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Submitted to : Prof. Dr. T. Raghvendra Rao Faculty of Mergers and Acquisitions

Submitted by :Rakesh Kalkhambkar Roll No. 54 LLM (2nd Year)



INTRODUCTION..............01 WHY INDIAN COMPANIES LOOK BEYOND THEIR BORDERS.04 The need to capture new markets The need to expand capabilities and assets The pressures of domestic competition HOW INDIA IS HELPING ITSEL..08 Creation of a favourable political and economic environment: Improving financing conditions Surging business confidence INDIAS EVOLVING STORY....10 Deal sizes are increasing but they still have room to grow: The diversity of target industries is increasing APPLICABLE INDIAN LAWS......12 The Companies Act, 1956 The Competition Act, 2002 The Tax Laws The Indian Stamp Act, 1899 Securities Laws of India Foreign Exchange Laws REFORMS RECOMMENDED BY THE "IRANI REPORT".21 OVERSEAS DIRECT INVESTMENT26 CASES RELATING TO CROSS BORDER MERGERS..................................................28
The Bharti-Mtn Deal Sesa Goa- Sterlite Deal


ACKNOWLEDGEMENT I wish to extend my heartfelt gratitude to all my teachers in NALSAR University of Law who endeavor to shape every student. I take immense pleasure to express my deep sense of gratitude to Prof. Dr. T. Raghvendra Rao , for his able guidance and useful suggestions, which helped me in completing the project work and for being kind enough to spare their time to interact with me and give me insight about Cross Border Mergers and Acquisitions in India I take immense pleasure in thanking my teachers for their encouragement during my study and most importantly for the tremendous amount of encouragement and inspiration they have bestowed on me throughout the project.

Rakesh Kalkhambkar

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Over the past several years, the mergers-and-acquisitions market in India has been very active. In particular, the percentage of cross-border transactions has risen significantly. Cross-border deals have taken the form of both inbound and outbound transactions. The growth in inbound transactions can be attributed to the growing interest of foreign companies in making acquisitions in India's information-technology and telecom sectors. It has been observed that overseas companies find it far more economical to acquire existing setups rather than opt for organic growth. On the other hand, outbound transactions, too, have increased significantly, with manufacturing companies acquiring entities overseas. It is evident that the appetite of Indian companies for making global acquisitions has grown bigger with time. The Indian economy grew by 9.2% in 2006,1 but M&A deal volumes grew much faster, up 54% to $28.2 billion in 2006.2 The beginning of 2007 saw the signing of the largest inbound deal in India's history, Vodafone's $11.1 billion acquisition of a controlling interest in Hutchison Essar, India's fourth-largest mobile phone company,3 while Tata Steel's $13.2 billion dollar acquisition of the European steelmaker, Corus, which closed in early January 2007, headlined a frenzy of acquisitions of foreign companies by Indian corporate enterprises in the past year.4 From senior politicians to ordinary citizens, Indians have joined the business community in celebrating the recent M&A boom, confident that it is yet another indicator of India's recent and rapid economic ascent.5 Even the wholly European takeover of Arcelor by Mittal Steel, orchestrated by Indian born Lakshmi Mittal, drew the vocal support of the

India on Fire, Economist, available at http:// www.economist.com. 2Ruth David, Indian M&A Deals Set Yearly Record available at http://www.forbes.com/markets/2007/06/12/indiamergers-record-markets-equitycx_rd_0611markets39.html 3 Phineas Lambert, Vodafone: Hutchison Essar on Track to Close, Daily Deal, available at http://www.thedeal.com 4 See Jonathan Braude, Tata Wins Corus Auction, Daily Deal, available at http://www.thedeal.com. Wipro, Suzlon, Ranbaxy, Bharat Forge, and United Breweries, amongst others, each also completed major foreign acquisitions in 2006. India's Acquisition Spree, Economist, available at http://www.economist.com. 5 See Anand Giridharadas, India is Reveling in Being the Buyer, N.Y. Times, at C8 ("Much of India erupted with jubilation last week when [Tata Steel won the bidding war for Corus] ... as numerous Indian acquisition deals have been announced, a sense of new nationalism has emerged.").
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Indian government, with the Indian Commerce Minister, Kamal Nath, publicly imploring the French government to recognize that "globalization is not just a one-way street."6 Every merger or acquisition involves one or more methods of obtaining control of a public or private company, and the legal aspects of these transactions include issues relating to duediligence review, defining the parties' contractual obligations, structuring exit options, and the like. In India, the relevant laws that may be implicated in a cross-border merger or acquisition include the company law, the income tax law, the stamp duty act, the foreign exchange laws, competition laws, and securities regulations, among others. Mergers and acquisitions are used as a means to achieve crucial growth and are becoming more and more accepted as a tool for implementing business strategy, whether they involve Indian companies wanting to expand or foreign companies wishing to acquire market share in India. Some of the other motivating factors behind mergers and acquisitions are the desire to acquire a competency or capability, to enter into new markets or product segments, to enter into the Indian market generally, to gain access to funding resources, and to obtain tax benefits. The India story has seen a profound shift in gear and direction during 2006. While in recent years most media references to Indias growth have focused on the sub-continent as a destination for outsourcing and investment, this year has seen the arrival of India as a shaping force on global markets. This is particularly evident in the powerful new trend towards overseas acquisitions by Indian companies. In 2006 a unique survey was conducted of key industry players in India that looked into the imperatives driving globalisation. This survey, in conjunction with wider economic analysis, has prompted this report. Indian companies are in many cases motivated to look abroad in response to newly competitive, complex or risky domestic markets or to find capabilities and assets that are lacking in India. The steep increase in the number of major cross-border transactions in recent years - from 20 in 2002 to more than 180 predicted in 2006 - has been facilitated by the relaxation of regulations on overseas capital movements as well as a more supportive political and economic environment, including deeper currency reserves, and easier access to debt financing, both at home and from international banks. This M&A trend is a key factor
Mittal Steels a Global March, Econ. Times (India), available at https://news.helplinelaw.com/0606/econ_mittal.php ("Indian chests have swelled up with pride. Listen to finance minister P Chidambaram: '[w]e are happy and proud that an Indian-born entrepreneur is the biggest steel maker in the world.' Commerce and industry minister Kamal Nath, who did his bit to throw his voice behind Mittal in his hour of need, has this to say: 'I am happy that some countries have finally realised that globalisation is not a one-way street.").

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helping Indian companies to emerge on the global stage. Six Indian companies feature in the Fortune Global 500 list of the biggest companies in the world. These are Indian Oil, Reliance Industries, Bharat Petroleum, Hindustan Petroleum, Oil & Natural Gas, and the State Bank of India. The strategy by which many Indian companies are expanding globally is also distinctive. As Indian companies are relatively small by the standards of global multinationals, their cross border acquisitions also tend to be smaller. These deals are therefore often carried out as part of a broader globalisation drive involving a string of strategically-targeted acquisitions. This is particularly the case for Indias larger corporate groups, for example Tata, that look to strengthen specific parts of their value chain and develop globally integrated offerings. The locations of the acquisitions also reflect the strategies of Indias globalisers. Attracted by the markets and higher -value offerings of developed economies, Indian companies are making the vast majority of their transactions in North America, Europe and the more developed economies in Asia, with transactions equally distributed between these locations. Indias current success in overseas acquisitions is fuelled by a new class of business leaders. The confidence within the Indian business community, combined with its natural entrepreneurial zeal and intuitive ease with global business models, creates a formidable force. This recent survey and wider economic analysis, identifies four key imperatives for Indian companies considering overseas acquisitions: Maintain clear but flexible organisational structures and accountabilities Conduct deep and wide due diligence Take a strategic approach to location decisions Ensure commitment and communication from leadership.

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The need to capture new markets:
Some 81 percent of participants in the study said that a key motivation for going global was to find new markets to sustain top-line growth.7 Entry to overseas markets via M&A may be attractive for reasons that include increased proximity to customers, access to resources, competition at home, or domestic regulatory barriers. From 1995 to August 2006, 29 percent of Indian cross-border M&As occurred in the European Union and 32 percent in North America. These developed economies are attractive because of their large consumer markets, transparent business processes, rule of law, advanced technologies, skills and knowledge capital. Moreover, as the markets in these economies tend to be mature and saturated, it often proves difficult for Indian companies to gain market share without acquisitions. In line with this trend, the more developed economies of Singapore, Hong Kong and South Korea together account for 40 percent of the cross-border acquisitions conducted by India within Asia in the first half of 2006.8 Research has found that 76 percent of Indian companies that expanded abroad did so in order to operate more closely to global customers.9 Targeting established firms, particularly in developed economies, is an effective way to gain market share as well as provide a platform for regional growth. Further, it is usually easier to access other resources and benefits once a company is established in a foreign market. Once companies have a foothold in a market, they can explore further acquisition opportunities to consolidate their local presence, reach new customers, and acquire new sources of supply and further assets
India Meets the World, Accenture, September 2006, http://www.accenture.com/in-en/Pages/index.aspx Accenture analysis of Thomson Financial data, http://www.accenture.com/in-en/Pages/index.aspx. 9 India Meets the World, Accenture, September 2006, http://www.accenture.com/in-en/Pages/index.aspx.
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and capabilities. Less developed economies also have their attractions, such as low acquisition costs and favourable terms due to a high demand for foreign direct investment (FDI) and capital. The recent global spending spree by Tata which has concluded deals in the United States (Eight Oclock), the United Kingdom (Tetley) and Thailand (Millennium Steel) - illustrates some of the strategic thinking behind location decisions: the groups industrial and manufacturing businesses have clearly found it more attractive to target acquisitions in developing markets, while the services companies in the group tend to seek opportunities in developed markets. Emerging markets also may be attractive to Indian companies because they provide access to consumer markets which are often overlooked by Western firms. In contrast to India, China has invested heavily in emerging economies in Africa, Central Asia and Latin America, largely to secure the natural resources essential for its own economic growth. The urgency for India to step up its efforts to do the same is quickly becoming apparent. But competing with China on this global hunt for resources will prove a major challenge for India which cannot begin to match its neighbours stateleveraged financial power.

The need to expand capabilities and assets:

Many Indian companies are seeking to expand their distinctive capabilities by acquiring specific skills, knowledge and technology abroad that are either unavailable or of inadequate quality at home. Sun Pharmaceutical Industries, for example, acquired Able Laboratories Inc of New Jersey for US$23.15 million in December 2005 to gain its in-house manufacturing and development capabilities for generic pharmaceutical products.10 Indian companies are also using M&As to assimilate technologies that have been tried and tested abroad. i-Flex, for example, the software company based in Mumbai, recently paid US$11 .5 million for the US company Super solutions Corp11 to access technology that is widely used in US banks. At a broader organisational level, such acquisitions can also improve overall standards of customer service, processes and quality. Analysis suggests that M&As are helping Indian companies to capitalise on their traditional low cost structures. Indian companies are able to identify foreign firms that have value-added offerings which complement their own low-cost products and services to create an efficient integrated global business model - turning the conventional direction of such deals on its head. In this way they
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India Inc. on global shopping spree, The Financial Express, June 28, 2006 i-flex board okays SuperSolutions buy, The Hindu BusinessLine, December 17, 2003

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can more closely replicate the model of Western multinationals involving a mix of high-value and low-cost capabilities distributed across different geographic locations. In more direct ways, larger Indian companies also look to their foreign M&As to provide new assets. When Tata Motors purchased the Daewoo Commercial Vehicle Company in 2003 for US$188 million, it did so for the state-of-the-art production facilities of the South Korean company.12 Acquisitions are increasingly prompted, too, by the need for less tangible assets, brand equity in particular. Welspun India bought an 85 percent stake in CHT Holdings for US$24 million to benefit from the premium UK brand Christy13, while the Indian pharmaceutical giant Ranbaxy Technologies acquired the French company RPG Aventis in 2003 for US$70 million to gain access to its well-established and respected name.14

The need to expand product or service portfolio:

Analysis reveals that a significant number of Indian companies are endeavouring to increase their market share by building the size of their product and service portfolios. This is particularly true in the pharmaceutical sector. Ranbaxy, for example, acquired 18 generic drug patents from Spanish company EFARMES earlier this year.15 Similarly Nicholas Piramal, an Indian healthcare company, entered into a US$350 million, five-year manufacturing agreement with Pfizer to gain 12 products.16 Acting on a similar imperative Sobha Renaissance Information Technology acquired Billing Components to sell products in the telecoms market; previously it had provided only services.17 While these companies are purchasing particular foreign expertise to stay competitive, a number of Indian companies are already competing at a global level and need acquisitions to secure scale. This is a key driver behind Indias latest and biggest cross-border announcement the US$8.1 billion bid by Tata Steel to acquire Corus18 a bold but necessary move to stay competitive in the new, Mittal-Arcelor-dominated global steel market.

