m & a- indian senario

8/20/2019 M & a- Indian Senario

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Module- II

Mergers, Takeovers and

Restructuring routes –Indian scenario –


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Contents

• Relevant Statutes, Rules and Regulationsand regulatory bodies

• Identifcation o the statutes having a bearing

on Mergers & Acquisition activities and a brieoverview o their impact on the transactions

• Provisions o the Companies Act !"# &"$%'(ecurities Contract )egulation Act' "$%' (*+I

Act' "$$' (*+I )egulation on (ubstantialAcquisition o (hares' !"" - ,ther )ules and)egulations under (*+I Act'


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• I)A "$%"' +an.ing )egulation Act' "$/$'(A)0A*(I Act' Competition Act' !!' I1Act "$"' 2isting Agreement' etc3

• )egulator5 bodies in Merger & Acquisitionactivities and their role - 1he Court61ribunal7' (*+I' 1a.eover Panel' )eserve+an. o India' (toc. *8changes'

Competition Commission' Central9overnment' etc3

•


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1he routes o corporate )estructuring:nder the Indian laws

"3 +usiness acquisitions under (3";!6"76a 7 o the!"# Act


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statutes having a bearing onMergers & Acquisition activities

"3 1he Companies Act' !"#- (s3#!-#=

3 1he (C)A '"$%-

#3 (*+I Act' "$$-Chapter >A ' s3"A- Prohibition o manipulativeand deceptive devices ' insider trading and substantialacquisition o securities or control

/3 1he Industries 6evelopment & )egulation 7 Act'"$%" 3 (eeChapter Chapter III AA & III A+ -";067 r?w";003

%3 1he +an.ing )egulation Act' "$/$'6 1a.e over? acquisition7 Part-IIC (s3# A*-#A93 Merger (ee (3 //A6 >oluntar5 merger7 & (3/%6 Compulsor5 merger7

3 (A)0A*(I Act ' !! 6 1he securiti@ation and )econstruction o0inancial Assets and *norcement o securit5 Interest Act ' !!7(ee (3 % - Acquisition o rights or interest in fnancial assets3

=3 (*+I 1a.eover )egulations'!""


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=3 1he Competition Act' !!- (s3 #' /'%' r?w (3"$' ! ' ; etc3

;3 1he Income 1a8 Act

$3 2isting Agreement


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)egulator5 +odies o M& A and their

role

• 1he Court

• (*+I

•

)+I in +an. mergers• Competition Commission

• (toc. e8changes

•

Central 9ovt3'


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)ole o the court6tribunal7 in M & A

• AIR India Employees v. AIR India Ltd and Union of India 6!"/7

• Bharati Jyothindra Sha v. Bombay Stock Exchane Ltd 6 ,rissa ighcourt7' !" 6 (cheme o arrangement or capital restructuring 7

• Sehal !.! v. Sehal "aper !ills Ltd 6 "$;7 ! Comp Cas %"! 6 P

&7

• Coimbatore Cotton Mills 2td and 2a.shmi Cotton Mills Co32td ' In re6 "$;!7 %! ComCas # 6 Mad7

• Bomal plastic enterprises 2td v3 )o85 *nterprises P 2td 6 "$$"7 =ComCas"

•Miheer 3 Maatlal v3 Maatlal Industries 6"$$7 / Comp2 %;%

• (idhpur Mills Co32td ' )e6"$;!7 %! Comp Cas=6 9u7

• All India +luestar *mplo5ees 0ederation v3 +lue (tar 2td 6 !!!7 =(C2 % 6 +om 7


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(ehgal M3M v3 (eghal Paper Mills 2td 6 "$;7 !Comp Cas %"! 6 P &7

• 1he case concerned with ta.e over andmanagement o (egal Papers 2td ' which wasin the course o Dinding up3 An Application

was moved b5 the ormer chairman o the saidcompan5 under (s3 #$"-#$/3 1he same wasobected b5 the (ecured creditors 3 Againstwhich the petitioner approached the courtunder )ule =$ o the Compan5 Court )ules 3

• main Issue – "7 Dhen can the court invo.e its urisdiction under (s3#$"-#$/E


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• (3P39o5al F3' G 1o Invo.e the urisdiction o the court under (3 #$"o the Act to sanction the scheme

the same must have been approvedb5 the requisite maorit5 as laiddown in (3 #$" 6 73 :nless the

scheme brought beore was soapproved the court will have no

urisdiction to entertain an

application under )3 =$ o theH


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• Dho can fle an application under (3#$"o "$% Act


