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Provisions relating to Cross Border M&A, Demergers & Class


Action Suits, Loans to Directors, Loans/Investments by Action Suits, Loans to Directors, Loans/Investments by
Companies
Dhinal Shah
CharteredAccountant
Tools of Re- structuring
TOOLS OF RESTRUCTURING
Merger /
Amalgamation
Demerger
Financial
Reconstruction
Acquisition of
shares
Deals with section 391- 394 Deals with section 395
Consolidationof
businesses/entities
Divestnoncore
business
Acquiringinterestin
newbusiness/entity
Restructuringwithinthe
Company
Deals with section 391- 394 Deals with section 395
NOTE under Section 396 of Companies Act 1956 Central Government may Amalgamate two NOTE under Section 396 of Companies Act, 1956 Central Government may Amalgamate two
Companies in public interest
Key Drivers for Re- structuring
Unlocking of Value and
its Sustainability
Restatement of Balance
Sheet
Business clarity to
Investors and Analysts
Positioning the
businesses to be more
competitive
Improving Governance
Processes
Making Businesswise
Fund raising possible
Business Risk Business Risk
Management
Investor Relations
Stock & Credit Re-
rating
Regulatory aspects under various statues
Takeover
Regulations
Competition
Accounting
Competition
Commission
of India
g
Standards
(IFRS)
Companies
Act, 2013
SEBI and
Stock
Exchanges
Income Tax
(DTC)
Indirect Tax
(GST)
Stamp Duty
FEMA
HOW HOW
P d t b f ll d
Procedure under Sec 391-394 of Companies Act, 1956
Considering proposal for Merger and Amalgamation
Procedure to be followed
Considering proposal for Merger and Amalgamation
Preparation of Scheme of Amalgamation , Valuation and Fairness Opinion (if Co.
Approval of the Scheme by Board of Directors of the Companies
p g , p (
is listed)
Filing of Scheme with the designated Stock Exchanges for SEBI approval, if Co. is
listed
Filing of Application in High Court
Convening of Shareholders and Creditors Meetings decision reported to Court
Procedure to be followed
Procedure under Sec 391-394 of Companies Act, 1956
Notice to Regional Director and Official Liquidator and submission of their NOC
ith Hi h C t with High Court
Fi l H i b Hi h C t Final Hearing by High Court
Obtaining High Court Order and filing with Registrar of Companies Obtaining High Court Order and filing with Registrar of Companies
Annexing the copy of High Court order with Articles of Association
Post Merger compliances
e g t e copy o g Cou t o de t t c es o ssoc at o
Regulatory Moves in case of restructuring
involves listed Company
SEBI
SEBI has also increase Transparency and more disclosure to protect the interest of
investors after 4th February and 21st May 2013 Circular
Valuation by independent chartered account mandatory other than those specifically exempted.
''Valuation Report from an Independent Chartered Accountant'' is not required in cases where
there is no change in the shareholding pattern of the listed company / resultant company there is no change in the shareholding pattern of the listed company / resultant company.
As per SEBI circular, vote by public shareholder through postal ballot and E-voting is required in such
a case when additional shares have been allotted to promoters / promoter group, related party of
promoter, associates of promoters.
Acquisition of shares (Section 395 of Companies Act, 1956)
Section 395 is the only provision in the Companies Act that deals with the
compulsory acquisition of shares of minority shareholders.
