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Acquisitions in India: Law, Trend And Analysis

This article will help you discover the Acquisition laws framework and the contemporary acquisitions in India. The Acquisition kickstarted in India in 1988 when Swaraj Paul made a hostile takeover bid to overpower DCM Limited. With this started the trend of acquisitions in India, which has become a sweeping reality in the Indian market.

Before the LPG [Liberalization, Privatization & Globalization] reforms of 1991, the Scope and mode of corporate restructuring were minimal due to the prohibitive government policies and rigid regulatory structure. Post LPG reforms, due to flexibility in the Government policies, mergers, and acquisitions geared up in the country.

Mergers, Amalgamations, and Acquisitions [M&A] are transactions in which the ownership of companies, other business organizations, or operating units are transferred or combined. Precisely, an Acquisition is when one company purchases most or all of the other Company's stock or equity interests or assets to gain control or power of that Company, and a Merger is the combination of two or more companies, by which the identity of one or more is lost resulting in a single company.

Both the companies post takeover/acquisition remains independent and separate; there is only a change in control and management of the Companies. As a result, M&A allows enterprises to grow, shrink, and change the nature of the business or competitive position.

The terms Acquisition and Takeover are used interchangeably in the industry but have an acceptable difference between the same. An Acquisition is done with the permission of the transferor company and a Takeover is executed against the will of the target company. The purpose and conclusion of both acquisition/takeover is same.

The reasoning behind M&A is that two separate companies together create more value compared to being on a separate stand. With the intent of wealth maximization, companies keep evaluating different opportunities through the route of Merger or Acquisition. Section 232 of the Act deals with the mergers and amalgamation of Indian companies, Section 234 of the Act which deals Merger or amalgamation of a company with a foreign company and Section 235 deals with the Acquisition of shares of the Company.

What are the benefits of Acquisition?

Acquisition has numerous benefits that aid in the growth and advancement of the acquirer.

Vital motives for Acquisition:

  • To grow in size and expand
  • To eliminate competition.
  • Taxation benefits.
  • Economies of scale.
  • Innovation.
  • To dominate the market.

Why Acquisition/Takeover is better than Merger/Amalgamation?

In lucid terms, Acquisition/Takeover is just a share transfer deal by which voting power or equity shares are transferred to the acquirer, while on the other side, Merger/Amalgamation is a complex process and requires the permission of the Tribunal [the NCLT] and a due process has to be adhered. In Acquisition/Takeover, the identity of both acquirer and the target company remains in existence.

In a merger both party consent is a pre-requisite, but an acquisition can be made against the wishes of the target company by way of a hostile takeover. No new equity shares are needed to be issued in case of Acquisition.

Laws applicable to Acquisition/Takeover in India:

  1. The Companies Act, 2013
  2. The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 ["CAA RULES"]
  3. Indian Stamp Act, 1899
  4. Competition Act, 2002
  5. Foreign Exchange Management Act,1999 [FEMA]
  6. Intellectual Property Rights
  7. Income Tax Act, 1961
  8. The Companies (Share Capital and Debentures) Rules, 2014
  9. SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011

The Companies Act, 2013

Sections 230 to 240 of the Act deal with Mergers, Acquisitions, and Amalgamations and is applicable over the Companies, their members, creditors, and other related stakeholders. All these sections are in effect now. No section of the Companies Act, 1956 are applicable now.

There are wide differences between these sections and the sections relating to M&A in Companies Act 1956.
In fact, the Companies Act 1956 had only four sections (S-391 to 394) dealing with M&A.
  • Section 230: Power to Compromise or Make Arrangements with Creditors and Members
  • Section 231: Power of Tribunal to Enforce Compromise or Arrangement Section
  • Section 232: Merger and Amalgamation of Companies Section
  • Section 233: Merger or Amalgamation of Certain Companies
  • Section 234: Merger or Amalgamation of Company with Foreign Company
  • Section 235: Power to Acquire Shares of Shareholders Dissenting from Scheme or Contract Approved by Majority
  • Section 236: Purchase of Minority Shareholding
  • Section 237: Power of Central Government to Provide for Amalgamation of Companies in Public Interest
  • Section 238: Registration of Offer of Schemes Involving Transfer of Shares
  • Section 239: Preservation of Books and Papers of Amalgamated Companies
  • Section 240: Liability of Officers in Respect of Offences Committed Prior to Merger, Amalgamation
  • Sections 235 and 236 are the key sections for acquisition mechanism.

The Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 ["CAA RULES"]
In exercise of the powers conferred by sub´┐Ż sections (1) and (2) of section 469 [Power of Central Government to Make Rules] read with sections 230 to 233 and sections 235 to 240 of the Companies Act, 2013, the Central Government had made these rules with effect from 15th December, 2016.

Prominent highlights of these rules:

  • These rules provide the procedural requirements as enshrined under sections 230 to 240 of the Companies Act, 2013.
  • An application for order of a meeting of the shareholders can be made to the NCLT [National Company Law Tribunal] under these rules.
  • Content of the disclosures required to be made in the application and Creditors Responsibility statement.
  • Directions that can be given by the NCLT while hearing the application.
  • Format of the notice of the meeting.
  • Advertisement requirement of the notice of the meeting.
  • Copy of the Notice to the statutory authorities.
  • Voting and proxy mechanism.
  • Result of the meeting by voting and reporting of the same to the Chairperson.
  • Petition for confirming compromise and arrangement.
  • Application for directions under section 232 of the Companies Act, 2013.
  • Liberty of the Tribunal.

