that they bear such relationship amongst themselves as could justify raising of a presumption in the normal course of affairs that they are acting in concert .

4) Offer Period :The regulations require certain things to be done and certain things not to be done during the offer period. The regulations require that offers, competitive offers and revised offers will have to be done during the offer period. The term has been defined as follows:

“Offer period” means the period between the date of public announcement of the first offer and the date of closure of that offer.

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5) Promoter :The term “promoter” means :(1) (i) the person or persons who are in control of the company, or

(ii) person or persons named in any offer document as promoters;

(2) a relative of the promoter within the meaning of Section 6 of the Companies Act, 1956;(3) in case of a corporate body,

(i) a subsidiary or holding company of that body, or(ii) 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, or (iii) any corporate body in which a group of individuals or corporate bodies or

combinations thereof who hold 20 % or more of the equity capital in that company also hold 90 % or more of the equity capital of the ‘promoter’; and

(4) in the case of the individual,(i) any company in which 10 % or more of the share capital is held by the ‘promoter’ or a

relative of the ‘promoter’ or a firm or Hindu Undivided Family in which the ‘promoter’or his relative is a partner, co-parcener or a combination thereof, or

(ii) any company in which a company specified in (i) above, holds 10 % or more of the share capital, or

(iii) any HUF or firm in which the aggregate share of the promoter and his relatives is equal to or more than 10 % of the total.

6) Public Shareholding :The term “public shareholding” has been defined to mean shareholding in the hands of persons other than the acquirer and persons acting in concert.

7) Target Company :The expression “target company” has been defined in the takeover code to mean a listed company whose shares or voting rights or control is directly or indirectly acquired or is being

acquired. The definition has been provided to make a distinction between the acquirer company and the target or offeree company.

Disclosure of Shareholding and Control in a Listed Company.

As per Regulation 7 of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997, when an acquisition of shares together with the holdings already held in the company result in a person acquiring more than 5 % of the shares or voting rights, the reporting, in respect of such acquisition, has to be done by the acquirer within 4 days of such acquisition by the allotment or purchase to the company. The company is required to furnish this information within 7 days to the concerned stock exchange.

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Further, Regulation 8 requires the continuous disclosure of the shareholdings by the promoter/person who controls the company and by the bulk holder who holds more than 15 % of the shares. Such reporting has to be done within 21 days from the financial year ending on 31st March each year to the company. In case of the promoters and persons who are in control of the company, in addition to the above reporting, they have to report their holdings within 21 days of the record date fixed for the payment of dividend. The disclosure in respect of promoters and persons in control of the company should include holdings of “persons acting in concert”. In turn, the company is required to inform the stock exchanges where the shares of the company are quoted, the details of changes, if any, in the case of bulk holders, i.e., persons holding more than 15 % of the shares and in case of others the details of the holdings within 30 days of 31st March and of the record date. If there is no change as compared to the earlier reporting, the company need not make any disclosure to the stock exchanges, but in order to avoid correspondence in this regard it would be advisable to send a “no change report”.

As per Regulation 9, the stock exchanges and the companies are required to furnish the above information to the SEBI as and when required.

Substantial Acquisition of Shares or Voting Rights in and Acquisition of Control over a Listed Company.

An acquirer cannot acquire any shares or voting rights in a company if the proposed acquisition together with his holding of shares or voting rights of the persons acting in concert with him will entitle him to exercise 15 % or more voting rights in a company unless he makes a public announcement to acquire shares of such company in accordance with the regulations.

In case of those acquirers who hold alongwith persons acting in concert 15 % or more but less than 75 % of the shares or voting rights such an announcement is mandatory only if during a period of 12 months the acquisition of the shares exceeds 5 % of the voting rights. This will apply to indirect acquisition also, by virtue of acquisition of shares in the holding company also. A public announcement has to be made to the shareholders of each listed company when several companies are

acquired through acquisition of a single company. In case the acquirer holds 75 % or more voting rights then for additional acquisition of shares or voting rights a public announcement is required.

Regulation 12 requires the making of a public announcement to acquire control over the target company with or without acquisition of shares or voting rights. However, a change in control as a result of a resolution passed by the shareholders in a general meeting will not trigger in, the regulations.

Minimum Number of Shares to be Acquired.

As per Regulation 21 of the SEBI Regulations, the following criteria are prescribed in regard to the minimum number of shares which are to be acquired by the offerer for giving effect to the takeover of a company by substantial acquisition of its shares :-

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(1) The public offer is required to be made to the shareholders of the target company to acquire from them an aggregate minimum of 20 % of the voting capital of the company.

(2) In case the acquirer already holds 75 % or more shares or voting rights and wish to acquire further shares or voting rights then, the public offer shall be for such percentage of the voting capital of the company as may be decided by the acquirer.

(3) Clause (1) above is not applicable in case the offer is conditional upon the minimum level of acceptances from the shareholders and the acquirer has deposited in the escrow account in cash a sum of 50 % of the consideration payable under the public offer.

(4) If as a result of the acquisition, the public holding is reduced to 10 % or less, the acquirer is required to either make out within 3 months from the date of the closure of the public offer, a public offer for buying the said 10 % at the same price as the public offer or to disinvest through offer of sale or by a fresh issue of capital such number of shares so as to satisfy the listing requirements, within 6 months of the closure of the public offer.

(5) Where the number of shares offered for sale by shareholders are more than the shares agreed to be acquired by the person making the offer, such person is required to accept the offers on a proportionate basis in consultation with the merchant banker, taking care that the basis of acceptance is decided in a fair and equitable manner and does not result in non-marketable lots.

(6) The acquisition of shares from the shareholders should not be less than marketable lots or the entire holding if it is less than the marketable lot.

(7) For the purpose of computing the percentages, in clauses (1) to (4) above, the voting rights as at the expiration of 30 days after the closure of the public offer is reckoned.

Applicability of the Regulations.

The Regulations of the takeover code require a public announcement to be made in case the acquisition of shares exceeds the threshold limits prescribed in these regulations, or acquisition of control over a company or on consolidation of shareholdings as stipulated in Regulation 11. However, these regulations are not applicable to the following :-

(1) Allotment made in a public issue subject to stated stipulations.

(2) Allotment to the extent of entitlement in a Rights Issue and allotment of additional shares or on renunciations subject to stated stipulations.

(3) Preferential Allotment subject to stated stipulations.

(4) Allotment to underwriters pursuant to an underwriting agreement.(29)

(5) Inter-se transfer of shares amongst :(a) group companies coming within the definition of the term “group” under the Monopolies and

Restrictive Trade Practices Act, 1969. (b) Relatives within the meaning of the term set out in Section 6 of the Companies Act, 1956.(c) Indian promoters and foreign collaborators who are shareholders.(d) Promoters.

(6) Acquisition of shares in the ordinary course of business by registered stock brokers on behalf of their clients, a registered market maker in respect of shares for which he is market maker during the course of market making.

(7) Acquisition of shares by way of transmission.

(8) Acquisition of shares by the Government Companies which come within the definition of the said term as set out in Section 617 of the Companies Act, 1956 and statutory corporations.

(9) Transfer of shares from State Level Financial Institutions or its subsidiaries to the co-promoters pursuant to an agreement.

(10) Shares acquired under the scheme framed under the Sick Industrial Companies (Special Provisions) Act, 1985 and under the scheme of amalgamation or merger under any law or regulation, whether it be Indian or foreign.

(11) Acquisition of shares in an unlisted company, unless such acquisitions results in acquisition of voting rights or control of a listed company.

Acquisition exceeding 5 % of the voting share capital and falling under clauses (3), (5) (8) and (9) above, are required to be reported by the acquirer at least 14 working days before the date of acquisition to the Stock Exchange(s) where such share are quoted.

In regard to acquisitions falling under clauses (1), (2), (3), (5) and (9) above, if the acquisition alongwith the existing holding of the acquirer and persons acting in concert would result in such person exercising 15 % or more voting rights then such acquisitions have to be reported to SEBI within 21 days of the acquisition by the acquirer alongwith a fee of Rs.10,000.

Procedure for Seeking Exemption under Regulation 3(1) from the Securities and Exchange Board of India.

For the purpose of seeking exemption under Regulation 3(1) from SEBI, the person making the application has to follow the following procedure:

(1) An application has to be made by the acquirer to the SEBI for exemption as stated above setting out the grounds on which the exemption is being sought alongwith a fee of Rs.25,000.

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(2) SEBI will refer all such applications to a Takeover Panel constituted under Regulation 4 for the purpose.

(3) The reference to the Panel is to be made within 5 days of the receipt of the application.

(4) The Panel will within 15 days from the date of application make a recommendation on the application to the Board, i.e., SEBI.

(5) The Board shall, after affording a reasonable opportunity to the concerned parties and after considering all the relevant facts including the recommendations, if any, pass a reasoned order on the applications, within 30 days and publish the same.

Competitive Bid.

A competitive bid can be made by any person, other than the acquirer who has made the first public announcement, within 21 days of the public announcement of the first offer by making a public announcement thereof for acquisitions of shares of the same target company. The competitive offer by an acquirer is required to be for such number of shares which, when taken together with the shares already held by him are not less than the number of shares for which the first offer is made. On the public announcement of the competitive bid, the first acquirer(s) have the option either to revise the offer or withdraw the same with prior consent of SEBI.

This option has to be exercised within 14 days of the announcement of the competitive bid, or else the earlier offer on the original terms shall continue to be valid and binding on the acquirer. However, the date of closure shall stand extended till the closure of the last subsisting competitive bid.

The acquirer who made the first offer or the acquirer making the competitive bid may make an upward revision in their offers in respect of the price and number of shares to be acquired at any time upto seven working days prior to the date of closure of the offer. This information is to be

published in all the newspapers in which the original offer announcement was made. Information has also to be sent to SEBI, all the Stock Exchanges on which the shares of the company are listed and the target company at its registered office. The value of the escrow account is to be increased accordingly. The date of closure of all the offers shall be date of closure of the public offer under the last subsisting competitive bid.

Withdrawal of Offer.

A public offer, once made, shall not be withdrawn except under the following circumstances :

(a) the withdrawal is consequent upon any competitive bid ;(b) the statutory approvals required have been refused ;

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(c) the sole acquirer, being a natural person, has died ;(d) such circumstances as in the opinion of the Board merits withdrawal.