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Coimbatore Cotton Mills 2td and 2a.shmi Cotton MillsCo32td ' In re 6 "$;!7 %! ComCas # 6 Mad7

F3Padmanabhan

• 0acts A scheme o amalgamation wasproposed between two companies whichproduced the same goods i3 e 5arn and

cloth was approved b5 the requisite maorit5under (3 #$"6 7 3 +ut the scheme wasopposed b5 the central govt on the groundthat 6 a7 the ratio o the share e8change wasnot proper 6 b 7 no approval or sanction othe M)1P was sought3 1he igh court

negatived all the contentions andsanctioned the (cheme3


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• Issue – )ole o the court under (3 #$" othe Act E-

• F3Padmanabhan G In the absence oan5 allegation o raud or malafde onthe part o the chartered

accountants ' the e8change ratio hadto be considered as air and reasonableespeciall5 where the scheme has beenapproved b5 an overwhelming maorit5

o the shareholders and noshareholders have disapproved theschemeJJ3


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• (3 #6#7 o the M)1P Act e8empt rom obtainingsanction o M)1P o those companies which were tobe amalgamated produce the same goodsJ3

• G In e8ercising its discretion under (3 #$" & #$/ othe Act ' the court is not merel5 acting as a )ubber(tamp 3 It is the unction o the court to see that thescheme as a whole' having regard to the general

conditions and bac.ground and obect o thescheme is a reasonable one and i the courts sofnds it ' it is not or the court to interere with thecollective wisdom o the shareholders o thecompan5JJ33 owever i the scheme as a whole is

air and reasonable it is the dut5 o the court not tolaunch on an investigation upon the commercialmerits and demerits o the scheme which is theunction o those who are interested in thearrangement G


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(idhpur Mills Co32td ' )e6"$;!7 %!Comp Cas=6 9u7

• (idhpur Mills Co32td was order to wind updue to insolvenc53

• Applications were fled b5 the creditors '

members' wor.ers and emplo5ers o thecompan5 at diKerent occasions or a schemeunder (3 #$" o the companies Act3

• 1he Issue beore the court was whether the

court can f8 an5 time limit in entertainingapplications under (3 #$"E6 Dhether the courthad the power to adopt such a scheme oaction 7


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P33esai' F3'

• eld that G (3 #$" coners upon the court discretionto order a meeting o the creditors or the members othe compan5 to be called and held in such manner asthe court directs on the application o the compan5 or

o an5 creditor or the liquidator 3 1his rule does notpreclude the court rom evolving in advance andollowing certain rules ' precedence ' standards orpolicies to guide in it in e8ercise o its discretion as anwhen an occasion arises 3 (o ar as the discretion

under (3 #$" is concerned ' in the ver5 nature o thethings ' a scheme o amalgamation etc has to subserve various conLicting interests and meet with theapproval o diKerent classesJJJJJJJJ


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• J3 1here is no legal bar against thecourt la5ing down a rule or polic5that it will not e8ercise its discretion

under s3 #$" o the companies Actand convene the meeting o variousclasses o creditors and shareholders

and wor.men to consider a newscheme ater a certain limitJ3 G


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Miheer 3 Maatlal v3 Maatlal Industries 6"$$7 /Comp2 %;%6 9u7

• In the present case ' it was theobection o the petitioner thatproper classifcation o the

shareholders rom holding separatemeeting to the class o shareholdersas required under (3 #$"6 " 7 has

not been made ' which has aKectedthe validit5 o approval o thescheme b5 the court JE


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• C 3B3 1ha..er and )3 +alia F F3' J33 G o strait ac.etrule can be laid down in which case the court willdecide or will not decide on a particular issue 3 Itdepends on the totalit5 o the circumstances bearing

on the entire controvers5 and also the act thatwhether the urisdiction e8ercised its discretionar5one or obligator5 one JJJJ It is or the court toproceed in a manner as it deems ft in deciding theissues raised beore itJ3 In doing so it commits no

irregularit5 or illegalit5 so as to warrant intererenceon that ground alone in appeal3 :ltimatel5 it rests

within the discretion o the court JH


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Bomal plastic enterprises 2td v3 )o85 *nterprises P 2td 6 "$$"7 =ComCas"6 el7

