Column: Fast-tracking M&As

Written by Girish Vanvari | Alok Mundra | Updated: Oct 29 2013, 10:54am hrs
The new Companies Act offers greater clarity on mergers and acquisitions

At long last, it is almost time to bid adieu to the 57-year-old Companies Act, 1956, as India Inc readies itself for the Companies Act, 2013. While framing the new Act, the learnings from six decades proved very useful. Now, great emphasis has been laid on governance and transparency. A notable feature of the Act is that a significant portion of the Act lays down rules that allow a desired level of flexibility, which helps deal with the ever-changing corporate environment. However, for some time, both the Acts are going to be applicable, as the new Act has only been implemented in parts. Therefore, initially, there could be some overlapping and confusion that needs to be dealt with. Provisions under the old Act that relate to mergers and acquisitions, buyback of shares, restructuring of capital, etc, have evolved over a period of time, based on many landmark rulings. The new Act, to a great extent, has taken note of these rulings, bringing clarity on many issues.

Under the 2013 Act, National Company Law Tribunal (NCLT) approval shall be required for all schemes of amalgamation/arrangements. Over the years, many different procedures were adopted by various high courts to approve such schemes. However, with a common framework, it is expected that the procedure would be standardised across the country.

Going forward, all restructuring will need to comply with the prescribed accounting standards. These standards shall be applicable to all companies, listed as well as unlisted, instead of being applicable to just listed companies as it is now. This will enable for investors and shareholders a fair comparison of the financial statements of companies.

A new concept of fast-track merger has been introduced wherein NCLT approval is not required if merger is between a parent company and its wholly-owned subsidiary, two or more small companies, or such other class as may be prescribed. It has been introduced on the premise that in such mergers, public interest is generally not affected and, therefore, this should be allowed without regulatory approval, subject to certain checks and balances.

In the past, many restructurings were either delayed or stalled on account of frivolous litigation from minority shareholders or creditors with minuscule shareholding or interest in the company. In order to avoid such frivolous objections, a provision has been inserted whereby only those minority shareholders who together own more than 10% of the share capital or a creditor with outstanding debt of more than 5% can alone object to restructuring approved by majority.

At present, prior notices relating to restructuring were given to a limited set of regulators such as stock exchanges, Sebi, registrar of companies, regional director, official liquidator, competition commission, etc. In order to take on board the views of other regulators, the list has been expanded to include the tax department, RBI and other sectoral regulators. This will allow relevant regulators to present their objections in a timely manner, if any.

Generally, companies are not allowed to own their shares. However, in the past, many corporate entities, during the restructuring, have owned their own stock through Trusts and other bodies. This allows companies to have additional float available at their disposal. However, now companies will not be allowed to create treasury stocks.

Another notable change is the granting of legislative validity to the agreements entered between shareholders limiting free transferability of shares. In the past, shareholders have entered into such arrangements but in many cases ended up litigating validity in the courts. These provisions under the new company law, read with the recent Sebi notification, allow public companies to enter into contracts with pre-emptive rights or put/call options with certain conditions. This meets a long-standing demand of investors.

The new company law allows both inbound and outbound cross-border mergers between Indian and foreign companies (earlier only merger of a foreign company into an Indian company was permissible). However, once the new provisions are notified, cross-border mergers can be undertaken only with notified overseas jurisdictions with prior RBI approval. According to a recent release of the ministry of finance, unlisted Indian companies would be allowed to list and raise capital abroad without requirement of prior or subsequent listing in India. This will be undertaken on a pilot basis for two years. Going forward, one needs to see whether the ministry would broaden the scope and allow unlisted companies to list overseas through mergers.

The 2013 Act has clarified that the merger of a listed company into an unlisted company will not automatically require listing of unlisted transferee company. To implement this, Sebi regulations need to be aligned accordingly which currently require the unlisted transferee to get listed. Shareholders interest has been taken care of by giving them an exit opportunity as per the valuation made by registered valuer which shall not be lower than that determined under applicable Sebi regulations. These provisions shall provide an alternate route for de-listing of a listed company.

Minority squeeze-out provisions have been included in the new law. Till date, majority shareholders (owning greater than 90%) sought recourse with the selective capital reduction route to buy out minority and attain 100% ownership. However, these schemes faced resistance from minority shareholders leading to prolonged litigation for companies. Under the new law, a clear framework is provided wherein if the majority shareholder (owning >90%) makes an offer to buy out minority, then it shall be mandatory. Also, minority shareholders have been given the option to sell their stake to majority shareholders. These would meet the commercial objectives of majority owners, who with above 90% holding would ideally prefer to have complete control over the company.

However, considering that the final rules will be notified after taking into account comments received on draft rules, NCLT would be set up in the due course. Its function and the interpretation of new provisions will evolve and, therefore, at this juncture, corporate entities need to decide and evaluate whether they should speed up restructuring contemplated by them under the old provision or wait and carry out restructuring under the new Act.

Girish Vanvari is co-head, Tax, and Alok Mundra is director, KMPG. Views are personal