In the event of the withdrawal of the offer under any of the circumstances specified above, the acquirer or the merchant banker shall;

(a) make a public announcement in the same newspapers in which the public announcement of the offer was originally published, indicating the reasons for such withdrawal of the offer; and

(b) simultaneously with the issue of such public announcement, inform SEBI, all the Stock Exchanges on which the shares of the company are listed and the target company at its registered office.

Payment of Consideration by the Acquirer.

The acquirer is under an obligation to open a separate bank account to avoid delay in the payment of consideration to the shareholders. For the amount of consideration payable in cash, mode of payment of consideration has been standardized in the same manner as the refund account procedure for primary issues, so that the full amount of consideration payable to the shareholders may be deposited in a separate bank account within a period of 21 days from the date of closure of the offer and which should lie therein for a minimum period of three years and thereafter transferred to the Investor Protection Fund of the Regional Stock Exchange of the target company. In respect of the consideration payable by way of exchange of securities, the acquirer shall ensure that the securities are actually issued and dispatched to the shareholders.

Minimum Offer Price to acquire the shares of the Target Company.

The offer price to acquire the shares is to be made at a minimum offer price, which shall be the highest of the following :

(1) Negotiated price;

(2) Highest price paid by the acquirer for any acquisitions including in a public or rights issue during the period of 26 weeks prior to the date of public announcement.

(3) Price paid by the acquirer under a preferential allotment made to him or to persons acting in concert with him, at any time during the period of 12 months upto the date of closure of the offer.

(4) Higher of the average of the weekly high and low of the 26 weeks immediately prior to the date of public announcement (where the shares of the target company are most frequently traded).

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Where the shares of the target company are infrequently traded the offer price shall be determined by the acquirer and the merchant banker taking into account the above stated points (1) to (3) and other parameters including the return on net worth, book value of the shares of the target company, earnings per share (EPS), price earnings multiple (P/E ratio) vis-à-vis the industry average. Shares are deemed to be infrequently traded if on the stock exchange, the annualized trading turnover during the preceeding 6 calendar months prior to the month in which the public announcement is made is less than 2 % (by number of shares) of the listed shares. The weighted average number of shares listed during the said 6 months period may be taken.

The offer price is to be paid,(a) in cash, or(b) by exchange of shares of the acquirer company if it is a listed company, or(c) by exchange and/or transfer of secured instruments with a minimum of ‘A’ Grade Rating

from a credit rating agency, or(d) a combination of the aforesaid methods.

Where payment has been made in cash to any class of shareholders for acquiring shares during the preceeding 12 months from the date of public announcement under any agreement or pursuant to any acquisition in the open market or in any other manner, the offer document has to provide that the shareholders have an option to accept payment in cash or by exchange of shares or other secured instruments. Where the acquirer has acquired the shares in the open market or through negotiation or otherwise, after the date of the public announcement at a price higher than the minimum offer price stated in the letter of offer, then the highest price paid for such acquisition is to be paid for all acceptances received under the offer. However, no acquisition can be made by the acquirer during the last seven working days prior to the closure of the offer.

General Obligations of the Acquirer.

The acquirer has to comply with the following general obligations as provided under Regulation 22 of the SEBI Takeover Code :

(1) The public announcement is to be made only when the acquirer is able to implement the offer.

(2) Within 14days from the public announcement of offer, the acquirer has to send a copy of the draft Letter of Offer to the target company at its registered office address for being placed before its Board of Directors and to all the Stock Exchanges where the shares of the company are listed.

(3) Acquirer has to ensure that the Letter of Offer is sent to all the shareholders (including NRIs) of the target company whose names appear on the Register of Members on the specified date so as to reach them within 45 days from the date of public announcement and it is also sent to the custodians of GDRs or ADRs.

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(4) A copy of the Letter of Offer is also required to be sent to warrant holders or convertible debentureholders, if the period of the option or conversion falls within the offer period.

(5) The date of opening of the offer cannot be later than the sixtieth day from the date of public announcement and the offer is required to remain open for a period of 30 days.

(6) During the offer period, the acquirer or persons acting in concert with him are not entitled to be appointed on the Board of Directors of the target company.

(7) If any person having interest in the acquirer company is already a director on the Board of the target company or is an “insider” within the meaning of SEBI (Insider Trading) Regulations, 1992, he cannot participate in any matter relating to the offer.

(8) The acquirer has to create an escrow account on or before the date of issue of public announcement.

(9) The acquirer has to ensure that firm financial arrangement has been made for fulfilling the obligations under the public offer.

(10) The acquirer shall, within a period of 30 days from the date of closure of the offer, complete all the procedures relating to the offer including payment of consideration to the shareholders who have accepted the offer and for this purpose has opened a special account called an “escrow account”.

(11) Where the acquirer is unable to make payment within the abovesaid period to the shareholders due to non-receipt of the requisite statutory approvals and SEBI is satisfied that it is not due to willful default or neglect of the acquirer, it may grant extension of time subject to the acquirer agreeing to pay interest to the shareholders for delay beyond 30 days.

(12) Where deny is due to willful default or neglect or inaction on the part of the acquirer the amount lying in the escrow account is liable to be forfeited.

(13) In the event of the withdrawal of the offer in terms of the Regulations, the acquirer shall not make any offer for acquisition of shares of the target company for a period of 6 months from the date of public announcement of withdrawal of the offer.

(14) In the event of non-fulfillment of the obligations under Chapter III or IV of the Regulations the acquirer shall not make any offer for acquisition of shares of any listed company for a period of 12 months from the date of closure of offer.

(15) If the acquirer, in pursuance of an agreement, acquires shares which along with his existing holding, if any, increases his shareholding beyond 15 % then such an agreement for sale of shares must contain a clause to the effect that in case of non - compliance of the general

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obligations of the acquirer under Regulation 22, the agreement for such sale shall not be acted upon by the seller or the acquirer.

(16) Where the acquirer or persons acting in concert with him has acquired any shares in the open market or through negotiation or otherwise, after the date of public announcement, he has to disclose the number, percentage, price and the mode of acquisition of such shares to the Stock Exchanges on which the shares of the target company are listed and to the merchant banker, within 24 hours of such acquisition.

(17) The acquirer, where he has acquired control over the target company, shall be debarred from disposing off or otherwise encumbering the assets of the target company for a period of 2 years from the date of closure of public offer unless intention for the same was stated in the announcement and/or letter of offer.

General Obligations of the Board of Directors of the Target Company.

As per Regulation 23, the general obligations of the Board of Directors of the target company are as follows :

(1) Unless the approval of the general body of shareholders is obtained after the date of the public announcement of offer, the Board of Directors of the target company shall not, during the offer period –

(a) sell, transfer, encumber or otherwise dispose off or enter into an agreement for sale, transfer, encumberance or for disposal of assets otherwise, not being sale or disposal of assets in the ordinary course of business, of the company or its subsidiaries, or

(b) issue any authorized but unissued securities carrying voting rights during the offer period, or

(c) enter into any material contracts.

Restriction on the issue of securities under clause (b) above, shall not affect the right of the target company to issue and to allot shares carrying voting rights upon conversion of debentures already issued or upon exercise of option against warrants, as per pre-determined terms of conversion or exercise of option.

(2) The target company shall furnish to the acquirer, within 7 days of the request of the acquirer or within 7 days from the specified date whichever is later, a list of shareholders or warrant holders or convertible debentureholders as are eligible for participation, containing the names, addresses, shareholding and folio number and of those persons whose applications for registration of transfer of shares are pending with the company.

Once the public announcement has been made , the Board of Directors of the target company shall not –

(a) appoint as additional director or fill in any casual vacancy by any person representing the acquirer till the certification by the Merchant Banker for completion of all procedural formalities by the acquirer. However, after the closure when the full

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amount payable to the shareholders has been deposited in an escrow account, changes in the constitution of the Board is possible;(b) allow the person or persons representing or having interest in the acquirer who is

already a director on the Board of the target company to participate in the matters relating to the offer.

(3) The Board of Directors of the target company may send their unbiased comments and recommendations on the offer to the shareholders. For any mis-statement or for concealment of material information the directors shall be liable.

(4) The Board of Directors of the target company has to facilitate the acquirer in verification of securities tendered for acceptance.

(5) Upon fulfillment of all the obligations by the acquirer as certified by the Merchant Banker, the Board of Directors of the target company has to transfer the securities acquired by the acquirer in the name of the acquirer and allow changes in the Board.

General Obligations of the Merchant Banker.

As per Regulation 24, the general obligations of the merchant banker are as follows:(1) Before the public announcement is made the merchant banker shall ensure that –

(a) the acquirer is able to implement the offer ;(b) the provisions relating to escrow account has been made ;(c) the public announcement is in terms of SEBI takeover Code.

(2) The merchant banker is required to furnished to the SEBI a due-diligence certificate alongwith the draft letter of offer.

(3) The merchant banker has to ensure that the draft public announcement and the letter of offer is filled with the SEBI, target company and to all Stock Exchanges on which the shares of the target company are listed in accordance with the regulations.

(4) The merchant banker has to ensure that the contents of the public announcement of the offer as well as the letter of offer are true, fair and adequate.

(5) The merchant banker has to ensure compliance of the regulations and any other laws or rules as may be applicable in this regard.

(6) The merchant banker is required to send a final report to the Board, i.e., SEBI, within 45 days from the date of closure of the offer.

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Procedure for Takeovers and Acquisitions.

The procedure for takeover has been provided in Chapter III of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. The basic procedure to be followed for effecting a scheme of takeover or acquisition is briefly summarized below :-

(1) Appointment of Merchant Banker :Before making any public announcement, the acquirer is required to appoint a Category – I Merchant Banker holding a Certificate of Registration granted by SEBI to advise him on the acquisition and to make a public announcement of the offer on his behalf.

(2) Making the Public Announcement of Offer :The public announcement of offer should be made within 4 days of entering into the agreement or Memorandum of Understanding to acquire the shares or voting rights or acquisition of voting rights on conversion of Global Depository Receipts (GDRs) or American Depository Receipts (ADRs). The public announcement in case of acquisition of control over a company is required to be made not later than 4 working days after such change or changes are decided to be made resulting in the acquisition of control over the target company by the acquirer.