The pressures of domestic competition:

India Inc goes global, Asia Times Online, November 29, 2005 Welspun buys UKs Christy, The Economic Times, July 4, 2006 14 Ranbaxy buys Aventis generics unit in France, The Hindu BusinessLine, December 14, 2003 15 Ranbaxy acquires GSKs generics business in Spain, The Hindu Business Line, July 19 2006 16 India Inc. on global shopping spree, The Financial Express, June 28, 2006 17 Bangalore technology company buys German telecom software company for over US$ 13 million, The Economic Times, July 11 2006 18 Corus accepts 4.3bn Tata offer, BBC News, Friday, 20 October 2006
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As well as pursuing the desire to enter new markets for competitive advantage some companies are being pushed away from India by increasingly stiff domestic competition. In some cases this has encouraged companies to explore opportunities in less competitive markets, thereby spreading their risk across geographies. Though Indias operating environment is unrecognisable from that of a decade ago, some companies still look outside India to avoid domestic obstacles. Indian pharmaceutical companies, for example, often prefer to carry out certain stages of clinical trials in developed markets because of the lag times that are inherent in Indias bureaucratic processes, despite the other cost advantages of keeping them in India.

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Creation of a favourable political and economic environment:
The removal of policy and regulatory obstacles has been an essential first step in opening up global expansion opportunities for Indian companies. The rhetoric and legislation of Indian policymakers has encouraged overseas expansion. In January 2004, Prime Minister Singh announced that Indian corporates will hereafter be freely permitted to make overseas investments up to 100 per cent of their net worth, whether through an overseas joint venture or a wholly owned subsidiary. This will enable Indian companies to take advantage of global opportunities and also to acquire technological and other skills for adoption in India.19 In 2005, the Reserve Bank of India (RBI), for the first time, allowed domestic banks to lend money to Indian companies for overseas acquisitions. Some of the key Indian capital control policies that have facilitated the boom in cross-border M&As. Economic conditions have also become more favourable. As of June 2006, India had foreign exchange reserves of US$164.5 billion, compared with less than US$1 billion in 1991.20 Companies can therefore fund overseas acquisitions more readily, since the RBI has a greater capacity to convert domestic currency to overseas currency on their behalf.

Improving financing conditions:

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Indias Outward FDI: a giant awakening?, United Nations Conference on Trade and Development, 2004 Going Global: India Inc. in UK, India Brand Equity Foundation, 2006.

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Indian firms have traditionally used large cash reserves to acquire foreign companies and targeted less expensive, distressed assets. Cash transactions are still relatively common, thanks to the positive cash flows of efficient Indian businesses. However, as Indian companies have become more global in culture and as the Indian banking system has become more sophisticated, M&A transactions are increasingly financed via debt. Access to capital is also made easier by the improvement in Indias country risk ratings. And the fact that certain Indian companies have credit ratings higher than the sovereign rating means that they have greater access to capital in overseas markets. A bonus of this greater need to access debt financing will be to boost Indias somewhat weak corporate debt market. Since 2005, Indian companies have been permitted to fund foreign direct investments using external commercial borrowing. As a result, more Indian cross-border deals are being financed, in whole or in part, by foreign banks. In 2006, Tata Steel borrowed US$500 million in Singapore in a syndicated loan involving 17 banks to fund growth and acquisitions in Southeast Asia and China21. As India has become embedded in the international finance system, the role of private equity players also has increased. In Grant Thorntons M&A study, 43 percent of the companies that had conducted acquisitions had used private equity investors. Moreover, 54 percent of those that hadnt used private equity investors in the past were planning to use them in the next few years.22 As deals get larger, particularly in sectors like natural resources, it is likely that firms will finance more acquisitions through leveraged buyouts.

Surging business confidence:

Something that cannot be illustrated through figures and examples is the palpable sense of confidence that has been instilled in the Indian business community. Many Indian executives have long since overcome cultural barriers through their experience working in multinationals and many more through work in outsourcing, not to mention the vast number of Indians who have studied abroad. All of this provides a level of comfort and ease in conducting business globally and in taking a more global perspective of business opportunities. Encouraged by visibly successful deals around the world, Indian
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India finance: Banking on growth, Economist Intelligence Unit, May 31, 2006 Corporate Indias voice on The M&A and Private Equity Scenario 2006, Grant Thornton, 2006

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businesspeople are thriving in an environment where their entrepreneurial zeal and enthusiasm is being recognised globally. Names like Ranbaxy and Mahindra and Mahindra are no longer only familiar to industry insiders. They are global brands, making waves on global markets. India has joined China on the agendas of multinational boardroom strategy meetings and conferences around the world, and no longer simply as an outsourcing or investment destination. This confidence is not restricted to Indias large companies with many smaller firms also taking to the global marketplace. The entrepreneurial reputation of Indian businesspeople is now visible to more and more companies around the world as Indian firms of all sizes reach outside their traditional borders to discover the new opportunities on offer.



Deal sizes are increasing but they still have room to grow:
The value of Indian cross-border M&A deals in the first ten months of 2006 was US$23 billion, compared with US$7.8 billion in the same period the previous year.23 This was partly due to the higher number of large value cross-border deals. In June 2006 alone, 10 deals had a combined transaction value of US$1.5 billion. Acquisitions like Dr Reddys purchase of Betapharm, the fourth-largest drug manufacturer in Germany, for US$570 million in February 2006, and Aban Loyds acquisition of the Norwegian company Sinvest for US$446 million made headlines around the world. Tata steels US$8.1 billion bid for Corus Steel represents India Inc.s boldest offer to date. The average deal size also has increased from US$32 million in 2005 to US$47million in the first half of 2006. Despite this trend, however, the size of Indias acquisitions is still roughly half the size of average global M&A deals. Indian companies have tended to follow a string of pearls approach - making a series of small transactions, each with its own strategic rationale, rather than simply buying up expensive competitors.

Supra at note 8.

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This strategy is different to Chinas expansion which tends to be driven by largescale, state-sponsored organisations that often target large natural resource supplies in developing economies. Acquisitions are helping Indian companies to emerge as significant players on the global stage. Six Indian companies feature in the Fortune Global 500 list of the biggest companies in the world. These are Indian Oil, Reliance Industries, Bharat Petroleum, Hindustan Petroleum, Oil & Natural Gas, and the State Bank of India. Based on current growth and M&A trends, we would expect this number to double by 2010.

The diversity of target industries is increasing:

The dominant industries involved in Indias cross-border merger and acquisition activity between 1995 and 2000 were consumer goods and services, energy, pharmaceuticals and healthcare, which together accounted for about 66 percent of cross-border M&A activity.24 At the start of the century, Indias business environment changed with the relaxation of government policies, the boom in the IT software and services sector, and the improved liquidity of the Indian stock market. As a result, more companies from a more diverse range of industries have been able to look abroad for acquisition opportunities. Since 2000, industries as diverse as forest products, human resources and market research are getting involved in cross-border acquisitions.25 The most notable increase has been in the IT services and electronics & high technology industries, which account for more than half of cross-border transactions post-2000.26 The motivation varies for each company, but trends can be identified within industries facing similar challenges and opportunities. For example, the IT industry typically searches for access to customers and intellectual property, while financial service companies tend to seek targets that will improve their regulatory, governance and licensing status.27

Supra at note 8. ibid 26 ibid 27 Some M&A gyan for Indian cos, The Hindu Business Line, January 21, 2006
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A. The Companies Act, 1956:
The Companies Act, 1956 (the "Companies Act"), sets forth provisions relating to mergers and acquisitions. It also covers related issues, such as reorganizations, compromises and arrangements with creditors, and also becomes relevant while structuring an investment in a private-equity transaction (including matters relating to the type of shares and return available). Any number of the Companies Act's provisions may affect a particular merger or acquisition. If the Indian company is incorporated as a public limited company under the provisions of the Companies Act and the Indian company proposes to acquire the shares of the foreign company by issuing its shares as consideration to the shareholders of the foreign company, then the shareholders of the Indian company will be required to pass a special resolution under the provisions of Section 81(1A) of the Companies Act permitting the issue of shares to the shareholders of the foreign company. As to the approval of the shareholders under Section 372-A of the Companies Act, if the investment by the Indian company in the foreign company exceeds sixty percent (60%) of the paid-up share capital and free reserves of

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the Indian company or one hundred percent (100%) of the free reserves of the Indian company, whichever is more, then the Indian company is required to obtain the prior approval of the shareholders vide a special resolution.28 Procedures under the Companies Act are far from simple. Under the Companies Act, a merger (referred to in the Companies Act as an "amalgamation") is considered to be a scheme or arrangement29 made with members30 of a company. In any such scheme, both the amalgamating (i.e., merging) company or companies and the amalgamated (i.e., survivor) company are required to comply with the requirements specified in Sections 391 through 394 of the Companies Act, which, inter alia, require the approval of a "high court" and of the Central Government. Sections 394 and 394A of the Companies Act set forth the powers of the high court and provide for the court to give notice to the Central Government in connection with an amalgamation of companies. It is not enough for only one of the companies alone to comply with the necessary statutory formalities. While hearing the petitions of the companies in connection with the scheme of amalgamation, the court will give the petitioning company an opportunity to meet all the objections that may be raised by shareholders, creditors, the government and others. It is, therefore, necessary for the company to be prepared to face the various arguments and challenges that may be raised. Then, by court order, the relevant properties and liabilities of the amalgamating (i.e., transferor) company are transferred to the amalgamated (i.e., transferee) company and the amalgamating company is dissolved without undergoing the process of winding up.31 The Companies Act's provisions governing amalgamation may be applicable to a crossborder amalgamation in a limited manner. Pursuant to Section 394(4)(b) of the Companies Act, the "transferee company" must be a company within the meaning of the Companies Act (i.e., an Indian company); however, a "transferor company" may be anybody corporate,

