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Shardul Amarchand Mangaldas & Co
M&A TRANSACTIONS & COURT RESTRUCTURING
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TYPES OF M&A TRANSACTIONS
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TYPES OF M&A TRANSACTION
Acquisition of company
Strategic/Financial partnership
Acquisition of business undertaking
Asset Purchase/Sale
Restructuring of business to align with the future strategy
Business Combination/ Joint Ventures
Succession Planning
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M& A & CORPORATE RESTUCTURING THROUGH COURT SCHEMES
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M&A & CORPORATE RESTRUCTURING THROUGH COURT SCHEMES
TYPES OF TRANSACTION
Amalgamation
Demerger
Slump Sale
Slump Exchange
Business Combination
In bound transaction
Out bound transaction
Composite scheme covering one or moretransactions above
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DEMERGER
Pre-restructuring Structure-
Dalmia Cement (Bharat) Limited Listed Company (DCBL).
DCBL 56.6% (promoters); 43.4%(public)
DCBL has WOS in cement sector(Cem Co.).
Engaged in cement, sugar,refractory, thermal power, windpower.
DCBL holds 21.71% in anothergroup company OCL; 23.66% bypromoter of DCBL
Public (43.4%)Promoters
(56.6%)
DCBL
Cem Co.
(Cement)
100%
OCL
21.71%
23. 66%
Sugar
Power
Refractory
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CONTINUED.
Post Restructuring
Objectives
Chief objective tocreate a singularcement undertaking.
To create structurewhich is not controldilutive.
To organize thebusinessundertakings inbetter fashion.
DCBL
Cement
Refractory
Thermal
Power
Resulting
Company 1
DBEL (100% Sub
of DCBL).
100%
Cement undertakingThermal Power
undertaking
D
e
m
e
r
g
e
r
Demerger
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FAMILY SETTLEMENT
Pre- restructuring Structure
Asian Hotels Limited (AHL)
listed public limited company.
Runs three hotel undertakings in
Delhi, Kolkata, and Mumbai.
In the existing structure, each
group has their own interests and
thus disputes.
With objective of minimizing
potential conflicts, restructuring
was to be done.
AHL
Delhi
Undertaking
Mumbai
Undertaking
Kolkata
Undertaking
Controlled by
Jatia GroupGupta
GroupSaraf
Group
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CONTINUED.
Change of name of residual and resultingcompanies (AHL into AHL (North),Chillwinds into AHL (East) andVardhman into AHL (West)).
Exemption from SEBI Takeoverregulations as shareholding of promotersin AHL for more than 3 years deemed tobe shareholding of promoters inResulting Companies.
Effective date date of receipt ofapproval from WB Govt. to vesting ofleasehold property belonging to WBGovt./ or filing of order with ROC.
Cancellation of shareholding of AHL inResulting Companies.
Jatia
Group
Gupta
Group
Saraf
Group
AHL
AHL
(North)
(Jatia)
AHL
(East)
(Saraf)
AHL
(West)
(Gupta)
Residual Co.Resulting
Companies
Demerger of 2
undertakings
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COMPOSITE SCHEME
Evolve Services
Ltd
Scantech Evaluation
Services Ltd
NIIT Online
Learning Ltd
NIIT Limited
Hole- In- The -Wall Education Ltd
Under this scheme- atransaction of amalgamationand slump sale has occurredsimultaneously.
Amalgamation:
Amalgamating Company 1,2 & 3 the wholly ownedsubsidiaries of NIIT Limitedamalgamated with NIITLimited.
Slump Sale:
NIIT Limited transferred itsschool business undertakingto Hole- In The- Walleducation limited for a lumpsum consideration.
School Business
Undertaking
Amalgamating
Co. 2
Amalgamating
Co. 3Amalgamating
Co. 1
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SLUMP SALE
Noble BroadcastingCompany Limited(NBC) was operating anFM radio broadcastingchannel in Chennai alongwith other web TV &magazines.
NBC transferred its FMradio business to HT Musicand EntertainmentCompany Limited as agoing concern basisthrough court schemeunder section 391-394 ofthe Companies Act, 1956.
Noble Broadcasting
Company Limited
HT Music and Entertainment
Company Limited
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Transfer of FM
Radio business
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ISSUES UNDER THE SCHEME
A lump sum cash consideration was paid as a consideration for the saidtransfer instead of issue of shares as seen in most schemes.
