Академический Документы
Профессиональный Документы
Культура Документы
Project Report
PROJECT TOPIC:
Prepared By:
Mr. Malcolm K. Shroff
Company Secretaryship ApprenticeshipTrainee
Student Registration Number : WG0123230 / 08 / 1998.
CP.: 487
PREFACE
As per the Company Secretaryship Regulations, 1982, an Apprenticeship Trainee is
required to prepare a Project report in the Final Quarter of his/her training period. The said project
report should be prepared in consultation with the Company Secretary under whom he/she has trained.
Keeping in view this requirement, I have prepared this project report in consultation
with my Principal, Mrs. Jayshree S. Joshi under whom I have trained. The topic chosen by me has had
a significant impact in the current corporate scenario, especially after the changing policy of the
Government of India which stresses upon Globalisation & Liberalisation. Further, with the relaxation
in the Foreign Exchange Policy of the Government of India, the repeal of the Foreign Exchange
Regulation Act, 1973 and the introduction of the Foreign Exchange Management Act, 1999, there has
been a sudden inflow of Foreign Collaborators and other foreign companies which not only set up
shop in India, but also later on amalgamate with the Indian collaborated company or take over the
same.
The Project Report has been prepared by me after taking into consideration all the
possible areas which may have an impact on amalgamations and mergers, such as the Companies Act,
1956, Income Tax Act, 1961, Central Excise Rules, 1944, SEBI (Substantial Acquisition of Shares &
Takeovers) Regulations, 1997, the Accounting Standards issued by the Institute of Chartered
Accountants of India, the Sick Industrial Companies (Special Provisions) Act, 1985, the Foreign
Exchange Management Act, 1999 and the Regulations framed by the Reserve Bank of India
thereunder and the Industrial Policy framed by the Government of India.
The said Project has been prepared after referring various Books on the topic and the
Statutory Legislations enacted by the Parliament.
-- Malcolm K. Shroff
C.S. Apprenticeship Trainee
(i)
ACKNOWLEDGEMENT
This project is a culmination of the constant endeavour to learn while working and
training , while pursuing a professional course such as the Company Secretaryship Course. At the
outset I would like to express my sincere acknowledgements to my parents who have always
encouraged me to pursue the Company Secretaryship Course as well as all my other family members.
Further, I would also like to thank my Principal Mrs. Jayshree S. Joshi , who has always trained me
with great enthusiasm and sincerity.
-- Malcolm K. Shroff.
C.S. Apprenticeship Trainee
(ii)
METHODOLOGY
The Training Project Report has been prepared by following a learn while you work
approach to learning. The project has been prepared primarily by referring to various reference books,
professional journals, various bare acts of the statutory legislations, reference to various case laws,
guidelines issued by the professional bodies such as The Institute of Chartered Accountants of India,
regulations framed by the Securities and Exchange Board of India and the Reserve Bank of India.
The basic approach in the preparation of this project has been the constant reference to
various professional journals and the ever changing corporate and fiscal legislations as well as
discussion with my fellow professional collegues and fellow students who are pursuing the Company
Secretaryship Course.
The best of efforts have been made to make this project as lucid and simple as possible.
Reference to the relevant sections of corporate and fiscal legislations and case laws has been made at
appropriate places to explain the relevant topics thoroughly.
(iii)
INTRODUCTION
The Indian Economy is fast changing to adapt itself to the Global Economy and to
bring in foreign capital by relaxing the exchange control norms. This has witnessed new companies
emerging in the corporate scenario either from existing companies or by the floatation of new
companies. However, the amalgamation of companies as well as the merging of various corporate
bodies has been on the rise recently. However, the process of amalgamation is tedious and elaborate
due to the various statutory compliances that have to be adhered to in the process, such as obtaining
the approval of the shareholders of the amalgamating as well as the amalgamated company. Further,
acquisition of shareholding and takeover of companies has been made possible, but under the
supervision of the Securities and Exchange Board of India.
At the onset it is necessary to understand the meaning of the term amalgamation. It
is interesting to note that the Companies Act, 1956, has not defined the said term. However as per
common business parlance, the term amalgamation is understood as the process by which the
undertakings of two or more companies are brought under the ownership of one company, which may
be one of the amalgamating companies or may be a new company altogether, formed for the purpose
of amalgamation. Thus, amalgamation is the blending of substantially two or more undertakings into
one undertaking the shareholders of each blending company becoming substantially the shareholders
of the company which holds the blended undertakings. Amalgamation may be in the nature of
purchase or by the pooling of interest method. These methods have been discussed in detail later on at
the appropriate places.
The term merger is just an extension of the process of amalgamation. In a merger
two or more companies merge their entities and the acquiring company takes over all the assets and
liabilities of the transferor company. Further, the consideration for amalgamation is received by the
equity shareholders of the transferor company in the form of equity shares in the transferee company
and in no other form ( as per Accounting Standard 14, issued by the Institute of Chartered Accountants
of India ). In a merger, the transferor company loses its identity and it merges itself with the transferee
company. Thus, the transferee company takes over the transferor company and continues to remain in
existence, which is not necessarily the position in the case of amalgamation.
Amalgamations have been in vogue in the United States of America since a long time
, but it is only recently that the Indian corporate sector has realised the importance of amalgamations
and mergers in the process of corporate restructuring, diversification and expansion. The main
advantage of amalgamating two or more companies is that by acquiring the business of the transferor
company, the transferee company obtains possession of not only the assets of the former, but also
obtains the existing know how or may be able to capture a dominant market share which was
previously held by the transferor company. Amalgamation may also be resorted to by a loss- making
company by following the provisions of Section 72A of the Income Tax Act, 1961, whereunder the
accumulated losses and unabsorbed depreciation of the amalgamating company can be set off against
the profits of the amalgamated company within a period of 8 assesssment years commencing from the
(iv)
(v)
relevant assessment year in which the amalgamation took place. Further there are various provisions in
the Income Tax Act, 1961, whereunder the relevant losses, expenses, etc., of the amalgamating
company are allowed as deductions in computing the business income of the amalgamated company,
such as capital expenditure on family planning by the amalgamating company under Section 36(1)(ix)
of the Income Tax Act, 1961, or amortisation of preliminary expenses during the relevant period after
the incorporation of the amalgamating company under Section 35D of the said Act.
Amalgamations and mergers also help to secure synergistic effects by merging of two
entities which may be able to function better together, than as individual entities. Synergy implies the
effect when a merged entity (comprising of two corporate entities) is able to function better as such,
rather than functioning individually.
The importance of amalgamations and mergers in the fast-changing corporate scenario
can in no way be undervalued as it is of far reaching consequences. Mergers and Amalgamations
(more popularly known as M & As, for brevity sake in international legal and corporate parlance) are
now quite prevailant in the Indian Corporate Scenario. They help in restructuring the corporate bodies
as well as help in tapping previously untapped resources and markets. They are a tool for economic
and corporate growth as well as expansion.
It may thus be summed up that corporate mergers and amalgamations have come of
age and are an essential ingredient for successful corporate expansion and diversification as well. They
not only help in attaining synergistic effects, but also help in tapping the untapped market potential.
They are thus a key tool for corporate restructuring and growth.
(2)
The essential distinguishing accounting feature in case of a merger is that the resulting figures of
assets, liabilities, capital and reserves represent the sum total of the relevant figures of both the
amalgamating companies. Further, the business of the amalgamating company is intended to be carried
on by the transferee company. Further in the case of a merger, shareholders holding not less than 90 %
of the face value of the equity shares of the transferor company (other than the equity shares already
held therein immediately before the amalgamation, by the transferee company or its subsidiaries or
their nominees) should become equity shareholders of the transferee company by virtue of the
amalgamation.
A merger is basically an addition of the assets and liabilities of the amalgamating
companies, whereby all assets and liabilities of the transferor company before the amalgamation
become the assets and liabilities of the transferee company on amalgamation. Further, the
consideration receivable by the equity shareholders of the transferor company is received only in the
form of equity shares in the transferee company, except for the fractional shares which may be
discharged in cash. In the case of a merger, adjustment in the book value of assets and liabilities of the
transferor company, taken over by the transferee company, is not allowed, except to ensure the
uniformity in accounting policies.
Thus, amalgamation in the nature of merger is suited only when the business of the
transferor company is intended to be carried on by the transferee company and the equity shareholders
of the former receive only equity shares in the latter as consideration for the merger. Thus,
amalgamation may be said to be the genus, while merger is a specie of the former.
Amalgamations Its Types.
Amalgamations are basically of two types, viz, amalgamation in the nature of merger
and amalgamation in the nature of purchase (as per Accounting Standard 14 issued by The Institute
of Chartered Accountants of India). These types are briefly explained herein below:
1. Amalgamation in the Nature of Merger :In the case of amalgamation in the nature of merger, as already discussed above, it can
be so called only when all the following conditions are fulfilled:1. All the assets and liabilities of the transferor company become the assets and liabilities of the
transferee company, after amalgamation.
2. Shareholders holding not less than 90 % of the face value of equity shares of the transferor
company become the equity shareholders of the transferee company by virtue of the
amalgamation.
3. The business of the transferor company is intended to be continued or carried on, after the
amalgamation, by the transferee company.
(3)
4.
The consideration for the amalgamation receivable by the equity shareholders of the transferor
company is discharged by the transferee company wholly by the issue of equity shares in the
transferee company, except for cash that any be paid in respect of fractional shares.
5. No adjustments, in the book value of the assets and liabilities of the transferor company, are
intended to be made when they are incorporated in the financial statements of the transferee
company, except to ensure uniformity in accounting policies.
2. Amalgamation in the Nature of Purchase :In the case of amalgamation in the nature of purchase, if the said amalgamation does
not satisfy any of the above criteria, as is mentioned in the case of amalgamation in the nature of
merger, it will be an amalgamation in the nature of purchase. In this case, if all individual assets
and liabilities are not taken over at the existing or agreed value , or if at least 90 % of the equity
shareholders do not become the equity shareholders of the transferee company, or if the other
criteria are not fulfilled, it would be an amalgamation in the nature of purchase.
Mergers & Takeovers Its Types.
Mergers or takeovers are basically horizontal, vertical and conglomerate mergers.
These types or classifications of mergers are explained in brief in the following paragraphs :
1. Horizontal Mergers :A horizontal merger or takeover is one which takes place between two companies
which are essentially operating in the same kind of market . Their products may or may not be
identical. For example, the merger of Tata Oil Mills Company Ltd., (TOMCO) with Hindustan Lever
Ltd., is a horizontal merger. Both these companies have similar products and their market is also of the
same kind. This method is resorted to by both companies for achieving optimum size, carving out
greater size of market, curbing the competition, gaining economies of scale, increasing the
competitiveness and reducing the competition and to utilise the previously untapped capacities.
2. Vertical Mergers :A vertical merger or takeover refers to a combination of one or more companies engaged
in production of a particular product at different levels of its product process. Under this type of
merger, two corporate bodies which are vertically linked to each other either forward or backward,
come together. Vertical merger is generally resorted to for achieving operating efficiencies through
reliability of imports, better management control, gaining competing power through controlling input
prices and to create an entry barrier in terms of market and technology. Vertical mergers may further
be classified as forward and backward mergers.
(4)
a) Backward Mergers :It refers to merging of a firm with another firm engaged in earlier stages of production.
The merger of Reliance Petrochemicals Limited with Reliance Industries Limited is a good
example of a vertical merger with backward linkage, so far as reliance Industries is concerned.
b) Forward Mergers :This kind of merger refers to the merging of a firm with another engaged in the
subsequent stages of production. For example, if a cement manufacturing company acquires a
company engaged in civil construction activities, it will be a case of vertical takeover or merger
with forward linkage.
3. Conglomerate Mergers :Conglomerate mergers or takeovers are also called concentric mergers/takeovers. Under
this type, the concerned companies are in totally unrelated lines of business or markets. For example,
Mohta Steel Industries merged with Vardhaman Mills Limited. Conglomerate mergers are expected to
bring about stability of income and profits since the two units belong to different industries. Adverse
fluctuations in sales and profit arising due to trade cycles may not hit uniformly all the industries at the
same time.
Reasons for Mergers or Takeovers .
