Overview of the M&A Market

With a few highs and lows, the merger and acquisition ("M&A") activity in India during the period from 2015-2019 has been largely resilient. During this period, India has witnessed more than 3,600 M&A deals with an aggregate value of more than USD 310 billion."

Sectors such as industrial goods, energy, telecom & media represented more than 60% of deals by volume and value. A few of the largest deals include Walmart's USD 16 billion acquisition of Flipkart (2018), the USD 13 billion acquisition of Essar Oil by a Rosneft-led Russian consortium (2017), and Adani Transmission's USD 3 billion acquisition of Reliance Infrastructure's integrated Mumbai i power distribution business (2018).3

The second term of the Modi government brought back tremendous faith in the investor community in India. The government's reform agenda and the policies were largely formulated to encourage foreign investments. There was also a surge in M&A activity due to the new bankruptcy law, the faster pace of approvals initiated by the government as part of its ease of doing business in India campaign and the relaxation in Foreign Direct Investment ("FDI") norms. That particular facts that certainly appreciated.

However, India started seeing a slump in deal making in the third and fourth quarters of 2019. Inter alia the US-China trade war, Brexit, the situation in Hong Kong, the drone strike on Saudi Arabia's oil facilities had indicated a dawning recession.

In addition, the COVID-19 outbreak which disrupted the world in 2020 has not left the Indian economy untouched. Several M&A deals in the country have been stalled in the wake of this pandemic including the privatization of Air India and Bharat Petroleum Corporation Limited. Once the world is able to curtail the spread of the virus and lift the lockdown across the globe, countries will look up to their governments to propose measures to revive the economy and help revive M&A activity.

Conceptual Overview
In this section, we have briefly explained the different types of M&As that may be undertaken. and an overview of certain laws that would be of significance to M&A in India.

1. Mergers and Amalgamations
   The term 'merger' is not defined under the Companies Act, 2013 ("CA 2013") or under Income Tax Act, 1961 ("ITA"). As a concept. 'merger' is a combination of two or more entities into one; the desired effect being not just the accumulation of assets and liabilities of the distinct entities, but organization of such entity into one business. The possible objectives of mergers are manifold-economies of scale, acquisition of technologies, access to varied sectors/markets etc. Generally, in a merger, the merging entities would cease to exist and would merge into a single surviving entity.
   
   The ITA does however define the analogous term 'amalgamation' as the merger of one or more companies with another company, or the merger of two or more companies to form one company. The ITA goes on to specify certain other conditions that must be satisfied for an 'amalgamation' to be eligible for benefits accruing from beneficial tax treatment (discussed in Part VI of this Paper).
   
   Sections 230-234 of CA 2013 (the "Merger Provisions") deal with the schemes of arrangement or compromise between a company, its shareholders and/or its creditors. These provisions are discussed in greater detail in Part II of this Paper, Commercially, mergers and amalgamations may be of several types. depending on the requirements of the merging entities. Although corporate laws may be indifferent to the different commercial forms of merger/amalgamation, the Competition Act. 2002 does pay special attention to the forms.
   
   
   1. Horizontal Mergers
      Also referred to as a 'horizontal integration', this kind of merger takes place between entities engaged in competing businesses which are at the same stage of the industrial process. A horizontal merger takes a company a step closer towards monopoly by eliminating a competitor and establishing a stronger presence in the market. The other benefits of this form of merger are the advantages of economies of scale and economies of scope. These forms of merger are heavily scrutinized by the Competition Commission of India (CCI)
       
   2. Vertical Mergers
      Vertical mergers refer to the combination of two entities at different stages of the industrial or production process. For example, the merger of a company engaged in construction business with a company engaged in production of brick or steel would lead to vertical integration. Companies stand to gain on account of lower transaction costs and synchronization of demand and supply. Moreover, vertical integration helps a company move towards greater independence and self-sufficiency.
       
   3. Congeneric Mergers
      A congeneric merger is a type of merger where two companies are in the same or related industries or markets but do not offer the same products. In a congeneric merger, the companies may share similar distribution channels, providing synergies for the merger. The acquiring company and the target company may have overlapping technology or production systems, making for easy integration of the two entities. This type of merger is often resorted to by entities who intend to increase their market shares or expand their product lines.
       
   4. Conglomerate Mergers
      A conglomerate merger is a merger between two entities in unrelated industries. The principal reason for a conglomerate merger is utilization of financial resources, enlargement of debt capacity, and increase in the value of outstanding shares by increased leverage and earnings per share, and by lowering the average cost of capital. A merger with an unrelated business also helps the company to foray into diverse businesses without having to incur large start-up costs normally associated with a new business.
       
