Current global response and future challenges with respect to provisions of mergers and amalgamations in Companies Bill, 2011 – Siddharth Acharya

The free economy demands a lot of ease and flexibility in implementation of regulations and legislations. The market regulators like SEBI and RBI too are expected to normalize the norms and when it comes about investment boosting and encouraging foreign investments.  The legal framework has to be a bit resilient and respect the sentiments of investors. The regulations need to be pedantic in approach and considering the requirements of flow of large foreign investments it has to be meticulously liberal and respectful in its outlook.  The Companies Act, 1956 is revamped in form of bill and a lot of provisions have been comprehensively discussed and drafted by the ministry of Corporate Affairs.  The bill has created scintillating effect and has been reviewed as an endeavor to please global investors who look India as a potential market.

So far the Companies Act has been rigid in its outlook and as per the act, cross-border mergers are permitted only if the transferee is an Indian company, and not vice-versa as it was decided in landmark judgment of Andhra High Court in Moschip Semiconductor case. But the bill has opened the channels for cases in which India is a transferor. It has allowed cross border mergers with any foreign company unlike proposed in Bill of 2009 where only foreign companies having business in India had the option to have the Indian Company merged into it. This has given a strong signal outside and has really whetted the appetite of investors who are willing to put their stake and money in Indian market. This will lower down the redemption and boost the investment in the Country. It will give lots of opportunities to the Indian Industry to enter into various deals of arrangements with the Foreign Companies and Body Corporate. This can be exploited in form of an opportunity to increase market share, reduce tax liabilities, and acquire new competencies. But there are some inhibiting factors to it as well like the Bill indicates that the provisions will apply to any  and all cross-border transactions and not just to outbound  cross-border mergers and, as a result, these qualifications can  be viewed unfavorably as they hold the  potential of restricting even the currently possible action. The viewpoint of department of taxation in such matters is inevitable. The ambiguity regarding this issue that shareholders of a public company cannot contractually agree on restriction on transfer of shares held by them has been put to rest. Interestingly (and unfortunately) for private companies, certain provisions from which they are exempted will apply to them.

One such provision relates to preferential allotment of shares. Now even in case of a private company, approval of shareholders will be required in case the shares are issued on a preferential allotment basis.

Further, the issue price of shares will have to be determined by a registered valuer. One provision in the Companies Bill can impede the way corporate houses structure their investment through the chain of companies. In order to avoid diversion of funds through many levels of investment companies, the Bill proposes to restrict the creation of investment companies only up to two levels. This could limit how they would like to create their investment structure and channel their funds.

A merger of an Indian company with a foreign company will have to be approved by the RBI and will be possible only with foreign companies incorporated in territories specified by the central government. This will surely facilitate cross border merger and could possibly be used as a viable structuring option to achieve certain desired objectives
In this case, the National Company Law Tribunal (NCLT) will have powers to order exit of the dissenting shareholders of the listed company if upon merger they do not wish to become the shareholders of the unlisted company. Such an exit will be at a payment of value for the shares held by dissenting shareholder. The role of the NCLT has been constrained in short term mergers which is also one of the striking feature of the bill and the more power has been granted to Central Government to approve unlike the act.

The bill also aims to cut down on time and tedious process of mergers which is liked by the foreign companies venturing with Indian Companies.  The merger activities have been made time-bound, with a specified time limit. In order to avoid stakeholders with minimal stakes from objecting to a genuine scheme of amalgamation on flimsy reasons, it is now provided that any objection to the scheme of amalgamation can only be by persons holding not less than 10% of the shareholding or having an outstanding debt of not less than 5% of the total outstanding debt.

To control the squeezing and oppression of minority shareholders  it is now provided that an ‘acquirer’ or a ‘person acting in concert with him’ holding 90% or more of the capital has to inform the company of their intention to buy out the minority shareholders holding 10% or less.

Thus the provisions of the bill are less restrictive and do not have much limitations. It attempts to wash the stain of Indian market being taboo to FII. But whatever may be the outcome as of now it seems to be optimistic.

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