Indian Stamp Act, 1899

This Act contains the rates at which various instruments are to be stamped. The Section 3 of the Act is the charging section under which the stamp duty is charged and deposited to the State Government. Stamp duty matters are covered in the concurrent list of the [Entry 44 List III] i.e. both union and state have powers to make laws on this subject. The Central Government has delegated the power to the states to either adopt the Central Stamp Act

or modify it or can have their own Stamp Act. States such as Delhi has its own Stamp Act. In an acquisition deal, bulk shares are transferred to the acquirer and this attracts stamp duty provisions. Stamp duty is payable on issue of share certificates and transfer of shares.

If the stamp duty is not submitted to the state government in the prescribed time then it is subject to penalty provisions.

Competition Act, 2002

Competition Act, 2002 is the replacement of the MRTP Act, 1969 as the MRTP Act has various loopholes and complexities. The intent of the Competition Act, 2002 is to prevent practices leaving an adverse effect on competition, to promote and sustain competition in the markets, to protect the interests of consumers and to ensure freedom of trade carried on by other participants in the markets in India.

The Act was formulated to regulate the activities and operations of the combinations originated by the outcome of the corporate restructuring such as mergers, amalgamations and acquisitions/takeover.

Some important provisions of the Act are as:
Section 3
This section enumerates certain practices which will be anti-competitive. Anti-Competitive agreements are restrictive in nature. Section 3 further talks about the types of anti-competitive agreements and cartelisation, bid rigging etc.

Section 4
This section enumerates regulation of abuse of dominant position by the enterprises.

Section 5 and Section 6
This section talks about the regulation of combinations formed after mergers, amalgamations and acquisitions.

The acquirer has to take prior approval of the CCI [Competition Commission of India] before proceeding for the takeover/acquisition of the target enterprise.

Foreign Exchange Management Act, 1999 [FEMA]

In cases of Overseas Acquisitions or Overseas Direct Investment [ODI], it is very necessary to understand the guidelines enshrined under this act and related regulations. FEMA is governed by the Reserve Bank of India [RBI]. Due to globalization cross border mergers and acquisitions are on the rise and involve large sums of foreign exchange.

Cross Border Mergers can be further divided into two categories i.e. Inbound Mergers [Foreign Company acquiring or merging with a Indian Company] and Outbound Mergers [Indian Company acquiring or merging with a Foreign Company].

Intellectual Property Rights [IPRs]

IPRs mainly refers to the intellectual property and includes patents, trademarks, copyrights, designs registered under the name of the Company. Intellectual Property plays a very crucial role in Mergers and Acquisitions. Intellectual property aids in the expansion of business and diversification, as it forms intangible assets of the Company and a main source of the company asset portfolio. So, it is very integral for any company to protect and conserve its Intellectual property rights.

Mergers and Acquisitions help corporates in expanding their asset portfolio, acquiring new techniques and know how, expanding their customer base, diversification, growth of the business segments, etc., and Intellectual Property [IP] helps in achieving all of these motives. So, we can say that the role of IP in mergers and acquisitions is of utmost important.

Income Tax Act, 1961

Income tax implications on the acquisitions/takeover is related with capital gains. The concept of capital gain means profit or gains that one receives after the sale/disposal of capital assets. Any gain or profit from the sale of assets is regarded as income and hence tax is required to be paid for that income in the year of purchase. It can be either short term or long term or both.

Following are the transactions that are exempted from capital gain tax in an amalgamation are as under:

Section 47 of the act exempts the following:
If the amalgamated Company is an Indian company. Any assets transferred by amalgamating Company towards amalgamating Company shall be exempted.

Where the transfer of shares is made by shareholder has been made by an amalgamated company which is an Indian Company along with that allotment of shares is also made by the amalgamated Company.

If two foreign companies are amalgamated, no tax is levied. When an Indian company and foreign Company are amalgamated, and the resultant Company is in India. This will result in a capital gain for shareholders.

The Companies (Share Capital and Debentures) Rules, 2014
These rules came into force on 1st April, 2014. These rules are applicable to all unlisted public companies, private companies and listed companies, so far as they do not contradict or conflict with any other provision framed in this regard by the Securities and Exchange Board of India.

These rules talk about the types of equity shares, issuance of equity & preference shares, issue of share certificates, transfer and transmission of shares etc.

SEBI (Substantial Acquisition of Shares & Takeovers) Regulations, 2011
SEBI (Substantial Acquisition of Shares -and Takeovers) Regulations, 1994 was a pioneer attempt in India to regulate in an organized manner 'takeover' of a listed company. It was found to have certain discrepancies. Thus, aforesaid Law was replaced by new and improvised version i.e., SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

In order to align our takeover laws with international practices and to make it simple, these 1997 Regulations, with effect from 23rd October, 2011, have been replaced by SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. These Regulations are based on the recommendations of Achuthan Committee Report.

As per these regulations, if any person [along with persons acting in concert] triggers the limit (25% or more of the shares) prescribed under the regulations, he has to make an open offer to the public. An open offer is an offer made by the acquirer to the shareholders of the target company inviting them to tender their shares in the target company at a particular price.

The primary purpose of an open offer is to provide an exit option to the shareholders of the target company on account of the change in control or substantial Acquisition of shares, occurring in the target company.

Contemporary and prominent cases of Acquisitions in India:
  • Reliance is dominating the acquisition market in India. It has acquired renowned brands such as Campa Cola, Hamleys, Zivame, Justdial, Saavn, Milkbasket and many more
  • Adani Enterprises acquired ACC and Ambuja Cement.
  • Bharti Airtel acquired Telenor India.
  • Axis Bank acquired Freecharge.
  • Sony Corporation acquired TEN Sports from Zee Group.
  • LIC acquired IDBI Bank.
  • Zomato acquired UberEats.
  • HUL acquired GSK Consumer.
  • ITC acquired Sunrise Foods.
  • Ebix acquired Yatra.com

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