When 9/10th Value of shareholder accept the offer of Acquirer Company
A i ill i ti t Mi it Di ti Sh h ld Acquirer company will give notice to Minority Dissenting Shareholders
Th Di ti Sh h ld h th i ht ith ti t th t diti The Dissenting Shareholder have the right either negotiate the term condition or
they have right to file their objection to Company Law Board
Wide powers of discretion have been conferred on the Company Law Board to
allow or reject an offer to squeeze out a minority group under section 395
Aparadigmshift
1/30/2014
Introduction of NCLT
High
Court
BIFR
CLB
NCLT
Modifications for Merger and Amalgamation
under Companies Act, 2013
If Reduction of Capital is the part of Scheme then it has to be
Companies Act 2013
disclosed to NCLT through affidavit
Notice of any meeting relating to any Compromise and Arrangement shall also
be given to CG Income Tax Authorities RBI SEBI Stock Exchanges OL CCI
Representation has
to give within a
period of 30 Days
f th d t f
be given to CG, Income Tax Authorities, RBI, SEBI, Stock Exchanges, OL, CCI
for their representation
Notice of any meeting relating to any Compromise and Notice of the meeting will also
from the date of
receipt of letter
Notice of any meeting relating to any Compromise and Notice of the meeting will also
specify the impact of scheme on Creditors, KMP, Promoter, Non-promoters Members
Wider shareholder participation through voting by postal ballot possible
Only those shareholders can raise objection to the scheme who holds not less than 10% of the y j
shareholding
Modifications for Merger and Amalgamation
under Companies Act, 2013
Only those creditors can raise objection to the scheme who holds 5 %
of the total outstanding debt
Companies Act 2013
of the total outstanding debt
The tribunal may provide the order for Exit option to dissenting shareholders
based upon the valuation by Registered Valuer
In case of buyout of a company when the majority holding 75 negotiate secretly for a
higher price then such gain shall be shared with the minority shareholders on pro-rata basis
Creditors meeting not required if > = 90% in value agree and confirm by affidavit
Titled of Single window clearance has been taken off in case of Buy Back of shares (including
cooling period of one year)
Takeover through scheme of arrangement allowed in accordance with regulations to be framed by
SEBI
Certificate from Statutory Auditor that accounting treatment complies with prescribed accounting
standards (Currently applicable to listed Companies)
Comparison
Compromises, Arrangements & Amalgamations
Pointsofcomparison CompaniesAct,2013 CompaniesAct,1956
COMPROMISES&ARRANGEMENTS
TakeoverOffers Anycompromiseorarrangementmay
includetakeoveroffermadeinsuchmanner
asmaybeprescribed.
In case of listed compa nies takeover offer
Nospecificprovisionsonthisissue
astowhethercompromiseor
arrangementcaninclude'takeover
offers' Incaseoflistedcompanies,takeoveroffer
shallbeaspertheguidelinesissuedbythe
SEBI.
offers
Buybackofsecurities Compromiseorarrangementshallnotinclude
any buy back of securities [See section 68 of the
Noexpressstipulationaswhether
"compromise or arrangement" anybuybackofsecurities[Seesection68ofthe
2013Act]
compromiseorarrangement
includesbuybackofsecurities.
Detaileddisclosuresby
affidavittotheTribunalby
h li (
Allmaterialfactsrelatingtothecompany,
suchasthelatestfinancialpositionofthe
h l di ' h
Nosuchdetaileddisclosures
required.
theapplicant(companyor
anycreditorormember)
company,thelatestauditor'sreportonthe
accountsofthecompanyandthependency
ofanyinvestigationorproceedingsagainst
thecompany;
Compromises, Arrangements & Amalgamations
Pointsofcomparison CompaniesAct,2013 CompaniesAct,1956
Reductionofsharecapitalofthecompany,if
any,includedinthecompromiseorarrangement;
Anyschemeofcorporatedebtrestructuring
consentedtobynotlessthan75%ofthesecured
creditorsinvalue,including
(i) acreditor'sresponsibilitystatementinthe
prescribedform,
(ii) safeguardsfortheprotectionofother
securedandunsecuredcreditors,
(iii) reportbytheauditorthatthefund
requirementsofthecompanyafterthe
corporatedebtrestructuringasapprovedshall
conformtotheliquiditytestbaseduponthe
estimatesprovidedtothembytheBoard,
(iv) wherethecompanyproposestoadoptthe
corporatedebtrestructuringguidelinesspecified
bytheReserveBankofIndia,astatementtothat
effect,and
(v) avaluationreportinrespectoftheshares
andthepropertyandallassets,tangibleand
intangible,movableandimmovable,ofthe
companybyaregisteredvaluer.