(3) Contents of the Public Announcement of Offer :The public announcement should contain the following particulars :

(a) The paid-up share capital of the target company, the number of fully paid-up and partly paid-up shares.

(b) The total number and percentage of shares proposed to be acquired from the public, subject to a minimum of 20 % of the voting capital of the company.

(c) The minimum offer price for each fully paid-up or partly paid-up share.(d) Mode of payment of consideration.

(e) The identity of the acquirer and in case the acquirer is a company or companies, the identity of the promoters and, or the persons having control over such companies and the group, if any, to which the companies belong.

(f) The existing holding, if any, of the acquirer in the shares of the target company, including holdings of persons acting in concert with him.

(g) Salient features of the agreement, if any, such as the date, the name of the seller, the price at which the shares are being acquired, the manner of payment of the consideration and the number and percentage of shares in respect of which the acquirer has entered into the agreement to acquire the shares or the consideration, monetary or otherwise, for the acquisition of control over the target company, as the case may be.

(h) The highest and the average price paid by the acquirer or persons acting in concert with him for the acquisition, if any, of shares of the target company made by him during the 12 month period preceeding the date of public announcement.

(i) The “specified date”, as mentioned in Regulation 19.(j) The date by which individual letters of offer would be posted to each of the shareholders.(k) The date of opening and closure of the offer and the manner in which and the date by

which the acceptance or rejection of the offer would be communicated to the shareholders. (37)

(l) The date by which the payment of consideration would be made for the shares in respect of which the offer has been accepted.

(m) Disclosure to the effect that firm arrangement for the financial resources required to implement the offer is already in place, including details regarding the sources of the funds whether domestic or otherwise or foreign.

(n) Provisions for acceptance of the offer by persons who own the shares but are not the registered holders of such shares.

(o) Whether the offer is subject to a minimum level of acceptance from the shareholders.(p) Such other information as is essential for the shareholders to make an informed decision in

regard to the offer.

(4) Media for Announcement :The public announcement is required to be made in all editions of one English National Daily with wide circulations, one Hindi National Daily with wide circulation and a regional language daily with wide circulation at the place where the registered office of the target company is situated and at the place of the Stock Exchange where the shares of the target company are most frequently traded.

(5) Furnishing of Copy of Public Announcement :A copy of the public announcement is required to be submitted to the SEBI through the merchant banker at least two working days before its issuance. The copy is simultaneously required to be sent to all Stock Exchanges on which shares of the company are listed or being listed or being notified on the notice board and to the target company at its registered office for being placed before the Board of Directors of the Company.

(6) Submission of Letter of Offer to SEBI :

The acquirer has to file, through its merchant banker, with SEBI the draft of the letter of offer containing disclosure as specified by the SEBI alongwith filing fee of Rs.50,000 within 14 days from the date of public announcement . A copy thereof has to be sent to the target company and all the concerned Stock Exchanges.

(7) Despatch of Letter of Offer to the Shareholders : The letter of offer is required to be sent to the shareholders not earlier than 21 days from its submission to SEBI. The merchant banker and acquirer have to carry out the changes, if any, as may be specified by SEBI in the letter of offer before dispatching the same to the shareholders. If the changes have not been specified by SEBI within 21 days from the date of submission of the letter of offer thereto, the same can be sent to the shareholders. The public announcement shall specify a date, which is called the “specified date” for the purpose of determining the names of the shareholders to whom the letter of offer should have been sent. The “specified date” cannot be later than the thirtieth day from the date of the public announcement.

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Provisions for Escrow Account.

As per the SEBI Takeover Regulations, cash is require to be deposited in an Escrow Account before the public announcement and the cash so deposited therein will be forfeited if the acquirer fails to fulfill his obligations. The amount to be deposited in the escrow account is calculated as under:

(a) For consideration payable under the public offer : If the consideration is upto Rs.100 Crores then the amount to be deposited in the escrow account is 25 % and in case the amount is exceeding Rs.100 Crores, then the amount to be deposited in the said account is 25 % upto the first Rs.100 Crores and 10 % thereafter.

(b) For offers which are subject to a minimum level of acceptance :Where the acquirer does not want to acquire a minimum of 20 %, then 50 % of the consideration payable under the public offer in cash is required to be deposited in the escrow account.

The escrow account consists of –

(1) Cash deposited with a scheduled commercial bank.

(2) Bank guarantee in favour of the merchant banker.

(3) Deposit of acceptable securities with appropriate margin with the merchant banker.

(4) Cash deposited in case offers are subject to minimum level of acceptance.

Obligations of the Acquirer in regard to Escrow Account : (1) Where the escrow account consists of deposits with a scheduled commercial bank, the acquirer is

obliged to empower the merchant banker to operate the escrow account.

(2) Where the escrow account consists of bank guarantee, the acquirer is obliged to issue the same in favour of the merchant banker.

(3) Where the escrow account consists of deposit of acceptable securities, the acquirer is obliged to empower the merchant banker to realize the value by sale or otherwise.

(4) Where the escrow account consists of bank guarantee or approved securities, the bank guarantee or the approved securities are not to be returned to the acquirer until all the obligations have been completed by the acquirer under these Regulations. Further, the acquirer is also required to deposit with the bank a sum of at least 1 % of the total consideration payable as and by way of security.

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Bailout Takeover.

According to Regulation 30 of the SEBI Takeover Regulations, 1997, the substantial shares of a financially weak company can be acquired in pursuance of a scheme of rehabilitation by a public financial institution or a scheduled bank. The lead institution is responsible under the regulations for ensuring compliance with the provisions of the Takeover Code. The lead institution has to appraise the financial weak company taking into account the financial viability and assess the requirement of funds for the revivals and draft the rehabilitation package on the principle of protection of interests of minority shareholders, good management, effective revival and transparency. The scheme shall also provide for any change in management and for acquisition of shares in the said company in a manner of outright purchase of shares or exchange of shares or a combination of both. Such a scheme can also include the elimination of the existing promoters.

To facilitate the takeover of the financially weak company, the lead institution can invite offers for acquisition of the shares of the said company from at least three parties. The lead institution evaluates the bids received with respect to the purchase price or exchange of shares, track record, financial resources and reputation of the management of the person acquiring the shares. The offers are listed in the order of preference and after consultation with existing management of the financially weak company, the lead institution will accept one of the bids.

Offer by Persons Acquiring Shares.

The person acquiring the shares is required to make a formal offer to acquire shares from shareholders including promoters or from persons in charge of the management of such company or financial institutions. The price for such offer is determined through mutual negotiations between the person acquiring the shares and the lead institution.

Public Announcement by Persons Acquiring Shares.

The persons acquiring the shares are required to make a public announcement of their intention for acquisition of shares from the other shareholders of the company which should contain relevant details about the offer including the information about the identity and background of the persons acquiring the shares, number and percentage of shares proposed to be acquired, offer price, the specified date, date of opening of the offer and the period for which the offer shall be kept open and such other relevant as may be required by the SEBI. The offeror is also required to send a letter of offer to the shareholders of the financially weak company, if after the offer, the public shareholding is reduced to 10 % or less of the voting capital of the company. The acquirer is required to;

(a) make an offer to buy out the outstanding shares remaining with the shareholders within a period of 3 months from the date of closure of the public offer at the same offer price, which may have the effect of delisting the target company, or

(b) undertake to disinvest to the public within 6 months from the date of closure of public offer such number of shares so as to satisfy the listing requirements.

(40) The above stated options of the acquirer should be stated in the letter of offer. The acquirer is obliged to acquire the entire holding of an individual shareholder, if such holding is upto 100 shares of the face value of Rs.10 each or 10 shares of the face value of Rs.100 each.

Competitive Bid for a Financially Weak Company.

No person shall make a competitive bid for the acquisition of shares of the financially weak company once the lead institution has evaluated the bid and accepted the bid of the acquirer who has made the public announcement of offer for acquisition of shares from the shareholders other than the promoters or the persons in charge of the management of the financially weak company.

Exemptions from the operation of Chapter III of the SEBI Takeover Regulations.

An offer for acquisition of shares of a financially weak company may be exempted from the provisions of Chapter III of the Regulations, i.e., regarding acquisition of shares or voting rights over a listed company. An application has to be made to the SEBI by the acquirer. However, even if the exemption has been granted the lead institution and/or the acquirer are obliged to adhere to the time limits specified for various activities of public offer specified in Chapter III of the Regulations.

Share & Asset Valuation and Price Bidding in Takeovers.

Necessity of Share Valuation.

In order to arrive at the true value of consideration to be paid to the offerree in the takeover bid, valuation of the assets of the transferor company becomes very essential. In the course of time several methods have evolved in share and asset valuation. Share valuation has become very essential because it is necessary to know the exact number of shares that are required to be offered by the transferee company to the transferor company. The valuation of shares may be done on the basis of the price earnings ratio or may be done on the basis of dividend and earnings of the company. The exchange ratio is dependant on the valuation of the shares.

Methods of Asset Valuation.

There are several methods to value the assets of the transferor company in order to know the value required to be paid as net purchase consideration while negotiating a scheme of amalgamation or takeover. The general methods of asset valuation are explained briefly herein below :

(1) Valuation based on Capitalized Earning Power :This method is applied to inter corporate transfers of assets and requires the amount of earning power and the rate at which this amount be capitalized. It involves two aspects, namely, determination of capitalization rate and the earning power. As regards the determination of earning power. A weighted average giving more weight to recent earnings may be used. Determination of capitalization rate is important as the earning power is to be capitalized. The company which is

making a takeover bid generally adopts the rate at which it regularly earns on its own capital investment.

(2) Goodwill or Going Concern Valuation : In this method, a certain rate of return on tangible assets is arrived at from the average earnings for the years taken. The remainder represents the company’s excess earning power, which capitalized on the basis of a certain number of years purchase, gives the value of the goodwill. The value of goodwill, added to the value of the tangible assets, constitute the value of the company as a going concern.

(3) Market Value Method : It rests on the quoted value of the company’s stocks on the Stock Exchanges. This method is used when there is a broad market for the company’s securities. These quotations should be averaged over a period of time.

(4) Investment Value Method : In this method, the amount of cash outlay actually paid to develop the enterprise and bring it up to its present state of productivity is taken into account. This method is good for a company which

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has been recently organized to develop a new process or invention. Rate of interest is added to the rate of return on investments when the organization starts earning revenue to arrive at a rate of return.