The effective date under the scheme was subject to the approval frombroadcasting regulatory authorities such as Ministry of Information &Broadcasting, Ministry of Communication and Information Technology &Standing Advisory Committee on Radio Frequency Allocation.
the scheme even after the court sanction was subject to approval of theregulatory authorities, failing which the scheme was considered to be null& void.
Whether slump sale allowed under section 391- 394 of 1956 Act-consistent view by HCs- In re Health Products Ltd, In re Nirma Ltd, Inre United Spirits Ltd- Section 391-394 is code in itself- single windowclearance
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SLUMP EXCHANGE
Jaiprakash AssociatesLimited vested its entirebusiness of Baspa HydroElectric project Stage- II& Karcham WangtooHydro Electric Project onslump exchange basis toits wholly ownedsubsidiary.
The transferee companyissued its equity sharesand Non-convertibledebentures to thetransferor company.
Appointed date same aseffective date- effectivedate subject to approvals
Jaiprakash Associates
Limited
Himachal Baspa Power
Company Limited
Baspa Hydro Electric projectStage- II & KarchamWangtoo Hydro ElectricProject
Equity shares &NCDs
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CONCEPT OF SLUMP EXCHANGE
The term slump exchange- not defined in any statue.
Bombay High Court in CIT V. Bharat Bijlee Ltd, held sale ofundertaking for consideration other than cash is slump exchange ¬ slump sale.
Slump exchange not liable for tax under section 50 of Income Tax Act,1961.
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COURT- BASED RESTRUCTURING PROCESS
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COURT-BASED RESTRUCTURING -PROCEDURE
Implemented through a court scheme u/s. 391-394 of the CompaniesAct 1956 (1956 Act) read along with Rule 67 87 of Company CourtRules.
MCA has issued draft Company (Compromises, Arrangements andAmalgamations) Rules, 2016 dated January 28, 2016 for which publiccomments were invited by 17 February, 2016 (New Draft Rules).
The New Draft Rules rules along with relevant sections on compromisesand arrangement under the Companies Act, 2013 (2013 Act) arecurrently not in force.
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DIFFERENCE BETWEEN COMPROMISE AND ARRANGEMENT
COMPROMISE
Not defined under 1956 Act or 2013 Act.
Compromise - Agreement to settle a dispute between parties.
Effect - modifying the settled rights of a party, or enabling enforcement of suchsettled rights.
ARRANGEMENT
Arrangement includes a reorganization of the share capital by theconsolidation of shares of different classes or by the division of shares intoshares of different classes or both (Section 390(b), 1956 Act).
Inclusive definition.
Not merely restricted to reorganization of share capital.
Wide scope and includes several transactions.
Composite Schemes of Arrangement
Various transactions undertaken through one scheme of arrangement.
For example, scheme including merger and demerger.
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COURT-BASED RESTRUCTURING -PROCEDURE
Scheme Approved by
the Board of the
company.
Ist Motion: Application by Company to Court for
convening a meeting of the Creditors and Shareholders
Company to convene meeting as per directions of the
Court for obtaining approval from Creditors or class
thereof/ Shareholders or class thereof.
Scheme to be sanctioned/approved by majority in number
representing 3/4th in value of the creditors or class thereof/
shareholders or class thereof present and voting.
IInd Motion: Company to file
petition within 7 days after
submitting the report.
Upon hearing, after receiving the report from RD or OL
and hearing the objections, Court shall make an order
sanctioning the scheme.
Court Order to be filed within
the prescribed timeline.
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CHANGES INTRODUCED UNDER 2013 ACT AND NEW DRAFT RULES
Dispensation of meeting
Express provision in the New Draft Rules empowering NCLT to dispensewith the requirement of holding meetings of creditors and shareholders.
No corresponding provision in the 2013 Act for dispensation ofshareholders meeting.
Section 230(9) of 2013 Act - NCLT may dispense meeting of creditors, ifcreditors holding 90% value agrees to the scheme by way of an affidavit.
Postal Ballot
Section 391(2) of the 1956 Act requires the members to be present physicallyor through proxy for voting The 2013 Act requires a company to provideoption of postal ballot.