There are several reasons for companies to go in for mergers or takeovers. Some of the
major reasons for such merging or takeovers include the following :1. Economies of Scale :When two or more companies combine, the larger volume of operations of the merged
entity results in various economies of scale. These economies arise because of the intensive utilisation
of the combined production capacities, distribution channels, research and development facilities, and
a range of other economies. These economies of scale are more pre-dominant in horizontal mergers as
the same kind of resources are available in the merged entity which can be utilised intensively. In
vertical mergers the principal economies are increased efficiency and control over the production
process, better co-ordination of activities and lower inventory levels.
2. Synergy :When two companies merge together, the combined effect of their courses of action is
greater than the sum of the individual companies. The concept of synergy can be explained in
symbolic terms as under:
(5)
V(AB) > V(A) + V(B)
Where,
V(AB) = Value of the merged entity.
V(A) = Independent Value of Company / Firm A.
V(B) = Independent Value of Company / Firm B.
The greater value results in higher earnings per share (EPS) for the merged entity.
3. Growth & Diversification :Growth and diversification are important corporate objectives. Growth implies
expansion of a firms operation in terms of sales, profit and assets. Diversification on the other hand,
means expansion of operation through the merger of the firm in unrelated lines of business. The
company may want to diversify to reduce risks involved with a seasonal business. Acquisition of a
firm engaged in another industry may help the company to reduce the risks involved with floatation
and initial teething problems which are generally faced by new companies. A merger may be a preemptive move to prevent a competitor from establishing a similar position in that industry. For
example, the merger of Tata Oil Mills Company Limited and Hindustan Lever Limited. It may entail
less risk and even less loss.
4. Tax Savings :A profit-making company can acquire a loss-making company and can set-off the
accumulated losses and unabsorbed depreciation of the loss-making company under Section 72A of
the Income Tax Act, 1961. Subject to the acquiring company fulfilling certain conditions the healthy
companys profits can be set-off against the losses of the loss-making company. However, the
acquiring company is required to carry on the business of the loss- making company for at least 5
years from the date on which it amalgamates with the latter. The healthy company besides saving on
tax acquires the manufacturing capacity of the sick company also.
5. Acquisition of Patents, Brand Names, etc. :Mergers and takeovers are a relatively easy way to acquire valuable brand names,
patents, technical knowhow, etc. For instance, one of the attractions for Hindustan Lever Limited in
acquiring Tata Oil Mills Company Limited, is the latters brand name HAMAM which had around
15 percent market share and is a highly popualr soap brand, in the family soap segment.
6. Higher Debt Capacity :A company can enhance its borrowing capacity significantly through a merger.
A merged firm will enjoy a higher debt capacity because the earnings of the merged entity are more
stable than the independent earnings of the merging entities. A higher debt capacity means advantage
and thus higher value of the firm.
(6)
7. Avoiding Unhealthy Competition :Mergers and takeovers may enable companies to avoid unhealthy competition in a
situation where there are too many players aiming at capturing a limited market. It may be a short cut
to reduce monopolistic or unfair trade practices which are not in the interest of the public at large.
8. Higher Price Earnings Ratio (P/E Ratio) of Stock :The net income of a new company may be capitalised at a low rate, resulting in high
market value for its stock. The stock of large companies is usually more marketable than that of a
small one. These attributes may result in a high price earnings ratio for the stock.
9. Fund raising capacity :Mergers or acquisitions open the fund raising capacity of the company to meet its
increasing financial requirements for expansion, diversification and modernisation. A company may
improve its ability to raise funds when it combines with other companies having a higher liquid assets
and low debts.
10. Reduction in Flotation Costs :When two firms merge, they can save on the flotation cost of future equity,
preference and debt issues. In general, these costs decrease with the increase in size of the issue, in
terms of percentage.
11. Deployment of Surplus Funds :A profit-making company may be having surplus funds which it is not in a position to
deploy profitably. In the present context, many of the companies having a good track record of
profitability are approaching the capital market for raising resources. Funds are being raised by the
issue of debt or equity at a substantial premium. This enables the companies to reduce the average
cost of capital. At the same time, there are companies which are starved of funds either due to low
profitability or rapid rate of expansion. Mergers and acquisitions enable a company having surplus
funds to invest the same in another company which is starved of the same.
Thus, one can notice that the reasons for the corporate sector being so keen to acquire
good brands and companies with a good market standing or those engaged in a competing line of
business is not without sound reasoning. Acquisition and mergers help a company to be better
equipped to face the challenges of competition and enable competing firms to achieve synergy of
resources and also help in the healthy growth of the market. Therefore, it can be very aptly said that
amalgamations and mergers have enabled companies to take a short cut to achieving higher
profitability and growth. They are an essential feature in the current corporate scenario.
(8)
has made a report to the Court that the affairs of the company have not been conducted in a manner
prejudicial to the interest of its members or to the public at large. The Official Liquidator will make
such a report after scrutinising the books and papers of the company.
When an order is made by the Court for the transfer of any property or any liabilities,
then, by virtue of that order, that property or liabilities, as the case may be, shall be transferred to the
transferee company. Another important consideration to be kept in mind is that within 30 days after
making of the order, every company in relation to which an order is made under this Section shall
cause a certified true copy of the order to be filed with the Registrar of Companies for registrartion.
A transferor company may or may not be a company within the meaning of the
Companies Act, 1956, but, the transferee company should only be a company within the meaning of
Section 3 (1) (i) of the Companies Act, 1956.
Jurisdiction of the Court in a Scheme of Arrangement under Section 391 of the Companies Act,
1956.
The Court has no jurisdiction to sanction a scheme of arrangement under Section 391
of the Companies Act, 1956, which does not have the approval of the company, either through the
Board, or, if appropriate, by the means of a simple majority of the members in a general meeting. This,
was the decision held in Re., Savoy Hotel Limited. Further when two amalgamating companies are
under the jurisdiction of two different High Courts, it is not necessary that both of them should come
before the same High Court., as was decided in Telesound India Limited. When two companies are
under the jurisdiction of two different High Courts and no proceedings were commenced in the High
Court which had jurisdiction over the transferee company, such company has no locus standi to
intervene in the petition of the transferor company so as to compel it to transfer shares.
Further, when in a case of amalgamation, there is an identity of interest between the
transferor company and the transferee company, approval; of the shareholders to the scheme should be
accorded by the shareholders of both companies. Both the transferor and the transferee companies
should make an application to the High Court to sanction the scheme of amalgamation under Section
394 of the Companies Act, 1956. This was as per the decision of the Madras High Courts ruling in
W.A. Beardsell and Company Limited and Mettur Industries Limited. Thereafter, the department of
Copmpany Affairs had issued a circular affirming the decision of the Madras High Court. Further, a
joint petition by the transferor company and the transferee company would be sufficient where both
the companies have their Registered Offices in the same State. A joint petition for the amalgamation
would be sufficient, because neither the Companies act, 1956, nor the Companies (Court) Rules, 1959,
prohibit filing of a joint petition by the two companies when the subject matter of the petition is the
same and a common question of fact and law arises.
(9)
Procedure to be followed for Reconstruction or Amalgamation of a company by the transfer of
undertaking under Section 394 of the Act.
When a scheme of reconstruction or arrangement is devised for the amalgamation
of a company with another company, by way of transfer of undertaking under the provisions of
Section 394 of the Companies Act, 1956, then the procedure to be followed for the purpose of
effecting such a scheme should be as detailed below :1.) The Board of directors of the two companies should consider the proposal of reconstruction or
amalgamation by the transfer of undertaking and accord approval to the proposal subject to the
necessary approvals.
2.) The companies should exchange the resolution passed by the respective Boards.
3.) The Board of the two companies shall appoint one or more Chartered Accountants as may be
mutually decided to value the shares of the two companies and to suggest a formula for the
exchange of the shares of the transferee company to the shareholders of the transferor company.
4.) The Boards of the two companies shall consider and approve for the ratio of exchange of shares
and the draft scheme of amalgamation or reconstruction. The Boards will also authorise the
moving an application before the High Court and also authorise the managing director and the
secretary to move the application and take all the necessary action including appointing advocates.
5.) In response the High Court, pursuant to Section 391, will direct the calling and holding the
meeting of the members of the company or separate meetings if there are different classes of
shareholders and will appoint the Chairman or Chairmen to conduct the said meeting or meetings.
6.) The notice for the meeting or meetings and the explanatory statement will be approved by the
Registrar of the Court. Notices will also be published in newspapers as directed by the Court.
7.) The majority in numbers of members representing 75 % of the value of shares or above should
approve the resolution at the meetings held on the direction of the Court. The voting will be by
ballot.
8.) The Chairman of the meeting or meetings, as the case may be, will submit his report to the Court.
The company will also file a petition to the Court for sanctioning the scheme of amalgamation or
reconstruction.
9.) The transferor company has to notify the fact to the public before seeking the sanction of the Court
that a petition has been made to the Court under section 394 of the Companies Act, 1956 and any
person interested therein may raise objection, if any, before the Court on the date as notified on
which the petition is to be heard. When there are no objections, or if there are any, they are either
flimsy or ruled out by satisfying the persons raising them, the Court will issue the order
sanctioning the scheme.
(10)
10) After this, within 30 days of the receipt of the copy of the order, the company concerned should
file a certified true copy thereof with the Registrar of Companies.
11) The transferor company will then transfer its undertaking to the transferee company according to
the order of the Court and the transferee company then begins the work of alloting shares and
debentures to the shareholders of the transferor company.
Amalgamation by way of a Take-over Offer under Section 395 of the Companies Act, 1956.
Another way of acquiring the shares of another company is by way of acquiring the
shares of a target company without going in for the transfer of the undertaking of the transferee
company. This method of amalgamation is done without approaching the Court in most cases. Section
395 of the Companies Act, 1956, provides that when a company wants to acquire shares of another
company with a view of acquiring its control, then the scheme of such acquisition has to be accepted
by not less than nine-tenths in value of the shares whose transfer is involved. This acceptance has to be
made by the shareholders of the transferor company within four months after making of the offer by
the transferee company to the transferor company.
When the shareholders of the transferee company have accepted the offer within the
stipulated period of four months, the transferee company should, within two months after the expiry of
the aforesaid period of four months, give notice in the prescribed manner to the dissenting
shareholders, if any, that it desires to acquire his shares. If the dissenting shareholder does not agree to
the transferee company acquiring his shares, he must within one month from the date on which the
notice was given to him, approach the Court to set aside the scheme of acquisition of his shares. If the
shareholders dissenting from the acquisition do not make an application to the Court within one month
from the date of giving the notice , the transferee company will be entitled to acquire the shares of the
dissenting shareholders, on the terms on which the shares of the approving shareholders are to be
transferred to the transferee company.
However, when the transferee company already holds shares greater than one-tenth
of the aggregate value of all the shares in the company of the same class as the shares whose transfer is
involved, then the following additional provisions have to be complied with :1. The transferee company offers the same terms to all the holders of shares of that class (other
than those already held as aforesaid) whose transfer is involved, and
2. The holders who approve the scheme besides holding not less than nine-tenths in value of the
shares (other than those already held as aforesaid) whose transfer is involved are not less than
three-fourths in number of the holders of those shares.
(11)
Acquisition of nine-tenths of the value of shares of the Transferor Company by the Transferee
Company.
Where as a result of a scheme or contract, shares or shares of any class, in a company
are transferred to another company or its nominee, so that the shares so transferred along with the
shares already held by the transferee company before the scheme or contract comprise nine-tenths in
value of the shares, or the shares of that class, in the transferor company, the transferee company must,
within one month from the date of such transfer, give notice of that fact in the prescribed manner to the
holders of the remaining shares who have not assented to the scheme or contract. Any such holder of
shares may within three months of such notice, may require the transferee company to acquire the
shares in question.
Where the shareholder gives notice, the transferee company shall be entitled and bound
to acquire those shares on the terms on which, under the scheme or contract, the shares of the
approving shareholders were transferred to it, or on such terms as may be agreed, or as the Court on
the application of either the transferee company or the shareholder thinks fit to order.
Acquisition of the shares of the Dissenting Shareholders of the Transferor Company by the
Transferee Company.
Where the transferee company has given notice to the dissenting shareholders and the
Court has rejected the application of the dissenting shareholder against the scheme, the transferee
company must, on the expiry of one month from the date of its notice, transmit a copy of the notice to
the transferor company together with an instrument of transfer executed on behalf of the shareholder
by any person appointed by the transferee company and on its own behalf by the transferee company.
The transferee company shall also pay or transfer to the transferor company the amount or other
consideration representing the price payable by the transferee company for the shares which that
company is entitled to acquire.