(5) Book Value :It represents a fair and equitable basis of value determination and the purchase price provided the accounting practices and convention are fully adhered to.

(6) Cost less Depreciation : This method is an improvement on the book value method as it includes a write-up of assets. The

fairness of this method depends upon the company’s depreciation policies.

(7) Reproduction Cost : This method takes into account the real cost of putting a new company again on the lines of the

subject company and thus whatever the cost of new venture comes to it should be the basis of valuation. This method takes into account the market value of the assets at which they could be acquired at prevailing prices at the date of valuation. Allowances are made for the user of plant and machinery which are old like cost less depreciation method. This method is not generally used, but is just mentioned for academic reference.

(8) Substitution Cost : This is again a hypothetical method which presupposes cost of constructing a plant that would

possess the same utility to the purchaser and would have the same capacity but that might not

necessarily be similar in design and material or located in the same place. Allowance is made for the age of the plant considered for acquisition.

Methods of Share Valuation.

Share valuation and price bidding for a company whose stocks are contemplated to be acquired requires a thorough consideration of the elements which are considered in the above method of valuation of assets to arrive at an imaginary true value. This is so because share valuation is a very difficult exercise in view of the fluctuations in the share prices, which are regulated due to the speculative activities of the stock brokers and investors. The following are the two principal valuation methods for valuation of shares :

(1) Valuation based on Dividends, Earnings and Cash Flows :According to Graham, Dodd and Cottle dividends play a predominant role in stock valuation. The theory states that a common stock is worth the sum of all the dividends to be paid on it in the future, each discounted to its present value. Miller and Modigliani have shown that in certain conditions, in particular where tax position on dividends and retained earnings should be unimportant in assessing the returns to the shareholders. This controversy seems to have been resolved by Samuel and Wilkies when we noted that under the assumption as noted above, the

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share price will be the same whether calculated on a dividend or on an earning basis as demonstrated below :

At time “t” let,I(t) = Firms total investment, including any replacement investment.C(t) = Source of funds from operation, net of taxesN(t) = New borrowings or stock issues less repayment of any loanF(t) = Total cash flow of the firmL(t) = Interest paymentsD(t) = Dividend to those shareholders who hold shares at time ‘0’A(t) = Dividend to the new shareholders, shares issued between period ‘0’ and period ‘t’.N = Number of shares.

Source of Funds :

F(t) = N(t) + C(t) (1)

Uses of Funds :

F(t) = D(t) + L(t) + A(t) + I(t) (2)D(t) = F(t) – A(t) – I(t) – L(t) OrD(t) = C(t) + N(t) – a(t) – I(t) – L(t) (3)

The shareholders at time ‘0’ expect the total dividends D(t) to be equal to the cash flow of the firm, less expected interest payments, dividend payments to new shareholders and investment needs. If P(0) is the price of one share at period zero, then,

P(0) = 1/n E (t=1) D(t) / (1+i)t (4)

= 1/n E (t=1) {F(t) – A(t) – I(t) – L(t) / (1+I)t}

If we add ‘W’ to the equation number (3) as the figure for depreciation funds maintained by the company for investment purposes the equation (3) will be rewritten as under :

D(t) + W(t) = C(t) – L(t) + W(t) – I(t) + N(t) – A(t) (5)

D(t) = ( C(t) – L(t) – W(t) ) – ( I(t) – W(t) – N(t) ) – (t) (6)

The expression ( C(t) – L(t) – W(t) ) is in accounting terminology the profits of the firm, net income from operation, less interest less depreciation. Define this as Y(t). The expression [ I(t) – W(t) – N(t) ] = R(t) represents the gross investments of the firm, less the funds provided by the provision for depreciation and from any new borrowings or new issues and it is this amount of

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investment that has to be financed from retained earnings. This quantity which the shareholders expect to be reinvested may be defined as `R’. Now it is possible to rewrite equation (4) as under : P(0) = 1/n E (t = 1) D(t) / (1+i)t = 1/n E (t=1) [Y(t) – R(t) – A(t) ] / (1+i)t (7)

Now, [Y(t) – R(t) – A(t)] represents all the funds which remain from company’s operations during the year that are available for dividend to those who were shareholders at the beginning of the period. Therefore, either the earnings approach described or the dividend approach can be used to determine the company’s price. They lead to the same results if the tax provisions of dividend, and retained earnings is the same. However, with change in taxation for either, the results will differ. However, both the methods could be used as complementary to each other.

In the above model a reference is made to cash flow. In a survey carried out by Kaplan and Roll in the U.S.A., it has been inferred that companies are valued more on cash flow basis than on retained earnings basis.

(2) Valuation based on Price – Earning Ratio : It is a simpler way of valuing a company’s shares. An analysis of expected growth in earnings of the company relative to the expected growth in earnings of the rest of the market will indicate whether the company’s existing price-earnings ratio is realistic as compared to the general level of ratios.

The valuation involves a comparison of P/E ratio for a particular company with the P/E ratio for companies in the same class. For instance, if the P/E ratio for a particular company is 15:1 and the actual market ratio for the company at the current price is 12:1, then the share is being under valued. The share would have to rise in price by 25 % before what is considered the appropriate price-earning level would be reached.

The valuation based on price-earning level is easy but not accurate. Results will differ on the basis whether actual earning figure or normalised earning figure are being used by the analyst. However, normalised earnings figure is more meaningful for long-term assessment of share valuation, whereas the actual earnings figures are safer for the short-term price movement.

Price-earnings ratio plays an important role in merger evaluation. The P/E exchange ratio is the P/E ratio of the transferee company divided by the P/E ratio of the transferor company, i.e.,

P/E Exchange Ratio = P/E ratio of Transferee Company P/E ratio of Transferor Company The transferee company is concerned with this ratio because of its effect on earnings per share (EPS) after the merger . When the P/E ratio is greater than one ( i.e., the

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transferee’s P/E ratio is greater than that of the seller) the merger proposal is considered from the buyer’s point of view . This is so because the EPS of the combined entity will be less than the EPS of the buyer whenever the P/E ratio is less than one. Buyers do not go in for merger when it results in the dilution of current EPS because of the presumed bad effect of this dilution of stock price and stockholders’ wealth. The dilution of current EPS caused by an acquisition may be more than offset by other factors. The acquisition may, for instance, lead to increased earnings growth expectations and as a result, the stock price may increase.

Price Bidding for Acquisition.

The dividend approach and the earning approach may be used to value shares and it is upon this value that the share price bidding is resumed by the interested investors. Share price bidding is affected by dividend and retained earnings. Under certain assumptions, as propounded by Miller and Modigliani (known as the M&M Theory, for convenience sake), the share price is independent of the dividend declared. Any reduction in current dividends will be offset by an increase in the share price. This argument is true when a company is a going concern. On the other hand, where a company’s existence is threatened by merger or takeover bids, the retained earnings and dividend both come to its rescue as the shareholders can be motivated to counter the takeover bid.

The company may project an ambitious future programme for its expansion or diversification and may project an attractive profitability for maintaining shareholder confidence and this declaration may strengthen the investors sentiments and increase the demand for shares bidding and may also cause the prices to `sky rocket’. Valuation of shares affect the price bidding. Investors

would hesitate to cross their limitations if they know the value of the share of the company unless the deal is speculative or is based on interior motives of take-over through acquiring stock in the open market by a mighty financial group. Instances of such takeover bids are noted in India in cases of DCM and Escorts Limited, where the Capro Group Companies represented by the non-resident Indian tycoon Lord Swaraj Paul were out to purchase the stocks at highest prices bid by him through the broker in the Stock exchanges, ignoring the Foreign exchange Regulation Act, 1973 (as it then existed). In such situations extra-academic factors dominate and the bidding continues to inflate the share price in the market. Such takeover bids exert the financial strength of a particular group interested in takeover of a particular concern and simultaneously reflect on the weapons of the subject company’s management.

Legal Aspects of Acquisition of Shares and Takeover Bids under the Companies Act, 1956.

The Companies Act, 1956, places restrictions on the acquisition of shares and prohibits takeover bids by groups or combines. With the restructuring of the Monopolies and Restrictive Trade Practices Act, 1969, in the year 1991,the provisions of Sections 108A to 108I of the Companies Act, 1956 have made express provisions for restricting the acquisition and takeover bids in certain cases.

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Acquisition of Shares to Require Central Government Approval in certain cases [Section 108A].

As per the provisions of Section 108A of the Companies Act, 1956, no individual, firm or group, constituent of a group, body corporate or bodies corporate under the same management (known as the acquirer) shall acquire or agree to acquire more than 25 percent of the paid-up equity share capital of a public company or a private company which is a subsidiary of a public company [now vide the Companies (Amendment) Act, 2000 a private company which is a subsidiary of a public company will be treated as a public company ], without the previous approval of the Central Government. Further, in such a case, no –

(a) company in which not less than 51 percent of the share capital is held by the Central Government, or

(b) corporation (not being a company) established by or under any Central Act, or(c) financial institution,

shall transfer or agree to transfer any share to such acquirer unless the acquirer has obtained the previous approval of the Central Government for acquisition of such shares.

Restrictions on the Transfer of Shares in certain cases [Section 108B].

Every body corporate or bodies corporate under the same management holding whether singly or in the aggregate 10 percent or more of the subscribed equity share capital of any company shall intimate to the Central Government of the proposal for the transfer of one or more such shares.

The intimation to the Central Government shall include a statement regarding the particulars of the shares proposed to be transferred, the name and address of the person to whom the shares are proposed to be transferred, the shareholdings, if any, of the proposed transferee in the concerned company and such other particulars as may be prescribed. Where, on the receipt of the intimation, the Central Government is satisfied that as a result of such transfer, a change in the composition of the Board of Directors of the company is likely to take place and that such change would be prejudicial to the interest of the company or to public interest, it may by order direct that,

(a) no such shares shall be transferred to the proposed transferee, or(b) where such shares are held in a company engaged in any industry specified in Schedule XV,

such shares shall be transferred to the Central Government or to such corporation owned or controlled by the Government as may be specified in the direction.

