LAWS GOVERNING MERGERS AND ACQUISITIONS IN INDIA

Authors:

Amit Patel DSNLU, Vishakhapatnam

Prachi Ganeriwala, Amity University, Kolkata

Editor:

Shristi Singh, UWSL, Karnavati University


INTRODUCTION Modern-day businesses can be delineated as extremely zestful, rapidly progressing, and dynamic. The augmentation of technology has created exigent pressure on the way businesses operate. Under this milieu accompanied by globalization, the prominence of mergers & acquisitions (‘M&A’) has risen. In layman language, a merger can be defined as a combination of two companies where one corporation is completely absorbed by another corporation. Businesses entail M&A on account of various motives, including diversification, achieving growth, increased revenue, market, product & technology access, synergies, elimination of competition, cross-selling along with regulatory, tax, and fiscal considerations. An enabling framework under corporate and taxation laws goes a long way in reinforcing its efficacy.

LAWS GOVERNING THE MERGER & ACQUSITION IN INDIA

Following are the key pieces of legislations that regulate the merger of the company: -

1. The Companies Act, 2013

The Companies Act being the key legislature governing all the companies in India, it is pivotal that the merger and acquisition are must be in accordance with the provisions and rules made beneath. The legal procedure for bringing about a merger of companies can be briefed as below:

· Firstly, the object clause accommodated in the memorandum of association of both the companies has to be examined to check the authorization of the amalgamation. Further, it should permissible for the merging company to carry on the business of the merged company. Conversely, the merger cannot take place unless the approvals are received.

· The next step includes intimation about the proposal to designated stock exchanges. The board of each company shall pass a resolution authorizing its directors/executives to pursue the matter further and a draft proposal for the merger should be approved, after which each company shall make an application to the High Court of the state where its registered office is situated to convene the meetings of shareholders and creditors for passing the proposed merger in the prescribed manner.

· Once it is passed, the companies involved shall present a petition to the High Court for its confirmation. A notice about the same has to be published in two newspapers.

· Certified true copies of the order must be filed with the Registrar of Companies after which all the assets and liabilities of the merged company will be transferred to the merging company, who will issue securities to be listed on the stock exchange.

2. Foreign Exchange Management Act,1999

The laws unfolding to the issuance and allowance of shares to foreign entities are enclosed in The Foreign Exchange Management (Transfer or Issue of Security by a individual residing out of India) Regulation, 2000. These regulations endow with general guidelines on issuance of shares or securities by an Indian entity to a person residing outside India or recording any relocate of security from or to such person. Accordingly, subject to the sanction by the Indian court, the transferee company can transfer shares to the shareholders of the foreign company, subject to certain rules including:

· The shareholders of the foreign company shall not exceed the shareholding percentage beyond the prescribed pectoral cap.

· Either company shouldn’t be engaged in actions prohibited by the Foreign Direct Investment policy.

· The pricing guidelines laid down by Foreign Exchange Regulation regarding the price at which the Indian company can:

o Issue securities to a non-resident.

o Transfer securities from a resident to a non- resident.

· Acquisition of Indian securities by a non-resident is also required to be reported in a prescribed form to RBI, through authorised dealers.

3. The Indian Income Tax Act (ITA), 1961

To encourage restructuring, the Income-tax Act provides for the treatment of mergers and demergers as tax-neutral, both for the target company and its shareholders, subject to the satisfaction of the prescribed conditions. An Indian company is subject to corporate tax [1] along with Division Distribution Tax[2].India does not permit the consolidation of profits or losses for tax purposes for group companies. Thus, in the case of an Indian acquirer company, repatriation of profits from the target company by way of the distribution of dividends could be subject to two levels of DDT[3] . This dual impact is, however, relaxed in cases where the Indian acquisition company holds more than 50 percent of the equity share capital of the target company[4]. On the other hand, if the acquirer company is outside India, there would be one level of tax in India. Further, in the case of the sale of the shares in the target company, one level of capital gains tax would be triggered in India, which could be mitigated if the acquisition was made from jurisdictions such as Cyprus, Mauritius, etc, by relying on the favourable tax treaties shared with these countries, subject to the satisfaction of Limitation of Benefit (LOB) test and GAAR Regulations. All forms of business acquisitions involve transaction taxes in some form, though nature and quantification may vary, including stamp duty, GST, etc. Who bears the stamp duty is negotiated, although it is common for the buyer to bear it. GST, being an indirect tax, is normally collected from the seller and borne by the buyer.

4. The Competition Act, 2020

Section 5 of the Competition Act specifically deals with the combinations. It deals with the merger of one or more enterprises by one or more persons[5]. It states the definition of the combinations with reference to the assets and the turnover of the respective enterprises exclusively within and outside India. An Indian company, exceeding the turnover cannot acquire another Indian company without the sending prior approval of the commission, unlike foreign enterprises established outside India. Section 6 of the Competition Act, 2002 states that no person or enterprise shall enter into an amalgamation which causes or is probably to cause a significant adverse effect on antagonism within the pertinent market in India and such a combination shall be void[6]. This provision controls the competition running and the market and ensures no combination should make a negative impact on the relevant market. Even though, all the combinations, demergers, mergers, and other similar transactions should be exempted,[7] as they do not affect the competitive market.

5. SEBI regulation and code 1994

SEBI takeover regulations permit a person the consolidation of shares or the voting rights from 15% to 55% such that the acquirer does not hold more than 5 percent of share or voting rights. Despite the fact that prior notification needs to be given if the acquisition of share is more than twenty six percent under the act. If the consolidations of the shares or voting rights are permitted under the SEBI takeover regulation the notification to CCI will not be required.

6. Intellectual Property & Due Diligence in Mergers and Acquisitions

The increased value of intellectual property related transactions has exalted the need owners to acknowledge its valuation. Due diligence is the process of investigating a party’s ownership, right to use, and to halt others from using the same. Due Diligence in Intellectual Property for valuation would help in building strategy in the event of an asset being underestimated or the trademark having been maximized to the level that it loses its stature in the market. Certain events can disparage an asset and the management can use risk information divulged by the due diligence. Therefore, it can be correlated with providing a precise verdict regarding the present and future value of the asset. Apart from the above mentioned acts The Indian Contract Act, 1872 and The Specific Relief Act, 1963 also governs the rights of the parties and the remedies available to private parties in case of breach of the same respectively. Various state and centre regulations also govern employment matters.

7. Stamp duty

Under the Indian laws, stamp duty has to be paid on every document to regard it as admissible evidence in the court of law, which varies from state to state, depending upon the subject matter and the place of execution.

CONCLUSION

Mergers and Acquisitions are business and financial processes, undertaken by companies aspiring prosperity. Indian legislature provides certain laws to invigilate the entire process and consequently might prohibit the same in the event of the merger being against the welfare of the people or the market itself. With the FDI policies becoming more liberalized, Merger & Acquisition talks are growing rapidly. Indian markets having been proliferated over time; it is befitting for businesses & corporate to grab the opportunity.

[1] at the rate of 30 % excluding the applicable surcharge and cess. [2] at the rate of 17.65 % excluding the applicable surcharge and cess. [3] first, when the target company distributes dividends to the Indian acquisition company, and second, when the Indian acquisition company distributes dividends to its foreign parent. [4] In such a case, the dividends distributed by the target company on which it has paid DDT are allowed as a deduction in the hands of the Indian acquisition company, while computing its DDT liability in the same financial year. [5] Competition act, 2002, No. 12, & 5. [6] Competition act, 2002, No. 12, & 6. [7] Competition act, 2002, No. 12, &5(2).

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