The transferor company then must,
a) thereupon register the transferee company as the holder of these shares and
b) within one month of the date of such registration, inform the dissenting shareholders of the fact of
such registration and of the receipt of the amount or other consideration representing the price payable
to them by the transferee company.
It is to be noted that an instrument of transfer is not required for any share for which a
share warrant is for the time being outstanding. Any sum received by the transferor company from the
transferee company must be paid into a separate bank account and held in trust for the several persons
entitled to the shares in respect of which the said sums or other consideration were respectively
received.
The term dissenting shareholder includes a shareholder who has not assented to the
scheme or contract or any shareholder who has failed or refused to transfer his shares to the transferee
company in accordance with the scheme or contract.
(12)
Offer or Circular to be given to the Members of the Transferor Company by its Board of
Directors.
With a view to prevent certain malpractices in relation to takeover bids and acquisition
of shares of dissenting shareholders under the scheme approved by the majority, sub-section (4A) to
Section 395 was added to the said Section by the Amendment Act in 1965. The following provisions
are applicable to every offer of a scheme or contract involving the transfer of shares or any class of
shares in the transferor company to the transferee company :a) Every such offer or every circular containing such offer or every recommendation to the members
of the transferor company by its directors to accept such offer shall be accompanied by such
information as may be prescribed by the Central Government. This is to ensure that adequate
information is disclosed in a take-over offer to the shareholders so that they could be allowed to
judge for themselves whether or not to accept the offer.
b) Every such offer shall contain a statement by or on behalf of the transferee company, disclosing
the steps it has taken to ensure that necessary cash will be available for payment of consideration
for the shares to be acquired.
c) Every circular containing or recommending acceptance of such offer shall be prescribed to the
Registrar of Companies for registration and no such circular shall be issued unless it is registered.
d) The Registrar has the power to refuse to register any such circular which does not contain the
prescribed information in a manner likely to give a false impression.
e) An appeal shall lie to the Court against an order of the Registrar, refusing to register any such
circular. If the circular containing an offer to purchase shares is not registered as aforesaid, then
whosoever issues it, shall be punishable with fine which may extend to Rs.5000.
The provisions of section 395 of the Companies Act, 1956 apply only when an offer to
acquire shares is made by one company and they do not apply to a scheme or contract involving the
transfer of shares to two or more companies jointly, even if the offer to acquire only a fraction of
shares by each company (as held in Blue Metal Industries Limited vs. Dilley).
Amalgamation by Order of the Central Government in Public Interest [Section 396] .
In cases the Central Government may feel it necessary to amalgamate two or more
companies in the interest of the public at large. For such a case, to follow the procedure as discussed
aforesaid would be detrimental to the interest of the public. Thus, where the Central Government is
satisfied that it is in the interest of the public to do so, it may under the provisions of Section 396 of
the Companies Act, 1956, by an order notified in the Official Gazette, provide for the amalgamation
of, the aforesaid, two or more companies into a single company. The order will specify the
constitution, property, powers, rights, interests, authorities, privileges, liabilities, duties and
(13)
obligations of the resulting amalgamated company. The order will also provide for the consequential,
incidental and supplemental provisions deemed necessary to give effect to the amalgamation. The
order must also provide that the old members, debenture holders and other creditors will have, as
nearly as may be, the same interests in and rights against the company as a result of the amalgamation
as they had in their original companies. The old members will be entitled to compensation, assessed by
the prescribed authority, if their rights or interests fall short of their rights and interests against the
original companies. The compensation will have to be paid by the company resulting from the
amalgamation.
Before making the order for amalgamation, the Central Government should send a
draft copy of the proposed order to each of the companies concerned for their suggestions and
objections. If any company, within two months after receipt of the notice, makes some suggestions or
raises any objections, the Central Government may, before issuing the order, modify the draft in the
light of those suggestions or objections received from the company, its creditors or the shareholders.
Any person aggrieved by an order of the prescribed authority [i.e., the Joint Director
(Accounts) in the Department of Company Affairs] may, within 30 days from the date of publication
of such assessment in the Official Gazette, prefer an appeal to the Company Law Board and thereupon
the assessment of compensation shall be made by the Company Law Board.
Copies of every order under this Section shall, as soon as may be after it has been made,
be laid before both Houses of the Parliament.
Preservation of Books and Papers of the Amalgamated Company.
With a view to preventing the practice of destroying incriminating accounts and records
of the company which has been amalgamated with another company, Section 396A of the Act provides
that, the books and papers of the company which has been amalgamated with or whose shares have
been acquired by another company, shall not be disposed off without the prior permission of the
Central Government. Before granting such permission, the Central Government shall appoint a person
to examine books and papers or any of them for the purpose of ascertaining whether they contain any
evidence of the commission of an offence in connection with the promotion or formation, or the
management of the affairs of the company or amalgamation or the acquisition of shares of the
company being amalgamated with the other company.
Provision prohibiting Reconstruction or Amalgamation void.
As per the provisions of Section 376 of the Companies Act, 1956, any provision
contained in the Memorandum or Articles of Association of a company, or by the resolution of the
Board of Directors or of the company in the general meeting, in the deed of agreement between the
company and its managing director or manager, which prohibits, or has the effect of prohibiting
reconstruction of the company or its amalgamation with another company or companies absolutely or
(14)
conditionally such that the managing director or manager will be appointed to such office in the
reconstructed or amalgamated company, shall be void.
Reconstruction or Amalgamation by Sale of Assets / Property under Section 494 of the Companies
Act, 1956.
Sometimes it may happen that a company wants to wind itself up voluntarily merely
for the purpose of reconstruction or amalgamation with another company, by the transfer of the whole
or a part of its business or property to the latter. In that case, the company, may, by way of a Special
Resolution confer a general or special authority to the Liquidator of the company, to do any of the
following:
1. Receive, by way of compensation or part compensation for the transfer or sale, any shares,
policies, or other like interests in the transferee company, for distribution among the members
of the transferor company, or
2. Enter into any other arrangement whereby the members of the transferor company may, in lieu
of receiving cash, shares, policies or other like interests or in addition thereto, participate in the
profits of, or receive any other benefits from, the transferee company.
Any sale or arrangement in pursuance of this section shall be binding upon the
members of the transferor company, as per sub-section (2) to Section 494 of the Companies Act, 1956.
The liquidator will give notice to the shareholders of the transferor company as
regards the number of shares to which they are entitled, the amount payable by them thereafter and the
time within which they must apply for the shares. The sale or arrangement under this provision is
binding on all members as already mentioned earlier. However, if any member or members does or do
not vote in favour of the Special resolution, he may address to the Liquidator his dissent in writing
within 7 days after the passing of the said Special Resolution and require him to,
1. abstain from carrying out the resolution into effect, or
2. purchase his interest at a price to be determined by an agreement or arbitration.
The Liquidator has the right to exercise either of the two options . Should he elect to
purchase the interest of the dissenting shareholders, he must raise money in such a manner as is
determined by the company. It must be paid before the company is dissolved.
The transferor company may pass the Special Resolution either before or concurrently
with the resolution for voluntary winding up or for the appointment of a liquidator. However, if an
order for winding up of a company by or under the supervision of the Court has been passed within
one year, the Special Resolution will not be valid unless sanctioned by the Court. Section 494 does not
make any provision as regards the rights of creditors, who may feel that they have been affected by the
scheme of transfer. As such, the only remedy available to them is to present
(15)
a petition for compulsory winding up under the supervision of the Court within one year of the passing
of the Special Resolution.
According to Section 507 of the Act, the provisions of Section 494 will apply to a
creditors voluntary winding up as well as to members winding up, but with the modification that the
liquidator shall have to exercise the power only with the sanction of the Court or that of the Committee
of Inspection.
(16)
(17)
specified limits, there is no need of obtaining the approval of the reserve Bank of India nor is there any
need of obtaining the Central Governments approval. For instance, in the case of software sector, the
limit of foreign investment is 100 % of the capital of the company; in the case of telecommunications
it is 49 % for basic, cellular mobile, paging and value added services and 100 % for manufacturing
services, in the case of drugs and pharmaceuticals and hotel and tourism it is 51 %, in the case of films
and exploration and mining of gold and silver it is 100 %, in the case of coal and lignite it is 49 % for
investment in Public Sector Undertakings (PSUs) and 50 % for other than PSUs.
Acquisition of / Investment in Foreign Securities by way of Stock Swap or Exchange of Shares of
an Indian Company.
An Indian Company engaged in the business of Information Technology (IT) and
Entertainment Software, Pharmaceutical Sector or the Biotechnology Sector, may acquire shares of a
foreign company engaged in similar activity in exchange of American Depository Receipts (ADRs) or
Global Depository Receipts (GDRs) issued to the latter in accordance with the scheme for issue of
Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism)
Scheme, 1993 and the guidelines issued thereunder, from time to time, by the Central Government, for
the shares so acquired.
However, the following conditions have to be complied with, as per the Foreign
Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme,
1993 ;1) The Indian Company has already made an ADR and/or GDR issue and that such ADRs
and/or GDRs are currently listed on any stock exchange outside India.
2) The investment by the Indian company/ party in the issue of the ADRs and/or GDRs does
not exceed :
a) an amount equivalent to US $ 100 million, or
b) an amount equivalent to 10 times the export earnings of the Indian Party during the
preceeding financial year as reflected in its audited Balance Sheet, inclusive of all
investments made, including those made under clause (a) above, in the same
financial year.
3) At least 80 % of the average turnover of the Indian Party in the preceeding three financial
years is from the activities or sectors in which the Indian Party is engaged, or the Indian
Party has an annual average export earnings of at least Rs.100 Crores in the previous three
financial years from the activities/sectors mentioned hereinabove.
4) The ADR and/or GDR issue for the purpose of acquisition is backed by underlying fresh
equity shares issued by the Indian Party.
(18)
5)
The total holding in the Indian Party by persons resident outside India in the expanded
capital base, after the new ADR and/or GDR issue, does not exceed the sectoral cap
prescribed for the investment.
(19)
(20)
5) The reduction of the interest or the rights which the shareholders have in the sick industrial
company to such extent as the Board considers necessary in the interest of the reconstruction,
revival or rehabilitation of the sick industrial company or for the maintenance of the business
of the sick industrial company.
6) The allotment to the shareholders of the sick industrial company of shares in the sick industrial
company or, as the case may be, in the transferee company and where any shareholder claims
payment in cash and not allotment of shares, or where it is not possible to allot shares to any
shareholder, the payment of cash to those shareholders in full satisfaction of their claims
(a) in respect of their interest in shares in the sick industrial company before its
reconstruction or amalgamation, or
(b) where such interest has been reduced, in respect of their interest as so reduced.
7) Any other terms and conditions for the reconstruction or amalgamation of the sick industrial
company.
8) The continuation by, or against, the sick industrial company or, as the case may be, the
transferee company of any action or other legal proceeding pending against the sick industrial
company immediately before the date of the order made under sub-section (3) of Section 17 of
the Act.
9) The method of sale of the assets of the industrial undertaking of the sick industrial company
such as by public auction or by inviting tenders or in any other manner as may be specified and
for the manner of publicity thereof.
10) Lease of the industrial undertaking of the sick industrial company to any person, including a
co-operative society formed by the employees of such undertaking.
11) Transfer or issue of the shares in the sick industrial company at the face value or at the intrinsic
value which may be at discount value or such other value as may be specified to any industrial
company or any person including the executives and employees of the sick industrial company.
12) Sale of the industrial undertaking of the sick industrial company free from all encumbrances
and all liabilities of the company or other such encumbrances and liabilities as may be
specified, to any person, including a co-operative society formed by the employees of such
undertaking and fixing of reserve price for such sale.
13) Such incidental, consequential and supplemental matters as may be necessary to secure that the
reconstruction or amalgamation or other measures mentioned in the scheme are fully and
effectively carried out.
(21)
The scheme carried prepared by the operating agency shall be examined by the Board
of Industrial and Financial Reconstruction (BIFR) and a copy of the scheme with or without
modification made by the Board shall be sent, in draft, to the sick industrial company and the
operating agency and in the case of amalgamation, also to any other company concerned, and the
Board shall publish or caused to be published the draft scheme in brief in such daily newspapers as the
Board may consider necessary, for suggestions and objections, if any, within such period as the Board
may specify.
