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
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.
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.
Mergers and Amalgamations:
- 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
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.
- 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)
- 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
- 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
- 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.
- 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.
- 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).
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
- 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.
Key Corporate and Securities Laws Considerations.
- 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.
- 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.
- 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:
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
- 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
- a holding company with its wholly owned subsidiary; or
- such other class of companies as may be
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.
- 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:
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.
- The foreign company should be incorporated in a permitted jurisdiction
which meets certain conditions.
- 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.
- The procedure prescribed under CA 2013 for undertaking mergers must be
Acquisitions: Key Corporate and Securities Laws Considerations.
- 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
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
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.
- 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."
- Acquisition of Shares
Acquisitions may be via acquisition of existing shares of the target, or by
subscription to new shares issued by the target.
- 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.
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
- Squeeze Out Provisions
- 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
- 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.
- 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.
- 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
- 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.
- 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.
- 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
- 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.
- 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.
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.