   5. Cash Merger
      In a 'cash merger', also known as a 'cash-out merger', the shareholders of one entity receives cash instead of shares in the merged entity. This is effectively an exit for the cashed-out shareholders.
       
   6. Triangular Merger
      A triangular merger is often resorted to, for regulatory and tax reasons. As the name suggests, it is a tripartite arrangement in which the target merges with a subsidiary of the acquirer. Based on which entity is the survivor after such merger, a triangular merger may be forward (when the target merges into the subsidiary and the subsidiary survives), or reverse (when the subsidiary merges into the target and the target survives).
       
2. Acquisitions
   An 'acquisition' or 'takeover' is the purchase by one person, of controlling interest in the share capital or of all or substantially all of the assets and/or liabilities, of the target. A takeover may be friendly or hostile and may be structured either by way of agreement between the offeror and the majority shareholders or purchase of shares from the open market or by making an offer for acquisition of the target's shares to the entire body of shareholders.
   
   Acquisitions may also be made by way of acquisition of shares of the target, or acquisition of assets and liabilities of the target. In the latter case, entire business of the target may be acquired on a going concern basis or certain assets and liabilities may be cherry picked and purchased by the acquirer. The transfer when a business is acquired on a going concern basis is referred to as a 'slump sale' under the ITA.
   
   Section 2(42C) of the ITA defines slump sale as a "transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales". The legal and tax considerations of slump sale vis a vis an asset sale is discussed in greater detail in Part VI of this Paper.
   
   Another form of acquisition may be by way of demerger. A demerger is the opposite of a merger, involving the splitting up of one entity into two or more entities. An entity which has more than one business, may decide to 'hive off' or 'spin off one of its businesses into a new entity. The shareholders of the original entity would generally receive shares of the new entity.
   
   In some cases, if one of the business units of a company is financially sick and the other business unit(s) is financially sound, the sick business units may be demerged from the company, thereby. facilitating the restructuring or sale of the sick business, without affecting the assets of the healthy business unit(s). Conversely, a demerger may also be undertaken for moving a lucrative business into a separate entity. A demerger may be completed through a court process under the Merger Provisions or contractually by way of a business transfer agreement.
    
3. Joint Ventures
   A joint venture is the coming together of two or more businesses for a specific purpose, which may or may not be for a limited duration. The purpose of the joint venture may be an entry into a new business, or an entry into a new market (which requires specific skills, expertise or the investment by each of the joint venture parties). Parties can either set up a new company or use an existing entity, through which the proposed business will be conducted.
   
   The parties typically enter into an agreement to set out the rights and obligations of each joint venture party and the broad framework for the management of the company, and such terms are then incorporated in the byelaws of the company for strengthening the enforceability.
    

Mergers and Amalgamations:
Key Corporate and Securities Laws Considerations.

1. Company Law
   The Merger Provisions govern schemes of arrangements between a company, its shareholders and creditors The Merger Provisions are in fact worded so widely that they provide for and regulate all kinds of corporate restructuring that a company can possibly undertake, such as mergers, amalgamations, demergers, spin-off/ hive off, and every other compromise, settlement, agreement or arrangement between a company and its members and/or its creditors.
   
   
   1. Procedure under the Merger Provisions.
      Since a merger essentially involves an arrangement between companies, those companies which intend to merge must make an application to the National Company Law Tribunal ("NCLT") having jurisdiction over such company for (i) convening meetings of its respective shareholders and/or creditors; (11) or seeking dispensation of such meetings basis the consents received in writing from the shareholders and creditors.
      
      Basis the NCLT order, either a meeting is convened or dispensed with If the majority in number, representing 3/4th in value of the creditors or shareholders present and voting at such meeting (if the meeting is held) agree to the merger, then the merger, if sanctioned by the NCLT, is binding on all creditors and shareholders of the company.
      
      The Merger Provisions constitute a comprehensive code in themselves, and under these provisions, the NCLT has full power to sanction any alterations in the corporate structure of a company. For example, in ordinary circumstances a company must seek the approval of the NCLT for effecting a reduction of its share capital.
      
      However, if a reduction of share capital forms part of the corporate restructuring proposed by the company under the Merger Provisions, then the NCLT has the power to approve and sanction such reduction in share capital and companies will not be required to follow a separate process for reduction of share capital as stipulated under the CA 2013.
       