• 1he scheme o amalgamation was opposed b5 the securedcreditor despite that the scheme was sanctioned b5 thecompan5 court3

• N3B3(abarwal F3' G 1he provisions o (3 #$"6 7 o theCompanies Act'"$% are clear and unambiguous 3 1hecompan5 court has no urisdiction to sanction a scheme i itis not approved b5 a #?/th maorit5 o the creditors oreach class o the creditors 3 1he question o courtconsidering the scheme would arise onl5 i it is beenapproved b5 the statutor5 maorit5 provided or under (3

#$"6 73 Dhere separate meeting are called to considerone composite scheme covering both secured andunsecured creditors ' it is necessar5 that both themeetings should pass the scheme b5 #?/th maorit5 JJJ3


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• 33i the secured creditors on the frstmeeting reect the scheme thescheme has to be deemed to have

been reected b5 the creditorsgenerall5 and cannot be consideredor sanctioning b5 the court3 G


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• Is it mandator5 to call a meeting b5 the courtunder (3 #$"-

• 1he court has the discretion to dispense with

the ormal meeting i consent o the requiredmaorit5 otherwise obtained 3

• In (3M3oldings 0inance 2td v3 M5soremachiner5 manuacturers 2td 6 "$$#7 =;

compCas3 /#- Gthere is a substantialcompliance o the statutor5 provision i #?/th o the creditors have agreed to and approvedthe schemeH


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• Dhat would be the eKect osanctioning o the scheme has beenconsidered in )e *uroplast India 2td3

A Compan5 Incorporated :nderCompanies Act' "$% reported in!"! 6""7 +om2) ;" !"! Indlaw

M:M #/$ stating the law thus6 Citedb5 Idea Cellular 2td v3 :nion o India6!""7-Fudgement b5 elhi igh

court7

• #he $%estion as to &hat is the scope of po&er of the

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• #he $%estion as to &hat is the scope of po&er of the'ompany 'o%rt &hile exercisin (%risdiction %nder Section)*+ and )*, of the Act is no more res intera.

• #he Apex 'o%rt &ent on to observe that the "arliament has-in its &isdom- conferred a po&er of &ide amplit%de on theih 'o%rt in India to provide for its contin%o%s s%pervisionof carryin o%t of compromise and/or arranement and alsothe conse$%ential po&er to make the s%pervision e0ectiveby removin the hitches- obstacles or impediments in&orkin of compromise or arranement by conferrin po&er

to ive s%ch directions in reard to any matter or for makins%ch modi1cation in the compromise or arranement as itmay consider necessary for the proper &orkin of thecompromise and/or arranement. It is f%rther observed thatthe scheme sanctioned %nder Section )*+ of the Act does

not merely operate as an areement bet&een the partiesb%t has stat%tory force and is bindin not only on thecompany b%t even the dissentin creditors or members asthe case may be.


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• 'o%rt has observed that the e0ect of the sanctioned scheme is tos%pply by reco%rse to the proced%re thereby prescribed the absence ofthat individ%al areement by every member of the class to be bo%nd by

the scheme &hich &o%ld other&ise be necessary to ive it validity. It isalso observed that scheme represents a contract sancti1ed by 'o%rt2sapproval bet&een the company and the creditors and/ or members ofthe company. It is e$%ally &ell established that the rihts &hich areenshrined in the scheme of the class of creditors cannot be impaired ors%perseded %nless it is by a ne& scheme approved in the same &ay asthe earlier one. 3%rther- sanction of the 'o%rt operates as a (%dment inrem4.

• In the case of Smt. "ramila 5evi v. "eoples Bank of 6orthern India Ltd.7+*)*8 * 'om 'as. 9the 'o%rt held that the scheme &hen sanctionedac$%ires stat%tory force and has reater sanctity than a mereareement bet&een the parties a0ected. It cannot be varied by a mereareement of the parties4.