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CHANGES INTRODUCED UNDER 2013 ACT AND NEW DRAFT RULES
Notice of the court convened meeting (Notice)
Notice of at least 30 days (currently 21 days) before the date fixed formeeting.
Notice to be advertised in newspapers at least 30 days (currently 21 days)and also to be placed on the website.
Notice along with requisite documentation to be sent to various authoritiesas per section 230(5) of 2013 Act. The New Draft Rules further require thenotice to be given:
In all cases to the Central Government, ROC, Income Tax Authoritiesand the official liquidator;
If applicable to RBI, SEBI, ROC, CCI, stock exchanges, other sectoralregulators.
Any representations, to be sent within 30 days from date of receipt of suchnotice, failing which it is assumed there are no representations.
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CHANGES TO INTRODUCED UNDER 2013 ACT AND NEW DRAFT RULES
Contents of Notice
Diclosures in notice of meeting with the explanatory statement made stricterand streamlined.
Currently no prescribed details required to be given in the Explanatorystatement
Now Explanatory statement must disclose / attach Parties involved in such compromise or arrangement; Appointed date, share exchange ratio and other considerations Summary of valuation report including basis of valuation and fairness
opinion of management; Details of capital/debt restructuring, if any Rationale for the compromise or arrangement, its benefits as perceived by
board, members, creditors and others, Amount due to unsecured creditors.
Valuation Report to be annexed to the notices for the meetings.
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CHANGES TO INTRODUCED UNDER 2013 ACT AND NEW DRAFT RULES
Eligibility Threshold for raising objections
persons holding not less than 10% of the value of the shareholding; or
persons having outstanding debt amounting to not less than 5% of the totaloutstanding debt.
Accounting Treatment: Requirement to provide an auditor's certificate statingthat the accounting treatment is in accordance with the accounting standards.
Filing of statement certified by a CA/CS with ROC: by the company indicatingwhether the scheme is being complied in accordance with the orders - until thecompletion of the scheme.
Express provision empowering NCLT to pass any direction or dispense with anyprocedure prescribed in the New Draft Rules, except otherwise provided in the2013 Act.
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MERGER/AMALGAMATION INVOLVING A LISTED COMPANY
SEBI, vide its circular dated February 4, 2013 (Ist Circular), significantly revised
the requirements for listed companies undertaking a scheme of arrangement.
Approval of Audit Committee to draft scheme and valuation report.
Submission of Complaints Report to stock exchange and SEBI.
Attachment of observations of SEBI and stock exchanges and the Complaints
Report with the notices.
Disclosure of everything on the websites of companies as well as the stock
exchanges.
Lock in requirements where shares are to be issued by unlisted companies.
Subsequent to the Ist Circular, SEBI issued another Circular on May 21, 2013 (IInd
Circular) providing clarification and modifying certain provisions of Ist Circular.
Clarified that Ist Circular will apply to all listed companies undertaking a scheme
of arrangement including those for which no exemption from rule 19(2)(b) of
SCRR is sought from SEBI.
Independent valuation not required if no change in the shareholding pattern of
resultant company.
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MERGER/AMALGAMATION INVOLVING A LISTED COMPANY
Public shareholder approval will only be required when,
(a) additional shares are allotted to promoter/promoter group;
(b) the scheme of arrangement involves listed company and any other entity
involving the promoter/promoter group; and
(c) the parent listed company has acquired the equity shares of the subsidiary,
by paying consideration in cash or kind in the past to any the shareholders
(promoter/promoter group) of the subsidiary and thereafter the same
subsidiary is merged with the parent listed company under the scheme.
On November 30, 2015, SEBI issued a new circular which replicates the provision
laid down in the Ist and the IInd Circular with some minor amendments.
Requirement to the fairness opinion elaborated.
Additional disclosures to be provided pre-sanction and post sanction of scheme
by the Court.
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CROSS BORDER M&A - ANALYSIS
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CROSS BORDER M&A - ANALYSIS
No express provision under Sections 391-394 of the 1956 Act. Types
Merger of foreign company into an Indian company
Merger of Indian company into a foreign company
Currently only merger of foreign company into an Indian company allowed in terms ofsection 394(4)(b) of the 1956 Act.
foreign company defined to mean a company or a body corporate, incorporatedoutside India, whether having a place of business in India or not. Under the New DraftRules, limited to foreign companies incorporated in jurisdictions as notified by theCentral Government.