   2. Fast track merger
      The Fast Track merger covered under section 233 of CA 2013 requires approval from shareholders, creditors, the Registrar of Companies, the Official Liquidator and the Regional Director. Under the fast track merger, scheme of merger shall be entered into between the following companies:
      
      1. Two or more small companies (private companies having paid-up capital of less than INR 100 million and turnover of less than INR 1 billion per last audited financial statements); or
      2. a holding company with its wholly owned subsidiary; or
      3. such other class of companies as may be prescribed.
      The scheme, after incorporating any suggestions made by the Registrar of Companies and the Official Liquidator, must be approved by shareholders holding at least 90% of the total number of shares, and creditors representing 9/10th in value, before it is presented to the Regional Director and the Official Liquidator for approval. Thereafter, if the Regional Director/ Official Liquidator has any objections. they should convey the same to the central government.
      
      The central government upon receipt of comments can either direct NCLT to take up the scheme under Section 232 (general process) or pass the final order confirming the scheme under the Fast Track process.
       
   3. Cross Border Mergers
      Section 234 of the CA 2013 permits mergers between Indian and foreign companies with prior approval of the Reserve Bank of India ("RBI"). A foreign company means any company or body corporate incorporated outside India, whether having a place of business in India or not.
      
      The following conditions must be fulfilled for a cross border merger:
      
      1. The foreign company should be incorporated in a permitted jurisdiction which meets certain conditions.
      2. The transferee company is to ensure that the valuation is done by a recognized professional body in its jurisdiction and is in accordance with internationally accepted principles of accounting and valuation.
      3. The procedure prescribed under CA 2013 for undertaking mergers must be followed.
      The RBI also issued the Foreign Exchange Management (Cross Border Merger) Regulations, 2018 ("Merger Regulations") on March 20, 2018 which provide that any transaction undertaken in relation to a cross-border merger in accordance with the FEMA Regulations shall be deemed to have been approved by the RBI.

Securities Laws

1. Takeover Code
   The Securities and Exchange Board of India (the "SEBI") is the nodal authority regulating entities that are listed or to be listed on stock exchanges in India. The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the "Takeover Code") restricts and regulates the acquisition of shares, voting rights and control in listed companies.
   
    Acquisition of shares or voting rights of a listed company, entitling the acquirer to exercise 25% or more of the voting rights in the target company or acquisition of control, obligates the acquirer to make an offer to the remaining shareholders of the target company. The offer must be to further acquire at least 26% of the voting capital of the company.
   
   Further, if the acquirer already holds 25% or more but less than 75% of the target company and acquires at least 5% shares or voting rights in the target company within a financial year, it shall be obligated to make an open offer. However, this obligation is subject to the exemptions provided under the Takeover Code.
   
   Exemptions from open offer requirement under the Takeover Code include inter alia acquisition pursuant to a scheme of arrangement approved by the NCLT. Further, SEBI has the power to grant exemption or relaxation from the requirements of the open offer under the Takeover Code in the interest of investors and the securities market. Such relaxations or exemptions can be sought by the acquirer by making an application to SEBI.
    
2. Listing regulations
   The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("Listing Regulations'') provides for a comprehensive framework governing various types of listed securities. Under the Listing Regulations, SEBI has laid down conditions to be followed by a listed company while making an application before the NCLT, for approval of a scheme of merger/amalgamation/reconstruction. Certain key provisions under the Listing Regulations applicable in case of a scheme involving a listed company are as follows:
   
   Filing of scheme with stock exchanges: Any listed company undertaking or involved in a scheme of arrangement, must file the draft scheme with the relevant stock exchanges, prior to filing them with the NCLT (as per the process laid down under CA 2013), to seek an observation letter or no objection letter from the relevant stock exchanges."
   
   Compliance with securities law: The listed companies shall ensure that the scheme does not violate, limit or override any of the provisions of the applicable securities law or requirements of the stock exchanges.
   
   Change in shareholding pattern: The listed companies are required to file the pre and post arrangement shareholding pattern and the capital structure with the stock exchanges as per requirements of the listing authority or stock exchanges of the home country in which the securities are listed.
   
   Corporate actions pursuant to merger: The listed company needs to disclose to the stock exchanges all information having a bearing on the performance/operation of the listed entity and/or price sensitive information."

Acquisitions: Key Corporate and Securities Laws Considerations.
Company Law

1. Acquisition of Shares
   Acquisitions may be via acquisition of existing shares of the target, or by subscription to new shares issued by the target.
   