Compromises, Arrangements & Amalgamations
Pointsofcomparison CompaniesAct,2013 CompaniesAct,1956
Personsentitledtoobject
totheschemeof
Personsholdingnotlessthan10%oftheshare
holdingorpersonshavingoutstandingdebt
Noexpressprovisionsinthis
regard.
compromise or
arrangement
amountingtonotlessthan5%ofthetotal
outstandingdebtasperthelatestauditedfinancial
statement.
Nosanctionfor Nocompromiseorarrangementshallbesanctioned Nosuchrequirement
compromiseor
arrangementifaccounting
treatmentnotAS
Compliant
bytheTribunalun less:
Theaccountingtreatment,ifany,proposedby
thecompanyproposedintheschemeofcompromise
orarrangementisincon formity withtheaccount
ing standardsspecified
undersection133ofthe2013Act;and
Acertificatetothateffectfromthecompany's
auditorhasbeenfiledwiththeTribunal
PowerofTribunalto
enforcesanctioned
Merenonworkabilityofsanctionedschemeis
notenoughtowindupthecompany.
schemecompromiseor
arrangement Itmustalsobeestablishedthatthecompanyis
unabletopayitsdebtsasperthescheme.
Compromises, Arrangements & Amalgamations
Pointsofcomparison CompaniesAct,2013 CompaniesAct,1956
AMALGAMATIONS&DEMERGERS
Division (de merger) Specific mention of 'division' (i e demergers) in No mention of 'division'/ Division (demerger) Specificmentionof division (i.e.demergers)in
section232dealingwith
mergers/amalgamations.
Nomentionof division /
'demergers'
PowerofTribunaltoallow
setoffoffeespaidby
transfer or company on its
TheTribunal'sorder(i.e.ordersanctioningthe
schemeorsubsequentorder)may,inacase
where the transferor company is dissolved
HighCourtnotexpressly
empoweredtoprovideforsuch
set off transferorcompanyonits
authorizedcapitalagainst
feespayablebytransferee
wherethetransferorcompanyisdissolved,
providethatthefee,ifany,paidbythe
transferorcompanyonitsauthorizedcapital
shallbesetoffagainstanyfeespayablebythe
transferee company on its authorized capital
setoff.
transfereecompanyonitsauthorizedcapital
subsequenttotheamalgamation.
Wherein
amalgamation/mergerthe
transferor company is a
TheTribunal'sorder(i.e.
ordersanctioningtheschemeorsubsequent
order) may contain certain provisions where the
Noprovisionforsuchsituation.
transferorcompanyisa
listedcompanyandthe
transfereecompanyisan
unlistedcompany.
order)maycontaincertainprovisionswherethe
transferorcompanyisalistedcompanyandthe
transfereecompanyisanunlistedcompany.
Compromises, Arrangements & Amalgamations
Pointsofcomparison CompaniesAct,2013 CompaniesAct,1956
Crossbordermergers Indiancompaniesmaybemergedwithforeign
companies or viceversa (cross
Section394ofthe1956Act
defined 'transferee company' as : companiesorvice versa(cross
bordermergers)
defined transfereecompany as:
"transfereecompany"doesnot
includeanycompanyotherthan
acompanywithinthemeaningof
this Act; but "transferor thisAct;but transferor
company"includesanybody
corporate,whetheracompany
withinthemeaningofthisActor
not. In other words, under the not.Inotherwords,underthe
1956Act,ascheme
amalgamationwhere
transfereecompanyisr.a
'company'(Indian company) company (Indiancompany)
cannotbesanctioned.