In this case, the Central Government or the specified corporation as the case may be, shall forthwith pay, in cash, to the body corporate(s) from whom such shares stand transferred, an amount equal to the market value of those shares.

Restriction on the Transfer of Shares of a Foreign Company [Section 108C].

Section 108C of the Companies Act, 1956, provides that a body corporate or bodies corporate under the same management, which hold in aggregate, 10 percent or more of the nominal value of equity share capital of a foreign company having an established place of business in India,

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shall not transfer any share in such foreign company to any citizen of India or any body corporate incorporated in India except with the previous approval of the central Government. The central Government shall not refuse such approval unless it is of the opinion that such transfer would be prejudicial to the interest of the public.

Power of the Central Government to give Directions in certain cases [Section 108D].

The Central Government is empowered to direct companies not to give effect to any transfer of shares if as a result of such transfer, a change in the controlling interest of the company is likely to take place and such change would be prejudicial to the interest of the company or public interest. The directions of the Central Government in this regard may include the following:

(a) Where the transfer of such share or block of shares has already been registered, not to permit the transferee or nay nominee or proxy of the transferee, ot exercise any voting right or other rights attaching to such share or block of shares; and

(b) Where the transfer of such share or block of shares has not been registered, not to permit any nominee or proxy of the transferor to exercise any voting right or other rights attaching to such share or block of shares.

Where any direction is given by the Central Government as above, the share or the block of shares referred to therein shall stand retransferred to the person from whom they were acquired, and thereupon the amount paid by the transferee for the acquisition of such share or block of shares shall be refunded to him by the person to whom such share or block of shares stands or stand retransferred.

If the refund is not made within the period of 30 days from the date of the direction, the Central Government shall, on the application of the person entitled to get the refund, direct, by order, the refund of such amount and such order may be enforced as if it were a decree made by a Civil Court. The person to whom the share or block of shares stands or stand retransferred shall, on making the refund be eligible to exercise voting or other rights attaching to such share or block of shares.

Time Limit within which the Central Government has to communicate its decision u/s 108A or 108C [Section 108E].

The Central Government has to communicate its decision for any refusal on the proposal for acquisition of shares under Section 108A or transfer of shares under Section 108C within 60 days from the date of such intimation. If no communication with regard to the refusal is received from the Central Government within the period of 60 days from the date of receipt of such request, it shall be presumed to have been granted.

Applicability of the Provisions of Sections 108A to 108D [Section 108F].

Section 108F provides that nothing contained in Sections 108A to 108D shall apply in the following cases:

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(a) Any company in which not less than 51 percent of the share capital is held by the Central Government.

(b) Any corporation not being a company established by or under any Central Act, i.e., a Statutory Corporation.

(c) Any financial institution.

Applicability of the Provisions of Sections 108A to 108F [Section 108G].

Section 108G deals with the applicability of the provisions of Section 108A to 108F. The Section provides that the provisions of Sections 108A to 108F shall apply to the acquisition or transfer of shares or share capital by or to, an individual, firm, group, constituent of a group, body corporate, or bodies corporate under the same management who or which –

(a) is, in case of acquisition of shares or share capital, the owner in relation to a dominant undertaking and there would be, as a result of such acquisition, any increase-(i) in the production, supply, distribution or control of any goods that are produced, supplied,

distributed or controlled in India or any substantial part thereof by that dominant undertaking, or

(ii) in the provision or control of any services that are rendered in India or any substantial part thereof by that dominant undertaking ; or

(b) would be as a result of such an acquisition or transfer of shares, or share capital, the owner of the dominant undertaking; or

(c) is in the case of transfer of shares or share capital, the owner in relation to a dominant undertaking.

Definition of certain terms used in Sections 108A to 108G [Section 108H].

The expressions “group”, “same management”, “financial institution”, “dominant undertaking” and “owner” used in Sections 108A to 108G shall have the same meanings as respectively assigned to them under the Monopolies and Restrictive Trade Practices Act, 1969.

Thus, the Companies Act, 1956, makes abundant provisions for prohibiting unfair and unhealthy transfers and takeovers/acquisitions by requiring the transferor or the acquirer to obtain the prior approval or giving intimation to the Central Government. The Central Government should exercise its power under Section 108A, 108B, 108C or 108D with due diligence and caution in the interest of the company and the public at large.

Accounting for Amalgamations under Accounting Standard –14 issued by The Institute of Chartered Accountants of India.

The Institute of Chartered Accountants of India had issued Accounting Standard 14 which is applicable w.e.f. 1st April, 1995. The accounting standard is mandatory in nature and has to be complied with by all entities which have amalgamated with other entities, after 1st April, 1995.

As already explained earlier an amalgamation can be either in the nature of merger or in the nature of purchase. These two concepts are briefly explained below :

(1) Amalgamation in the Nature of Merger : As per AS-14 an amalgamation is said to be in the nature of merger only if all the following conditions are satisfied :

(a) All the assets and liabilities of the transferor company become the assets and liabilities of the transferee company, after amalgamation.

(b) Shareholders holding not less than 90 % of the face value of the equity shares of the

transferor company become the equity shareholders of the transferee company by virtue of the amalgamation.

(c) The business of the transferor company is intended to be carried on by the transferee company after the amalgamation.

(d) The consideration received by the equity shareholders of the transferor company who agree to become the equity shareholders of the transferee company is discharged by way of issue of equity shares by the transferor company to the said shareholders of the transferee company, except for cash which may be paid for fractional shares, if any.

(e) No adjustment is intended to be made in the book value of the assets and liabilities of the transferor company when they are incorporated in the books of the transferee company, except to ensure uniformity of accounting policies.

(2) Amalgamation in the Nature of Purchase : An amalgamation is said to be one in the nature of purchase when any of the conditions which are required to be satisfied in case of amalgamation in the nature of merger, are not so satisfied. Thus, when any of the required conditions are not complied with, for instance, when all the assets and liabilities of the transferor company are not taken over by the transferee company, it would not be an amalgamation in the nature of merger. When one company acquires the other company and, as a consequence, the shareholders of the company which is acquired normally do not continue to have a proportionate

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shareholding in the equity share capital of the combined entity, or in the business of the company which is acquired is not intended to be continued, the amalgamation is said to be in the nature of purchase and not in the nature of merger.

Methods of Accounting for Amalgamations.

There are two main methods of accounting for amalgamations, viz, the pooling of interest method and the purchase method. The pooling of interest is confined to the circumstances which meet the criteria for an amalgamation in the nature of merger. The object of the purchase method is to account for the amalgamation by applying the same principles as are applied in the normal purchase of assets. The purchase method is used for amalgamations in the nature of purchase. These two methods of accounting for amalgamations are explained below :

(1) The Pooling of Interest Method :Under the pooling of interest method, the assets, liabilities and reserves of the transferor company are recorded by the transferee company at their existing carrying amounts, after making the adjustments required. If at any time of amalgamation, the transferor company and the transferee company have conflicting accounting policies, a uniform set of accounting policies is adopted following the amalgamation. The effects on the financial statements of any changes in accounting policies are reported in accordance with AS-5, “ Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies”.

(2) The Purchase Method :

Under this method, the transferee company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation. The identifiable assets and liabilities may include assets and liabilities not recorded in the financial statements of the transferor company.

Consideration for the Amalgamation.

The consideration for the amalgamation may consist of securities, cash or other assets. In determining the value of the consideration, an assessment is made of the fair value of its elements. A variety of techniques are applied in arriving at the fair value. For example, when the consideration includes securities, the value fixed by the statutory authorities may be taken to be the fair value. In case of other assets, the fair value may be determined by reference to the market value of the assets given up. Where the market value of the assets given up cannot be reliably assessed, such assets may be valued at their respective net book values.

Many amalgamations recognize that adjustments may have to be made to the consideration in the light of one or more future events. When the additional payment is probable and can reasonably be estimated at the date of amalgamation, it is included in the calculation of the

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consideration. In all other cases, the adjustment is recognized as soon as the amount is determinable, keeping in mind AS-4, “Contingencies and Events Occuring after the Balance Sheet Date”.

Treatment of Reserves on Amalgamation.

In case of “amalgamation in the nature of merger”, the identity of the reserves is preserved and they appear in the financial statements of the transferee company in the same form in which they appeared in the financial statements of the transferor company. As a result of preserving the identity, the reserves which are available for distribution as dividend before the amalgamation would also be available for distribution as dividend after the amalgamation. The difference between the amount recorded as share capital issued and the amount of share capital of the transferor company is adjusted in reserves in the financial statements of the transferee company.

If the amalgamation is an “amalgamation in the nature of purchase”, the identity of the reserves, other than the statutory reserves such as Development Rebate Reserve or Investment Allowance Reserve, is not preserved. The amount of consideration is deducted from the value of the net assets of the transferor company acquired by the transferee company. If the result of the computation is negative, the difference is debited to ‘Goodwill’ arising on amalgamation and is amortised to income on a systematic basis over its useful life. On the other hand, if the result of the computation is positive, the difference is credited to ‘Capital Reserve’. Certain reserves may have been created by the transferor company pursuant to the requirements of, or to avail of the benefits under the Income Tax Act, 1961; for instance, Development

Rebate Reserve or the Investment Allowance Reserve. The Act requires that the identity of the reserves should be preserved for a specified period. Similarly, certain other reserves may have been created in the books of the transferor company in terms of the requirements of other statutes. Though in the case of amalgamation in the nature of purchase, the identity of the reserves is not preserved, an exception is made in respect of statutory reserves and such reserves retain their identity in the financial statements of the transferee company, so long as their identity is required to be maintained to comply with the relevant statute. This exception is made only in those cases where the requirements of the relevant statute for recording the statutory reserves in the books of the transferee company are complied with. In such a case the statutory reserves are recorded in the books of the transferee company by a corresponding debit to a suitable account head such as “Amalgamation Adjustment Account”, which is disclosed as a part of “Miscellaneous Expenditure” or other similar category in the balance sheet. When the identity of the statutory reserve is no longer required to be maintained, both reserves and the aforesaid account are reversed.

Treatment of Goodwill arising on Amalgamation.