Condition for merger:
sanction of the scheme by NCLT in India.
sanction of the scheme by relevant adjudicating authority and regulatory authoritiesof the notified countries having jurisdiction over the other company.
compliance with FEMA and any other applicable laws, including any approvalrequired to effect the merger.
Consideration to be paid to the shareholders of the transferor company in cash and/ ordepository receipts.
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DRAFTING OF SCHEME
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ROLE OF COURT WHILE SANCTIONING THE SCHEME
Settled principle laid down in Supreme Court in Miheer H. Mafatlal vs.Mafatlal Industries Limited -
Court not rubber stamp and has to apply its judicious mind;
Fairness and reasonableness of Scheme ;
Court has to ensure that
Compliance with statutory provisions have been complied with.
Disclosure of relevant material for meetings.
Adequate representation of class of creditors/shareholders.
Statutory majority was acting bona fide.
Not patently unfair or grossly prejudicial to the shareholders
Not violative of any provision of law, neither is contrary to publicpolicy
Court does not have jurisdiction or expertise to delve into commercialwisdom of members and creditors and company.
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IMPORTANT PROVISIONS UNDER A SCHEME
Introduction of parties to the scheme.
MOA to authorize the business to be undertaken.
In Re: Pmp Auto Industries Ltd.
Rationale for the scheme
Drafting of undertaking clause
Valuation
Hindustan Lever Employee Union v. Hindustan Lever Ltd.
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IMPORTANT PROVISIONS UNDER A SCHEME
Appointed Date
Prospective appointed date
In Re: Edelweiss Stock Broking Limited, Gujarat HC , while rejectingthe observations of RD, approved the scheme of arrangement withprospective appointed date- in the interest of stakeholders & public.
In the matter of In Re HCL Hewlett-Packard Ltd, appointed date- foridentification and quantification of assets and liabilities of the existingcompany- the appointed date of resulting company prior to the date ofincorporation of the new company is immaterial.
Appointed date same as effective date- In Re: Equitas FinanceLimited, Equitas Housing finance limited, Equitas Micro Finance Ltd,Equitas Micro Finance Ltd.
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IMPORTANT PROVISIONS UNDER ASCHEME
Third Party Rights
General Radio & Appliances Limited V. M.A. Khadar-amalgamation results in transfer of tenancy right, exposingamalgamated company for vacating the premises if land lord doesnot agree to said transfer.
Entrustment provisions- conduct of business till the effective date.
Residuary Clause.
Effective Date can be made subject to regulation.
Modification of Scheme
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STAMP DUTYISSUES IN M & A TRANSACTIONS
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INTRODUCTION
In terms of Section 3 of the Indian Stamp Act, 1899 (Central Act) instruments shallbe chargeable with duty of the amount indicated in the Schedule.
For the purposes of this presentation we shall be looking into the followingdefinitions under the Central Act:
Instruments - Section 2 (14) - "Instrument" includes every document by which anyright or liability is, or purports to be, created, transferred, limited, extended, extinguishedor record.
Conveyance - Section 2 (10) - "Conveyance" includes a conveyance on sale, everyinstrument, and every decree or final order of any Civil Court, by which property, whethermovable or immovable, is transferred to, or vested in or declared to be of any other person,inter vivos and which is not otherwise specifically provided for by Schedule I or ;
Concept of property - legally
The Indian Stamp (Amendment) Bill, 2014 proposes an amendment to Section 2(10) to include, inter alia:
(d) every order made by the High Court under section 394 of the Companies Act, 1956in respect of the amalgamation or reconstruction of companies:
Provided that on or after the constitution of the National Company Law Tribunalunder section 10FB of the said Companies Act, the reference to High Court underthis clause shall be construed as reference to such Tribunal; and
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STAMP DUTY ON AN ORDER OF THECOURT UNDER SECTION 394 OF 1956 ACT(ORDER)
The Central Act is silent on the stamp duty payable on such Orders.
However, there are diverging views on the issue amongst the States in the
form of the following:
Some states have specifically amended the state laws levying stamp duty
to include Orders.