• In the case of :rishnanath Sen v. 5ina(p%r Loan ;


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Courts power' unction & discretionunder (3 #$"-(COs view

"3 1he sanctioning court has to see to it that all requisitestatutor5 procedure or supporting such a scheme havebeen complied with and that the requisite meeting ascontemplated b5 (3 #$" has been complied with3

3 1hat the maorit5 decision o the concerned class o voters

is ust and air to the class as a whole so as to legitimatel5bind even the dissenting members o that class3

#3 1hat all necessar5 materials indicated b5 s3 #$#6"7 6a7 isplaced beore the voters at the concerned meeting as placedas contemplated b5 s3 #$" sub-section 6 "73

/3 1hat all the requisite material contemplated b5 the provisoto sub sec 6 7 o s3 #$" o the Act is placed beore the courtb5 the concerned applicant see.ing sanction or such ascheme and the court gets satisfed about the same 3


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/3 1hat the compan5 court has also to satis5 thatitsel that the members or class o members orcreditors or class o creditors as the case ma5 bewere acting bonafde and in good aith and were

not coercing the minorit5 in order to promote an5interest adverse to that o a latter comprisingthe same class whom the5 purported to represent3

% 3 1hat the scheme as a whole is also ound to be

ust' air & reasonable rom the point o view oprudent men o business ta.ing a commercialdecision benefcial to the class represented b5

them or whom the scheme is meant3


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o power to e8amine the validit5 o

transactions

• ational organic Industries v3 Mihir3Maatlal 6!!/7 ""; Com Cas %6 9u7- there is no power in the court

in a petition or sanction o a schemeto go into the validit5 o transers o

shares ' or entitlement o shares to

shareholders3


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)ole o (*+I in M &A

• 2isted companies are bound b5 (*+I )egulations

• Pre-"$$- 2isting agreement governed substantialacquisition o shares

• "$$- (*+I Constituted

• "$$/- 1a.e cover regulations notifed

• "$$=- )evamped ta.e over regulations notifed asper the +hagavati committee )eport

• !!$- 1)AC constituted to review the regulationsunder the chairmanship o (mt :sha ara5an

• !"" – ew ta.e over )egulations came into eKect3

• (*+I 1a.e over 6 )egulations7 !""


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India

• (*+I is a bod5 corporate created underthe (*+I Act ' "$$ to protect the interesto the investors in securities ' to promote

the development o the securities mar.etand to regulate it 36 (ee (3 ""6"7 o the(*+I Act' "$$73

• It is statutoril5 empowered to regulate

the (ubstantial acquisition o shares andta.eovers o Companies 6 (ee (3 ""676h7o the (*+I Act ' "$$7


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Main eatures o ta.e over

regulations are

• 1he 2imits on the acquisition o sharesand voting rights

• Acquisition o control Dhen and ow

• *8emptions• ,pen oKer-1rigger and Conditions

• Be5 obligations o parties during open

oKer• Minimum public shareholding

• isclosure requirement


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*ngland

• Panel on ta.eovers and mergers isan unincorporated associationestablished to develop ' administer

and interpret the CI1N C,* , 1a.e overs and mergers3


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)ole o )+I in M &A

• (3//A6/7 o +an.ing )egulation Act'"$/$->oluntar5 merger-approval o)+I

• (3 /%6 +3)3 Act' "$/$7- Compulsor5merger- Approval o )+I3#

• (3#A*-#A9-)eport to be submitted

b5 )+I to central govt3 or acquisitionunderta.ings o ban.ing compan53


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)ole o Competition 2aw & CCI in

M&A• )eer 1he competition Act'!!- (ee the ,bectives• (ee (36a7 Acquisition

• (3#-Anti-Competitive agreements

• (3/-Abuse o dominant position

• (3%-Combinations 6 Mergers ? Acquisition7

•

Competition law orbids abuse o mar.et power3• Merger control is not simpl5 about preventing uture abuses ' it is also

about maintaining competitive mar.et structure which lead to better outcomes or consumers3

• Competition authorit5 is called upon to consider &hether a merer &illlead to harmf%l e0ects on competition in the f%t%re .