Compromises, Arrangements & Amalgamations
Pointsofcomparison CompaniesAct,2013 CompaniesAct,1956
ReportfromtheROC/OL
that the affairs of the
Therequirementforsuchreport(as
contained in the 1956 Act) has been
Nocompromiseor.arrangement
proposed for the purposes of, or in thattheaffairsofthe
companyhavenotbeen
conductedinamanner
prejudicialtotheinterests
of its members or to
containedinthe1956Act)hasbeen
omittedbythe2013Act.
proposedforthepurposesof,orin
connectionwith,aschemeforthe
amalgamationofacompany,whichis
beingwoundup,withanyothercompany
or companies. shall be sanctioned by Court ofitsmembersorto
publicinterest
orcompanies.shallbesanctionedbyCourt
unlesstheCourthasreceivedareport
fromRegistrarthattheaffairsofthe
companyhavenotbeenconductedina
manner prejudicial to the interests of its mannerprejudicialtotheinterestsofits
membersortopublicinterest.
Noorderforthedissolution(without
windingup)ofanytransferorcompany
shall be made by the Court unless the shallbemadebytheCourtunlessthe
OfficialLiquidatorhas,onscrutinyof
booksandpapersofcompany,madea
reporttotheCourtthattheaffairsofthe
company have not been conducted in a companyhavenotbeenconductedina
mannerprejudicialtotheinterestsofits
memberspublicinterest.
Compromises, Arrangements & Amalgamations
Pointsofcomparison CompaniesAct,2013 CompaniesAct,1956
Simplifiedprocedurefor
merger or amalgamation
Section233ofthe2013Actprovidesforsimple
procedure for merger or amalgamation
Nosuchprovisionsinthe1956
Act. mergeroramalgamation
ofcertaincompanies
proce dureformergeroramal gamation
between:
i. twoormoresmallcompanies;
ii. a holding company and its wholly owned
Act.
ii. aholdingcompanyanditswhollyowned
subsidiary
(WOS)company;
i. suchotherclassorclassesofcompaniesas
may be prescribed maybeprescribed
Compromises, Arrangements & Amalgamations
Pointsofcomparison CompaniesAct,2013 CompaniesAct,1956
Powertoacquireshares
ofshareholders
Section235ofthe2013Actomitsthis
requirementof75%innumber.
Wheresharesinthetransferor
companyofthesameclassasthe
dissentingfromschemeor
contractapprovedby
majority.
Section235ofthe2013Actprovides
fortimebounddisbursalofpurchase
considerationreceivedbytransferor
companytoitsshareholders(within60
shareswhosetransferisinvolvedare
alreadyheldby,orbyanomineeof
thetransfereecompanyorits
subsidiarycompaniestoavalue
daysfromdateofreceiptbytransferor
company).Thiswasnotthecaseinthe
1956Act.
greaterthan10%oftheaggregateof
thevaluesofallthesharesinthe
companyofsuchclass,theholders
whoapprovetheschemeorcontract,
besidesholdingnotlessthan90%in
valueoftheshares(otherthanthose
alreadyheldasaforesaid)whose
transferisinvolved,shouldnotbeless
than75%innumberoftheholdersof
thoseshares
Purchaseofminority
shareholding
Newprovisions "squeezeoutprovisions"
(section236ofthe2013Act)introducedby
Nosqueezeoutprovisionsinthe1956
Act. g ( ) y
the2013Act.
Rehabilitation of Sick Companies
All the Companies, whether Industrial Company or not, are covered
now now
Criteria for erosion of 50% Net Worth erosion knocked off
Power has been entrusted with Secured Creditors, representing 50%
or More of the Debt of the Company.