Section 372(1) of the Companies Act. An "arrangement" includes a reorganization of the share capital of the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes, or by both those methods. [S. 390(b), The Companies Act, 1956] 30 "Members" include every person holding share capital of a company and whose name is entered as beneficial owner of record. 31 S. 394(1) (b), The Companies Act, 1956
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whether a company within the meaning of the Companies Act or not. A "body corporate"

includes a company incorporated outside India. In the case of Moschip Semiconductor Technology Limited33, the High Court of the State

of Andhra Pradesh, dealing with the amalgamation of an Indian company (as the transferee) and a foreign company governed by the laws of California (as the transferor), held that, under section 1108 of the California Corporation Code and in contrast to the provisions of Indian law, the surviving company could be either a domestic company or a foreign company.34 In the above matter, the court observed that "in these days of liberal globalization, a liberal view is expected to be taken enabling such a scheme of arrangement for amalgamation between a domestic company and a foreign company and there is every need, in my considered view, for suitable modification of the law in that direction." The court also stated that a scheme involving a foreign and an Indian company would be subject to the laws of both countries. Notwithstanding the high court's dicta, currently in a merger or amalgamation of an Indian company and a foreign company, the transferee company (i.e., the surviving entity) must be an Indian company. Its important to understand the general nature of courts jurisdiction under section 391 and 394 while sanctioning the scheme of amalgamation. It is well established that the nature of jurisdiction of Court under Section 394 is supervisory as it cannot sanction an arrangement which does not have the necessary approvals of the members and creditors of the company. The jurisdiction does not transform into appellate jurisdiction throughout the proceedings. Further the court cannot deal with the issues which are outside the scheme as its jurisdiction stands limited to the issues within it, the broad parameters defining the jurisdiction of the sanctioning court have been laid down by the Supreme Court in the landmark judgement of Miheer H. Mafattal v. Mafatlal Industries Ltd The sanctioning court has to ensure that (1) All the requisite statutory procedure for supporting such a scheme has been complied with, the requisite meetings as contemplated by section 391 (1) (a) have been held and the scheme is backed up by the requisite majority vote as required by section 391 (2)
S.2(7), The Companies Act, 1956 1 Company L.J. 307 (2005) 34 Section 394(4) of the Companies Act specifically states that the transferee company shall be a company as defined under the Companies Act and the transferor company can be a body corporate, which includes a foreign company.
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(2) The concerned meeting of the creditors or members or any class of them had relevant material to enable the voters or arrive to an informed decision for approving the scheme in question. (3) The majority decision of the concerned class of voters is just and fair to the class as a whole so as to legitimately bind the dissenting members of that class. (4) All necessary material indicated by section 393 (1) (a) is placed before the voters at the concerned meetings as contemplated by Section 391 (1). (5) All the requisite material contemplated by the proviso of section 391 (2) is placed before the court by the concerned applicant seeking sanction for such a scheme and the court gets satisfied with the same. (6) The proposed scheme of compromise and arrangements is not found to be violative of any provision of law and is not contrary to public policy. For ascertaining the real purpose underlying the scheme with a view to be satisfied on this aspect, the Court, if necessary, can pierce the veil of apparent corporate purpose underlying the scheme and can judiciously Xray the same. (7) the members or class of members or creditors or class of creditors, as the case may be, were acting bona fide and in good faith and were not coercing the minority in order to promote any interest adverse to that of the latter comprising the same class whom they purported to represent. (8) The scheme as a whole is also found to be just and fair and reasonable form the point of view of prudent men of business taking a commercial decision beneficial to the class represented by them for whom the scheme is meant. (9) The scheme does not run contrary to public interest. The Supreme Court in its celebrated judgement in Hindustan Lever Employees Union V. Hindustan Lever Ltd. has opined that the Indian Law departs from English Law when public interest is in question and it is the duty of Indian Courts to ensure that the scheme is in public interest.

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(10) The valuation of share and share exchange ratio is reasonable and fair. The statement that the report is fair should be supported by materials like valuation report by independent valuation experts so as to prove that price has not been understated. Lastly, the court held that once the aforesaid broad parameters have been met, the Court will not question the commercial wisdom of the members or creditors for whom the scheme is framed. The court cannot refuse to sanction a scheme on that ground as it would otherwise amount to the Court exercising appellant jurisdiction over the scheme rather than its supervisory jurisdiction. The courts in the case of Andhra Bank Housing Finance Ltd. have taken an expensive interpretation of the expression in view of Section 4. Both cases involved consideration of schemes of amalgamation between a company formed under the Companies Act, 1956 and a body corporate formed under different legislations (viz Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980). Clearly, a body corporate can only be a transferor under section 394 and not a transferee body corporate. For purposes of Section 4, company includes anybody corporate and thus, a body corporate is regarded as holding company under the Act. The Court, in both cases, came to the conclusion that there is an apparent conflict between Section 394 (4) (b) And Section 4 (5). Thus, applying the principle of harmonious construction, it has been held that a transferor company can amalgamate with a transferee parent company which might be a body corporate. In the case of Bombay Gas Co. Pvt. Ltd. v. Union of India the court has categorically laid down that: It is quite clear from the special provisions of law contained in section 394 (4) (b) of the Act that the transferor company could be body corporate incorporated outside India but the transferee could not be a foreign company.

B. The Competition Act, 2002

In the pursuit of globalization, India has opened up its economy, removing controls and resorting to liberalization. The natural corollary to this is that the Indian market needs to face competition from both within and outside the country. The Monopolies and Restrictive Trade Practices Act, 1969 (the "MRTP Act"), has become obsolete in certain respects in light of international economic developments relating to competition laws, and there is a need for India to shift its focus from curbing monopolies to promoting competition. In furtherance of

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the foregoing philosophy, the Government of India passed the Competition Act, 2002 (the "CA"), which seeks to ensure fair competition in India by prohibiting trade practices that cause an appreciable adverse effect on competition in markets within India. For this purpose, the CA provides for the establishment of a quasi judicial body called the Competition Commission of India (the "CCI"), which also is empowered to undertake measures for the promotion of competition advocacy, creating awareness and offering training about competition issues. The CA draws upon concepts of competition law found in more liberalized economies, such as those of the United States and the European Union. Of particular relevance to multinational companies operating in India is that the proposed new regulatory body, the CCI, will be empowered to scrutinize all mergers, acquisitions and joint-venture activity in India when the asset value of the parties involved is more than Rs. 10 billion within India or US $500 million globally, or when sales are greater than Rs. 30 million within India or US $1,500 million globally. The main components of the CA are the prohibition of anticompetitive agreements; the prevention of abuse by enterprises of their dominant positions; the regulation of mergers and acquisitions; the establishment of the CCI; and fixing the scope of the CCI's powers.

C. The Tax Laws

As important corporate activities, mergers and acquisitions are also governed and regulated by provisions of the Income Tax Act, 1961 (the "IT Act"). The IT Act provides that the accumulated losses and unabsorbed depreciation of an amalgamating company (i.e., a company that does not survive a merger) shall be allowed in the assessment 35 of the amalgamated company (i.e., the company that survives a merger), provided, inter alia, that the amalgamating company owned an industrial undertaking, a hotel, or a ship; the amalgamated company holds at least three-fourths of the book value of the fixed assets of the amalgamating company for a minimum, continuous period of five years after the date of amalgamation;36 and the amalgamated company continues the business of the amalgamating company for a minimum period of five years. Other incentives, like the set-off of
The term "assessment" here would include the computation of income. The amalgamating company must have held three-fourths of the book value of fixed assets for a period of two years prior to the amalgamation and must have been engaged, for three years prior to the amalgamation, in the business that is being absorbed. See IT Act 72(A).
35 36

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depreciation and the treatment of expenditures for scientific research, the acquisition of patent rights or copyright, and expenditures for know-how, as well as the set-off of bad debts, are also envisaged in the IT Act for amalgamated and amalgamating companies. An important aspect of any merger or acquisition is structuring the transaction so as to ensure the most tax-efficient structure. India has entered into treaties with various countries for the avoidance of double taxation. It has generally been observed that US investors, whether investing through private equity investment or by means of a direct acquisition, have used the Mauritius route for their investments in India.

D. The Indian Stamp Act, 1899

The Indian Stamp Act, 1899, provides for the levy of a stamp duty on the execution of an instrument. The stamp duty is applicable to an amalgamation (i.e., a merger) and to an acquisition, whether an asset or stock acquisition. Under the Indian Stamp Act, 1899, an "instrument" is defined to mean every document by which any right or liability is, or purports to be, created, transferred, limited, extended, extinguished or recorded. The applicability of the Indian Stamp Act to a stock acquisition depends on the form of the shares. If the shares exist in a physical form, the transfer of such shares is subject to as stamp duty at the prevailing rates. However, if the shares exist in a dematerialized form, no stamp duty is applicable for any transfer, thereof since such transfer is in the electronic form and does not require execution of any share transfer deeds. Section 108 of the Companies Act provides that there can be no registration of a transfer of shares in physical form without production of the certificate or allotment letter. Further, every instrument of transfer has to be duly stamped by an authorized person and executed by or on behalf of the transferor as well as the transferee. However, the Depository Act, 1996, provides that the formalities prescribed by Section 108 do not apply to any transfer of dematerialized shares between a transferor and transferee, both of whom are entered as beneficial owners in the records of a depository. Dematerialization is the process by which the physical certificates of an investor, at his request, are taken back by the company and actually destroyed and an equivalent number of securities are credited in the electronic holdings of the investor. For this, the investor will have to first open an account

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with a Depository Participant (DP) and then request for dematerialization of his or her certificates through the DP so that the dematerialized shares can be credited to his or her account. The buyer is not required to apply to the company for registering the security in his or her name and thus no stamp duty is payable.

E. Foreign Exchange Laws

Under Regulation 7 of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India ) Regulations, 200037 (the "FEMA regulations"),once a scheme of merger , demerger or amalgamation has been approved by the court, the transferee company (whether the survivor or a new company) is permitted to issue shares to the shareholders of the transferor company who are persons resident outside India, subject to the condition that the percentage of non resident holdings in the company does not exceed the limits for which approval has been granted by the Reserve Bank of India(RBI) or the prescribed sectoral ceiling under the foreign direct investment (FDI) policy set under the FEMA regulations. If the new share allotment exceeds such limits, the company will have to obtain the prior approval of the Foreign Investment Promotion Board (FIPB) and the RBI before issuing shares to the non residents. If the transferee company is engaged in a line of activity in which no foreign investment is permitted under India's FDI policy, then shares cannot be issued to the non-residents. In a similar vein, any acquisition of shares of an Indian company by a non-resident must comply with the foreign-exchange laws. Such an acquisition may be by way of subscribing to new shares or acquiring existing shares. Foreign investments in sectors or activities subject to the RBI's automatic route38 do not require any prior approval of the FIPB. Under India's present FDI policy, any sale of shares from a resident to a non-resident (and vice versa) is permitted under the RBI's automatic route, provided certain conditions (inter alia, those relating to pricing) are complied with.

F. Securities Laws of India

The regulations were framed pursuant to Section 47 of the Foreign Exchange Management Act, 1999, No. 42 of 1999. 38 As a governmental report has observed, India permits FDI in nearly all activities under automatic route except for ownership restrictions in certain industries on strategic and security grounds. See "A Comprehensive Manual for Foreign Direct Investment-Policy & Procedures" issued by Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of India, available at www.dipp.nic.in/manual/manual_11_05.pdf.

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In India, takeovers and acquisitions are governed by SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997,39 popularly known as the "Takeover Code." These regulations seek to regulate the whole process of acquisition and takeovers, based on principles of transparency, fairness and equal opportunity for all. The Takeover Code lays down the procedures governing any attempted takeover of a company whose shares are listed on one or more recognized stock exchanges in India. The important aspect of the Takeover Code is that any acquirer of more than 5%, 10%, 14%, 54% or 74% of the shares or voting rights in a company has to disclose, at every stage, the aggregate of his or her shareholding or voting rights. The disclosure must be made to the company and to the stock exchanges where shares of the target company are listed. There are various other, continual disclosure obligations; for example, the acquirer also has to disclose to the company and the relevant stock exchanges any purchase aggregating two percent or more of the share capital of the target company within two days of such purchase and must also disclose what his or her aggregate shareholding will be after the acquisition. A failure to make such disclosure will incur a penalty of Rs. 250 million or three times the amount of profits resulting from such failure, whichever is greater. Before acquiring shares or voting rights that (together with the shares or voting rights held by persons acting in concert with the acquirer) would entitle the acquirer to exercise 15% or more of the voting rights of a company, the acquirer must make a public announcement that he or she will acquire, at a minimum, an additional 20% of the equity shares of the company. If the Indian company that is issuing its shares to the shareholders of the foreign company as consideration for acquiring shares of the foreign company is listed on any stock exchange in India, then it will be required to comply with the guidelines for preferential allotment under the SEBI (Disclosure and Investor Protection) Guidelines, 2000 (the SEBI DIP Guidelines) in addition to the provisions of Section 81(1A) of the Companies Act. Some of the relevant provisions of the SEBI DIP Guidelines have been highlighted herein below: 1. Pricing:
39 40


These regulations were issued pursuant to the Securities and Exchange Board of India Act, 1992, No. 15 of 1992. Regulation 13.1.1 of the SEBI DIP Guidelines.