•

Most mergers must be notifed to the CCI and cleared beore the5 areput into eKect3

• 1he competition authorit5 will not onl5 to predict the li.el5 outcome othe merger but also to consider the counter actual ' that is to sa5 theposition i merger were not to occur3


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CA'!!& M&A

• ,n "st Fune !""-merger control provisions othe Competition Act '!! have come intoeKect3 It is .nown as 1he competitionCommission o India 6 Procedure in regard tothe transactions o business relating tocombinations 7

• As a result M &A transactions resulting in

certain thresholds need to be notifed to theCCI and will not be permitted to carr5 onbusiness until cleared b5 the competitioncommission3


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otifcations to be made to the CCIwithin #! da5s

• In case o a merger or amalgamation '

granting o board approval or merger3• 0or acquisition o an5 shares ' voting

rights or assets ' e8ecution o an5

document conve5ing an agreement ordecision to ma.e the acquisition3

•


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• ,bligation to fle lies with theacquiring compan5 and sanctionsma5 be imposed or ailure to do so

within prescribed #! da5s period 3


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CCIOs review ocombinations

• CCI has a f8ed period o #! da5s romaccepting the parties notifcation in which toconduct its initial investigation and issue itsprima acie opinion as to whether the

combination will or is li.el5 to have an adverseeKect on competition in the relevant mar.et inIndia3

• owever i CCI have an5 prima acie obection

and launches an in depth review the partieshave to wait upto urther ";! da5s or a fnaldecision 6 Min-#! da5s – ma8imum o ";! da5s7

h i i i


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1heories o competitiveharm

• Most mergers cause no harm to the competition3owever there ma5 be cases where it can bepredicted that the changed structure o themar.et will provide the mergered entit5 with the

incentive and abilit5 to e8ercise the mar.et powerin such a wa5 that will be harmul to the consumerwelare 3A competition authorit5 concerned aboutthe particular merger will need to articulate its

theor5 as to how competition will be harmed3>arious theories o competitive harm have beendeveloped

•


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A3 :nilateral or non-coordinated

eKects

• :nilateral eKects occur where AOmerges with +O and the mergedentit5 A+ will be as a result o the

merger to e8ercise mar.et power3 1here b5 the compan5 ma5 be ableto increase the price ' reduction o

output' qualit5' variet5 or innovation


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+3 Coordinated eKects

• Coordinated eKects occur where Amerges with + and this result in asituation where A+ will be able or

more able than when AO and +Owere independent to coordinate theircompetitive behavior on the mar.et

with other frms 3


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C 3 >ertical eKects

• 1here ma5 be circumstances inwhich a vertical merger couldproduce adverse eKects' frst' where

the possibilit5 o oreclosure o athird part5 arise and second wherethe vertical integration o the A+

ma.es it more li.el5 that there willbe coordinated eKects on themar.et3


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3 Conglomerate eKects

• 1heor5 o harm in the case o conglomerateeKect is particularl5 speculative –ore8ample that A+O might decide to tie the

two complementar5 products together in awa5 that will oreclose the competitor or toprice a unbundled pac.age o both o themto similar eKect3 It is possible that tie-in

transactions and bundling practices wouldviolate laws that orbid the abuse odominant position3


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• Illustration Fa5achandran ? Mint• Updated: Mon' (ep !" !!;3 " "/ AM I(1

• :nder Indian law' minorit5 shareholders in a compan5 are in a position to challenge the larger shareholders and put orward their agenda or the direction ta.en b5 the compan5 on variousmatters and' accordingl5' a trend has emerged whereb5 the maorit5 shareholders preer to consolidate their holdings to achieve better control and reap greater economic benefts rom thegrowth o the compan53 Illustration Fa5achandran ? Mint

• In act' the Companies Act' "$%' provides or protection o minorit5 shareholders against certain actions ta.en b5 the maorit5 shareholders' such as unair dilution o shares' related part5transactions' etc3 Apart rom deadloc. or ris.s o litigation created b5 the minorit5 bloc. ' the maorit5 shareholders ma5 also want to get rid o the minorit5 shareholders in order to obtainincreased administrative Le8ibilit53 A maorit5 shareholder would want unettered rights to conduct the business o the compan5 in the manner it deems ft' and the concept o m inorit5Gsquee@e-outsH' well-recogni@ed in man5 urisdictions internationall5' becomes relevant3 A Gsquee@e-outH reers to a mechanism that eKectivel5 entitles the controlling bloc. to acquire the

shares held b5 the minorit5 shareholders in a compan5

• :nder Indian law' the (ecurities and *8change +oard o IndiaOs 6(ebi7 delisting guidelines provide or provisions relating to delisting' which entitle promoters to voluntaril5 delist a compan5 romthe stoc. e8changes b5 oKering to purchase the shares o public shareholders3 1his seems to be on similar lines as minorit5 squee@e-out provisions because' upon the compan5 being delisted'

the shareholders would lose the liquidit5 attached to their shares and their e8it options would be reduced substantiall5' ma.ing it li.el5 that t he5 would accept the oKer o the promoters topurchase their shares3 evertheless' considering that the shareholders have the right to reect the oKer to sell their shares and can continue as shareholders o the compan5' strictl5 spea.ing'these provisions do not have the same eKect as minorit5 squee@e-out provisions3