Net Worth (old law )Vs Repayment of debt(New law ), Provisions of
new Act are on lines with Chapter XI of US Bankruptcy Law
Introduction of Rehabilitation and Insolvency Fund
IssueandImpactAnalysis
Issues
Due to Involving of so many authorities the speed of Compromise Arrangement
may effect,
In case of fast track merger approval required form Members holding 90%
Shares and Creditors holding 90% in value this may be difficult Shares and Creditors holding 90% in value, this may be difficult,
Other statutory regulations need alignment;
Income Tax
RBI
SEBI
FEMA
Accounting Standards
Delisting regulations Delisting regulations
Impact
Internal Restructuring will increase due to separate provision for Small
Companies (Only Private Companies) and Holding and Wholly Owned Companies (Only Private Companies) and Holding and Wholly Owned
Subsidiary Company under Fast Track Merger,
Only relevant issue on Compromise and arrangement will be raised due to
prescribed limit for objecting the Scheme,
Dissenting shareholder will easily exit the Compromise and Arrangement,
Th ill b C B d T ti i f f M d There will be more Cross Border Transaction in form of Merger and
Amalgamation
Role of other authority like Income Tax, RBI etc becomes important, y , p ,
Under Class Action Suit
Members or depositors may seek damages or suitable action from or against
the auditor in connection with any of the following :
Anyimproperormisleadingstatementinauditreport
Anyfraudulentactorconduct
Anyunlawfulorwrongfulactorconduct
Nodistinctionhasbeenmadebetweenwillfulorgrosslynegligentactsand
errorscausedunintentionally
Tribunals order would be binding on the company, all its members,
depositors, auditor or any other person associated with the company
Where the auditor is a firm, liability shall be that of
theauditfirm,aswellas ,
everyerringpartner
Registered Valuers
Overviewandkeychanges
Conceptofvaluationbyregisteredvaluerintroduced
Registered valuer to be a person with such qualifications and experience and registered as a Registeredvaluertobeapersonwithsuchqualificationsandexperienceandregisteredasa
valuer,inamannerasmaybeprescribed
Registeredvaluertovalueassetsornetworthorliabilitiesrequiredtobevaluedunderthe
2013Act
Theregisteredvaluer:
Makeanimpartial,trueandfairvaluation
Exerciseduediligence
Make valuation in accordance with the prescribed rules Makevaluationinaccordancewiththeprescribedrules
Notundertakeanyvaluationofanyasset(s)inwhichheisinterested
Eligiblepersontobeappointedasregisteredvaluer isprescribedunderruleswhichincludes
amongotherqualifiedpersonsCA,CS,CWA.
Followingapproachesareprescribedunderrules
Assetapproach
incomeapproach;
Marketapproach.
Registered Valuers
Overviewandkeychanges
Therulesspecifythefollowingmethodsforthepurposeofvaluation:
Netassetvaluemethod
MarketPricemethod:
Yieldmethod/ProfitEarningCapacityValue
DiscountedCashFlowMethod
Comparable Companies Multiples Methodology ComparableCompaniesMultiplesMethodology
ComparableTransactionMultiplesMethod
PriceofRecentInvestmentmethod
Sumofthepartsvaluation
Keyimpact
F l ti t b d f d l i i l i t d l
Liquidationvalue
WeightedAverageMethod
Forvaluationstobeusedfordualpurposes,companiesmayinvolveregisteredvaluers,
otherwise,thesameasset/liabilitymaygetvalueddifferentlyfordifferentpurposes
WhethertherequirementwillapplytoactuarialvaluationrequiredunderAS15
Companies with inhouse capabilities to perform certain fair valuation e.g. fair valuation of real Companieswithin housecapabilitiestoperformcertainfairvaluatione.g.fairvaluationofreal
estate,maystillrequireinvolvementofregisteredvaluers
Provisions related to Inter corporate Deposits,
Loans & Investments
Loanstodirectorsandsubsidiaries
Overviewandkeychanges
2013Actcontainsrestrictiononadvancingofloan/guarantee/providingsecuritytoanydirectororany
person in whom director is interested. personinwhomdirectorisinterested.
Personinwhomdirectorisinterestedincludes:
anybodycorporate,theBoardofdirectors,managingdirectorormanager,whereofisaccustomedto
actinaccordancewiththedirectionsorinstructionsoftheBoard,orofanydirectorordirectors,of
thelendingcompany.