Decisions of various High Courts - where no modification has been made
by the States to the definition of conveyance or the relevant entry for
conveyance in the Schedule.
A number of High Courts as well as the State specific
amendments/modification are silent on the issue.
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STATES WITH SPECIFIC ENTRYPERTAINING TO ORDER
Some states (such as Maharashtra, Gujarat, Karnataka, Rajasthan, Andhra Pradesh,Madhya Pradesh ) have amended their respective state laws levying stamp duty, toinclude an Order within the ambit of the term Conveyance. In such states the prescribedduty shall be applicable.
Maharashtra Bombay Stamp Act, 1958 Definition of Conveyance Section 2 (g)
Hindustan Lever Ltd. v. State of Maharashtra an order of the Court sanctioningscheme of amalgamation u/Section 394 read with s. 391 of Companies Act, 1956 wouldfall within the definition of instrument and conveyance It is exigible to stamp duty (amendment in the law was clarificatory and only by way of abundant caution)
Prior to Amendment After Amendment in 1985 and 1993 (as referred to in Hindustan Lever Ltd. Case)
(g) "conveyance" includes a conveyance on sale and everyinstrument by which property, whether moveable orimmovable, is transferred inter vivos and which is nototherwise specifically provided for by Schedule I.
(l) instrument includes every document by which any rightor liability is, or purports to be created, transferred, limited,extended, extinguished, or recorded but does not include bill ofexchange, promissory note, bill of lading, letter of credit, policyof insurance, transfer of share, debenture, proxy and receipt.
(g) conveyance includes, -(i) a conveyance on sale,(ii) every instrument,(iii) every decree or final order of any civil court,(iv) every order made by the High Court under section 394 ofthe Companies Act, in respect of amalgamation orreconstruction of companies ..;
by which property, whether movable or immovable, or anyestate or interest in any property is transferred to, or vested in,any person, inter vivos, and which is not otherwise specificallyprovided for by Schedule I .
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DUTY CHARGEABLE IN MAHARASHTRA
Entry Rate
If relating to the order of the High Court in respect
of the amalgamation or reconstruction of companies
under section 394 of the 1956 Act or under the order
of the Reserve Bank of India under section 44A of
the Banking Regulation Act, 1949
10 per cent of the aggregate of the market value of the
shares issued or allotted in exchange or otherwise and the
amount of consideration paid for such amalgamation:
Provided that, the amount of duty, chargeable under this
clause shall not exceed, -
(i) an amount equal to 5 per cent of the true market value
of the immovable property located within the State of
Maharashtra of the transferor company ; or
(ii) an amount equal to 0.7 per cent of the aggregate of the
market value of the shares issued or allotted in exchange
or otherwise and the amount of consideration paid for
such amalgamation, whichever is higher:
Provided further that, in case of reconstruction of
demerger the duty chargeable shall not exceed, -
(i) an amount equal to 5 per cent of the true market value
of the immovable property located within the State of
Maharashtra transferred by the Demerging Company to
the Resulting Company; or
(ii) an amount equal to 0.7 per centum of the aggregate of
the market value of the shares issued or allotted to the
Resulting Company and the amount of consideration paid
for such demerger, whichever is higher.
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Explanation:- III-
(i) For the purposes of clause (da) the market value of shares,--
(a) in relation to the transferee company, whose shares are listed and quoted for trading on a stock
exchange, means the market value of shares as on the appointed day mentioned in the Scheme of
Amalgamation or when appointed day is not so fixed, the date of order of the High Court; and
(b) in relation to the transferee company, whose shares are not listed/or listed but not quoted for trading
on a stock exchange, means the market value of the shares issued or allotted with Reference to the market
value of the shares of the transferor company or as determined by the Collector after giving the
Transferee company an opportunity of being heard.
(ii) For the purposes of clause (da), the number of shares issued or allotted in exchange or otherwise shall
mean, the number of shares of the transferor company accounted as per exchange ratio as on appointed
date.
Vide notification M.G.G. Ext. No. 124, Part IV-B dated May 6, 2002, the State Government of Maharashtra
has reduced the maximum chargeable duty under Article 25(da) to Rupees Twenty Five Crores only.
DUTY CHARGEABLE IN MAHARASHTRA (Contd...)