The Board may make such modifications as it may consider necessary in the light of
the suggestions and objections received from the sick industrial company and the operating agency
and also from the transferee company and any other company concerned in the amalgamation and
from any shareholder or any creditors or employees of such companies. Where the scheme provides
for the amalgamation of two or more companies, the scheme shall be laid before the company with
which the sick industrial company is going to amalgamate, in the general meeting for the approval of
the scheme by its shareholders and no such scheme shall be proceeded with unless it has been
approved, with or without modification, by a special resolution passed by the shareholders of the
transferee company.
The scheme shall then be sanctioned by the Board and shall come into force on such
date as may be specified in this behalf. Different dates may be specified for different provisions of the
scheme. Thus, the scheme providing for the amalgamation shall be effective from such date as may be
specified by the Board after obtaining the approval of the shareholders, by special resolution, in the
general meeting.
Where the sanctioned scheme provides for the transfer of any property or liability of
the sick industrial company in favour of any other company or person or where such a scheme
provides for the transfer of any property or liability of any other company or person in favour of the
sick industrial company, then by virtue of, and to the extent provided in, the scheme, on and from the
date of coming into operation of the sanctioned scheme or any provision thereof, the property shall be
transferred to, and vest in, and the liability shall become the liability of, such other company or person
or, as the case may be, the sick industrial company.
On and from the date of the coming into operation of the sanctioned scheme or any
provision thereof, the scheme or such provision shall be binding on the sick industrial company and
the transferee company or, as the case may be, the other company and also on the shareholders,
creditors and guarantors and employees of the said companies. The Board may if it deems necessary or
expedient so to do, by order in writing, direct any operating agency specified in the order to implement
a sanctioned scheme with such terms and conditions and in relation to such sick industrial company as
may be specified in the order.
Thus, the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985,
provide for the amalgamation or reconstruction of a sick industrial company with a normal healthy
company, in a scheme formulated by the operating agency, under Section 18 (1) (c) of the Act. The
scheme has been formulated in order to save the winding up of the sick industrial company when it is
(22)
not possible, in the opinion of the BIFR, to make its net worth exceed the accumulated losses within a
reasonable period of time. As a last resort the BIFR may forward its opinion to the High Court
concerned and the said High Court, having jurisdiction to wind up the sick industrial company, shall
order the winding up of the said sick company in accordance with the provisions of the Companies
Act, 1956, pursuant to Section 20(2) of the Sick Industrial Companies (Special Provisions) Act, 1985.
(23)
(24)
concert with him of the target company. The main concepts/terms defined in the said Regulations
have been explained hereinbelow:
1) Acquirer :
An acquirer means any person who, directly or indirectly, acquires or agrees to acquire
shares or voting rights in the target company, or acquires or agrees to acquire control over the
target company, either by himself or with any person acting in concert with the acquirer.
2) Control :
The term control ahs been defined in the SEBI Regulations as to include the right to appoint
majority of the directors or to control the management or policy decisions exercisable by a
person or persons acting individually or in concert, directly or indirectly, including by virtue of
their shareholding or management rights or shareholders agreements or voting agreements or in
any other manner.
There are the following types of control:
Complete ownership of the share capital.
Majority control on the basis of majority of voting power exercised by the controlling
person.
c) Minority control exercised through holding a block of shares while other shares are
dispersed to a large number of shareholders.
d) Management control control over the proxy gathering machinery, having regard to inertia of
shareholders, enables the existing management to maintain control, where shareholding is
very widely dispersed.
a)
b)
(ii)
A company with any of its directors, or any person entrusted with the
management of the funds of the company.
(25)
(iii) Directors of companies referred to in sub-clause (i) above and their associates.
(iv) Mutual funds with sponsor or trustee or asset management company (AMC).
(v) Foreign Institutional Investors (FIIs) with sub-accounts.
(vi) Merchant bankers with their client(s) as acquirer.
(vii) Portfolio Managers with their client(s) as acquirer.
(viii) Venture Capital Funds with sponsor.
(ix) Banks with financial advisers, stock brokers of the acquirer, or any company
which is a holding company, subsidiary or the relative of the acquirer. However,
this clause will not apply to a bank whose relationship with the acquirer or with
any other company, which is the holding company or a subsidiary of the acquirer
or with a relative of the acquirer, is by way of providing normal commercial
banking services or such activities in connection with the offer, such as
confirming availability of funds, handling acceptances and other registration
work.
(x) Any investment company with any person who has an interest as director, fund
manager, trustee, or as a shareholder having not les than 2 % of the paid up share
capital of that company or with any other investment company in which such
person or his associates holds not less than 2 % of the paid up capital of the latter
company.
For the purpose of this clause the term associate means:
a)
any relative of that person within the meaning of Section 6 of the Companies Act,
1956, and
b)
family trust and Hindu Undivided Families (HUFs).
The persons acting in concert must have commonality of interest and objectives which
could be acquisition of shares or voting rights beyond the threshold limit, or gaining control over the
company and their act of acquiring the shares or voting rights in a company must serve this common
objective. The burden of proof lies with those who are presumed to be acting in concert to prove
otherwise, i.e., it is to be proved by the persons falling under this definition that they were not so
acting. The persons are grouped in such a manner in the same group or category that they bear such
relationship amongst themselves as could justify raising of a presumption in the normal course of
affairs that they are acting in concert .
4) Offer Period :
The regulations require certain things to be done and certain things not to be done during the
offer period. The regulations require that offers, competitive offers and revised offers will have
to be done during the offer period. The term has been defined as follows:
Offer period means the period between the date of public announcement of the first offer
and the date of closure of that offer.
(26)
5) Promoter :
The term promoter means :
(1) (i) the person or persons who are in control of the company, or
(ii) person or persons named in any offer document as promoters;
(2) a relative of the promoter within the meaning of Section 6 of the Companies Act, 1956;
(3) in case of a corporate body,
(i) a subsidiary or holding company of that body, or
(ii) any company in which the promoter holds 10 % or more of the equity capital or which
holds 10 % or more of the equity capital of the promoter, or
(iii)
any corporate body in which a group of individuals or corporate bodies or
combinations thereof who hold 20 % or more of the equity capital in that company also
hold 90 % or more of the equity capital of the promoter; and
(4) in the case of the individual,
(i) any company in which 10 % or more of the share capital is held by the promoter or a
relative of the promoter or a firm or Hindu Undivided Family in which the
promoteror his relative is a partner, co-parcener or a combination thereof, or
(ii) any company in which a company specified in (i) above, holds 10 % or more of the
share capital, or
(iii) any HUF or firm in which the aggregate share of the promoter and his relatives is
equal to or more than 10 % of the total.
6) Public Shareholding :
The term public shareholding has been defined to mean shareholding in the hands of
persons other than the acquirer and persons acting in concert.
7) Target Company :
The expression target company has been defined in the takeover code to mean a listed
company whose shares or voting rights or control is directly or indirectly acquired or is being
acquired. The definition has been provided to make a distinction between the acquirer
company and the target or offeree company.
Disclosure of Shareholding and Control in a Listed Company.
As per Regulation 7 of the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997, when an acquisition of shares together with the holdings already held in the
company result in a person acquiring more than 5 % of the shares or voting rights, the reporting, in
respect of such acquisition, has to be done by the acquirer within 4 days of such acquisition by the
allotment or purchase to the company. The company is required to furnish this information within 7
days to the concerned stock exchange.
(27)
Further, Regulation 8 requires the continuous disclosure of the shareholdings by the
promoter/person who controls the company and by the bulk holder who holds more than 15 % of the
shares. Such reporting has to be done within 21 days from the financial year ending on 31 st March each
year to the company. In case of the promoters and persons who are in control of the company, in
addition to the above reporting, they have to report their holdings within 21 days of the record date
fixed for the payment of dividend. The disclosure in respect of promoters and persons in control of the
company should include holdings of persons acting in concert. In turn, the company is required to
inform the stock exchanges where the shares of the company are quoted, the details of changes, if any,
in the case of bulk holders, i.e., persons holding more than 15 % of the shares and in case of others the
details of the holdings within 30 days of 31 st March and of the record date. If there is no change as
compared to the earlier reporting, the company need not make any disclosure to the stock exchanges,
but in order to avoid correspondence in this regard it would be advisable to send a no change report.
As per Regulation 9, the stock exchanges and the companies are required to furnish the
above information to the SEBI as and when required.
Substantial Acquisition of Shares or Voting Rights in and Acquisition of Control over a Listed
Company.
An acquirer cannot acquire any shares or voting rights in a company if the proposed
acquisition together with his holding of shares or voting rights of the persons acting in concert with
him will entitle him to exercise 15 % or more voting rights in a company unless he makes a public
announcement to acquire shares of such company in accordance with the regulations.
In case of those acquirers who hold alongwith persons acting in concert 15 % or more
but less than 75 % of the shares or voting rights such an announcement is mandatory only if during a
period of 12 months the acquisition of the shares exceeds 5 % of the voting rights. This will apply to
indirect acquisition also, by virtue of acquisition of shares in the holding company also. A public
announcement has to be made to the shareholders of each listed company when several companies are
acquired through acquisition of a single company. In case the acquirer holds 75 % or more voting
rights then for additional acquisition of shares or voting rights a public announcement is required.
Regulation 12 requires the making of a public announcement to acquire control over the
target company with or without acquisition of shares or voting rights. However, a change in control as
a result of a resolution passed by the shareholders in a general meeting will not trigger in, the
regulations.
Minimum Number of Shares to be Acquired.
As per Regulation 21 of the SEBI Regulations, the following criteria are prescribed in
regard to the minimum number of shares which are to be acquired by the offerer for giving effect to
the takeover of a company by substantial acquisition of its shares :(28)
(1)
The public offer is required to be made to the shareholders of the target company to acquire from
them an aggregate minimum of 20 % of the voting capital of the company.
(2)
In case the acquirer already holds 75 % or more shares or voting rights and wish to acquire
further shares or voting rights then, the public offer shall be for such percentage of the voting
capital of the company as may be decided by the acquirer.
(3)
Clause (1) above is not applicable in case the offer is conditional upon the minimum level of
acceptances from the shareholders and the acquirer has deposited in the escrow account in cash a
sum of 50 % of the consideration payable under the public offer.
(4)
If as a result of the acquisition, the public holding is reduced to 10 % or less, the acquirer is
required to either make out within 3 months from the date of the closure of the public offer, a
public offer for buying the said 10 % at the same price as the public offer or to disinvest through
offer of sale or by a fresh issue of capital such number of shares so as to satisfy the listing
requirements, within 6 months of the closure of the public offer.
(5)
Where the number of shares offered for sale by shareholders are more than the shares agreed to
be acquired by the person making the offer, such person is required to accept the offers on a
proportionate basis in consultation with the merchant banker, taking care that the basis of
acceptance is decided in a fair and equitable manner and does not result in non-marketable lots.
(6)
The acquisition of shares from the shareholders should not be less than marketable lots or the
entire holding if it is less than the marketable lot.
(7)
For the purpose of computing the percentages, in clauses (1) to (4) above, the voting rights as at
the expiration of 30 days after the closure of the public offer is reckoned.
(2)
Allotment to the extent of entitlement in a Rights Issue and allotment of additional shares or on
renunciations subject to stated stipulations.
(3)
(4)
(5)
(6)
Acquisition of shares in the ordinary course of business by registered stock brokers on behalf of
their clients, a registered market maker in respect of shares for which he is market maker during
the course of market making.
(7)
(8)
Acquisition of shares by the Government Companies which come within the definition of the
said term as set out in Section 617 of the Companies Act, 1956 and statutory corporations.
(9)
Transfer of shares from State Level Financial Institutions or its subsidiaries to the co-promoters
pursuant to an agreement.
(10) Shares acquired under the scheme framed under the Sick Industrial Companies (Special
Provisions) Act, 1985 and under the scheme of amalgamation or merger under any law or
regulation, whether it be Indian or foreign.
(11) Acquisition of shares in an unlisted company, unless such acquisitions results in acquisition of
voting rights or control of a listed company.
Acquisition exceeding 5 % of the voting share capital and falling under clauses (3), (5)
(8) and (9) above, are required to be reported by the acquirer at least 14 working days before the date
of acquisition to the Stock Exchange(s) where such share are quoted.
In regard to acquisitions falling under clauses (1), (2), (3), (5) and (9) above, if the
acquisition alongwith the existing holding of the acquirer and persons acting in concert would result in
such person exercising 15 % or more voting rights then such acquisitions have to be reported to SEBI
within 21 days of the acquisition by the acquirer alongwith a fee of Rs.10,000.