Unlike1956Act,nopossibilityforseekingCentralGovernmentapprovalformakingprohibited
loans/guarantees
Unlikethe1956Act,the2013Actdoesnotcontainspecificexemptionwithregardto
loan/guarantee/securitygivenbyprivatecompanyorbyholdingcompanytoitssubsidiary.
Restriction on loan does not apply to : Restrictiononloandoesnotapplyto:
Makingofloantomanaging/wholetimedirectoraspartofserviceconditionextendedbycompanyto
allitsemployeesorpursuanttoanyschemeapprovedthroughspecialresolution
Acompany,whichinordinarycourseofitsbusinessprovidesloans/guarantees/securitiesandinterest
chargedisnotlessthanthebankratedeclaredbyRBI.
The1956Actdoesnotcontainthisexemption.
Keyimpact
Whether the holding company will be able to give loan /guarantee/security on behalf of its subsidiary? Whethertheholdingcompanywillbeabletogiveloan/guarantee/securityonbehalfofitssubsidiary?
Provisions related to Inter corporate Deposits,
Loans & Investments
Loanstodirectorsandsubsidiaries
Overviewandkeychanges
Companycannotmakeinvestmentthroughmorethan2layersofinvestmentcompanies. However
requirementnottoeffect:
AcquisitionofcompanyincorporatedoutsideIndiaifsuchcompanyhasinvestmentsubsidiaries
beyondtwolayersasperlawofthatcountry
Subsidiarycompanyhavinginvestmentsubsidiaryformeetinglawrequirement.
I t t C h i i l b i i th i iti f h InvestmentCompanymeansacompanywhoseprincipalbusinessistheacquisitionofshares,
debenturesorothersecurities.
Prohibitscompanyfromgivingloans/guarantees/securitytoothercorporateoracquiringsecuritiesofother
corporateexceedinghigherof
60%ofpaidupcapital,freereservesandsecuritiespremiumor p p p , p
100%offreereservesandsecuritiespremium
2013Actextendstherestrictiontoprovisionofloanto/guarantee/securityonbehalfofanypersonor
entity
2013Actallowstoprovideloan/guaranteeexceedingthelimitbypriorapprovalthroughspecialresolution.
The1956Actallowstoprovideguaranteeexceedingthelimitwithoutpriorapprovalifthesameis
confirmedwithin12monthsatgeneralmeeting.Thisaspectisnotthereinthe2013Act.
Fulldisclosureinthefinancialstatementoftheloansgiven,investmentsmadeorguaranteegiven/security
providedalongwithpurpose.
Provisions related to Inter corporate Deposits,
Loans & Investments
Loanstodirectorsandsubsidiaries
Overview and key changes
The rate of interest cannot be lower than prevailing
Key impact
Prohibition on more than two layers of investment
p g
yield on one year, three year, five year or ten year
Government security closest to tenor of loan. Under
1956 Act, the rate cannot be lower than prevailing bank
rate i.e., the standard rate made public under section
49 of the Reserve Bank of India Act, 1934.
y
may require many groups to reconsider their
investment structures
Removal of exemption for holding company for loans
made/guarantee/security given by holding company
to its wholly owned subsidiary will create hardship
Unlike 1956 Act, no exemptions provided for following
under 2013 Act
Private Company, unless subsidiary of public
company
Loans made by holding company to its wholly
y y p
for many subsidiary
Loans made/guarantee/security on behalf of any
person or entity will also be included in maximum
limit
The disclosure of transactions in the financial
Loans made by holding company to its wholly
owned subsidiary
Guarantee given or security provided by holding
company to its wholly owned subsidiary
Acquisition by holding by way of subscription,
The disclosure of transactions in the financial
statements will also be subject to audit
No specific transitional provision have been
prescribed
Change regarding interest may apply only to new
loans or upon change in terms
q y g y y p
purchases the securities of wholly owned
subsidiary
loans or upon change in terms.
Prohibition on having more than two layer of
investment may apply to existing investments also
Whether interest rate prescribed meets the test of
the arms length principle under the IT Act.