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STATES WHICH ARE GUIDED BY THEDECISIONS OF THE COURT
Some states (such as Delhi, and Uttar Pradesh) have adopted the provisions of CentralAct with modifications and amendments but have not specifically included such Ordersneither under the definition of conveyance nor provided for them in the charging entryof the Schedule. The Courts in these States have opined on the same.
Delhi - Delhi Towers Ltd. v. G.N.C.T. of Delhi relied on the Apex Court in HindustanLever - Order is an instrument which has the impact of transferring of all assets andliabilities including the property of the transferor company to the transferee company -therefore be exigible to stamp duty under the Indian Stamp Act, 1899.
In the above States Issue of computation of stamp duty:
Value of shares being issued?
Value of assets and liabilities being transferred?
Any other consideration being exchanged?
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STATES WHICH ARE SILENT ON THEISSUE
Some states such as Haryana, Punjab and Bihar have adopted theprovisions of Central Act with modifications and amendments. However,they have not included such Orders within these amendments neitherunder the definition of conveyance nor provided for them in the chargingentry of the Schedule. Further, their respective High Courts have also nottaken a view on the same. In such states, state notifications or memos arethe guidelines for stamping of Orders.
However, in Haryana, a recent memo was issued by the HaryanaGovernment to the stamp authorities in the State directing them to impose astamp duty of 5% on instruments of mergers/amalgamations upondirections/order of the High Court evidencing transfer of property in termsof Article 23 (a) of Schedule I-A of the Indian Stamp Act, 1899.
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OTHER ISSUES PERTAINING TOSTAMPING OF ORDERS
Transactions involving registered offices/properties located in multiple States
Section 19 A of the modified/amended Central Act as adopted in severalstates or Section 19 of the State specific stamp legislations -payment of thedifference in stamp duty in case documents executed in one State and takento another State relating to any property situate or to any in matter or thingdone or to be done in that State.
Chief Controlling Revenue Authority v. Reliance Industries Limited
For the purposes of stamp duty, whether the Order of the Court is regardedas the instrument or the scheme?
If a reduction in stamp duty is permitted in case of stamp duty already paidin another state?
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EXCHANGE CONTROL
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WHEN ARE THE FOREIGN EXCHANGE REGULATIONS TRIGGERED?
Resident - Acquires foreign security of a foreign entity
Non-resident Acquires security of Indian entity.
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FOREIGN DIRECT INVESTMENT THROUGHA COURT APPROVED SCHEME
The transferee company / new company may issue shares to theshareholders of the transferor company resident outside India, subject tothe following conditions:
The percentage of shareholding of persons resident outside India in thetransferee or new company does not exceed the sectoral cap.
The transferor company or the transferee or the new company is notengaged in activities, which are prohibited in terms of FDI policy.
Reporting Details of shares held by persons resident outside India beforeand after acquisition within 30 days.
Approval not be required for investment in sectors permitting foreigninvestment under the Automatic route. (FDI Policy)
Implies Government approval required for investment in sectorspermitting foreign investment under Government approval route.
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FOREIGN DIRECT INVESTMENT THROUGH A COURT APPROVED SCHEME (CONTD.)
Issuance of non-convertible/redeemable preference shares or debentures tonon-resident shareholders is permitted by way of distribution as bonusfrom its general reserves subject to the following:
the original acquisition of shares / convertible debentures of the Indiancompany by non-resident shareholders entitling them to hold non-convertible redeemable preference shares or debentures is inaccordance with these Regulations and the conditions specified in therelevant Schedule;
in accordance with the provisions of the Companies Act, as applicableand the terms and conditions, if any, stipulated in the scheme approvedby the Court in India have been complied with;
no-objection from the Income Tax Authorities.
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THANK YOU
Inder Mohan SinghPartner
Shardul Amarchand Mangaldas & Co.
Shardul Amarchand Mangaldas & CoAdvocates & Solicitors
Amarchand Towers, 216 Okhla Industrial Estate, Phase III, New Delhi - 110 020, IndiaT +91 11 41590700, 40606060 ext. 4387 F: +91 11 2692 4900
Ahmedabad Bengaluru Gurgaon Kolkata Mumbai New DelhiEmail: [email protected]
Mobile No.: +91-9818927535
mailto:[email protected]