Goodwill arising on amalgamation represents a payment made in anticipation of future income and it is appropriate to treat it as an asset to be amortised to income on a systematic basis over its useful life. Due to the nature of goodwill, it is frequently difficult to estimate its useful life with reasonable certainty. Such estimation is, therefore, made on a prudent basis. Accordingly, it is

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considered appropriate to amortise goodwill over a period not exceeding 5 years unless a somewhat longer period can be justified. Factors which are considered in estimating the useful life of goodwill arising on amalgamation include, among others, the following :

(1) The foreseeable life of the business or industry.(2) The effects of product obsolescence, changes in demand and other economic factors.(3) The service life expectancies of key individuals or groups of employees.(4) Expected actions by competitors or potential competitors.(5) Legal, regulatory or contractual provisions affecting the useful life.

Balance of Profit and Loss Account.

In case of “amalgamation in the nature of merger”, the balance of the profit and loss account appearing in the financial statements of the transferor company is aggregated with the corresponding balance appearing in the financial statements of the transferee company. Alternatively, it is transferred to the ‘General Reserve’, if any. In case of “amalgamation in the nature of purchase”, the balance of the Profit and Loss Account appearing in the financial statements of the transferor company, whether debited or credited, loses its identity.

Treatment of Reserves specified in a Scheme of Amalgamation.

The scheme of amalgamation sanctioned under the provisions of the Companies act, 1956, or any other statute may prescribe the treatment to be given to the reserves of the transferor company after its amalgamation. Where the treatment is so prescribed, the same is followed.

Disclosures to be made in the Financial Statements.

For all amalgamations, the following disclosures are considered appropriate in the first financial statements following the amalgamation :

(a) Names and general nature of business of the amalgamating companies.(b) Effective date of amalgamation for accounting purposes.(c) The method of accounting used to reflect the amalgamation, and (d) Particulars of the scheme sanctioned under a statute.

For amalgamations accounted for under the “Pooling of Interest Method”, the following additional disclosures are considered appropriate in the first financial statements following the amalgamation :

(a) Description and number of shares issued, together with the percentage of each company’s equity shares exchanged to effect the amalgamation.

(b) The amount of any difference between the consideration and the value of net identifiable assets acquired, and the treatment thereof.

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For amalgamations accounted for under the “Purchase Method”, the following additional disclosures are required to be made in the first financial statements following the amalgamation :

(a) Consideration for the amalgamation and a description of the consideration paid or contingently payable, and

(b) The amount of any difference between the consideration and the value of net identifiable assets acquired, and the treatment thereof including the period of amortisation of any goodwill arising on the amalgamation.

Amalgamation after the Balance Sheet Date.

When an amalgamation is effected after the balance sheet date , but before the issuance of the financial statements of either party to the amalgamation, disclosure is to be made in accordance with the provisions of AS-4, “Contingencies and Events Occuring after the Balance Sheet Date”. However, the amalgamation is not incorporated in the financial statements. In certain circumstances, the amalgamation may also provide additional information affecting the financial statements themselves, for instance, by allowing the going concern assumption to be maintained.

Mergers, Amalgamations and De-mergers under the Income Tax Act, 1961 and Tax Benefits available thereunder.

The Government of India has made provisions for the amalgamation and de-merger of companies under the Income tax Act, 1961, in order to provide an impetus for corporate mergers so as to reap the economies of scale and to provide for better tax planning. The brief provisions of the Income Tax Act, 1961 are explained in the succeeding paragraphs, with reference to the provisions of amalgamations and de-mergers thereunder.

Amalgamation – Meaning thereof { Section 2(1B) } The Income Tax Act, 1961 has defined the term “amalgamation” under Section 2 (1B). the purpose of providing such a definition is that the benefits are available both to the amalgamating and the amalgamated companies only when all the conditions mentioned in the said section have been complied with. According to Section 2(1B) of the Income tax Act, 1961, “amalgamation” in relation to companies means the merger of one or more companies with another company or the merger of two or more companies to form one company in such a manner that –

(i) All the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of amalgamation.

(ii) All the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of amalgamation.

(iii) Shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies (other than the shares held therein immediately before the amalgamation or by a nominee for the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation, otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of distribution of such property to the other company after the winding up of the first-mentioned company.

Provisions relating to Carry Forward and Set-Off of Accumulated Losses and Unabsorbed Depreciation in Amalgamation under Section 72A of the Income Tax Act, 1961.

The provisions of the old Section 72A of the Income tax Act, 1961, have been substituted by a new Section 72A inserted vide the Finance Act, 1999. the provisions of the new Section 72A are to come into force with effect from the Assessment Year 2000 – 2001. Under the provisions of the new Section 72A, the amalgamated company is entitled to carry forward the unabsorbed depreciation and brought forward losses of the amalgamating company provided that the

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following conditions are fulfilled :

(1) The amalgamation should be of a company owning an industrial undertaking or a ship.

(2) The amalgamated company holds at least three-fourths of the book value of the fixed assets of the amalgamating company for a continuous period of 5 years from the date of amalgamation.

(3) The amalgamated company continues the business of the amalgamating company for a period of 5 years from the date of amalgamation.

(4) The amalgamated company fulfils such other conditions, as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose. For this purpose the provisions of Rule 9C have to be complied with.

The amalgamated company gets a fresh lease of 8 years to carry forward and set off the brought forward loss and unabsorbed depreciation of the amalgamating company.

Tax Benefits / Concessions available in case of Amalgamation.

In case of an amalgamation which takes place within the meaning of Section 2(1B), as explained earlier, the following tax concessions will be available :

(1) Tax benefits / concessions to the amalgamating company.(2) Tax benefits / concessions to the shareholders of the amalgamating company.(3) Tax benefits / concessions to the amalgamated company.

Tax Benefits / Concessions to the Amalgamating Company.

(a) Capital Gains Tax not attracted : According to Section 47(vi), where there is a transfer of any capital asset in the scheme of amalgamation, by an amalgamating company to the amalgamated company, such transfer will not be regarded as a transfer for the purpose of capital gains provided the amalgamated company, to whom the assets have been transferred, is an Indian company.

(b) Tax Concessions to a Foreign Amalgamating Company :As per Section 47(via), where a foreign company holds any shares in an Indian company and transfers the same, in the scheme of amalgamation, to another foreign company such transaction will not be regarded as a transfer for the purpose of capital gain under Section 45 of the Income Tax Act, 1961, if the following conditions are fulfilled :(i) At least 25 % of the shareholders of the amalgamating foreign company should continue to

remain shareholders of the amalgamated foreign company, and(56)

(ii) Such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated.

Tax Benefits / Concessions to the Shareholders of the Amalgamating Company .

Here a shareholder of an amalgamating company transfers his shares, in a scheme of amalgamation, such transaction will not be regarded as a transfer for capital gains purposes, if the following conditions under Section 47(vii) are satisfied : (i) The transfer of shares is made in consideration of the allotment to him of any share or shares in

the amalgamated company, and(ii) The amalgamated company is an Indian Company.

Tax Benefits / Concessions available to the Amalgamated Company.

(a) Expenditure on Scientific Research [Section 35(5)] :Where an amalgamating company transfers any asset represented by capital expenditure on scientific research to the amalgamated Indian company in a scheme of amalgamation, the provisions of Section 35 shall become applicable to the amalgamated company. Consequently,

(i) the unabsorbed capital expenditure on scientific research of the amalgamating company will be allowed to be carried forward and set off in the hands of the amalgamated company, and

(ii) if such asset ceases to be used in a previous year for scientific research related to the business of the amalgamated company and is sold by the amalgamated company without having being used for other purposes, the sale price, to the extent of the cost of the asset, shall be treated as business income of the amalgamated company. The excess of the sale price over the cost of the asset shall be subject to the provisions of capital gains.

(b) Expenditure for obtaining Licence to operate Telecommunication Services [ Section 35ABB(6)] :Where in a scheme of amalgamation, the amalgamating company sells or otherwise transfers its licence to the amalgamated company, being an Indian Company, the provisions of Section 35ABB which were applicable to the amalgamating company shall become applicable in the same manner to the amalgamated company. Consequently,(i) the expenditure on the acquisition of the telecommunication licence, not yet written off, shall

be allowed to the amalgamated company in the same number of balance instalments.(ii) where such licence is sold by the amalgamated company, the treatment of the

deficiency/surplus will be same as would have been in the case the amalgamating company.

(c) Treatment of Preliminary Expenses [ Section 35D(5)] :Where an amalgamating company merges in a scheme of amalgamation with the amalgamated company, the amount of preliminary expenses of the amalgamating company, which have yet not been written off, shall be allowed as deduction to the amalgamated company in the same manner as would have been allowed to the amalgamating company.

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(d) Treatment of Expenditure on Prospecting , etc., of Certain Minerals [Section 35E(7A)] :Where an amalgamating company merges in a scheme of amalgamation with the amalgamated company, the amount of expenditure incurred wholly and exclusively on prospecting of any mineral or a group of minerals specified in Part A or Part B, respectively, of the Seventh Schedule or on the development of a mine or other natural deposit of any such mineral or group of associated minerals, during the year of commercial production and any one or more of the four years immediately preceeding that year, of the amalgamating company and the same is yet not written off, it shall be allowed as deduction to the amalgamated company in the same manner as would have been allowed to the amalgamating company.

(e) Treatment of capital Expenditure on Family Planning [ Section 36 (1) (ix)] :Where the asset representing the capital expenditure on family planning is transferred by the amalgamating company to the Indian amalgamated company, in a scheme of amalgamation, the provisions of Section 36 (1) (ix) shall become applicable to the amalgamated company. Consequently,(i) the capital expenditure on family planning not yet written off shall be allowable to the

amalgamated company in the same number of balance instalments;(ii) where such assets are sold by the amalgamated company, the treatment of the

deficiency/surplus will be the same as would have been in the case of amalgamating company.

(f) Treatment of Bad Debts [Section 36 (1) (vii)] :Where due to amalgamation, the debts of the amalgamating company have been taken over by the amalgamated company and subsequently such debt or part of the debt becomes bad, such bad debt will be allowed as a deduction to the amalgamated company. (CIT vs. T. Veerabhadra Rao, K. Koteswara Rao & Co.)

(g) Amortisation of Expenditure in case of Amalgamation [Section 35DD] :From the assessment year 2000 – 2001 and onwards, where an assessee being an Indian company, incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation or de-merger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation or de-merger takes place. Further, no deduction shall be allowed in respect of the said expenditure under any other provision of the Income Tax Act, 1961.