   1. Transferability of shares
      Broadly speaking, an Indian company can be set up as a private company or as a public company. A restriction on transferability of shares is inherent to a private company, such restrictions are contained in its articles of association (the byelaws of the company) and are usually in the form of a pre-emptive right in favor of the other shareholders. With the introduction of CA 2013, although shares of a public company are freely transferable, share transfer restrictions for even public companies's shares have been granted statutory sanction.
      
      The articles of association may prescribe certain procedures for transfer of shares that must be adhered to in order to effect a transfer of shares. It is therefore advisable for the acquirer of shares of a private company to ensure that the non-selling shareholders (if any) waive their rights of pre-emption and any other preferential rights that they may have under the articles of association. Any transfer of shares, whether of a private company or a public company, must comply with the procedure for transfer specified under its articles of association.
       
   2. Squeeze Out Provisions
      
      1. Section 236 of CA 2013
         Section 236 of CA 2013, provides that, if a person or group of persons acquire 90% or more of the shares of a company by virtue of an amalgamation, share exchange, conversion of securities or for any other reason, then such person(s) shall besides notifying the company of their intention to buy the remaining equity shares of the company, have a right to make an offer to buy out the minority shareholders at a price determined by a registered valuer, which shall be determined based on the fair value of shares of the company after taking into account valuation parameters including return on net worth, book value of shares, earning per share, price earning multiple vis-a-vis the industry average, and such other parameters as are customary for valuation of shares of such companies.
          
      2. Section 230 of CA 2013
         Section 230 read with Rule 3 of the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 made effective from February 7, 2020, permits the shareholders of unlisted companies holding at least 75% of the securities (including depository receipts) with voting rights to make an offer for acquisition of any part of the remaining shares in such company. pursuant to an application of compromise or arrangement to be filed before the NCLT. Once NCLT approves such offer for acquisition, the minority shareholders would mandatorily be required to sell their shares to the acquiring shareholder. This method of squeeze-out is only available to unlisted companies and listed companies will be subject to the regulations prescribed by SEBI in this regard.
          
      3. Scheme of capital reduction
         Section 66 of the CA 2013 permits a company to reduce its share capital and prescribes the procedure to be followed for the same. The scheme of capital reduction under section 66 of the CA 2013 must be approved by. (i) the shareholders of the company vide a special resolution; and (ii) by the NCLT by an order confirming the reduction. When the company applies to the NCLT for its approval, the creditors of the company would be entitled to object to the scheme of capital reduction. The NCLT will approve the reduction only if the debt owed to the objecting creditors is safeguarded/provided for.
         
         In addition, the NCLT is also required to give notice of application of reduction of capital to the Central Government and SEBI (in case of a listed company) who will have a period of 3 (three) months to file any objections. Companies will have to mandatorily publish the NCLT order sanctioning the scheme of capital reduction. The framework for reduction of capital under section 66 (and the erstwhile Section 100 under CA 1956) has been used by companies to provide exit to certain shareholders, as opposed to all shareholders on a proportionate basis. The courts have held that reduction of share capital need not necessarily be amongst all the shareholders of the company.
          
      4. New share issuance
         Section 42 and 62 of CA 2013 read with Rule 13 of the Companies (Share Capital and Debenture) Rules 2014 and Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014 prescribe the requirements for any new issuance of shares on a preferential basis (i.e. any issuance that is not a rights or bonus issue to existing shareholders) by an unlisted company.
         
         Some of the important requirements under these provisions are described below:
         
         • The company must engage a registered valuer to arrive at a fair market value of the shares proposed to be issued.
            
         • The issuance must be authorized by the articles of association of the company's and approved by a special resolution passed by shareholders in a general meeting, authorizing the board of directors of the company to issue the shares." A special resolution is one that is passed by at least 3/4th of the shareholders present and voting at a meeting of the shareholders. If shares are not issued within 12 months from date of passing of such special resolution, the resolution will lapse and a fresh resolution will be required for the issuance.
            
         • The explanatory statement to the notice for the general meeting should contain key disclosures pertaining to the object of the issue, pricing of shares including the relevant date for calculation of the price, shareholding pattern, change of control, if any, pre-issue and post-issue shareholding pattern of the company,whether the promoter/directors/key management persons propose to acquire shares as part of such issuance, etc.
            
         • Shares must be allotted within a period of 60 days of receipt of application money, failing which the money must be returned within a period of 15 days thereafter. Interest is payable @ 12%p.a. from the 60th day.
            
         • These requirements apply to equity shares, fully convertible debentures, partly convertible debentures or any other financial instrument convertible into equity.
            
