15.

0 LEGAL ASPECTS OF M & As Merger control requirements in India are currently governed by the provisions of the Companies Act, 1956 and the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. (the takeover code). The provisions of the Takeover Code apply only to acquisition of shares in listed public companies. Although there is no definition of amalgamation or mergers in the Indian Companies Act, it is understood to mean an arrangement by which transfer of undertakings is effected. Sections 391 to 396 of the Companies Act deals with such an arrangement. Other statues which governs merger proposals are the Industries (Development and Regulation) Act, 1951; the Foreign Exchange Management Act, 2000, the Income Tax Act, 1961 and the SEBI Act, 1992. 15.1 COMPANIES ACT, 1956 A merger under the provisions of the Companies Act is tedious and time consuming process. Sections 391 to 396 deal with the procedure, powers of the court and related matters. An application has to be made to the court under Section 391, where a proposal for merger of two companies is contemplated, along with the scheme of amalgamation. On receipt of the application, the court may order a meeting of the creditors or class of creditors or the members or the class of members to be called, held and conducted in such manner as it may direct. It is necessary to furnish all material facts relating to the companys financial positions, the latest auditors report on the accounts, and the pendency of any investigation proceeding under Sections 235 to 251 and the like while making the application. The court has not only the power to supervise the carrying out of the scheme, it can make modifications, if any, to the scheme and also the power under Section 392 to order the winding up of a company where it considers that the scheme cannot work satisfactorily If a majority, in number representing three-fourth in value of the creditors, or class of creditors or members or class of members present and voting either in person or by proxy at the court-convened meeting in favour of the scheme, it shall, if sanctioned by the court, be binding on the creditors, class of creditors, members, class of members as the case may be and also on the company. If there is a division, and the statutory majority has approved the scheme, the dissent of the others will have no effect on the scheme. However, the court may, under Section 394(1)(v) of the Companies Act, make provisions to deal with such dissenting creditors or members. The order of the court sanctioning the scheme shall have effect only after the certified copy of the order has been filed with the Registrar. The basic difference between a court merger and an acquisition is that the transferor company will be dissolved without winding-up in the case of a court scheme, if the scheme provides for the same, whereas in the case of an acquisition the transferor company continues to exist. Under Section 396 of the Companies Act 1956, the Central Government is empowered to order the merger of two companies in the public interest when the procedure of making application to the court etc., are not required to be followed. 15.2 INDUSTRIES (DEVELOPMENT AND REGULATION ACT) The applicability of the above Act in the case of merger is very limited. An application under Section 391 of the Companies Act, initiating a merger process cannot be proceeded with where permission of the High Court has been granted under Section 18FA of this Act to appoint anyone to take over the management of the industrial undertaking on the application of the Central Government for the purpose of running or restarting it. However, the Central

Government may review its order at the request of the parties to proceed with the scheme of merger. There is no necessity to get a new licence since the license of the amalgamating company is treated as adequate for the purpose of the amalgamated company since the takeover includes licenses also. 15.3 SICK INDUSTRIAL (SPECIAL PROVISIONS) ACT( SINCE REPREALED) This Act is not applicable to a non-industrial company and to a small-scale or ancillary undertaking. An industrial company will be deemed to be a sick industrial company if it has been registered for not less than five years and which has, at the end of any financial year, accumulated losses equal to or exceeding its entire net worth. Once a company becomes a sick industrial company, it will be referred to the BIFR, which may, under Section 18, sanction the merger of a sick industrial undertaking with any other company or vice versa. The sanctioned scheme must be approved through a special resolution by the shareholders of the company which is not sick. Another significant fact in this type of merger is that the Act provides for hearing the view of employees, particularly of the employees of the transferor company, who may anticipate uncertainty on merger, and the scheme, once sanctioned, will be binding on them. 15.4 SEBI REGULATIONS Regulation 3 of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeover) Regulations, 1997 provides that Chapter III of the Regulations (relating to takeovers) will not apply to the acquisition of shares pursuant to a scheme of amalgamation under Sections 391 and 394 of the Companies Act, 1956 and to the acquisition of shares pursuant to a scheme framed under the Sick Industrial Companies (Special Provisions) Act. 15.5 THE INCOME TAX ACT, 1961 Section 72A of the Income Tax Act, which deals with the amalgamations and tax benefit there on, was introduced by the Finance Act, 1977 with effect from April 1, 1978. Sickness among industrial undertakings was considered to be a matter of grave national concern. Allowing such undertakings to be closed would result in loss of production, loss of employment for many and substantial waste of valueable assets. Therefore, the Finance Minister explained in his budget speech of providing incentive and removing impediments to facilitate the amalgamated of the sick industrial units with sound ones. Section 72A laid down that where there has been an amalgamation of a company with another, and the Central Government, on recommendation of the specified authority, is satisfied that certain conditions laid down in the section are fulfilled, the accumulated unabsorbed losses (not being a loss sustained in a speculation business) and the unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or allowance of the amalgamated company for the previous year in which the amalgamation was effected. The conditions stipulated in the Section are : The amalgamating company, immediately before such amalgamation, should be financially non-viable by reason of its liabilities, accumulated losses and other relevant factors and, Amalgamation was in public interest. It is also laid down that for the benefit to accrue, the business of the amalgamating company should be carried on by the amalgamated company without any modification or reorganisation or with such modification or reorganisation as may be approved by the Central Government to enable the

amalgamating company to carry on such business more economically or more efficiently. A certificate from the specified authority to the effect that adequate steps have been taken for the rehabilitation or revival of the business of the amalgamating company should be obtained and furnished along with the return of income. However, amendments to Section 72A in Budget 99 made the procedure easier. The Finance Minister in his speech on February 27, 1999 said : The corporate sector has been voicing the need for a flexible fiscal policy for regulating business reorganisations. In response to this need, I propose a comprehensive set of amendments to the IT Act to make such business reorganisations fully tax neutral. In the case of amalgamations of companies, the existing requirement of routing the proposal through BIFR is being removed.....Further, it is proposed that all fiscal concessions will survive for the unexpired period in the case of amalgamations and demergers. Accordingly, the existing provisions will be rationalised as under for any amalgamations not necessarily an amalgamation through BIFR. The carry forward and set-off of a accumulated losses and unabsorbed depreciation will be available to the amalgamated company subject to certain conditions to be prescribed. The amortisation of expenditure on technical know-how enjoyed by the amalgamating company will be available to the amalgamated company. Amalgamation expenses will be allowed as a deduction equally over five years. In the case of an Indian subsidiary of a foreign company, the brought forward losses will not lapse in spite of change in shareholding, subject to certain conditions. In the case of GDRs and FCCBs, the concessional tax provisions will continue to apply to the shareholders and bondholders. These far reaching amendments to the Income Tax Act will certainly create opportunities for more mergers and amalgamations.