Procedure for Seeking Exemption under Regulation 3(1) from the Securities and Exchange Board
of India.
For the purpose of seeking exemption under Regulation 3(1) from SEBI, the person
making the application has to follow the following procedure:
(1)
An application has to be made by the acquirer to the SEBI for exemption as stated above
setting out the grounds on which the exemption is being sought alongwith a fee of Rs.25,000.
(30)
(2)
SEBI will refer all such applications to a Takeover Panel constituted under Regulation 4 for the
purpose.
(3)
The reference to the Panel is to be made within 5 days of the receipt of the application.
(4)
The Panel will within 15 days from the date of application make a recommendation on the
application to the Board, i.e., SEBI.
(5)
The Board shall, after affording a reasonable opportunity to the concerned parties and after
considering all the relevant facts including the recommendations, if any, pass a reasoned order
on the applications, within 30 days and publish the same.
Competitive Bid.
A competitive bid can be made by any person, other than the acquirer who has made the
first public announcement, within 21 days of the public announcement of the first offer by making a
public announcement thereof for acquisitions of shares of the same target company. The competitive
offer by an acquirer is required to be for such number of shares which, when taken together with the
shares already held by him are not less than the number of shares for which the first offer is made. On
the public announcement of the competitive bid, the first acquirer(s) have the option either to revise
the offer or withdraw the same with prior consent of SEBI.
This option has to be exercised within 14 days of the announcement of the competitive
bid, or else the earlier offer on the original terms shall continue to be valid and binding on the acquirer.
However, the date of closure shall stand extended till the closure of the last subsisting competitive bid.
The acquirer who made the first offer or the acquirer making the competitive bid may
make an upward revision in their offers in respect of the price and number of shares to be acquired at
any time upto seven working days prior to the date of closure of the offer. This information is to be
published in all the newspapers in which the original offer announcement was made. Information has
also to be sent to SEBI, all the Stock Exchanges on which the shares of the company are listed and the
target company at its registered office. The value of the escrow account is to be increased accordingly.
The date of closure of all the offers shall be date of closure of the public offer under the last subsisting
competitive bid.
Withdrawal of Offer.
A public offer, once made, shall not be withdrawn except under the following
circumstances :
Negotiated price;
(2)
Highest price paid by the acquirer for any acquisitions including in a public or rights issue during
the period of 26 weeks prior to the date of public announcement.
(3)
Price paid by the acquirer under a preferential allotment made to him or to persons acting in
concert with him, at any time during the period of 12 months upto the date of closure of the offer.
(4)
Higher of the average of the weekly high and low of the 26 weeks immediately prior to the date
of public announcement (where the shares of the target company are most frequently traded).
(32)
Where the shares of the target company are infrequently traded the offer price shall be
determined by the acquirer and the merchant banker taking into account the above stated points (1) to
(3) and other parameters including the return on net worth, book value of the shares of the target
company, earnings per share (EPS), price earnings multiple (P/E ratio) vis--vis the industry average.
Shares are deemed to be infrequently traded if on the stock exchange, the annualized trading turnover
during the preceeding 6 calendar months prior to the month in which the public announcement is made
is less than 2 % (by number of shares) of the listed shares. The weighted average number of shares
listed during the said 6 months period may be taken.
(a)
(b)
(c)
(d)
Where payment has been made in cash to any class of shareholders for acquiring shares
during the preceeding 12 months from the date of public announcement under any agreement or
pursuant to any acquisition in the open market or in any other manner, the offer document has to
provide that the shareholders have an option to accept payment in cash or by exchange of shares or
other secured instruments. Where the acquirer has acquired the shares in the open market or through
negotiation or otherwise, after the date of the public announcement at a price higher than the minimum
offer price stated in the letter of offer, then the highest price paid for such acquisition is to be paid for
all acceptances received under the offer. However, no acquisition can be made by the acquirer during
the last seven working days prior to the closure of the offer.
General Obligations of the Acquirer.
The acquirer has to comply with the following general obligations as provided under
Regulation 22 of the SEBI Takeover Code :
(1)
The public announcement is to be made only when the acquirer is able to implement the offer.
(2)
Within 14days from the public announcement of offer, the acquirer has to send a copy of the
draft Letter of Offer to the target company at its registered office address for being placed before
its Board of Directors and to all the Stock Exchanges where the shares of the company are listed.
(3)
Acquirer has to ensure that the Letter of Offer is sent to all the shareholders (including NRIs) of
the target company whose names appear on the Register of Members on the specified date so as
to reach them within 45 days from the date of public announcement and it is also sent to the
custodians of GDRs or ADRs.
(33)
(4)
A copy of the Letter of Offer is also required to be sent to warrant holders or convertible
debentureholders, if the period of the option or conversion falls within the offer period.
(5)
The date of opening of the offer cannot be later than the sixtieth day from the date of public
announcement and the offer is required to remain open for a period of 30 days.
(6)
During the offer period, the acquirer or persons acting in concert with him are not entitled to be
appointed on the Board of Directors of the target company.
(7)
If any person having interest in the acquirer company is already a director on the Board of the
target company or is an insider within the meaning of SEBI (Insider Trading) Regulations,
1992, he cannot participate in any matter relating to the offer.
(8)
The acquirer has to create an escrow account on or before the date of issue of public
announcement.
(9)
The acquirer has to ensure that firm financial arrangement has been made for fulfilling the
obligations under the public offer.
(10) The acquirer shall, within a period of 30 days from the date of closure of the offer, complete all
the procedures relating to the offer including payment of consideration to the shareholders who
have accepted the offer and for this purpose has opened a special account called an escrow
account.
(11) Where the acquirer is unable to make payment within the abovesaid period to the shareholders
due to non-receipt of the requisite statutory approvals and SEBI is satisfied that it is not due to
willful default or neglect of the acquirer, it may grant extension of time subject to the acquirer
agreeing to pay interest to the shareholders for delay beyond 30 days.
(12) Where deny is due to willful default or neglect or inaction on the part of the acquirer the amount
lying in the escrow account is liable to be forfeited.
(13) In the event of the withdrawal of the offer in terms of the Regulations, the acquirer shall not
make any offer for acquisition of shares of the target company for a period of 6 months from the
date of public announcement of withdrawal of the offer.
(14) In the event of non-fulfillment of the obligations under Chapter III or IV of the Regulations the
acquirer shall not make any offer for acquisition of shares of any listed company for a period of
12 months from the date of closure of offer.
(15) If the acquirer, in pursuance of an agreement, acquires shares which along with his existing
holding, if any, increases his shareholding beyond 15 % then such an agreement for sale of
shares must contain a clause to the effect that in case of non - compliance of the general
(34)
obligations of the acquirer under Regulation 22, the agreement for such sale shall not be acted
upon by the seller or the acquirer.
(16) Where the acquirer or persons acting in concert with him has acquired any shares in the open
market or through negotiation or otherwise, after the date of public announcement, he has to
disclose the number, percentage, price and the mode of acquisition of such shares to the Stock
Exchanges on which the shares of the target company are listed and to the merchant banker,
within 24 hours of such acquisition.
(17) The acquirer, where he has acquired control over the target company, shall be debarred from
disposing off or otherwise encumbering the assets of the target company for a period of 2 years
from the date of closure of public offer unless intention for the same was stated in the
announcement and/or letter of offer.
General Obligations of the Board of Directors of the Target Company.
As per Regulation 23, the general obligations of the Board of Directors of the target
company are as follows :
(1) Unless the approval of the general body of shareholders is obtained after the date of the public
announcement of offer, the Board of Directors of the target company shall not, during the
offer period
(a) sell, transfer, encumber or otherwise dispose off or enter into an agreement for sale,
transfer, encumberance or for disposal of assets otherwise, not being sale or disposal
of assets in the ordinary course of business, of the company or its subsidiaries, or
(b) issue any authorized but unissued securities carrying voting rights during the offer
period, or
(c) enter into any material contracts.
Restriction on the issue of securities under clause (b) above, shall not affect the right
of the target company to issue and to allot shares carrying voting rights upon conversion of
debentures already issued or upon exercise of option against warrants, as per pre-determined
terms of conversion or exercise of option.
(2) The target company shall furnish to the acquirer, within 7 days of the request of the acquirer
or within 7 days from the specified date whichever is later, a list of shareholders or warrant
holders or convertible debentureholders as are eligible for participation, containing the names,
addresses, shareholding and folio number and of those persons whose applications for
registration of transfer of shares are pending with the company.
Once the public announcement has been made , the Board of Directors of the target
company shall not
(a) appoint as additional director or fill in any casual vacancy by any person representing
the acquirer till the certification by the Merchant Banker for completion of all
procedural formalities by the acquirer. However, after the closure when the full
(35)
amount payable to the shareholders has been deposited in an escrow account, changes
in the constitution of the Board is possible;
(b) allow the person or persons representing or having interest in the acquirer who is
already a director on the Board of the target company to participate in the matters
relating to the offer.
(3) The Board of Directors of the target company may send their unbiased comments and
recommendations on the offer to the shareholders. For any mis-statement or for concealment
of material information the directors shall be liable.
(4) The Board of Directors of the target company has to facilitate the acquirer in verification of
securities tendered for acceptance.
(5) Upon fulfillment of all the obligations by the acquirer as certified by the Merchant Banker, the
Board of Directors of the target company has to transfer the securities acquired by the acquirer
in the name of the acquirer and allow changes in the Board.
General Obligations of the Merchant Banker.
As per Regulation 24, the general obligations of the merchant banker are as follows:
(1) Before the public announcement is made the merchant banker shall ensure that
(a) the acquirer is able to implement the offer ;
(b) the provisions relating to escrow account has been made ;
(c) the public announcement is in terms of SEBI takeover Code.
(2) The merchant banker is required to furnished to the SEBI a due-diligence certificate alongwith
the draft letter of offer.
(3) The merchant banker has to ensure that the draft public announcement and the letter of offer is
filled with the SEBI, target company and to all Stock Exchanges on which the shares of the
target company are listed in accordance with the regulations.
(4) The merchant banker has to ensure that the contents of the public announcement of the offer as
well as the letter of offer are true, fair and adequate.
(5) The merchant banker has to ensure compliance of the regulations and any other laws or rules as
may be applicable in this regard.
(6) The merchant banker is required to send a final report to the Board, i.e., SEBI, within 45 days
from the date of closure of the offer.
(36)
Procedure for Takeovers and Acquisitions.
The procedure for takeover has been provided in Chapter III of the SEBI (Substantial Acquisition of
Shares and Takeovers) Regulations, 1997. The basic procedure to be followed for effecting a scheme
of takeover or acquisition is briefly summarized below :(1) Appointment of Merchant Banker :
Before making any public announcement, the acquirer is required to appoint a Category I
Merchant Banker holding a Certificate of Registration granted by SEBI to advise him on the
acquisition and to make a public announcement of the offer on his behalf.
(2) Making the Public Announcement of Offer :
The public announcement of offer should be made within 4 days of entering into the agreement or
Memorandum of Understanding to acquire the shares or voting rights or acquisition of voting
rights on conversion of Global Depository Receipts (GDRs) or American Depository Receipts
(ADRs). The public announcement in case of acquisition of control over a company is required to
be made not later than 4 working days after such change or changes are decided to be made
resulting in the acquisition of control over the target company by the acquirer.
(3) Contents of the Public Announcement of Offer :
The public announcement should contain the following particulars :
(a) The paid-up share capital of the target company, the number of fully paid-up and partly
paid-up shares.
(b) The total number and percentage of shares proposed to be acquired from the public,
subject to a minimum of 20 % of the voting capital of the company.
(c) The minimum offer price for each fully paid-up or partly paid-up share.
(d) Mode of payment of consideration.
(e) The identity of the acquirer and in case the acquirer is a company or companies, the
identity of the promoters and, or the persons having control over such companies and the
group, if any, to which the companies belong.
(f) The existing holding, if any, of the acquirer in the shares of the target company, including
holdings of persons acting in concert with him.
(g) Salient features of the agreement, if any, such as the date, the name of the seller, the price
at which the shares are being acquired, the manner of payment of the consideration and the
number and percentage of shares in respect of which the acquirer has entered into the
agreement to acquire the shares or the consideration, monetary or otherwise, for the
acquisition of control over the target company, as the case may be.
(h) The highest and the average price paid by the acquirer or persons acting in concert with
him for the acquisition, if any, of shares of the target company made by him during the 12
month period preceeding the date of public announcement.