      5. Issue of shares with differential voting rights
         
         • The CA 2013 also allows for issuance of equity shares with differential voting rights as to dividend, voting or otherwise, provided that the company complies with the rules prescribed in this regard, which require that:
           
           • The articles of association of the company authorizes issue of shares with differential voting rights;
           • The issue of shares is authorized by an ordinary resolution passed at a general meeting of the shareholders;
           • The voting power in respect of the shares with differential rights shall not exceed 74% of the total voting power including voting power in respect of equity shares with differential rights issued at any point in time;
           • The company shall not have defaulted in filing financial statements and annual returns for 3 financial years immediately preceding the financial year in which it has decided to issue shares with differential voting rights. Private companies may be exempt from these requirements if their memorandum and articles of association so provide.
              
      6. Limits on acquirer
         Section 186 of the CA 2013 provides for certain limits on inter-corporate loans and investments. An acquirer that is an Indian company might acquire by way of subscription, purchase or otherwise, the securities of any other body corporate up to (i) 60% of the acquirer's paid up share capital and free reserves and securities premium, or (ii) 100% of its free reserves and securities premium account, whichever is higher.
         
         However, the acquirer is permitted to acquire shares beyond such limits, if it is authorized by its shareholders vide a special resolution passed in a general meeting. These limits are not applicable in case of purchase of securities of a wholly owned subsidiary.
          
      7. Asset/ Business Purchase
         Besides share acquisition, the acquirer may also decide to acquire the business of the target which could typically entail acquisitions of all or specific assets and liabilities of the business for a predetermined consideration. Therefore, depending upon the commercial objective and considerations, an acquirer may opt for (i) an asset purchase, whereby one company purchases all of part of the assets of the other company; or (ii) a slump sale, whereby one company acquires the business undertaking' of the other company on a going concern basis i.e. acquiring all assets and liabilities of such business.

Under CA 2013, the sale, lease or other disposition of the whole or substantially the whole of any undertaking of a company (other than a private company24) requires the approval of the shareholders through a special resolution.' The term "undertaking" means an undertaking in which the investment of the company exceeds 20% of its net worth as per the audited balance sheet of the preceding financial year, or an undertaking which generated 20% of the total income of the company during the previous financial year. Further this requirement applies if 20% or more of the undertaking referred to above is sought to be sold, leased or disposed of.

An important consideration for these options is the statutory costs involved i.e. stamp duty, tax implications etc. We have delved into this in brief in our chapter on Taxes and Duties'

Others Securities Laws

1. Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations).
   If the acquisition of an Indian listed company involves the issue of new equity shares or securities convertible into equity shares ("Specified Securities") by the target (issuer) to the acquirer, the provisions of Chapter V ("Preferential Issue Regulations") contained in ICDR Regulations will apply (in addition to company law requirements mentioned above). We have highlighted below some of the important provisions of the Preferential Allotment Regulations.
   
   1. Pricing of the Issue
      The Preferential Allotment Regulations set a floor price for an issuance. If the equity shares of the issuer have been listed on a recognized stock exchange for a period of 26 weeks or more as on the relevant date, the floor price of the shares shall be higher of the average of the weekly high and low of the volume weighted average prices of the stock of the company either (a) over a 26 week period; or, (b) a 2 week period preceding the relevant date."
      
      If the equity shares of the issuer have been listed on a recognized stock exchange for a period of less than 26 weeks as on the relevant date, the floor price of the shares shall be higher of (a) the price at which the equity shares were issued via initial public offer or value of price per share arrived under the scheme pursuant to which the equity shares of the issuer were listed, or (b) the average of the weekly high and low of the volume weighted average prices of the stock of the company during the period the stock has been listed prior to the relevant date; or (c) the average of the weekly high and low of the volume weighted average prices of the related equity shares quoted on a recognized stock exchange during the two weeks preceding the relevant date.
       
   2. Lock-in
      Securities issued to the acquirer (who is not a promoter of the target) are locked-in for a period of 1 year from the date of trading approval. The date of trading approval is the latest date when approval for trading is granted by all stock exchanges on which the securities of the company are listed. Further, if the acquirer holds any equity shares of the target prior to such preferential allotment, then such prior holding will be locked-in for a period of 6 months from the date of the trading approval. If securities are allotted on a preferential basis to promoters/ promoter group," they are locked-in for a period of 3 years from the date of trading approval, subject to a limit of 20% of the total capital of the company,

The locked-in securities may be transferred amongst promoter/ promoter group or any person in control of the company, subject to the transferee being subject to the remaining period of the lock-in.