(h) Carry forward and set-off of business losses and unabsorbed depreciation of the amalgamating company [Section 72A] : In addition to the above benefits / concessions, the amalgamated company shall be allowed to carry forward and set off the unabsorbed depreciation and brought forward losses of the amalgamating company if all the conditions mentioned in Section 72A are satisfied. The set off and carry forward will be allowed for a period of 8 years form the year in which the amalgamation takes place.

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Tax Planning in case of Amalgamation.

Tax planning in case of amalgamation is of vital significance. The benefit of tax concession is allowed to the amalgamating and amalgamated company only when the amalgamation satisfies the conditions provided under Section 2(1B) of the Income Tax Act, 1961. One of the conditions laid down is that all the assets and liabilities of the amalgamating company, as on the date of amalgamation should be taken over by the amalgamated company. If some assets or liabilities of the amalgamated company are not proposed to be taken over by the amalgamated company, the same should be disposed off or discharged by the amalgamating company before the amalgamation takes place. Similarly, there is a condition that at least 75 percent of the shareholders of the amalgamating company should become the shareholders of the amalgamated company. If more than 25 percent of the shareholders of the amalgamating company are not willing to become the shareholders of the amalgamated company, then such shares of the dissenting shareholders may be purchased by the other shareholders or by the amalgamated company, before the amalgamation, so that at the time of amalgamation the condition of 75 percent of the shareholders becoming shareholders of the amalgamated company is satisfied.

The amalgamated company can carry forward and set off the business loss and unabsorbed depreciation of the amalgamating company only when certain conditions are satisfied, under Section 72A of the Act. Where it is not possible to satisfy such conditions the company may opt for a “Reverse Merger”, i.e., instead of the loss making company being merged with the profit making company, the profit making company merges with the loss making company. In this case the loss making company, which is the amalgamated company will be able to set off its accumulated losses and unabsorbed depreciation against the profits of the profit making company which has been merged with the former.

The benefit under Section 47(vii) shall be allowed only when the shareholders of the amalgamating company are allowed shares of the amalgamated company in lieu of shares held by them in the amalgamating company. If the shareholders are allotted something more than shares in the amalgamated company, for instance, bonds or debentures, no benefit will be allowed under Section 47(vii) of the Act.

De-merger – Meaning Thereof { Section 2(19AA)}

The term “de-merger” in relation to companies means the transfer, pursuant to a scheme of arrangement under Sections 391 to 394 of the Companies Act, 1956 by a de-merged company of one or more of its undertakings to any resulting company in such a manner that –

(i) all the property of the undertaking, being transferred by the de-merged company immediately before the de-merger, becomes the property of the resulting company by virtue of the de-merger.

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(ii) all the liabilities relatable to the undertaking, being transferred by the de-merged company, immediately before the de-merger, becomes the liabilities of the resulting company by virtue of the de-merger.

(iii) the property and the liabilities of the undertaking or undertakings being transferred by the de-merged company are transferred at values appearing in its books of account immediately before the de-merger.

(iv) the resulting company issues, in consideration of the de-merger, its shares to the shareholders of the de-merged company on a proportionate basis.

(v) the shareholders holding not less than three-fourths in value of the shares in the de-merged company become the shareholders of the resulting company or companies by virtue of the de-merger, otherwise than a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company.

(vi) the transfer of the undertaking is on a going concern basis.

(vii) the de-merger is in accordance with the conditions, if any, notified under Section 72A(5) by the Central Government, in this behalf.

The term “undertaking” includes any part of an undertaking, or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.

The term “liabilities” shall include the following –(1) The liabilities which arise out of the activities or operations of the undertaking (2) The specific loans or borrowings (including debentures) raised, incurred and utilized solely for

the activities or operations of the undertakings.

(3) In cases, other than the above referred, so much of the amounts of the general or multipurpose borrowings, if any, of the demerged company as stand in the same proportion which the value of the assets transferred in a de-merger bears to the total value of the assets of such demerged company immediately before the de-merger.

The term ‘resulting company” under Section 2 (41A) of the Income Tax Act, 1961, means one or more companies to which the undertaking of the demerged company is transferred in a de-merger and, the resulting company in consideration of such transfer of undertaking, issues shares to the shareholders of the demerged company and includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of de-merger.

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Tax Benefits / Concessions available in case of De-merger.

If any de-merger takes place within the meaning of Section 2 (19AA) of the Income Tax Act, 1961, the following tax concessions shall be available :

(1) Tax benefits / concessions to the de-merged company.(2) Tax benefits / concessions to the shareholders of the de-merged company.(3) Tax benefits / concessions to the resulting company.

Tax Benefits / Concessions to De-merged Company.

The following concessions are available to the de-merged company :

(1) Capital Gains Tax not attracted [ Section 47(vib) ] :Where there is a transfer of any capital asset in a de-merger by the demerged company to the resulting company, such a transfer will not be regarded as a transfer for the purpose of capital gain provided the resulting company is an Indian company.

(2) Tax Concession to a Foreign Demerged Company [ Section 47 (vic) ] :Where a foreign company holds any shares in an Indian company and transfers the same, in a de-merger, to another resulting foreign company, such transaction will not be regarded as transfer for the purpose of capital gain under Section 45, if the following conditions are satisfied :(a) at least 75 % of the shareholders of the de-merged foreign company continue to remain the

shareholders of the resulting foreign company, and (b) such transfer does not attract tax on capital gains in the country, in which the de-merged

foreign company is incorporated.

(3) Reserves for Shipping Business :Where a ship acquired out of the reserve is transferred in a scheme of de-merger, even within the period of eight years of acquisition there will be no deemed profits to the demerged company.

Tax Benefits / Concessions to the Shareholders of the De-merged Company.

As per Section 47 (vid) of the Income Tax Act, 1961, any transfer or issue of shares by the resulting company, in a scheme of de-merger to the shareholders of the de-merged company shall not be regarded as a transfer if the transfer or issue is made in consideration of de-merger of the undertaking.

In the case of de-merger the existing shareholder of the de-merged company will now hold shares in the resulting company as well as in the de-merged company. In case the shareholder transfers any of the above shares subsequent to the de-merger, the cost of such shares shall be calculated as under :-

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(1) Cost of Acquisition of Shares in the Resulting Company [ Section 47 (2C) ] : It shall be the amount which bears to the cost of acquisition of shares held by the assessee in the

de-merged company the same proportion as the net book value of the assets transferred in a de-merger bears to the net worth of the de-merged company immediately before the de-merger.

(2) Cost of Acquisition of Shares in the Demerged Company [Section 47 (2D) ] :The cost of acquisition of the original shares held by the shareholder in the demerged company shall be deemed to have been reduced by the amount as so arrived at under Section 47 (2C) above.

In case of a capital asset, being a share or shares in an Indian company, which becomes the property of the assessee in consideration of a de-merger, there shall be included the period for which the share or shares held in the demerged company were held by the assessee .

Tax Benefits / Concessions to the Resulting Company.

The resulting company shall be eligible for tax concessions only if the following two conditions are satisfied, namely;

(a) The de-merger satisfies all the conditions laid down in Section 2 (19AA), and(b) The resulting company is an Indian company.

In general the following tax concessions are available to the resulting company :

(a) Expenditure for obtaining Licence to Operate Telecommunication services [ Section 35ABB(7) ] :Where in a scheme of de-merger, the demerged company sells or otherwise transfers its licence to the resulting company, the provisions of Section 35ABB which were applicable to the demerged company shall become applicable in the same manner to the resulting company. Consequently;

(1) The expenditure on acquisition of licence, not yet written off, shall be allowed to the resulting company in the same number of balance instalments.

(2) Where such licence is sold by the resulting company, the treatment of the deficiency or surplus as the case may be, will be the same as would have been allowed in the case of the demerged company.

(b) Amortisation of Preliminary Expenses [ Section 35D(5A) ] :Where the undertaking of an Indian company which is entitled to deduction of preliminary expenses is transferred before the expiry of ten years or five years, as the case may be, to another company in a scheme of de-merger, the preliminary expenses of such undertaking which are not yet written off shall be allowed as deduction to the resulting company in the same manner as would have been allowed to the demerged company. The demerged company will not be entitled to the deduction thereafter.

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(c) Treatment of Expenditure on Prospecting of Certain Minerals [ Section 35E(7A) ] :Where the undertaking of an Indian company which is entitled to deduction on account of prospecting of minerals, is transferred before the expiry of 10 years to another company in a scheme of de-merger, such expenditure of prospecting of minerals which is not yet written off shall be allowed as deduction to the resulting company as would have been allowed to the demerged company. The demerged company will not be entitled to the deduction thereafter.

(d) Treatment of Bad Debts [ Section 36(1)(vii) ] :Where due to de-merger the debts of the demerged company have been taken over by the resulting company and subsequently such debt or a part thereof becomes bad, such bad debt will be allowed as a deduction to the resulting company.

(e) Amortisation of Expenditure in case of De-merger [ Section 35DD ] :Where an assessee, being an Indian company, incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively for the purposes of de-merger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the

de-merger takes place. No deduction will be allowed for such purpose, under any other section of the Income Tax Act, 1961.

(f) Set Off and Carry Forward of Business Losses and Unabsorbed Depreciation of the Demerged Company [ Section 72A(4) and (5) ] :The accumulated losses and unabsorbed depreciation, in a de-merger, should be allowed to be carried forward by the resulting company if these are directly relatable to the undertaking proposed to be transferred. Where it is not possible to relate these to the undertaking, such losses and depreciation shall be apportioned between the demerged company and the resulting company in proportion of the assets coming to the share of each as a result of the de-merger.

Slump Sale – Meaning Thereof { Section 2(42C) }

The term “slump sale” means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. The determination of the value of an asset or liability for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities.

Computation of Capital Gains in case of Slump Sale [ Section 50B ] :

Any profits or gains arising from the slump sale effected I the previous year shall be chargeable to income tax as capital gains arising from the transfer of long term capital assets and shall be deemed to be the income of the previous year in which the transfer took place. Any profits or gains arising from the transfer under the slump sale, of any capital asset being one or more undertakings

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owned and held by an assessee for not more than 36 months immediately preceeding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.