(38)
Provisions for Escrow Account.
As per the SEBI Takeover Regulations, cash is require to be deposited in an Escrow
Account before the public announcement and the cash so deposited therein will be forfeited if the
acquirer fails to fulfill his obligations. The amount to be deposited in the escrow account is calculated
as under:
(a) For consideration payable under the public offer :
If the consideration is upto Rs.100 Crores then the amount to be deposited in the escrow
account is 25 % and in case the amount is exceeding Rs.100 Crores, then the amount to be
deposited in the said account is 25 % upto the first Rs.100 Crores and 10 % thereafter.
(b) For offers which are subject to a minimum level of acceptance :
Where the acquirer does not want to acquire a minimum of 20 %, then 50 % of the
consideration payable under the public offer in cash is required to be deposited in the escrow
account.
The escrow account consists of
(1) Cash deposited with a scheduled commercial bank.
(2) Bank guarantee in favour of the merchant banker.
(3) Deposit of acceptable securities with appropriate margin with the merchant banker.
(4) Cash deposited in case offers are subject to minimum level of acceptance.
Obligations of the Acquirer in regard to Escrow Account :
(1) Where the escrow account consists of deposits with a scheduled commercial bank, the acquirer is
obliged to empower the merchant banker to operate the escrow account.
(2) Where the escrow account consists of bank guarantee, the acquirer is obliged to issue the same in
favour of the merchant banker.
(3) Where the escrow account consists of deposit of acceptable securities, the acquirer is obliged to
empower the merchant banker to realize the value by sale or otherwise.
(4) Where the escrow account consists of bank guarantee or approved securities, the bank guarantee
or the approved securities are not to be returned to the acquirer until all the obligations have been
completed by the acquirer under these Regulations. Further, the acquirer is also required to deposit
with the bank a sum of at least 1 % of the total consideration payable as and by way of security.
(39)
Bailout Takeover.
According to Regulation 30 of the SEBI Takeover Regulations, 1997, the substantial
shares of a financially weak company can be acquired in pursuance of a scheme of rehabilitation by a
public financial institution or a scheduled bank. The lead institution is responsible under the
regulations for ensuring compliance with the provisions of the Takeover Code. The lead institution has
to appraise the financial weak company taking into account the financial viability and assess the
requirement of funds for the revivals and draft the rehabilitation package on the principle of protection
of interests of minority shareholders, good management, effective revival and transparency. The
scheme shall also provide for any change in management and for acquisition of shares in the said
company in a manner of outright purchase of shares or exchange of shares or a combination of both.
Such a scheme can also include the elimination of the existing promoters.
To facilitate the takeover of the financially weak company, the lead institution can
invite offers for acquisition of the shares of the said company from at least three parties. The lead
institution evaluates the bids received with respect to the purchase price or exchange of shares, track
record, financial resources and reputation of the management of the person acquiring the shares. The
offers are listed in the order of preference and after consultation with existing management of the
financially weak company, the lead institution will accept one of the bids.
Offer by Persons Acquiring Shares.
The person acquiring the shares is required to make a formal offer to acquire shares
from shareholders including promoters or from persons in charge of the management of such company
or financial institutions. The price for such offer is determined through mutual negotiations between
the person acquiring the shares and the lead institution.
Public Announcement by Persons Acquiring Shares.
The persons acquiring the shares are required to make a public announcement of their
intention for acquisition of shares from the other shareholders of the company which should contain
relevant details about the offer including the information about the identity and background of the
persons acquiring the shares, number and percentage of shares proposed to be acquired, offer price, the
specified date, date of opening of the offer and the period for which the offer shall be kept open and
such other relevant as may be required by the SEBI. The offeror is also required to send a letter of
offer to the shareholders of the financially weak company, if after the offer, the public shareholding is
reduced to 10 % or less of the voting capital of the company. The acquirer is required to;
(a)
make an offer to buy out the outstanding shares remaining with the shareholders within a period
of 3 months from the date of closure of the public offer at the same offer price, which may have
the effect of delisting the target company, or
(b)
undertake to disinvest to the public within 6 months from the date of closure of public offer such
number of shares so as to satisfy the listing requirements.
(40)
The above stated options of the acquirer should be stated in the letter of offer. The
acquirer is obliged to acquire the entire holding of an individual shareholder, if such holding is upto
100 shares of the face value of Rs.10 each or 10 shares of the face value of Rs.100 each.
Competitive Bid for a Financially Weak Company.
No person shall make a competitive bid for the acquisition of shares of the financially
weak company once the lead institution has evaluated the bid and accepted the bid of the acquirer who
has made the public announcement of offer for acquisition of shares from the shareholders other than
the promoters or the persons in charge of the management of the financially weak company.
Exemptions from the operation of Chapter III of the SEBI Takeover Regulations.
An offer for acquisition of shares of a financially weak company may be exempted
from the provisions of Chapter III of the Regulations, i.e., regarding acquisition of shares or voting
rights over a listed company. An application has to be made to the SEBI by the acquirer. However,
even if the exemption has been granted the lead institution and/or the acquirer are obliged to adhere to
the time limits specified for various activities of public offer specified in Chapter III of the
Regulations.
According to Graham, Dodd and Cottle dividends play a predominant role in stock valuation. The
theory states that a common stock is worth the sum of all the dividends to be paid on it in the
future, each discounted to its present value. Miller and Modigliani have shown that in certain
conditions, in particular where tax position on dividends and retained earnings should be
unimportant in assessing the returns to the shareholders. This controversy seems to have been
resolved by Samuel and Wilkies when we noted that under the assumption as noted above, the
(43)
share price will be the same whether calculated on a dividend or on an earning basis as
demonstrated below :
At time t let,
I(t) = Firms total investment, including any replacement investment.
C(t) = Source of funds from operation, net of taxes
N(t) = New borrowings or stock issues less repayment of any loan
F(t) = Total cash flow of the firm
L(t) = Interest payments
D(t) = Dividend to those shareholders who hold shares at time 0
A(t) = Dividend to the new shareholders, shares issued between period 0 and period t.
N
= Number of shares.
Source of Funds :
F(t) = N(t) + C(t)
(1)
Uses of Funds :
F(t) = D(t) + L(t) + A(t) + I(t)
D(t) = F(t) A(t) I(t) L(t)
Or
D(t) = C(t) + N(t) a(t) I(t) L(t)
(2)
(3)
The shareholders at time 0 expect the total dividends D(t) to be equal to the cash
flow of the firm, less expected interest payments, dividend payments to new shareholders and
investment needs. If P(0) is the price of one share at period zero, then,
P(0) = 1/n E (t=1) D(t) / (1+i)t
(4)
(5)
(6)
The expression ( C(t) L(t) W(t) ) is in accounting terminology the profits of the
firm, net income from operation, less interest less depreciation. Define this as Y(t). The expression
[ I(t) W(t) N(t) ] = R(t) represents the gross investments of the firm, less the funds provided by
the provision for depreciation and from any new borrowings or new issues and it is this amount of
(44)
investment that has to be financed from retained earnings. This quantity which the shareholders
expect to be reinvested may be defined as `R. Now it is possible to rewrite equation (4) as under :
P(0) = 1/n E (t = 1) D(t) / (1+i)t = 1/n E (t=1) [Y(t) R(t) A(t) ] / (1+i)t
(7)
Now, [Y(t) R(t) A(t)] represents all the funds which remain from companys
operations during the year that are available for dividend to those who were shareholders at the
beginning of the period. Therefore, either the earnings approach described or the dividend
approach can be used to determine the companys price. They lead to the same results if the tax
provisions of dividend, and retained earnings is the same. However, with change in taxation for
either, the results will differ. However, both the methods could be used as complementary to each
other.
In the above model a reference is made to cash flow. In a survey carried out by
Kaplan and Roll in the U.S.A., it has been inferred that companies are valued more on cash flow
basis than on retained earnings basis.
(2) Valuation based on Price Earning Ratio :
It is a simpler way of valuing a companys shares. An analysis of expected growth
in earnings of the company relative to the expected growth in earnings of the rest of the market
will indicate whether the companys existing price-earnings ratio is realistic as compared to the
general level of ratios.
The valuation involves a comparison of P/E ratio for a particular company with the
P/E ratio for companies in the same class. For instance, if the P/E ratio for a particular company is
15:1 and the actual market ratio for the company at the current price is 12:1, then the share is being
under valued. The share would have to rise in price by 25 % before what is considered the
appropriate price-earning level would be reached.
The valuation based on price-earning level is easy but not accurate. Results will
differ on the basis whether actual earning figure or normalised earning figure are being used by the
analyst. However, normalised earnings figure is more meaningful for long-term assessment of
share valuation, whereas the actual earnings figures are safer for the short-term price movement.
Price-earnings ratio plays an important role in merger evaluation. The P/E exchange
ratio is the P/E ratio of the transferee company divided by the P/E ratio of the transferor company,
i.e.,
The Companies Act, 1956, places restrictions on the acquisition of shares and prohibits
takeover bids by groups or combines. With the restructuring of the Monopolies and Restrictive Trade
Practices Act, 1969, in the year 1991,the provisions of Sections 108A to 108I of the Companies Act,
1956 have made express provisions for restricting the acquisition and takeover bids in certain cases.
(46)
Acquisition of Shares to Require Central Government Approval in certain cases [Section 108A].
As per the provisions of Section 108A of the Companies Act, 1956, no individual, firm
or group, constituent of a group, body corporate or bodies corporate under the same management
(known as the acquirer) shall acquire or agree to acquire more than 25 percent of the paid-up equity
share capital of a public company or a private company which is a subsidiary of a public company
[now vide the Companies (Amendment) Act, 2000 a private company which is a subsidiary of a public
company will be treated as a public company ], without the previous approval of the Central
Government. Further, in such a case, no
(a) company in which not less than 51 percent of the share capital is held by the Central
Government, or
(b) corporation (not being a company) established by or under any Central Act, or
(c) financial institution,
shall transfer or agree to transfer any share to such acquirer unless the acquirer has obtained the
previous approval of the Central Government for acquisition of such shares.
Restrictions on the Transfer of Shares in certain cases [Section 108B].
Every body corporate or bodies corporate under the same management holding whether
singly or in the aggregate 10 percent or more of the subscribed equity share capital of any company
shall intimate to the Central Government of the proposal for the transfer of one or more such shares.
The intimation to the Central Government shall include a statement regarding the
particulars of the shares proposed to be transferred, the name and address of the person to whom the
shares are proposed to be transferred, the shareholdings, if any, of the proposed transferee in the
concerned company and such other particulars as may be prescribed. Where, on the receipt of the
intimation, the Central Government is satisfied that as a result of such transfer, a change in the
composition of the Board of Directors of the company is likely to take place and that such change
would be prejudicial to the interest of the company or to public interest, it may by order direct that,
(a) no such shares shall be transferred to the proposed transferee, or
(b) where such shares are held in a company engaged in any industry specified in Schedule XV,
such shares shall be transferred to the Central Government or to such corporation owned or
controlled by the Government as may be specified in the direction.
In this case, the Central Government or the specified corporation as the case may be,
shall forthwith pay, in cash, to the body corporate(s) from whom such shares stand transferred, an
amount equal to the market value of those shares.
Restriction on the Transfer of Shares of a Foreign Company [Section 108C].
Section 108C of the Companies Act, 1956, provides that a body corporate or bodies
corporate under the same management, which hold in aggregate, 10 percent or more of the nominal
value of equity share capital of a foreign company having an established place of business in India,
(47)
shall not transfer any share in such foreign company to any citizen of India or any body corporate
incorporated in India except with the previous approval of the central Government. The central
Government shall not refuse such approval unless it is of the opinion that such transfer would be
prejudicial to the interest of the public.
Power of the Central Government to give Directions in certain cases [Section 108D].
The Central Government is empowered to direct companies not to give effect to any
transfer of shares if as a result of such transfer, a change in the controlling interest of the company is
likely to take place and such change would be prejudicial to the interest of the company or public
interest. The directions of the Central Government in this regard may include the following:
(a) Where the transfer of such share or block of shares has already been registered, not to permit
the transferee or nay nominee or proxy of the transferee, ot exercise any voting right or other
rights attaching to such share or block of shares; and
(b) Where the transfer of such share or block of shares has not been registered, not to permit any
nominee or proxy of the transferor to exercise any voting right or other rights attaching to such
share or block of shares.