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The shares issued on a preferential basis have to be made at a price that is not less than the higher of either (a) the average of the weekly high and low of the closing prices of the related shares quoted on the stock exchange during the six months preceding the relevant date41 or (b) the average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date.

2. Currency of the resolution: Any allotment pursuant to a resolution permitting the issue of shares on a preferential basis has to be completed within a period of three months from the date on which the resolution is passed by the shareholders failing which a fresh approval will have to be sought from the shareholders. However it is possible to make an application to the SEBI requesting for the extension of the validity of the resolution. The extension is granted on a case by case basis. This means that the entire transaction has to be completed within three months of the shareholders passing the resolution under Section 81(1A) of the Companies Act.



The term relevant date is defined to mean the date thirty days prior to the date on which the general meeting (whether annual or extraordinary) of the shareholders is to held the approve the proposed issue of shares.

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The provisions relating to investment by an Indian company in a foreign company were liberalized by the Foreign Exchange Management Act, 1999 (FEMA) (which came into effect from June 1, 2000 and the rules and regulations made there under. Subsequently, the Reserve Bank of India issued the Foreign Exchange Management (Transfer or Issue of Foreign Security) Regulations, 2000 which contain provisions governing any investment made by an Indian company in a foreign company. This chapter discusses the provisions relating to overseas direct investment under the FEMA and the Regulations. There are only certain special circumstances under which an Indian company is permitted to make an investment in a foreign company.42 An Indian party is not permitted to make any direct investment in a foreign entity engaged in real estate business or banking business without the prior approval of the Reserve Bank of India (RBI). There are several routes available to an Indian company which intends to invest in a foreign company. Some of these routes are described herein below: (1) Direct Investment in a Joint Venture/Wholly Owned Subsidiary The RBI has been continuously relaxing the provisions relating to investment in a joint venture or a wholly owned subsidiary. Owing to these relaxations the percentage of investment by Indian companies in a joint ventures and wholly owned subsidiaries abroad has been continuously rising. General conditions to be fulfilled for making an investment An Indian company is permitted to make a direct investment in a joint venture or a wholly owned subsidiary of a sum not exceeding USD 100 million or its equivalent in a financial year43 without seeking the prior approval of the RBI subject to the following conditions being fulfilled: 1. The direct investment is made in a foreign entity engaged in the same core activity carried on by the Indian company

Regulation 5 of the Foreign Exchange Management (Transfer or Issue of Foreign Security) Regulations, 2000 provides that no resident Indian (which term would include a company) can make an investment outside India, except in accordance with these regulations or without the prior approval of the Reserve Bank of India. 43 This condition will not apply if the investment is to be made in a joint venture or wholly owned subsidiary in Nepal or Bhutan. If the overseas direct investment is made in Nepal or Bhutan in Indian rupees the total financial commitment shall not exceed Indian Rupees 350 crores in a block of three financial years.

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2. The Indian company is not on the RBIs caution list or under investigation by the Enforcement Directorate 3. The Indian company routes all the transactions relating to the investment in the joint venture or the wholly owned subsidiary through only one branch of an authorized dealer to be designated by it. However the Indian company is permitted to designate different branches of authorized dealer for onward transmission to the RBI. 4. The Indian company files the prescribed form with the RBI. Special conditions for investment in a financial company There are also special additional conditions that apply to an Indian company making a direct investment in a foreign company that is engaged in financial services activities. In case of companies engaged in financial services, an Indian company is permitted to make investment in a foreign company engaged in the financial services sector on an automatic basis if it fulfils the following conditions: 1. The Indian company has earned a net profit during the preceding three financial years from the financial services activities. 2. The Indian company is registered with the appropriate regulatory authority in India for conducting the financial services activities. 3. The Indian company has a minimum net worth of Rs. 15 crores (Indian Rupees Fifteen Crores) as on the date of the last audited balance sheet; and 4. The Indian company has fulfilled the prudential norms relating to capital adequacy as prescribed by the concerned regulatory authority in India.44

Sources for investment The Regulations also prescribe that any direct investment (as discussed above) must be made only from the following sources:

The prescribed guidelines are the guidelines issued by the RBI that govern the capitalization of Non-Banking Financial Companies.

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1. EEFC account: The Indian Company can make the investment out of the balance held in the Exchange Earners Foreign Currency (EEFC) account of the Indian company. 2. Drawal of foreign exchange: The Indian company can also make the direct investment by drawal of foreign exchange from an authorized dealer in India provided that the foreign exchange so drawn does not exceed 50% of the net worth of the Indian company as on the date of the last audited balance sheet. 3. ADR/GDR proceeds: An Indian Company is also permitted to make a direct investment in a foreign company out of the proceeds of an ADR/GDR issue without the prior approval of the RBI provided it satisfies the following conditions: a. The ADR/GDR issue has been made in accordance with the provisions of the Scheme for Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt), 1993 (ADR/GDR Scheme). b. The Indian company files the prescribed form with the RBI. (2) Investment in a foreign company by ADR/GDR share swap An Indian company can also invest in a foreign company which is engaged in the same core activity in exchange of ADRs/GDRs issued to the foreign company in accordance with the ADR/GDR Scheme for the shares so acquired provided that the following conditions are satisfied: 1. The Indian company has already made an ADR/GDR issue and that such ADRs/GDRs are listed on a stock exchange outside India. 2. The investment by the Indian company does not exceed the higher of an amount equivalent to USD 100 million or an amount equivalent to ten times the export earnings of the Indian company during the preceding financial year.45 3. The ADR/GDR issue is backed by a fresh issue of underlying equity shares by the Indian company. 4. The total holding in the Indian company by non-resident holders does not exceed the prescribed sectoral cap.46


The export earnings should be as reflected in the audited balance sheet of the company.

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5. The valuation of the shares of the foreign company is done in the following manner: a. If the shares of the foreign company are not listed, then as per the recommendation of an investment banker or b. If the shares of the foreign company are listed then as per the formula prescribed in the Regulations.47 6. The Indian company will also be required to make a filing with the RBI in the prescribed form within thirty days from the date of the issue of ADRs/GDRs to the foreign company.48 In the event that the Indian company does not satisfy the conditions discussed in points (1) and (2) hereinabove, then the Indian company can make an application to the RBI for special approval. In considering the application the RBI may take into account the following factors: 1. Prima facie viability of the joint venture/wholly owned subsidiary abroad. 2. Contribution to external trade and other related benefits. 3. Financial position and business track record of the Indian company and the foreign company and 4. Expertise and experience of the foreign company in the same or related line of activity of the joint venture or the wholly owned subsidiary abroad. Issue of shares to the employees of the foreign company In the event that the Indian company wishes to issue stock options to the employees of the foreign company (which is a joint venture or a wholly owned subsidiary), the Indian company will be required to comply with the provisions of regulation 8 of the Foreign Exchange Management (Transfer or issue of Security by a person resident outside India) Regulations, 2000 which provides for the issue of shares to persons resident outside India under the Employees Stock Options Scheme.
The sectoral cap is contained in the Foreign Direct Investment Scheme contained in the Foreign Exchange Management (Transfer or Issue of Foreign Security) regulations, 2000. 47 The valuation in this case would be based on the current market capitalization of the foreign company arrived on the basis of the monthly average price on any stock exchange abroad for the three months preceding the month in which the acquisition is committed and over and above the premium, if any, as recommended by the investment bank in its due diligence report. 48 Form ODG is the prescribed form.

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As per these provisions an Indian Company may issue shares to non-resident: a. employees, or, b. employees of joint venture, or, c. employees of wholly owned subsidiary Provided that the scheme does not violate the terms of the regulations issued under the Securities and Exchange Board of India Act, 1992 (15 of 1992)49 and the face value of the shares to be allotted to the non-resident employees does not exceed 5% of the paid up share capital of the company issuing the ESOPs. In addition to the above, an Indian company can also acquire shares of a foreign company by way of capitalization.50 RBI has also provided certain additional facilities for Indian companies acquiring listed companies overseas through the bidding or tender procedure.51

Regulation 11. This Regulation provides that an Indian company can also make investments in a foreign company by way of capitalizing the amount due to it from the foreign company by making payment for export of plant, machinery, etc. 50 Regulation 14. This regulation provides that subject to fulfilling certain conditions an Indian company can approach an authorized dealer and request remittance towards earnest money deposit or request the authorized dealer to issue a bid bond guarantee on its behalf for the acquisition of a foreign company. 51 The report dated 31 May 2005 of the Expert Committee advising the Indian Government on the new Company Law, which committee was chaired by Dr. Jamshed J. Irani and set up by the Ministry of Company Affairs by order dated 2 December 2004.

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The Irani Report has observed that the process of mergers and acquisitions in India is a court-driven, long and drawn-out process that is problematic. A listed company undertaking a restructuring must undergo a tiered procedure that involves dealing with the stock exchange, the high court, the company's shareholders and creditors, the registrar of companies, and the regional director. This entire process can take anywhere from six to eight months and has, in some cases, taken more than a year. The Companies Act contains provisions relating to mergers and acquisitions and the related issues of compromises, arrangements and restructurings. Other provisions of the Companies Act, however, are also implicated in each case of a merger or acquisition; thus, the procedure remains far from simple. In this context, the Irani Report made the following key recommendations pertaining to mergers and acquisitions: (1) A single forum for approving schemes of mergers should be established in which, over a period of one or two days, all the interested stakeholders (including regulators) could meet and decide on the transaction. (2) Valuation should be carried out by independent registered evaluators, rather than by court-appointed ones. (3) A uniform nationwide, reasonably priced stamp-duty regime should replace the prevailing system of each state having its own separate and differing stamp duty. (4) The law should provide an exit opportunity for the public shareholders in the case of the merger of a listed company into an unlisted company, and vice versa, or in the case when substantial assets are moved out of a listed company in a de-merger. In other words, a delisting mechanism should be available when either (A) the restructuring results in the public shareholding falling below 10% or (B) 90% of the public shareholders opt for the exit route.

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(5) Only shareholders and creditors having a significant stake, at a level to be prescribed by law, should have the right to object to any scheme of merger. (6) Indian law still does not allow for an Indian company to merge into a foreign company. Cross-border mergers and acquisitions should be recognized, and Indian shareholders should be permitted to receive foreign securities or securities in lieu of Indian shares (especially in listed companies), so that they become members of the foreign company or holders of a security with a trading right in India. (7) A company should be allowed to be dissolved without winding up with court intervention. International practices and a coordinated approach should be adopted in amending the provisions regarding merger in the Companies Act. (8) Because the shareholders need to have complete information in the case of a scheme of merger or an acquisition, especially in the case of seller-initiated mergers, the Companies Act and rules there under should set out the disclosure requirements to be included in the explanatory statements sent to the shareholders in connection with the scheme filed with the court or other tribunal. (9) In the case of companies required to appoint independent directors, the Companies Act should mandate that a committee of independent directors serve as a monitoring body to ensure the adequacy of disclosures. (10) A separate electronic registry should be established for filing schemes under Sections 391-394 of the Companies Act. Filing with such an electronic registry would replace filing with local registration offices where the properties of the company are located.