In case of capital assets being an undertaking or division transferred by way of a slump sale, the “net worth” of the undertaking or the division, as the case may be, shall be deemed to be the cost of acquisition and the cost of improvement for the purposes of Sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48 of the Income Tax Act, 1961. The term “net worth” is the aggregate value of the total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as appearing in its books of accounts. However, any change in the value of assets on account of revaluation of assets shall be ignored for the purpose of computing the net worth.

For the purpose of computing the net worth, the aggregate value of the total assets shall be the written down value of the block of assets determined in accordance to the provisions contained in sub-item (C) of Section 43(6) (c) (i) of the Income Tax Act, 1961 relating to the written down value in case of slump sale, in case of depreciable assets. In case of other assets, the book value of such assets shall be taken into consideration.

Report of an Accountant to be furnished with Return of Income [ Section 50B(3) ].

Every assessee, in case of a slump sale, is required to furnish in Form No.3CEA along with the return of income, a report of an accountant indicating the computation of the net worth of the undertaking or division, as the case may be, and certifying that the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with the provisions of this Section.

Benefits available under the CENVAT Scheme of the Central Excise Rules, 1944.

CENVAT or Central Value Added Tax, as it is now known, was re-christened by the Finance Act, 2000. Rules 57AA to 57AK of the Central Excise Rules, 1944, were brought into force from the 1st April, 2000. As it is commonly known, CENVAT credit can be availed of by the assessee who uses “goods” (i.e., all goods except High Speed Diesel Oil, also known as HSD and motor spirit). The goods must be “used in or in relation to the manufacture of the final product, whether directly or indirectly and whether contained in the final product or not ”. Thus, all goods except high speed diesel oil or motor spirit will be entitled for CENVAT Credit

As far as amalgamation or merger is concerned, Rule 57AF make an express provision for the transfer of the unutilized CENVAT credit lying to the credit of the account of the manufacturer of the final product. Sub-rule (1) of this Rule permits a manufacturer of the final product to transfer unutilized CENVAT Credit lying in his accounts in the following situations :-

(1) When the manufacturer shifts his factory to another site, or

(2) When there is a change in the ownership of the factory, or

(3) When there is sale, merger, amalgamation, lease or transfer of the factory to a joint venture with specific provision for the transfer of liabilities of such factory.

The transfer of CENVAT credit under sub-rule (1) shall be allowed only if the stock of inputs as such or in process, or the acpital goods is also transferred along with the factory to the new site or ownership and the inputs, or capital goods, on which credit has been availed of, are duly accounted for to the satisfaction of the Commissioner. [ Sub-rule (2) ].

Where the assessee had two units in separate locations at the same place, but later closed one of the units for operational difficulties and transferred it to another unit, it was held that unutilized credit in the closed unit could be transferred to the other unit. [ N.K. Chemical Industries vs. CCE 1998 (100) ELT 495 (New Delhi – CEGAT) ] .

Thus, even the CENVAT Scheme, provided under the Central Excise Rules, 1944, give relief to an amalgamating or merging unit if certain criteria are fulfilled. One important point to be noted is that the capital goods or the stock of inputs are also required to be transferred along with the factory, in order to claim the CENVAT credit. If the liabilities are also transferred, as mentioned under clause (c) above, then only will the credit be available to the transferee.

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In conclusion it is evident that the role of amalgamations and mergers can in no way be undermined in the present corporate scenario. From the procedure to be followed for implementing the scheme of amalgamation under the Companies Act, 1956, to the various tax benefits available under the Income Tax Act, 1961, an amalgamation or a merger is a detailed and complex procedure requiring the analytical skills and accounting knowledge of a Chartered Accountant, the legal knowledge of an Advocate and the secretarial expertise of a Company Secretary.

Corporate restructuring is very common in today’s corporate scenario. It has provided a means to eliminate competition within the four corners of the legal framework, it helps to achieve better operational effectiveness and also helps in presenting a true and fair view of the state of the company. Mergers due to their synergistic effects are gaining popularity in India. To cite a few examples, the merger of Tata Oil Mills Company Limited (TOMCO) with Hindustan Lever Limited (HLL) is a classic example of a horizontal merger which was effected to gain synergistic effects. The merger of Mohta Steel Industries with Vardhaman Mills Limited is another example of a conglomerate merger which was effected to bring about stability of income and profits.

While adopting a scheme of merger or takeover, it has to be noted that a listed company has to abide with the provisions of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations, 1997. Further, the provisions of Section 108A to 108I of the Companies Act, 1956, have also to be considered in certain cases where it is proposed to acquire a prescribed percentage of the paid-up share capital of a company or to effect a transfer of a prescribed percentage of the subscribed share capital of a particular company. The accounting standard prescribed by the Institute of Chartered Accountants of India (i.e., Accounting Standard – 14) has also to be complied with in effecting the merger or amalgamation, as the case may be, since the same is mandatory for all companies. Care has to be taken to ensure that accounting for the merger or amalgamation is done as per the prescribed accounting standard.

Further, in case an amalgamation has taken place in pursuance of a scheme of arrangement under Section 394 of the Companies Act, 1956, the Court order has to be obtained prior to implementing the scheme, by both the transferor as well as the transferee companies. The transferee has to then give effect to the Court order by allotting the shares to the shareholders of the transferor company in the agreed ratio as is given in the Amalgamation Order by the Court. Generally, along with the order of transfer of the assets and liabilities of the transferor company to the transferee company, the same order also provides for the issue and allotment of the agreed number of shares to the existing shareholders of the transferor company, in an agreed ratio. After complying with all the formalities prescribed under law as well as various Boards (i.e., SEBI and/or BIFR) and the Institute of Chartered Accountants of India, the scheme of amalgamation is complete and both the entities merge to form a single new entity or one of the companies ceases to exist and is taken over by the other running company.

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Acquisitions and takeovers are healthy conditions in advanced countries from the point of view of efficient utilization of resources and resource allocation but at the same time certain activities of the “asset-strippers” are changing who obtain control of companies only to wind them up and make quick profit for themselves. To safeguard the interest of the investors and shareholders, the Governmental agencies have viewed mergers and takeovers as a subject of regulation and control. In England, the City Code was evolved with this end in view, in the year 1968. In 1981, the City Code was revised and it contains general principles which should be adhered to in all probabilities. The following are the four rules of the City Code, which are the main principles of general nature:

(1) All the shareholders of the same class should be treated equally.

(2) Shareholders should be given adequate information to form a proper judgement.

(3) Directors of the offerree company (whose shares are being bid for) should act in the best interest of their shareholders and obtain independent advice.

(4) Creation of false market in shares should be avoided.

To sum it all the takeover strategies are really complex legal and financial actions on the part of the acquiring firms. It involves selection of a suitable firm or company to be taken over or acquired and negotiating with the other company to find out the viability of the merger and find out the dissenting shareholders’ views and to convince them about the advantages of the merger. In case the dissenting shareholders do not agree to the scheme, the acquiring company may either go ahead with the acquisition or refrain from acquiring the target company.

Thus, it may be concluded that in order to implement a good and effective scheme of amalgamation or in order to effect a merger it is essential to first of all select the proper transferee company or target company, as the case may be, and also to see that the company is worth acquiring. The tax implications under the Income Tax Act, 1961 and the CENVAT Scheme (under the Central Excise Rules, 1944) have also to be considered in order to gain the maximum benefit in order to go ahead with the merger or amalgamation, as the case may be. Since, the procedure is complex it would always be advisable to first consult a Chartered Accountant, the legal advisor and the Company Secretary of the company concerned, before going ahead with the scheme of amalgamation or merger. External advise from tax consultants and solicitors may also be taken in order to have a sound base for the amalgamation / merger. The share valuation and valuation of the concerns is also an essential step in the process of corporate mergers and amalgamations. It is the duty of the Chartered Accountant to see that the appropriate valuation method is used and that all the relevant accounting standards are adhered to while effecting the scheme of amalgamation or merger.

Thus, amalgamations and mergers are a boon to the corporate world, but also have an adverse effect on the economy at times due to excessive monopolization and cartelisation. However, it may be noted that the Government has taken the necessary measures and made the necessary provisions to prevent interconnection of undertakings under the MRTP Act, 1969 . In order to achieve

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a balance between the good and adverse effects of amalgamations and mergers it must be seen that the underlying reason for the same considered while evaluating the scheme by the Court. The Court cannot refuse the scheme, if it is in the bona fide interest of the companies and approved by the requisite majority of the shareholders.

Therefore, though a complex and elaborate process, amalgamations and mergers are indeed essential in the present economic scenario of the country so as to attain economy and utilize the resources in an efficient and effective manner, so as to optimize production and achieve a general reduction in the cost of production, thus resulting in the optimisation of price level in the economy.

BIBLIOGRAPHY

Name of the Book Author / Publishers

1) Corporate Laws (Bare Act) Taxmann Publishers

2) Corporate Tax Planning & Management Girish Ahuja and Ravi Gupta

3) Chartered Secretary (Monthly Journal of The Institute of Company Secretaries of India) ICSI Publication

4) Guide to the Companies Act A. Ramaiya

5) Corporate Laws and Practice – I ICSI Publication

6) Financial Management Prasanna Chandra

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INDEX

S.No. Topic Page No.

1. Preface (i)

2. Acknowledgement (ii)

3. Methodology (iii)

4. Introduction (iv)

5. Amalgamations & Mergers – Meaning, Nature & Types 1

6. Amalgamations under the Companies Act, 1956 7

7. Provisions for Amalgamations, Mergers and Acquisitions under the Foreign

Exchange Management Act, 1999 and the Regulations framed thereunder. 16

8. Amalgamations of Sick Industrial Companies under the Sick Industrial Companies (Special Provisions) Act, 1985. 19

9. Takeovers – Their Types and Regulation of Acquisition of Shares and Takeovers by the Securities and Exchange Board of India (SEBI). 23

10. Share & Asset Valuation and Price Bidding in Takeovers. 41 11. Accounting for Amalgamations under Accounting Standard – 14 issued by The Institute of Chartered Accountants of India. 49

12. Mergers, Amalgamations & De-mergers under the Income Tax Act, 1961 and Tax Benefits available thereunder. 54

13. Benefits available under the CENVAT Scheme of the Central Excise Rules, 1944 64

14. Conclusion 65

15. Bibliography 68