Where any direction is given by the Central Government as above, the share or the
block of shares referred to therein shall stand retransferred to the person from whom they were
acquired, and thereupon the amount paid by the transferee for the acquisition of such share or block of
shares shall be refunded to him by the person to whom such share or block of shares stands or stand
retransferred.
If the refund is not made within the period of 30 days from the date of the direction, the
Central Government shall, on the application of the person entitled to get the refund, direct, by order,
the refund of such amount and such order may be enforced as if it were a decree made by a Civil
Court. The person to whom the share or block of shares stands or stand retransferred shall, on making
the refund be eligible to exercise voting or other rights attaching to such share or block of shares.
Time Limit within which the Central Government has to communicate its decision u/s 108A or
108C [Section 108E].
The Central Government has to communicate its decision for any refusal on the
proposal for acquisition of shares under Section 108A or transfer of shares under Section 108C within
60 days from the date of such intimation. If no communication with regard to the refusal is received
from the Central Government within the period of 60 days from the date of receipt of such request, it
shall be presumed to have been granted.
Applicability of the Provisions of Sections 108A to 108D [Section 108F].
Section 108F provides that nothing contained in Sections 108A to 108D shall apply in
the following cases:
(48)
(a) Any company in which not less than 51 percent of the share capital is held by the Central
Government.
(b) Any corporation not being a company established by or under any Central Act, i.e., a Statutory
Corporation.
(c) Any financial institution.
Applicability of the Provisions of Sections 108A to 108F [Section 108G].
Section 108G deals with the applicability of the provisions of Section 108A to 108F.
The Section provides that the provisions of Sections 108A to 108F shall apply to the acquisition or
transfer of shares or share capital by or to, an individual, firm, group, constituent of a group, body
corporate, or bodies corporate under the same management who or which
(a) is, in case of acquisition of shares or share capital, the owner in relation to a dominant
undertaking and there would be, as a result of such acquisition, any increase(i) in the production, supply, distribution or control of any goods that are produced, supplied,
distributed or controlled in India or any substantial part thereof by that dominant
undertaking, or
(ii) in the provision or control of any services that are rendered in India or any substantial part
thereof by that dominant undertaking ; or
(b) would be as a result of such an acquisition or transfer of shares, or share capital, the owner of
the dominant undertaking; or
(c) is in the case of transfer of shares or share capital, the owner in relation to a dominant
undertaking.
Definition of certain terms used in Sections 108A to 108G [Section 108H].
The expressions group, same management, financial institution, dominant
undertaking and owner used in Sections 108A to 108G shall have the same meanings as
respectively assigned to them under the Monopolies and Restrictive Trade Practices Act, 1969.
Thus, the Companies Act, 1956, makes abundant provisions for prohibiting unfair and
unhealthy transfers and takeovers/acquisitions by requiring the transferor or the acquirer to obtain the
prior approval or giving intimation to the Central Government. The Central Government should
exercise its power under Section 108A, 108B, 108C or 108D with due diligence and caution in the
interest of the company and the public at large.
A variety of techniques are applied in arriving at the fair value. For example, when the consideration
includes securities, the value fixed by the statutory authorities may be taken to be the fair value. In
case of other assets, the fair value may be determined by reference to the market value of the assets
given up. Where the market value of the assets given up cannot be reliably assessed, such assets may
be valued at their respective net book values.
Many amalgamations recognize that adjustments may have to be made to the
consideration in the light of one or more future events. When the additional payment is probable and
can reasonably be estimated at the date of amalgamation, it is included in the calculation of the
(51)
consideration. In all other cases, the adjustment is recognized as soon as the amount is determinable,
keeping in mind AS-4, Contingencies and Events Occuring after the Balance Sheet Date.
Treatment of Reserves on Amalgamation.
In case of amalgamation in the nature of merger, the identity of the reserves is
preserved and they appear in the financial statements of the transferee company in the same form in
which they appeared in the financial statements of the transferor company. As a result of preserving
the identity, the reserves which are available for distribution as dividend before the amalgamation
would also be available for distribution as dividend after the amalgamation. The difference between
the amount recorded as share capital issued and the amount of share capital of the transferor company
is adjusted in reserves in the financial statements of the transferee company.
If the amalgamation is an amalgamation in the nature of purchase, the identity of the
reserves, other than the statutory reserves such as Development Rebate Reserve or Investment
Allowance Reserve, is not preserved. The amount of consideration is deducted from the value of the
net assets of the transferor company acquired by the transferee company. If the result of the
computation is negative, the difference is debited to Goodwill arising on amalgamation and is
amortised to income on a systematic basis over its useful life. On the other hand, if the result of the
computation is positive, the difference is credited to Capital Reserve.
Certain reserves may have been created by the transferor company pursuant to the
requirements of, or to avail of the benefits under the Income Tax Act, 1961; for instance, Development
Rebate Reserve or the Investment Allowance Reserve. The Act requires that the identity of the reserves
should be preserved for a specified period. Similarly, certain other reserves may have been created in
the books of the transferor company in terms of the requirements of other statutes. Though in the case
of amalgamation in the nature of purchase, the identity of the reserves is not preserved, an exception is
made in respect of statutory reserves and such reserves retain their identity in the financial statements
of the transferee company, so long as their identity is required to be maintained to comply with the
relevant statute. This exception is made only in those cases where the requirements of the relevant
statute for recording the statutory reserves in the books of the transferee company are complied with.
In such a case the statutory reserves are recorded in the books of the transferee company by a
corresponding debit to a suitable account head such as Amalgamation Adjustment Account, which
is disclosed as a part of Miscellaneous Expenditure or other similar category in the balance sheet.
When the identity of the statutory reserve is no longer required to be maintained, both reserves and the
aforesaid account are reversed.
Treatment of Goodwill arising on Amalgamation.
Goodwill arising on amalgamation represents a payment made in anticipation of future
income and it is appropriate to treat it as an asset to be amortised to income on a systematic basis over
its useful life. Due to the nature of goodwill, it is frequently difficult to estimate its useful life with
reasonable certainty. Such estimation is, therefore, made on a prudent basis. Accordingly, it is
(52)
considered appropriate to amortise goodwill over a period not exceeding 5 years unless a somewhat
longer period can be justified.
Factors which are considered in estimating the useful life of goodwill arising on
amalgamation include, among others, the following :
(1)
(2)
(3)
(4)
(5)
All the liabilities of the amalgamating company or companies immediately before the
amalgamation become the liabilities of the amalgamated company by virtue of
amalgamation.
(iii) Shareholders holding not less than three-fourths in value of the shares in the amalgamating
company or companies (other than the shares held therein immediately before the
amalgamation or by a nominee for the amalgamated company or its subsidiary) become
shareholders of the amalgamated company by virtue of the amalgamation, otherwise than as
a result of the acquisition of the property of one company by another company pursuant to
the purchase of such property by the other company or as a result of distribution of such
property to the other company after the winding up of the first-mentioned company.
Provisions relating to Carry Forward and Set-Off of Accumulated Losses and Unabsorbed
Depreciation in Amalgamation under Section 72A of the Income Tax Act, 1961.
The provisions of the old Section 72A of the Income tax Act, 1961, have been
substituted by a new Section 72A inserted vide the Finance Act, 1999. the provisions of the new
Section 72A are to come into force with effect from the Assessment Year 2000 2001. Under the
provisions of the new Section 72A, the amalgamated company is entitled to carry forward the
unabsorbed depreciation and brought forward losses of the amalgamating company provided that the
(54)
(55)
following conditions are fulfilled :
(1) The amalgamation should be of a company owning an industrial undertaking or a ship.
(2) The amalgamated company holds at least three-fourths of the book value of the fixed
assets of the amalgamating company for a continuous period of 5 years from the date of
amalgamation.
(3) The amalgamated company continues the business of the amalgamating company for a
period of 5 years from the date of amalgamation.
(4) The amalgamated company fulfils such other conditions, as may be prescribed to
ensure the revival of the business of the amalgamating company or to ensure that the
amalgamation is for genuine business purpose. For this purpose the provisions of Rule
9C have to be complied with.
The amalgamated company gets a fresh lease of 8 years to carry forward and set off the
brought forward loss and unabsorbed depreciation of the amalgamating company.
Tax Benefits / Concessions available in case of Amalgamation.
In case of an amalgamation which takes place within the meaning of Section 2(1B), as explained
earlier, the following tax concessions will be available :
(1)
(2)
(3)
not be regarded as a transfer for the purpose of capital gains provided the amalgamated company,
to whom the assets have been transferred, is an Indian company.
(b)
(i) the expenditure on the acquisition of the telecommunication licence, not yet written off, shall
be allowed to the amalgamated company in the same number of balance instalments.
(ii) where such licence is sold by the amalgamated company, the treatment of the
deficiency/surplus will be same as would have been in the case the amalgamating company.
(c) Treatment of Preliminary Expenses [ Section 35D(5)] :
Where an amalgamating company merges in a scheme of amalgamation with the amalgamated
company, the amount of preliminary expenses of the amalgamating company, which have yet not
been written off, shall be allowed as deduction to the amalgamated company in the same manner
as would have been allowed to the amalgamating company.
(57)
(d) Treatment of Expenditure on Prospecting , etc., of Certain Minerals [Section 35E(7A)] :
Where an amalgamating company merges in a scheme of amalgamation with the amalgamated
company, the amount of expenditure incurred wholly and exclusively on prospecting of any
mineral or a group of minerals specified in Part A or Part B, respectively, of the Seventh Schedule
or on the development of a mine or other natural deposit of any such mineral or group of
associated minerals, during the year of commercial production and any one or more of the four
years immediately preceeding that year, of the amalgamating company and the same is yet not
written off, it shall be allowed as deduction to the amalgamated company in the same manner as
would have been allowed to the amalgamating company.
(e) Treatment of capital Expenditure on Family Planning [ Section 36 (1) (ix)] :
Where the asset representing the capital expenditure on family planning is transferred by the
amalgamating company to the Indian amalgamated company, in a scheme of amalgamation, the
provisions of Section 36 (1) (ix) shall become applicable to the amalgamated company.
Consequently,
(i) the capital expenditure on family planning not yet written off shall be allowable to the
amalgamated company in the same number of balance instalments;
(ii) where such assets are sold by the amalgamated company, the treatment of the
deficiency/surplus will be the same as would have been in the case of amalgamating company.
(f) Treatment of Bad Debts [Section 36 (1) (vii)] :
Where due to amalgamation, the debts of the amalgamating company have been taken over by the
amalgamated company and subsequently such debt or part of the debt becomes bad, such bad debt
will be allowed as a deduction to the amalgamated company. (CIT vs. T. Veerabhadra Rao, K.
Koteswara Rao & Co.)
(g) Amortisation of Expenditure in case of Amalgamation [Section 35DD] :
From the assessment year 2000 2001 and onwards, where an assessee being an Indian company,
incurs any expenditure, on or after the 1 st day of April, 1999, wholly and exclusively for the
purposes of amalgamation or de-merger of an undertaking, the assessee shall be allowed a
deduction of an amount equal to one-fifth of such expenditure for each of the five successive
previous years beginning with the previous year in which the amalgamation or de-merger takes
place. Further, no deduction shall be allowed in respect of the said expenditure under any other
provision of the Income Tax Act, 1961.
(h) Carry forward and set-off of business losses and unabsorbed depreciation of the
amalgamating company [Section 72A] :
In addition to the above benefits / concessions, the amalgamated company shall be allowed to
carry forward and set off the unabsorbed depreciation and brought forward losses of the
amalgamating company if all the conditions mentioned in Section 72A are satisfied. The set off
and carry forward will be allowed for a period of 8 years form the year in which the amalgamation
takes place.
(58)
Tax Planning in case of Amalgamation.
Tax planning in case of amalgamation is of vital significance. The benefit of tax
concession is allowed to the amalgamating and amalgamated company only when the amalgamation
satisfies the conditions provided under Section 2(1B) of the Income Tax Act, 1961. One of the
conditions laid down is that all the assets and liabilities of the amalgamating company, as on the date
of amalgamation should be taken over by the amalgamated company. If some assets or liabilities of the
amalgamated company are not proposed to be taken over by the amalgamated company, the same
should be disposed off or discharged by the amalgamating company before the amalgamation takes
place.