• In this regard' section #$% o the Companies Act' which provides or compulsor5 acquisition o shares b5 the maorit5 shareholders 6in certain circumstances7' becomes relevant3 :nder thisprovision' an acquiring compan5 ma5 ma.e an oKer to the shareholders o a target compan5 o a scheme or a contract involving the transer o shares o the target compan53 In the event thatholders o nine-tenths o the value o the shares o the target accept the oKer o the acquirer compan5 6Gapproving shareholdersH7 within a prescribed period' the acquirer compan5 shall havethe right to give a notice to the dissenting shareholders 6who have not accepted the oKer7 to acquire their shares also 6within a given period73 1he dissenting shareholders shall have the right to

fle their obection to the same with the Compan5 2aw +oard3 :nless the Compan5 2aw +oard orders otherwise' the acquirer shall be entitled to acquire the shares o the target compan5 on theterms on which the shares o the approving shareholders are to be acquired b5 the acquirer compan53

• It is important to note that section #$% o the Companies Act also specifes that in case the acquirer compan5 or its subsidiar5 hold more than one-tenth o the value o the shares o the target'

then the oKer would onl5 be valid i such an oKer is approved b5 the holders o nine-tenths o the shares o the target compan5 6e8cluding the shares held b5 the acquirer compan5 or itssubsidiar573 Additionall5' such approving shareholders should constitute not less than three-ourths in number o the holders o those shares3

• 0urther' section #$% is the onl5 provision in the Companies Act that deals with the compulsor5 acquisition o shares o minorit5 shareholders and there are no corresponding rules or guidelinesavailable in relation to this3 In the absence o such guidance notes' wide powers o discretion have been conerred on the Compan5 2aw +oard to allow or reect an oKer to squee@e out a

minorit5 group under section #$%3

• 1he udicial trend so ar 6considering that there are not man5 cases under this provision7 suggests that the Compan5 2aw +oard would allow the scheme or contract i the airness standard ismet and the onus to prove otherwise shall be on the dissenting shareholders3

• It is important to note that section #$% does not contain an5 guiding principles relating to the valuation o shares or the purposes o the ta.eover oKer3 0urther' the increased maorit5 o nine-tenths o the independent shareholders is onl5 required where the acquirer compan5 or its subsidiar5 holds shares in the compan53 1he requirement is not e8tended to cases where related

parties to the acquirer hold shares in the target compan53 1his gap has been flled in b5 the udiciar5 in some cases li.e AI 7!a%riti%s8 v #ata #elevent%res oldins Ltd' where the elhi highcourt reected the oKer o the acquirer compan5 on the basis that on liting the corporate veil' the acquirer compan5 was reall5 the same as the approving shareholders o the target compan53

owever' some legislative guidance 6urther to the case law7 would ma.e the legal position clearer3

• 1o conclude' it can be said that the legislature needs to revisit the provision3 Beeping in mind that an5 ta.eover oKer under section #$% requires the approval o nine-tenths o the minorit5shareholders' presentl5 section #$% onl5 enables a squee@e-out o the dissenting minorit5 shareholders and not all minorit5 shareholders3 It does not provide or a situation where the minorit5

bloc. is against the ta.eover oKer' irrespective o the level o their holding in the compan5 or the airness o the oKer3

• 1hereore' proper minorit5 squee@e-out provisions need to be introduced' providing or a air e8it to minorit5 shareholders and also entitling the controlling bloc. to compulsoril5 acquire shares

held b5 a minorit5 bloc.3

• Send yo%r comments to la&f%llyyo%rslivemint.com. #his col%mn is contrib%ted by Sachin !ehta of ACB D " artners- Advocates D Solicitors.

• 0irst Published Mon' (ep !" !!;3 " "/ AM I(1

• b5 1ab
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