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Case I
In general, cross-border mergers and acquisitions are a quick pathway to enter a new market, permit the acquiring firm to achieve critical mass presence in a market rapidly and result in more control as compared to other market entry modes. Some of the main reasons for firms to complete cross border mergers and acquisitions are gaining increased market power, overcoming entry barriers to enter a new market more rapidly, reducing the cost of new product development, increased speed to market and increased diversification. Having explained one side of the coin, one also needs to look into the other, i.e. resource mobilization for carrying out these cross-border transactions. Indian companies are involved in more and more merger/ acquisition activities, hence raising the importance of the issue. Earlier Indian capital markets were quite thin and merger and access to capital was quite restricted. The growing needs of the economy, have however, changed the face of the Indian financial system drastically and the capital markets have become important in the resource allocation process of the economy52 Keeping that in mind, the article looks into the dynamics of such cross-border transactions involving Indian companies and focuses on one particular example of an Indian telecom company, Bharti Enterprises53 recent attempts to enter into a complex merger deal
Narendra Jadhav, Development of Securities Market: An Indian Experience, available at www.drnarendrajadhav.info/ (Last visited on August 29, 2012). 53 Bharti Airtel is the flagship company of Bharti enterprises. It is Indias largest and first private telecom service provider Bharti Airtel since its inception has been at the forefront of technology and has steered the course of the telecom sector in the country with its world class products and services. The businesses at Bharti Airtel have been structured into three individual strategic business units - Mobile Services, Airtel Telemedia Services & Enterprise Services. The mobile business provides mobile & fixed wireless services using GSM technology across 23 telecom

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with a South African company, MTN Ltd.54 In recent years, mobile services have achieved a significant mile- stone in India, with the country having nearly 50 per cent telecom density.55 Increasing competition, decreasing call rates and fluctuating net profit growth, however, made Bharti Airtel, the telecom arm of the company to enter into negotiations with MTN, so as to make new customers in African continent which is also regarded as immensely growing market, with tremendous potential for growth, unlike India where telcos growth is projected to reach a flat terrain in five years. After a failed attempt, the two companies again tried to tie up a complex cross-border merger in 2009 which required Bharti to acquire about 36 per cent of MTNs equity and MTN to buy 25 per cent of Bharti; however the deal fell through mainly because of South African companys demand for dual listing of the shares of the company, which in turn required radical changes in foreign exchange, company, and takeover norms in India. This particular case has been taken specifically because of the novelty and complexity in the process of carrying of the cross-border merger as well as unheard of hurdles arising out of it, which raises important question about the arrangement of capital controls and other policies of the country. The article gives a detailed outline of the reasons which resulted in the failure of the deal and the paper have tried to link up the reasons to the likely amendments and changes which Indian laws require for facilitating such cross-border mergers of Indian companies with their foreign counterparts. HISTORY OF THE BHARTI-MTN DEAL

circles while the Airtel Telemedia Services business offers broadband & telephone services in 95 cities and has recently launched Indias best Direct-to-Home service, Airtel digital TV. The Enterprise services provide end-to-end telecom solutions to corporate customers and national & international long distance services to carriers. All these services are provided under the Airtel brand. See Bharti MTN Deal, available at http://www.oppapers.com/essays/ bharti-Mtn-Deal/244774 (Last visited on september 15, 2012); The Likely Bharti Airtel & MTN Merger, available at http://www.oppapers.com/essays/The-Likely-bharti-Airtel-Mtn/238156 (Last visited on September 15, 2012). 54 MTN Group Ltd, together with its subsidiaries, provides communication services. The company principally offers cellular network access and business solutions. It also offers convenience services, including ATM TopUp, voicemail, voicemail lite, WASP, and wakeup call; messaging services comprising SMS, MMS, Email2SMS, and SMS2Email; mobile banking services; and broadband services. MTN Group serves approximately 40 million subscribers in 21 countries, principally Botswana, Cameroon, Cote dIvoire, Nigeria, the Republic of Congo, Rwanda, South Africa, Swaziland, Uganda, Zambia, Iran, Afghanistan, Benin, Cyprus, Ghana, Guinea Bissau, etc. See id., 6 for more details. 55 Telecom density in India is already at 47.89 per cent and is projected to touch 80 per cent by 2015; See M. Rajendran, The Big Buy, available at, www.businessworld.in/bw/2010_02_20_ The Big Buy.html (Last visited on September 16, 2012).

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Talks of a mutual acquisition between the telecom giants of India and South Africa, Bharti Airtel and MTN, respectively was called off for a second time in two years. The history of the deal is provided below: (i) In 2008, talks ended because of a last-minute demand by MTN that Bharti Airtel become its subsidiary.56 (ii) In 2009, Bharti Airtel and MTN were again close to a merger agreement as part of a $24-billion deal which would have created the worlds third largest telecom company. The deal, however, could not go through due to some regulatory hurdles from the South African Government.


1. Details of Deal II The mutual acquisition was to be achieved through a scheme of arrangement57 with the following principal elements: MTN was to approximately acquire a 25 per cent economic interest in Bharti for an effective consideration of approximately $2.9 billion in cash and newly issued shares of MTN to the tune of approximately 25 per cent of the currently issued share capital of MTN. Bharti would have acquired approximately 36 per cent of the currently issued share capital of MTN from MTN shareholders for a consideration of ZAR 86.00 in cash and 0.5 newly issued Bharti shares in the form of Global Depository Receipts (GDRs) for every MTN share acquired which finally would take Bhartis stake to 49 per cent of the enlarged capital of MTN. Each GDR would be equivalent to one share in Bharti and would be listed on the Johannesburg Stock Exchange.

2. Reasons for failure The basic hurdle in the deal came in the form of requirement of dual listing by the South African government, which triggered off the requirement for other changes, like the open offer obligations under the Substantial Acquisition of Shares and Takeovers Regulations,

This was followed by an unsuccessful attempt by Reliance Communication headed by Anil Ambani to pull off a similar acquisition. See No deal: Bharti, MTN hang up available at http:// www.indianexpress.com/news/no dealBharti-mtn-hang-up/523666/0 (Last visited on September 17, 2012). 57 for details -Media Statement from Bharti Airtel, May 25, 2009, available at http://www.bharti.com/mediacentre/media-releases/release-detail/article/media-statement-from-bharti-airtel-limited-2. html (Last visited on September 17, 2012).

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1997 (SEBI takeover regulations), and proposed issuance of American Depository Receipts, (ADRs) and GDRs with voting rights to MTN, to name the important ones.

3. Dual Listing and its implications To define a dual listed structure, it involves a company linking with a foreign company in a way that allows each to retain its individual identity, but with the shareholders of the two separate companies receiving a claim on the combined earnings as though they had undertaken a conventional merger. A dual listed company (DLC) structure (also referred to as a Siamese twin) engages two companies incorporated in different countries contractually agreeing to operate their businesses as if they were a single enterprise, while retaining their separate legal identity and existing stock exchange listings.58 DLCs are the result of a merger between two firms incorporated in different countries in which the firms agree to combine their activities and cash flows. At the same time, the corporations keep separate shareholder registries and identities and distribute the cash flows to their shareholders using a ratio laid out in the equalization agreement59. The equalization agreements are set up in such a way that equal treatment of both companies shareholders in voting and cash flow rights is ensured under all circumstances. The contracts cover issues that determine the distribution of these legal and economic rights between the twin parents, including issues related to dividends, liquidation, and corporate governance. Usually the two companies will share a single board of directors and have an integrated management structure. A DLC is somewhat like a Joint Venture. But the parties share everything they own, not just a single project. DLCs have special corporate governance requirements. The interest that the shareholders in each of the listed companies have in the business is the same. This is usually addressed by guaranteeing equal rights in all respects (most importantly voting rights and dividends) and by an appropriate management structure (such a unified board). Often, management of the two companies believes that the merged company will have better access to capital if it maintains listings in each market, as local investors are already

Abe De Jong, The Risk and Return of Arbitrage in Dual Listed Companies , available at http:// gates.comm.virginia.edu/uvafinanceseminar/2005-van%20DijkPaper.pdf (Last visited on September 18, 2012). 59 Economic Times, Dual Listing: its Implications, available at http://economictimes.indiatimes. com/markets/analysis/Dual-listing-Its-implications/articleshow/5015937.cms (Last visited on September 18, 2012)

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familiar with their respective companies.60 When two companies in two countries enter into an equity alliance without an outright merger, dual listing means continued listing of the firms in both the countries. The key point to note here is that shareholders can buy and sell shares of both the companies on bourses in the two countries. In other words, if the BhartiMTN deal would have happened with a dual listing rider, a Bharti share could be sold on the Johannesburg Stock Exchange (JSE) and vice-versa. Global experience suggests that companies at times choose the dual listing structure to avoid capital gains tax that results from a conventional merger. Many a time, complicated cross-border mergers require various forms of official approvals, and dual listing can preserve the existence of each company. The South African government wanted MTN to continue to be listed at the JSE, but Indian corporate laws do not allow dual listing, and it will need major amendments to key corporate laws of the country.61 Currently, the scene in India is such that it allows only foreign firms to issue Indian Depository Receipts (IDRs), while Indian companies can issue ADRs and GDRs, which are consequential changes, which occur after deciding on the optimality of dual listing.

4. Issuance of GDRs-another tussle with the existing law The deal entailed the entire equity expansion of Bharti Airtel to be in the form of GDRs62 issued to MTN and its shareholders. Accordingly, MTN was to buy a 25 per cent stake in Bharti, while another 11 per cent was to be held directly by MTN shareholders.63 The main question involved was whether the acquisition of 36% GDRs in Bharti Airtel by MTN and its shareholders as part of the combination transaction would trigger various obligations under the SEBI Takeovers Regulations.64 With reference to this negotiation,

Financial Express, Two Countries, One Company, available at http://www.financialexpress.com/news/fe editorialtwo-countries-one-company/517866/2 (Last visited on September 18, 2012). 61 Bharti MTN deal failure- why it happened, available at http://www.sathyamurthy. com/finance/2009/10/mtnbharti-airtel-deal-failure-why-it-happened/ (Last visited on September 19, 2012) . 62 A Global Depositary Receipt is a negotiable certificate held in the bank of one country rep- resenting a specific number of shares of a stock traded on an exchange of another country. 63 This has been allowed by the new foreign holding norms which give enough headroom for Bharti to route MTNs entire holdings in it through GDRs on an expanded equity base. This is because, new FDI norms, notified under Press Notes 2, 3 and 4 by the previous UPA government, considers a company Indian-owned if Indian promoters hold a majority stake in it, and the investments made by such companies in any JV or downstream venture are also treated as Indian. See Joji Thomas Philip, MTN may take GDR route for 25% stake in Bharti Airtel, Economic Times, June 15, 2009, available at http://economictimes.indiatimes.com/news/ news-by-industry/telecom/MTN-may-take-GDRroute-for-25-stake-in-bharti-Airtel/article- show/4656410.cms (Last visited on September 19, 2012). 64 Depository Receipts and the Takeover Regulations, July 7, 2009, available at plaw.blogspot.com/search?q=bharti+mtn+GDR (Last visited on September 19, 2012).

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Chapter III of the SEBI Takeover Regulations requires the acquirer to make an open public offer to buy an additional 20 per cent equity in case of acquiring more than 15 per cent of the economic interest in an entity as a measure to regulate substantial acquisition of shares. Further, Regulation 3(2) of the Takeover Regulations prior to amendment provided, nothing contained in Chapter III of the regulations shall apply to the acquisition of Global Depository Receipts or American Depository Receipts so long as they are not converted into shares carrying voting rights. Also as mentioned earlier, MTN was to acquire an economic interest in bharti Airtel Bharti Airtel; the concept of economic interest was instrumental in the entire deal since it helped in triggering the exception under Regulation 3(1) ( j) of the Takeover Code, which stated that any acquisition of shares or voting rights made pursuant to a scheme of arrangement (Scheme) is exempt from the application of Regulations 10, 11 and 12 which deal with open offer requirements. MTN was supposed to be a board controlled subsidiary of Bharti. The term economic interest helped the company in complying with section 42 of the Indian Companies Act wherein a subsidiary cannot hold voting equity in its parent; hence while MTN was holding 25 per cent equity in Bharti from an economic rights point of view, that equity was nonvoting because the scheme under which it was issued was to comply with section 42. Hence the combination of shares plus the issuance of GDRs gave the shareholders an economic interest, as well as a sort of control, but not the control which would have triggered an open offer under the Takeover Code. Hence, the acquisition of economic interest of Bharti by MTN made it possible for it to take the benefit of exemption. To help the matter further, SEBI issued an informal guidance65 on July 7, 2009 pertaining to Bharti-MTN exempting MTN from making an open offer unless the GDRs were converted into shares with voting rights in consonance with the Takeover Regulations.66 The problem arose with the proposed changes in the Takeover Regulations, called the Proposed Changes to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.67 As it has been mentioned above, Bharti had planned to issue GDRs to the extent of 25 per cent stake to MTN and 11 per cent to the shareholders of MTN. SEBI had announced that mandatory public offer to acquire the shares would not be required to be
SEBI (Informal Guidance) Scheme, 2003 regarding the proposed transaction between Bharti Airtel Ltd. and MTN Group Ltd, June 22, 2009, available at http://www.sebi.gov.in/informal- guide/bharatiinformal.pdf (last visited on September 19, 2012). 66 See Regulation 3(2) and 14(2); Depository Receipts and the Takeover Regulations 67 Amendment to the Takeover Regulation by SEBI, available at http:// www.sebi.gov.in / press/2009/2009300.html (Last visited on September 19, 2012).