Similarly, there is a condition that at least 75 percent of the shareholders of the
amalgamating company should become the shareholders of the amalgamated company. If more than
25 percent of the shareholders of the amalgamating company are not willing to become the
shareholders of the amalgamated company, then such shares of the dissenting shareholders may be
purchased by the other shareholders or by the amalgamated company, before the amalgamation, so that
at the time of amalgamation the condition of 75 percent of the shareholders becoming shareholders of
the amalgamated company is satisfied.
The amalgamated company can carry forward and set off the business loss and
unabsorbed depreciation of the amalgamating company only when certain conditions are satisfied,
under Section 72A of the Act. Where it is not possible to satisfy such conditions the company may opt
for a Reverse Merger, i.e., instead of the loss making company being merged with the profit making
company, the profit making company merges with the loss making company. In this case the loss
making company, which is the amalgamated company will be able to set off its accumulated losses and
unabsorbed depreciation against the profits of the profit making company which has been merged with
the former.
The benefit under Section 47(vii) shall be allowed only when the shareholders of the
amalgamating company are allowed shares of the amalgamated company in lieu of shares held by
them in the amalgamating company. If the shareholders are allotted something more than shares in the
amalgamated company, for instance, bonds or debentures, no benefit will be allowed under Section
47(vii) of the Act.
all the liabilities relatable to the undertaking, being transferred by the de-merged company,
immediately before the de-merger, becomes the liabilities of the resulting company by virtue of
the de-merger.
(iii)
the property and the liabilities of the undertaking or undertakings being transferred
by the de-merged company are transferred at values appearing in its books of account
immediately before the de-merger.
(iv) the resulting company issues, in consideration of the de-merger, its shares to the shareholders
of the de-merged company on a proportionate basis.
(v)
the shareholders holding not less than three-fourths in value of the shares in the de-merged
company become the shareholders of the resulting company or companies by virtue of the demerger, otherwise than a result of the acquisition of the property or assets of the demerged
company or any undertaking thereof by the resulting company.
of the assets transferred in a de-merger bears to the total value of the assets of such demerged
company immediately before the de-merger.
The term resulting company under Section 2 (41A) of the Income Tax Act, 1961,
means one or more companies to which the undertaking of the demerged company is transferred in a
de-merger and, the resulting company in consideration of such transfer of undertaking, issues shares to
the shareholders of the demerged company and includes any authority or body or local authority or
public sector company or a company established, constituted or formed as a result of de-merger.
(60)
Tax Benefits / Concessions available in case of De-merger.
If any de-merger takes place within the meaning of Section 2 (19AA) of the Income Tax Act, 1961, the
following tax concessions shall be available :
(1) Tax benefits / concessions to the de-merged company.
(2) Tax benefits / concessions to the shareholders of the de-merged company.
(3) Tax benefits / concessions to the resulting company.
Tax Benefits / Concessions to De-merged Company.
The following concessions are available to the de-merged company :
(1) Capital Gains Tax not attracted [ Section 47(vib) ] :
Where there is a transfer of any capital asset in a de-merger by the demerged company to the
resulting company, such a transfer will not be regarded as a transfer for the purpose of capital gain
provided the resulting company is an Indian company.
(2) Tax Concession to a Foreign Demerged Company [ Section 47 (vic) ] :
Where a foreign company holds any shares in an Indian company and transfers the same, in a demerger, to another resulting foreign company, such transaction will not be regarded as transfer for
the purpose of capital gain under Section 45, if the following conditions are satisfied :
(a) at least 75 % of the shareholders of the de-merged foreign company continue to remain the
shareholders of the resulting foreign company, and
(b) such transfer does not attract tax on capital gains in the country, in which the de-merged
foreign company is incorporated.
(3) Reserves for Shipping Business :
Where a ship acquired out of the reserve is transferred in a scheme of de-merger, even within the
period of eight years of acquisition there will be no deemed profits to the demerged company.
(2) Where such licence is sold by the resulting company, the treatment of the deficiency or
surplus as the case may be, will be the same as would have been allowed in the case of
the demerged company.
(b)
(c)
(d)
(e)
(f)
Set Off and Carry Forward of Business Losses and Unabsorbed Depreciation of the
Demerged Company [ Section 72A(4) and (5) ] :
The accumulated losses and unabsorbed depreciation, in a de-merger, should be allowed to be
carried forward by the resulting company if these are directly relatable to the undertaking
proposed to be transferred. Where it is not possible to relate these to the undertaking, such losses
and depreciation shall be apportioned between the demerged company and the resulting
company in proportion of the assets coming to the share of each as a result of the de-merger.
The term slump sale means the 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 determination of the value of an asset or liability for the sole purpose of payment of
stamp duty, registration fees or other similar taxes or fees shall not be regarded as assignment of
values to individual assets or liabilities.
Computation of Capital Gains in case of Slump Sale [ Section 50B ] :
Any profits or gains arising from the slump sale effected I the previous year shall be
chargeable to income tax as capital gains arising from the transfer of long term capital assets and shall
be deemed to be the income of the previous year in which the transfer took place. Any profits or gains
arising from the transfer under the slump sale, of any capital asset being one or more undertakings
(63)
owned and held by an assessee for not more than 36 months immediately preceeding the date of its
transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.
In case of capital assets being an undertaking or division transferred by way of a slump
sale, the net worth of the undertaking or the division, as the case may be, shall be deemed to be the
cost of acquisition and the cost of improvement for the purposes of Sections 48 and 49 and no regard
shall be given to the provisions contained in the second proviso to section 48 of the Income Tax Act,
1961. The term net worth is the aggregate value of the total assets of the undertaking or division as
reduced by the value of liabilities of such undertaking or division as appearing in its books of
accounts. However, any change in the value of assets on account of revaluation of assets shall be
ignored for the purpose of computing the net worth.
For the purpose of computing the net worth, the aggregate value of the total assets shall
be the written down value of the block of assets determined in accordance to the provisions contained
in sub-item (C) of Section 43(6) (c) (i) of the Income Tax Act, 1961 relating to the written down value
in case of slump sale, in case of depreciable assets. In case of other assets, the book value of such
assets shall be taken into consideration.
Report of an Accountant to be furnished with Return of Income [ Section 50B(3) ].
Every assessee, in case of a slump sale, is required to furnish in Form No.3CEA along
with the return of income, a report of an accountant indicating the computation of the net worth of the
undertaking or division, as the case may be, and certifying that the net worth of the undertaking or
division, as the case may be, has been correctly arrived at in accordance with the provisions of this
Section.
(2)
(3)
When there is sale, merger, amalgamation, lease or transfer of the factory to a joint venture with
specific provision for the transfer of liabilities of such factory.
The transfer of CENVAT credit under sub-rule (1) shall be allowed only if the stock of
inputs as such or in process, or the acpital goods is also transferred along with the factory to the new
site or ownership and the inputs, or capital goods, on which credit has been availed of, are duly
accounted for to the satisfaction of the Commissioner. [ Sub-rule (2) ].
Where the assessee had two units in separate locations at the same place, but later
closed one of the units for operational difficulties and transferred it to another unit, it was held that
unutilized credit in the closed unit could be transferred to the other unit. [ N.K. Chemical Industries
vs. CCE 1998 (100) ELT 495 (New Delhi CEGAT) ] .
Thus, even the CENVAT Scheme, provided under the Central Excise Rules, 1944, give
relief to an amalgamating or merging unit if certain criteria are fulfilled. One important point to be
noted is that the capital goods or the stock of inputs are also required to be transferred along with the
factory, in order to claim the CENVAT credit. If the liabilities are also transferred, as mentioned under
clause (c) above, then only will the credit be available to the transferee.
(64)
CONCLUSION
In conclusion it is evident that the role of amalgamations and mergers can in no
way be undermined in the present corporate scenario. From the procedure to be followed for
implementing the scheme of amalgamation under the Companies Act, 1956, to the various tax benefits
available under the Income Tax Act, 1961, an amalgamation or a merger is a detailed and complex
procedure requiring the analytical skills and accounting knowledge of a Chartered Accountant, the
legal knowledge of an Advocate and the secretarial expertise of a Company Secretary.
Corporate restructuring is very common in todays corporate scenario. It has provided a
means to eliminate competition within the four corners of the legal framework, it helps to achieve
better operational effectiveness and also helps in presenting a true and fair view of the state of the
company. Mergers due to their synergistic effects are gaining popularity in India. To cite a few
examples, the merger of Tata Oil Mills Company Limited (TOMCO) with Hindustan Lever Limited
(HLL) is a classic example of a horizontal merger which was effected to gain synergistic effects. The
merger of Mohta Steel Industries with Vardhaman Mills Limited is another example of a conglomerate
merger which was effected to bring about stability of income and profits.
While adopting a scheme of merger or takeover, it has to be noted that a listed company
has to abide with the provisions of the Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeover) Regulations, 1997. Further, the provisions of Section 108A to
108I of the Companies Act, 1956, have also to be considered in certain cases where it is proposed to
acquire a prescribed percentage of the paid-up share capital of a company or to effect a transfer of a
prescribed percentage of the subscribed share capital of a particular company. The accounting standard
prescribed by the Institute of Chartered Accountants of India (i.e., Accounting Standard 14) has also
to be complied with in effecting the merger or amalgamation, as the case may be, since the same is
mandatory for all companies. Care has to be taken to ensure that accounting for the merger or
amalgamation is done as per the prescribed accounting standard.
(2)
(3)
Directors of the offerree company (whose shares are being bid for) should act in the best
interest of their shareholders and obtain independent advice.
(4)
To sum it all the takeover strategies are really complex legal and financial actions on
the part of the acquiring firms. It involves selection of a suitable firm or company to be taken over or
acquired and negotiating with the other company to find out the viability of the merger and find out the
dissenting shareholders views and to convince them about the advantages of the merger. In case the
dissenting shareholders do not agree to the scheme, the acquiring company may either go ahead with
the acquisition or refrain from acquiring the target company.
Thus, it may be concluded that in order to implement a good and effective scheme of
amalgamation or in order to effect a merger it is essential to first of all select the proper transferee
company or target company, as the case may be, and also to see that the company is worth acquiring.
The tax implications under the Income Tax Act, 1961 and the CENVAT Scheme (under the Central
Excise Rules, 1944) have also to be considered in order to gain the maximum benefit in order to go
ahead with the merger or amalgamation, as the case may be. Since, the procedure is complex it would
always be advisable to first consult a Chartered Accountant, the legal advisor and the Company
Secretary of the company concerned, before going ahead with the scheme of amalgamation or merger.
External advise from tax consultants and solicitors may also be taken in order to have a sound base for
the amalgamation / merger. The share valuation and valuation of the concerns is also an essential step
in the process of corporate mergers and amalgamations. It is the duty of the Chartered Accountant to
see that the appropriate valuation method is used and that all the relevant accounting standards are
adhered to while effecting the scheme of amalgamation or merger.
Thus, amalgamations and mergers are a boon to the corporate world, but also have an
adverse effect on the economy at times due to excessive monopolization and cartelisation. However, it
may be noted that the Government has taken the necessary measures and made the necessary
provisions to prevent interconnection of undertakings under the MRTP Act, 1969 . In order to achieve
(67)
a balance between the good and adverse effects of amalgamations and mergers it must be seen that the
underlying reason for the same considered while evaluating the scheme by the Court. The Court
cannot refuse the scheme, if it is in the bona fide interest of the companies and approved by the
requisite majority of the shareholders.
Therefore, though a complex and elaborate process, amalgamations and mergers are
indeed essential in the present economic scenario of the country so as to attain economy and utilize the
resources in an efficient and effective manner, so as to optimize production and achieve a general
reduction in the cost of production, thus resulting in the optimisation of price level in the economy.
BIBLIOGRAPHY
Name of the Book
Author / Publishers
1)
Taxmann Publishers
2)
Girish Ahuja
and
Ravi Gupta
3)
ICSI Publication
4)
A. Ramaiya
5)
ICSI Publication
6)
Financial Management
Prasanna Chandra
(68)
INDEX
S.No.
Topic
Page No.
1.
Preface
(i)
2.
Acknowledgement
(ii)
3.
Methodology
(iii)
4.
Introduction
(iv)
5.
6.
7.
8.
9.
16
19
23
10.
41
11.
49
12.
Mergers, Amalgamations & De-mergers under the Income Tax Act, 1961 and
Tax Benefits available thereunder.
54
13.
Benefits available under the CENVAT Scheme of the Central Excise Rules, 1944
64
14.
Conclusion
65
15.
Bibliography
68