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made by MTN on crossing the 15 per cent threshold, until the GDRs were converted into shares of the company. However, SEBI revised its Takeover norms on September 22, 2009 by bringing ADRs/GDRs with voting rights at par with domestic shares, thereby triggering the open offer requirement even in case of issuance of GDRs if the 15 per cent limit under Chapter III of the Takeover Regulations is crossed.68 This led to the detriment of the interests of the players in the deal as MTN now was getting no voting rights upon acquiring GDRs and with the additional open offer requirement MTN was seeking to totally acquire a majority 56 per cent share in Bharti which was not envisaged by the deal. The options which MTN had was to issued GDRs worth less than 15 per cent stake in Bharti to avoid an open offer, or MTN and its shareholders to be issued the originally agreed 36 per cent stake, but in the form of GDRs without voting rights. The entire valuation of the deal was, however, affected since even if MTN would have agreed to buy GDRs without voting rights, demand of higher cash payment from Bharti had to be made. Hence, among others, the refusal to grant dual listing and the variety of complications arising out of the SEBI deal being scrapped. EXTENT OF OVERHAUL IN INDIAN LAWS NEEDED The previous section dealt with the reasons as to why the deal was unsuccessful. The various regulatory hurdles that were faced during such a complex merger have thrown light on the various lacunae in Indian laws. This being a one off incident does not take away the fact that subsequent deals like this would again bring the matter into light. The above example shows the continuing collision between the growing Indian economy and the existing frame- work of capital controls in the country. Even though this merger has been in the limelight, it raises deeper questions about the old arrangements for capital control; the incremental reforms like SEBIs guidelines of June, 2009 to help the deal is an excessive response to the political pressures that went along this deal and removes the emphasis from the deeper economic and monetary policy problems.

Takeover Code revision to impact Bharti-MTN deal: Analysis, available at control.com/news/cnbc-tv18comments/takeover-code-revision-to-impact-bharti-mtn-deala(last visited on March 5, 2010


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This part try to look into the various changes which are required in various company and foreign exchange laws to accommodate such cross-border deals as well as the feasibility of such an overhaul. The major changes would start with the amendments which would usher in the system of dual listing. Dual Listing, which is currently not allowed in India, would need major amendments to key corporate laws of the country. For example, the existing Companies Act and its proposed successor would both need to be amended; apart from that, Securities Contracts (Regulation) Act, takeover regulations and the listing agreement need to be amended to enable dual listings. The listing agreement and the takeover code of the capital Market regulator, Securities and Exchange Board of India, would need to be redefined to protect the rights of shareholders.69 In the case of a dual listed company, an investor can buy shares in one country and sell it in an overseas market. Also, permission shall be needed for trading of shares denominated or expressed in a foreign currency (if shares are expressed in Rupee and shares of foreign company are expressed in local currency, the equalization will be disturbed). That would need the Indian rupee to be fully convertible, something that the central bank is yet to allow. It would require India to change its system to full capital account convertibility (at the moment, it is regulated).70 A Capital Account Transaction has been defined as meaning a transaction which alters the assets or liabilities including contingent liabilities, outside India of persons resident in India or assets or liabilities in India or persons outside India, and includes transactions referred to in sub-section (3) of section 6 [of the Foreign Exchange Management Act, 1999].71 The dual listing arrangements would simultaneously require capital account convertibility since a shareholder should be able to acquire the shares on one stock exchange

Mint, Lack of dual listing law may bog down deal, available at http://www.livemint. com/2009/09/16232432/Lack-of-dual-listing-law-may-b.html, (Last visited on September 19, 2012). 70 Foreign Exchange Management Act, 1999, section 6 [regarding restrictions on capital account trans- actions by the Reserve Bank of India (the RBI)] read with Rule 4 of the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000, [regarding the prohibitions on the capital account transactions]. Rule 3 [regarding restriction on issue or transfer of Security by a person resident outside India] and Rule 4 [Restriction on an Indian entity to issue security to a person resident outside India or to record a transfer of security from or to such a person in its books] of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000, prevent the dual- listed company arrangement. Furthermore, the restrictions specified in Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004 would also apply. 71 Foreign Exchange Management Act, 1999, section 2 (e). section 6(3)( a) includes within its scope: (i) transfer or issue of any foreign security by a person resident in India; and (ii) transfer or issue of any security by a person resident outside India

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and sell them on another.72 The current convertibility rules do not allow an Indian citizen to hold shares in foreign currency, which is different from the cash that such an individual would hold in foreign currency. As seen, shares are a common currency for acquisition and Indian companies would be shut out of overseas buyout opportunities if they are not allowed to issue them.73 It is not that Indian laws have not started to change according to the changing situation. The change in FDI guidelines, substantially through Press Notes 2, 3 and 4 in 2009, was brought in response to the needs of the industry.74 It also helped to bring the deal back on the tables after the failure in 2008. The changes brought earlier, however, have only impacted the flow of foreign investment into the country. But as this deal shows, the demand now, is to change rules for outward investments, and it hence refers to change in rules to relax the way the Indian currency flows out of India, bringing back the same concern change in capital account convertibility rules. It would help to conduct transactions of local financial assets (like shares) into foreign financial assets, freely and at prices determined by the markets. Even though the schedule for the change according to the Tarapore Committee report has been set out to be in 2012, however, the frequency of such deals begs the decision to be taken before that. Another change is required in the Foreign Exchange Management Act (FEMA). Also, domestic trading in shares denominated in foreign currency cannot happen without the permission of the Reserve Bank of India. The above mentioned changes would primarily mean that a foreign company would be listed on the Indian bourses, which is currently disallowed. Foreign companies can be listed in India, but only in the form of Indian Depository Receipts (IDRs) and not their underlying shares. Although the legal regime relating to IDRs has been in place for the last few years, no company is yet to avail of it.
Since, an arrangement as mentioned above, would result in the government losing control over the transfer of money across the border, therefore, it was not permitted. 73 Bharti Airtel MTN Deal Called off, available at http://www.cainindia.org/news/10_2009/ bharti_airtelmtn_deal_called_off.html (Last visited on September 19, 2012). 74 Press Note 5 of 2005 (Press Note 5), Press Note 3 of 2007 (Press Note 3) and Press Note 2 of 2009 (Press Note 2 of 2009) have provided for the regulatory framework for FDI in telecom sector and ascertain the trend and degree of regulation on FDI attendant downstream investments in the telecom sector. As regards computation of FDI, Press Note 5 provided that 74% FDI limit shall apply to FDI infused into the telecom services company both directly (that is, by investing directly into the company engaged in the business of telecom) or indirectly (that is, by investing into the holding company, of which the company engaged in the business of telecom is a subsidiary). Press Note 5 clarified that in the instances of indirect holding in the operating company, the extent of FDI would be calculated on a proportionate basis. Press Note 2 of 2009 clarifies the manner and mechanism for calculating indirect foreign investments in Indian companies. See Bharti MTN Deal Dissected, available at www.nishithdesai.com/ma- lab.html (Last visited on September 21, 2012).

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The regime for IDRs can work as an alternative for the major changes. The listing obstacle, where lack of capital account convertibility in the erstwhile deal meant that neither MTN nor Bharti shareholders could access each other bourses while dealing with shares, can maybe solved for the time being, through depository receipts.75 If seen in terms of the Bharti MTN deal, trading in South Africa could be done in the home currency for both the sets of shares with Bharti Airtel being traded in the form of a depository receipt. In the same manner, in the Indian bourses, MTN could be listed through India Depository Receipts (IDRs) which then would have facilitated quotation for MTNs shares in rupees. In short, absence of capital account convertibility need not be a stumbling block to the informal Siamese twins agreement between the two companies. Perhaps, this would incidentally kick-start the comatose market for IDRs in India

This deal can be regarded as the best example of corporate restructuring, in which the UK-based Vedanta Resources Plc will merge its Indian firms Sesa Goa and Sterlite Industries into a single entity Sesa Sterlite and also offload debt of $9 billion (Rs 45,000 crore)76 on it. Investment banking firm, JP Morgan has initiated coverage of Sesa Goa with an "overweight rating and a September 2013 target price of Rs 240.The investment bank has cited the earnings prospect of Sesa Goa following its merger with Sterlite Industries , with "high quality" assets in zinc and earnings growth driven by oil.

Hindu Business Line, Dual Listing truths, available at http://www.thehindubusinessline.com/2009/09/19/stories/2009091950080900.htm (Last visited on September 20, 2012). 76 Refer http://www.thehindubusinessline.com/companies/article2931666.ece last visited on 10th October 2012

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"In our view post merger, the combined SESA STERLITE entity would offer investors best in class resource diversification with top quality assets in zinc and oil," JP Morgan said77 JP Morgan adds heavy capital spending is coming to an end, although a re-rating of the stock depends on the performance of its aluminium and power businesses, while coal "remains the missing part in the diversified portfolio." About Sesa Goa Sesa Goa Limited is India's largest producer and exporter of iron ore in the private sector. For more than five decades, Sesa is engaged in the business of exploration, mining and processing of iron ore. In 2007, it became a majority-owned subsidiary78 of Vedanta Resources Plc, listed on the London Stock Exchange, when Vedanta acquired 51% controlling stake from Mitsui & Co. In fiscal 2011, it produced 18.8 million tonnes and 18.1 million tonnes (DMT) respectively of iron ore. In the same year, its turnover was above US$ 2 billion 79. Sesa is among the low-cost producers of iron ore in the World and is well placed to serve the growing demand of Asian countries. Sesa's iron ore markets/customers are primarily in China, India, Japan, Korea, Europe and other Asian countries. Sesa has mining operations in Goa and Karnataka in India. While iron ore from its Goa mines is shipped through the Mormugoa port, the ore from Karnataka mines is exported through the ports of Goa, Mangalore and Krishnapatnam. As of 31 March 2011, Sesa owns or has rights to reserves and resources of 306 million tonnes of iron ore; which has been independently reviewed and certified as per Joint Ore Reserves Committee (JORC) standards. In August 2011, Sesa acquired 51% stake in Western Cluster Limited, Liberia ('WCL"). WCL, which has mining interests / rights in the Western Cluster iron ore project in Liberia with a potential reserves and resources of over 1 billion tonnes over the last two decades, Sesa has diversified into manufacturing of pig iron
Refer The Economic Times dated 30 AUG. 2012, cited as Sesa Goa-Sterlite merger 'best in class', says JP Morgan. available at http://economictimes.indiatimes.com/news/news-by-industry/indl-goods/svs/metals mining/sesa-goa-sterlite-merger-best-in-class-says-jp-morgan/articleshow/15995291.cms last visited on 10 oct 2012 78 Refer http://www.thehindubusinessline.com/companies/article2931666.ece last visited on 2 oct 2012 79 Refer http://www.sesagoa.com/index.php?option=com_content&view=article&id=46&Itemid=53 last visited on 10 oct. 2012

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and metllurgical coke. In Goa, Sesa operates a metallurgical coke plant with an installed capacity of 280,000 tpa;80 and a pig iron plant with an installe capacity of 250,000 tpa and an environmental clearance of 292,000 mtpa of pig iron and 60,000 tpa of slag. Sesa has also developed and provides proprietary technology in metallurgical coke production and has entered into technology licensing agreements with different licenses for marketing technology for setting up non-recovery coke oven plants across the globe. About Sterlite : Sterlite Industries India Limited (SIIL) is the principal subsidiary of Vedanta Resources plc, a diversified and integrated FTSE 100 metals and mining company, with principal operations located in Australia and India. Sterlites principal operating companies comprise Hindustan Zinc Limited (HZL) for its fully integrated zinc and lead operations; Sterlite Industries India Limited (Sterlite) and Copper Mines of Tasmania Pty Limited (CMT) for its copper operations in India/Australia; and Bharat Aluminium Company (BALCO), for its aluminium and alumina operations and Sterlite Energy for its commercial power generation business. Sterlite is India's largest nonferrous metals and mining company and is one of the fastest growing private sector companies. Sterlite is listed on BSE, NSE and NYSE. It was the first Indian Metals & Mining Company to list on the New York Stock Exchange. Sterlite has continually demonstrated its ability to deliver major value creating projects, offering unparalleled growth at lowest costs and generating superior financial returns for its shareholders. At the same time, it ensures that its expansion projects meet high conservative financial norms and do not place an unwarranted burden on its balance sheet and financial resources. In addition, Sterlite Industries produces various chemical products, such as sulfuric acids, phosphoric acids, phospho gypsum, hydro fluo silicic acids, and granulated slag. Further, the company involves in trading gold, as well as in paper business. The Deal: The reconstruction which is done in this particular deal was although initiated previously in 2008 also where in the parent company intended to do the same but had failed due to objections raised by some minority shareholders over valuation of a group firm,


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Konkola Copper Mines. In Feb.2012 it again initiated the proceeding for restructuring of all its Indian subsidiaries into a single unit to cut costs, and planned to issue American Depositary Shares in the combined firm to be named Sesa Sterlite. It was also said that it will result in a cost cut of Rs 1000 cr. The present situation of the Vedanta, the parent group, has three major holdings companies Sterlite (54.6 per cent), Sesa Goa (55.1 per cent) and Cairn India (38.5 per cent). Sesa Goa also holds 20 per cent stake in Cairn India. Both the stakes, after the restructuring plan goes through, will transfer to Sterlite that will hold 58.8 per cent in Cairn India. Need of the reconstruction The reconstruction was always in question as to what was the requirement of such reconstruction. There are many reasons provided by various market experts after the company got listed in London Stock Exchange. According to the management, they want to align, simplify and restructure its different businesses under one roof. However, we believe there is no synergy between Sesa Goa and Sterlite as both are into different businesses. Sesa Goa is into iron ore (ferrous) mining whereas Sterlite is into non ferrous metal. Therefore the merger can also be one of the ways to repay some of the debt obligations looming large on the balance-sheet of the parent company i.e. the Vedanta Group. The Vedanta Group as of September 2011 had debts of USD 10 billion which includes the debt used to finance the Cairn India acquisition. Sterlite has a strong balance-sheet and therefore one can expect a major portion of the earnings to be used to service the debt. By merging Sesa Goa and Cairn India the group company will get cash and bank balance of these companies which will give them more leverage to raise further funds. Further, the company can collect dividend payouts from these subsidiaries which can be used to service their interest obligations. Vedantas debt covenants are all-restrictive which means the debt has been given on some conditions and if those conditions or covenants get triggered, there could be an impact on the ratings. Moreover, this restructuring is to de-leverage its balance-sheet for a further fund-raising programme. The Vedanta Group was recently in the news to acquire the remaining stake of its subsidiaries Bharat Aluminum and Hindustan Zinc. For that it will need a huge sum of money. Also, it has its own huge capex programmes. This will in turn result into additional debt burden and the gross debt could rise by 70-80 per cent of the current debts in the books. That will definitely not be sustainable

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After Deal: The deal will reach to its finality after all necessary approval from share holder and NOD from regulatory body which are required for the finalization of the deal. it is most likely end by the last week of December 2012. It collapses all the assets of Vedanta's listed and unlisted companies in India-Sesa Goa, Sterlite, Vedanta Aluminium (VAL), Malco, Balco and Hindustan Zinc-into Sesa Sterlite. The new company will also own the group's majority stake in Cairn India, the oil & gas company whose acquisition was finally completed in December Post merger will include the following things:1. Vedanta Resources, which is listed in London, will merge all of its Indian holdings, particularly Sterlite Industries and Sesa Goa, into a single entity. 2. Vedanta will hold 58.3 per cent in the new company 3. The merge will entail a share swap in the 3:5 ratio, wherein five shares of Sterlite will fetch three shares of Sesa Goa. 4. The new entity, to be named Sesa-Sterlite, will have a market capitalization of about $22 billion, four billion more than the sum of the individual firms market cap. 5. The merged company will have consolidated net profit of $2.5 billion. 6. Unlisted Vedanta Aluminium, Madras Aluminium and Vedanta's 38.8 per cent holding in oil and gas producer Cairn India will also be transferred to Sesa Sterlite, whose stake in the company will go up to 58.9 per cent. Cairn Indias debt of $5.9 billion will also be transferred to Sesa-Sterlite. 7. Vedanta Resources will also issue American Depository Shares (ADS) in the new company that will be listed on the New York Stock Exchange. 8. The restructuring does not include Vedantas African business it holds a 79.4 per cent stake in Konkola Copper Mines Plc in Zambia. 9. Sesa Goa is Indias largest privately-held producer and exporter of iron ore, Sterlite Industries is Indias largest non-ferrous metals and mining company.
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10. The restructuring will come into effect only after some minority shareholders and regulators in India and the UK give it their stamp of approval So by looking at all these points we can say that this merger makes Sesa Sterlite a natural resources conglomerate with global size and scale, not too different from some of the world's top listed resources monoliths like the Melbourne headquartered BHP Billiton, Vale in Rio de Janeiro and London's Rio Tinto. Only Konkola Copper Mines in Zambia, in which Vedanta Resources holds a 79 per cent stake, will be controlled by the holding company.


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Companies Act, 1956: Cross-border mergers are permitted only if the transferee is an Indian company, and not vice-versa Companies Act, 2013: The Act has opened doors for cross- border mergers by allowing them both ways subject to certain conditions. Permission of Reserve Bank of India shall also be a prerequisite in cross-border M&As. The consideration to shareholders of the amalgamating company may be discharged by payment of cash, or issuance of Indian Depository Receipts, or a combination of both. In case the Indian Company is the amalgamating company, The Central Government will notify the jurisdictions of the foreign Company which are allowed for such cross-border mergers. Prior Approval Another potentially unwished-for-change is the requirement of seeking prior RBI approval for any and all cross-border M&A activity. The inherent paperwork and lengthy timelines surrounding regulatory approval could prove practically onerous for Indian corporate, should such a process be required for each and every cross-border transaction. Clarity on foreign company definition One point in the pros column in favour of the new Acts provisions is the decision to qualify the newly defined foreign company. While the general definition of a foreign company seemed to require a company to have a place of business in India, the draft cross border provisions specifically provides for a separate definition that includes as a foreign company, any company not incorporated in India, whether or not it has a place of business in India. While providing clarity on one hand, the definition of foreign company also gives rise to uncertainty as to its scope, on the other. This is because the definition of a company in the new Act includes a company only, while the definition of a body corporate includes a corporation, a company not incorporated in India, and co-operative societies. Specific

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provisions that intended to include any type of firm or partnership within the ambit of the definition of a company, contained specific provisos to extend the mandate of the definition for the relevant sections. The cross-border provisions contain no such provisos making it uncertain as to whether Indian Limited Liability Partnerships (LLPs) will be given the ability to engage in cross-border mergers and amalgamations as part of their future commercial strategy. Removal of court approval: At present, all mergers including those between group companies or between a parent and a subsidiary must follow the procedure prescribed under the act, which necessarily involves intervention of the high court. However, the Act provides that a scheme of merger or amalgamation may be entered into between two or more small companies,81 between a holding company and its wholly owned subsidiary or such other classes of companies as may be prescribed by the central government, without the approval of the high court or National Company Law Tribunal (NCLT).82 For such mergers or amalgamations, certain necessary conditions must be fulfilled. As a first step, a scheme must be prepared by the companies, and the transferor and transferee must notify the registrar of companies and official liquidator of the proposed scheme. The registrar and liquidator are expected to give their objections or suggestions within 30 days of the date on which they receive notification of the scheme. The merging entities must then consider the concerns of the registrar and liquidator and approve the scheme in their respective general meetings. Next, both transferor and transferee companies must file a declaration of solvency with the registrar that has jurisdiction. The merging entities must also seek approval from their respective creditors. The Act stipulates that any objection to the proposed scheme must be made only by persons that hold at least a 10% shareholding or with outstanding debt amounting to at least

A 'small company' is defined under Section 2(85) of the bill as a company, other than a public company: l whose paid-up share capital does not exceed approximately $101,000 (or such higher amount as may be prescribed, which shall not exceed approximately $1,014,000); or l whose turnover in the last profit and loss account does not exceed approximately $405,000 (or such higher amount as may be prescribed, which shall not exceed approximately $4 million).This is subject to the provision that nothing in this clause shall apply to: l a holding company or a subsidiary company; l a company registered for charitable purposes; or l company or body corporate governed by any special act. 82 The NCLT is a proposed body that is expected to become a comprehensive forum for various matters under the bill.

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5% of the total outstanding debt, as detailed in the last audited financial statement. On receipt of approval from the shareholders and creditors, the scheme must be filed with the NCLT and the registrar and liquidator that have jurisdiction. The Act also describes the process addressing situations where objections may again be raised by the relevant authorities. If no objections are raised, the NCLT will confirm, approve and register the scheme and thereafter notify the registrar. Registration of the scheme will have the effect of liquidating the Transferor Company or companies. The process appears to be detailed, but several questions have arisen and more are expected during testing. For example, it is unclear whether the shareholders and creditors must approve the scheme in the same or in two separate general meetings. As the proposed provision requires no approval from the high court or NCLT, it is therefore aimed at providing substantial relief to small companies, as well as to their holdings and subsidiaries, when deciding on consolidation and mergers particularly those that have so far desisted due to the cumbersome process involved. New regulators The Act provides that no civil court shall have jurisdiction over any suit or proceeding in respect of any matter that the NCLT is empowered to determine under the Act. The only exception is in out-of-court approvals, where the objections or suggestions of the registrar of companies and official liquidator prevail if they object, the matter will proceed to the NCLT. The Act proposes the establishment of both the NCLT and the National Company Law Appellate Tribunal (NCLAT), which will replace several existing forums, including the Company Law Board, the Board for Industrial and Financial Restructuring and the Appellate Authority for Industrial and Financial Reconstruction. The NCLT will consist of a president and other judicial and technical members, as prescribed. The president will be appointed by the central government but, following consultation with the chief justice of India and the members, will be appointed by the central government on the recommendation of a selection committee. The NCLT is expected to take over the role of the high court in approving schemes for amalgamations and liquidation and dealing with petitions for oppression and mismanagement and other roles performed by the Company Law Board and the Board for Industrial and Financial Restructuring. However, the

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creation of the NCLT has been controversial right from the start.83 Although the act was amended as early as 2002 to pave the way for the establishment of the NCLT, the body is yet to be established and the relevant provisions of the Amendment Act 2002 are yet to be notified, as several aspects of its constitution and functioning have been the subject of litigation. In a recent development, a constitution bench of the Supreme Court has upheld the creation of the NCLT as constitutional.84 Once the proposed provision has been notified, it will also quash the Company Law Board. The purpose of the provision is to reduce the burden of the high courts by creating a high-power tribunal that will hear all company law matters. Keeping this in view, the expectation is that the formation of the NCLT should help to expedite the M&A process. Under the existing regime, a decision of the high court can be challenged before the Supreme Court. The Act provides that appeals from the NCLT will now go to the NCLAT, and thereafter directly to the Supreme Court. This should ensure that uniform decisions are received on a particular subject by the NCLAT instead of different decisions on the same or similar matters by different high courts, leading to confusion in relation to jurisprudence.


In R Gandhi v Union of India, ([2004] 120 Com Cases (Mad)), the constitutional validity of the NCLT and NCLAT was challenged. 84 Union of India v R Gandhi/Madras Bar Association, [2010] 100 SLC 142.

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The challenges to increased cross-border expansion Asked what they see as the critical success factors and challenges of going global, 60 percent of Indian business leaders selected the management mindset or process immaturity of Indian businesses as the main constraint.1 This finding suggests that there is scope for far greater global growth as more Indian managers are exposed to global operations and gain confidence to make the move themselves. It also highlights the need for a dedicated management team to give clear strategic direction to any acquisition and integration process. The next most common challenges identified were regulatory factors and a lack of knowledge of foreign countries. These issues must be resolved before making any foreign acquisition decisions and represent a fundamental part of the due diligence process. How these challenges can best be overcome Analysis of the opportunities and challenges of Indias global expansion identifies four imperatives for Indian businesses looking to acquire companies abroad. 1. Flexible organisation structures are essential: The execution of complex M&As often intensifies the incentives on leaders to maintain a tight-hold of the organisational reins. Paradoxically, successful integration actually requires a much more flexible and fluid approach by management to ensure the ability to adopt cultural, social, and other factors that vary across markets. Research has identified the development of flexible organisational structures as the most critical capability for the success of globalisation strategies, mentioned by 83 percent of respondents. Establishing flexible but clear structures and processes and assigning leadership responsibilities has to form an important part of pre-integration planning, and includes careful consideration of personal and

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cross-cultural issues. Indias family run companies sometimes limit control over information and decision making to a small number of people. This tendency is often heightened in the case of decisions as sensitive as cross border acquisitions. This underlines the importance of involving key managers at an early stage in deals.

2. Due diligence must be comprehensive:

The due diligence for cross-border transactions needs to cover unknown market landscapes as well as additional factors like governance, legislative and regulatory rules and processes. Complying with regulations in overseas markets was the second most commonly highlighted capability for success in any companys globalisation questionnaire, identified by 77 percent of respondents. For example, the extent to which environmental laws are adhered to in India varies from state to state, but many other countries have stringent penalties for even minor infractions, including possible facility closure. Indian companies intending to export their processes to acquired operations must be mindful of regulatory implications. Where possible, Indian companies should treat the governance standards of companies they are acquiring as an additional asset. For example, though not strictly an Indian merger, the well-reported Mittal-Arcelor deal was carefully constructed to allow the new company to benefit from Arcelors0 highly evolved corporate governance and operating structures. In terms of scoping the competitive landscape, cross-border due diligence should also include forward-looking analysis to anticipate the competitive responses from both the host market and other companies entering from other countries - India is not the only country going global.

3. Location decisions need a strategic approach:

In attitude survey, Coping with country risks in overseas markets was selected as a critical capability for success by 76 percent of respondents.1 With potential acquisition targets often spread through multiple countries, care must be taken to incorporate a wide range of country-specific factors into the decision-making process. For example, decisions should take into account longer-term regional growth prospects and political ramifications. Pre-integration planning should include an analysis of the expected competitive advantages of each location to support decisions on where to base functions for the joint entity. These plans should strategically manage how risk is spread around different locations.

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For example, it may be preferable to base intellectual property, research and development and manufacturing in different locations, according to where competitive advantages lie. Issues such as which locations standards to harmonise to and what organisational and governance models to use should also be assessed. In some cases, it may be best to leave the operating model of the acquired entity untouched and allow it to carry on with business as usual, just under new ownership. Particular attention should be paid in cases where political sensitivities or hist orical tensions are important factors. Developed economies feel increasingly threatened by competition from emerging economies such as China and India. Political relations become an important part of market entry strategies as protectionist sentiments harden. Chinas recent trade quarrels with the European Union and United States are cases in point, and India is not immune from this trend. Indian companies looking to gain market share in foreign countries should watch how previous Indian companies have fared in their attempts, noting their experiences and avoiding their mistakes. This allows faster and cheaper entry into the foreign marketplace once the investment decision is made. Indian companies acting as first movers should look to secure an early advantage by building brand and credibility quickly.

4. Strong communication is fundamental to success:

A successful integration process relies on effective, consistent and regular communication from company leaders to all constituencies, including customers, employees, regulators, shareholders, partners, suppliers and Competitors. Internal stakeholders should feel that they are positively contributing towards a better future, one in which they themselves will benefit. Indias family-run structures often have close, focused leadership teams which can build a strong sense of commitment. If communication channels and organisational structures are managed carefully, strong family leadership can instil a more inclusive and embracing culture that supports the integration process. The acquiring company should also manage external communications to position itself as a positive new force, rather than an unwelcome intruder vulnerable to criticism from the media, politicians and wider society.

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Finalizing an acquisition requires that various transactional issues be discussed, negotiated, finally agreed upon and properly reflected in the definitive purchase agreement. The representations and warranties of the company to be acquired and of the seller-especially the representation that full disclosure has been made to the acquirerare an important part of that agreement from the acquirer's perspective, whether or not the transaction involves a cross-border Indian acquisition. The seller will seek to qualify its representations and warranties to reflect what has come to light in the due diligence exercise. India being a country with a vast number of laws, it is necessary for a foreign acquirer to have the comfort of knowing to what extent the target company has been in compliance with those laws; moreover, the acquirer will want full disclosure of those matters as to which there has not been compliance. As for the issue of the post-closing survival of representations and warranties, it is typical for the parties to agree to a survival period of between three and four years. As for the issue of indemnity, the concepts of de minimise liability for which there is no recourse and of an overall cap on potential liability, as well as requiring a minimum threshold or basket amount before the seller can be held liable, are concepts that will likely be put forward by the seller to reduce its exposure to a certain extent. In the negotiation of such liability limits, it is essential for the acquirer (who, of course, will seek a blanket indemnity

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without any limits or caps) to keep in mind the local laws of the relevant country and the type and value of the claims that may arise. Conditions precedent to closing are essential in addressing and ensuring that all approvals and consents have been obtained to allow the transaction to be consummated. Moreover, conditions precedent to closing that involve curing any problems that were discovered during the due-diligence review help ensure that the acquirer will not also acquire those problems at closing. An acquisition can also be limited to the acquisition of a majority or minority stake in the target business. In a transaction involving the acquisition of a minority stake, the acquirer would seek certain rights in relation to the management of the company. Such rights would be in the nature of having representation on the board and having veto rights regarding certain matters relating to the operations of the company. Other rights that would be of concern to an acquirer of a minority stake include a guaranteed return on investment, having a preference upon liquidation and the distribution of dividends, anti-ratchet and anti-dilution provisions, exit options, and non-compete and non-solicitation covenants. Also sometimes sought are restrictions on transfers of shares, such restrictions taking the form of a right of first refusal, a right of first offer, tag-along rights, drag-along rights, and put or call options, for example. It should be noted that all corporate matters and rights extended to the parties to a transaction need to be adequately reflected in the articles of association (i.e., the bylaws of an Indian company), so as to be enforceable against the Indian company. However, since an Indian public company cannot restrict the transfer of its shares, shareholders, in addition to a shareholders' agreement, also enter into a non disposal agreement, in which they agree to transfer their shares only in the manner provided therein. An important element of merger and acquisitions involving a foreign company and an Indian company is the status of the Indian company, that is, whether it is a private limited company or a public limited company. A private limited company is more able to provide for restrictions, and the investment involving such a company can be structured in a more suitable manner since a private limited company is not restricted to having only two classes of shares (i.e., equity and preference), as is the case for a public company. There have been cases in which an acquirer has identified a target company that is a public company, but, for the purpose of the acquisition, has structured the transaction so as to convert the target

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company into a private limited company before proceeding with the acquisition. In short, mergers and acquisitions come in various forms, and investors need to understand what best suits their needs. The speed of Indias entrance into global markets illustrates the natural urge of Indian businesses to take part in the global economy. Globalisation has allowed the country to achieve great success in low-cost sourcing and services, but globalisation promises to deliver much more for India. The next challenge is to build higher-value markets and to give Indian companies the capabilities to contend against international competitors. The increasing scale and geographic scope of investment by Indian companies will in turn be a catalyst for wider industry and economic change, such as: Consolidation in key industries, e.g. information technology, pharmaceuticals, steel Intensification of competition in many industries as Indian companies apply their low-cost business models in Western markets Greater interdependence between economies as investment flows become more complex and multidirectional After years of anticipation, Indian companies have finally arrived, and seem set to leave a lasting impression on global markets and competition in the decade ahead.

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BOOKS: 1. A. K Majumdar and Dr. G. K. Kapoor, Taxmanns Company Law and Practice, 16th Edition, Taxmanns Publications (P.) Ltd. 2. Avtar Singh, Company Law, 15th Edition, Eastern Book Company. 3. MC Bhandari, Guide to Company Law Procedures (Set of 4 Vols.) 4. Author: A RAMAIYA, Ramaiya Guide to The Companies Act, 17th Edition. 5. S. Ramanujam, Mergers et al, 3rd edition, (Lexis Nexis, 2011) 6. Sampath K R, Law and Procedure for Mergers, Amalgamations, Takeovers and Corporate Restructuring, 2nd edition, (snow white, 1996) 7. Seth Dua & Associates, Joint Ventures & Mergers and Acquisitions in India: Legal and Tax Aspects; (Lexis Nexis Butterworths ; India,2006) 8. Sridharan and Pandian , Guide to Takeovers and Mergers, 3rd edition, (Lexis Nexis Butterworths Wadhwa, Nagpur, 2008) 9. T. Ramappa, competition Law In India : Policy , Issues and Development, 2nd edition ( Oxford university Press, New Delhi,2009)

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WEBSITES: 1. www.wikipedia.org 2. www.supremecourtcaselaw.com 3. www.manupatra.com 4. http://timesofindia.indiatimes.com 5. http://www.cci.gov.in 6. http://home.heinonline.org 7. www.thehindubusinessline.com 8. http://www.cuts-international.org

1. 2. 3. 4.

Blacks Law Dictionary. Websters Law Dictionary. Halsburys Laws of England. Oxford Dictionary

OTHER REFERENCES 1. http://pib.nic.in/newsite/erelease.aspx?relid=76548 2. www.cci.gov.in/images/media/ResearchReports/3102012.pdf 3. www.sebi.gov.in, Letter of offer to shareholders of Ranbaxy 4. Competition Assessment of Pharmaceutical Sector in India by Nidhi Chauhan, National Law School Of India University, Bangalore.

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5. Report of Expert Committeehttp://www.mca.gov.in/Ministry/reportonexpertcommitte/chapter10.html 6. http://www.mergersandacquisitions.in/merger-and-acquisition-in-india.htm 7. http://shodhganga.inflibnet.ac.in/bitstream/10603/1949/5/05_chapter%202.pdf 8. Beena saraswathy, Cross-Border Mergers and Acquisitions in India: Extent, Nature and Structure , Available at cds.edu/download_files/wp434.pdf 9. Esha Shekhar and Vasudha Sharma, Cross-Border Mergers In Light Of The Fallout Of The Bharti-MTN Deal Available at http://www.nujslawreview.org/articles2011vol4no1/esha-shekhar.pdf. 10. Mr Himanshu Srivastava and Mr Nitin Arora Cross Border Merger & Acquisition Available at http://www.cci.in/upload%5CArticle%5Cfile%5CFileLXTIVVICrossBoder-Merger-Acquisition.pdf 11. Rav Pratap Singh, Implications Of Cross border Mergers Under Indian Competition Law A Comparative Analysis with US & EC Jurisdictions Available at- www.cci.gov.in/images/media/ResearchReports/RavPratapSingh.pdf 12. Aniket Singhania, Cross Border Business Reorganization- The Indian Perspective Available at- www.itatonline.org/articles_new/?dl_id=13 13. Bhagwati Dan Charan, Implication Of The Competition Act, 2002 On Cross Border Merger: An Indian Perspective Available at cci.gov.in/images/media/.../CrossBorderMergerAnIndianPerspective.pdf