3.

Legal Mechanism of Mergers and Amalgamations in India

There are various legislations dealing with mergers and amalgamations in India. They
are companies act, competition act, the foreign exchange management act, the income tax act,
etc. which regulates the mergers and amalgamations in India.

3.1 Provisions under Companies act

Mergers and Amalgamations are substantially regulated by the companies act. 1 The
term merger or amalgamation is not defined under the companies act. However as far Indian
law is concerned, use of the term amalgamation is more prevalent. The basis law related to
mergers is codified in the Indian Companies Act, 1956 which works in tandem with various
regulatory policies. The general law relating to mergers, amalgamations and reconstruction is
embodied in sections 391 to 396 of the Companies Act, 1956 which jointly deal with the
compromise and arrangement with creditors and members of a company needed for a
merger.2

Section 390(a) defines the expression ‘company’ as any company liable to be wound
up under the act. Under section 390(b), the expression ‘arrangement’ is defined to include a
reorganisation of the share capital of the company by any or both of the following methods

• Consolidation of shares of different classes

• By the division of shares into shares of different classes.
• Under section 390C, unsecured creditors who may have filed suit or obtained decrees
shall be deemed to be of the same class as other unsecured creditors.

The word “arrangement” has a very wide meaning, and is wider than the word
“compromise”. There can be no compromise unless there is first a dispute but a scheme,
which is not a compromise may nonetheless be an arrangement within section 391.

1
Sections 391 – 396A, chapter V - Arbitration, compromises, arrangements and reconstructions, The
Companies Act, 1956.
2
Avtar Singh, “Company Law” 14th Ed. Pg – 515.

14
Section 391- Power to compromise or make arrangements with creditors and members3

(1) Where a compromise or arrangement is proposed-

(a) between a company and its creditors or any class of them; or

(b) between a company and its members or any class of them,

the Tribunal may, on the application of the company or of any creditor or member of the
company or, in the case of a company which is being wound up, of the liquidator, order a
meeting of the creditors or class of creditors, or of the members or class of members, as the
case may be to be called, held and conducted in such manner as the Tribunal directs.

(2) If a majority in number representing three-fourths in value of the creditors, or class of

creditors, or members, or class of members as the case may be, present and voting either in
person or, where proxies are allowed [under the rules made under section 643], by proxy, at
the meeting, agree to any compromise or arrangement, the compromise or arrangement shall,
if sanctioned by the Tribunal, be binding on all the creditors, all the creditors of the class, all
the members, or all the members of the class, as the case may be, and also on the company,
or, in the case of a company which is being wound up, on the liquidator and contributories of
the company:

(3) An order made by the Tribunal under sub-section (2) shall have no effect until a certified
copy of the order has been filed with the Registrar.

(4) A copy of every such order shall be annexed to every copy of the memorandum of the
company issued after the certified copy of the order has been filed as aforesaid, or in the case
of a company not having a memorandum, to every copy so issued of the instrument
constituting or defining the constitution of the company.

(5)If default is made in complying with sub-section (4), the company, and every officer of the
company who is in default, shall be punishable with fine which may extend to one hundred
rupees for each copy in respect of which default is made.

3
The Indian Companies Act, 1956.

15
(6)The Tribunal may, at any time after an application has been made to it under this section
stay the commencement or continuation of any suit or proceeding against the company on
such terms as the Tribunal thinks fit, until the application is finally disposed of.

This section gives the Tribunal the power to sanction a compromise or arrangement between
a company and its creditors/ members subject to certain conditions. It is well settled that,
under section 391, the court is invested with very wide powers to approve or sanction any
scheme of amalgamation, restructuring, compromise and reconstruction. It has been well
settled in several cases that section 391 is a complete code and the court has wide powers to
frame a scheme for the revival of a company. Thus section 391 provides a scheme whereby a
scheme of reconstruction, reorganization, amalgamation, compromise and arrangement may
be carried through.

Section 392: Power of Tribunal to enforce compromise and arrangement.4

After sanctioning a scheme of compromise or arrangement under section 391, the court shall
have the power to supervise the carrying out of the compromise or arrangement. The court
has the power to give such direction in regard to any matter or make such modifications in
the compromise or arrangement as it may consider necessary for the proper working of the
scheme.

(1) Where the Tribunal makes an order under section 391 sanctioning a compromise or an
arrangement in respect of a company, it-

(a) shall have power to supervise the carrying out of the compromise or an arrangement; and

(b) may, at the time of making such order or at any time thereafter, give such directions in
regard to any matter or make such modifications in the compromise or arrangement as it may
consider necessary for the proper working of the compromise or arrangement.

(2) If the Tribunal aforesaid is satisfied that a compromise or an arrangement sanctioned

under section 391 cannot be worked satisfactorily with or without modifications, it may,
either on its own motion or on the application of any person interested in the affairs of the
company, make an order winding up the company, and such an order shall be deemed to be
an order made under section 433 of this Act.
4
The Indian Companies Act, 1956.

16
(3) The provisions of this section shall, so far as may be, also apply to a company in respect
of which an order has been made before the commencement of the Companies (Amendment)
Act, 2001 sanctioning a compromise or an arrangement.

This section gives the power to the Tribunal to enforce and/ or supervise such compromises
or arrangements with creditors and members.

Section 393: Information as to compromises or arrangements with creditors and

members5

(1) Where a meeting of creditors or any class of creditors, or of members or any class of
members, is called under section 391,-

(a) with every notice calling the meeting which is sent to a creditor or member, there shall be
sent also a statement setting forth the terms of the compromise or arrangement and explaining
its effect; and in particular, stating any material interests of the directors, managing director
or manager of the company, whether in their capacity as such or as members or creditors of
the company or otherwise, and the effect on those interests of the compromise or arrangement
if, and in so far as, it is different from the effect on the like interests of other persons; and

(b) in every notice calling the meeting which is given by advertisement, there shall be
included either such a statement as aforesaid or a notification of the place at which and the
manner in which creditors or members entitled to attend the meeting may obtain copies of
such a statement as aforesaid.

(2) Where the compromise or arrangement affects the rights of debenture-holders of the
company, the said statement shall give the like information and explanation as respects the
trustees of any deed for securing the issue of the debentures as it is required to give as
respects the company's directors.

(3) Where a notice given by advertisement includes a notification that copies of a statement
setting forth the terms of the compromise or arrangement proposed and explaining its effect
5
The Indian Companies Act, 1956.

17
can be obtained by creditors or members entitled to attend the meeting, every creditor or
member so entitled shall, on making an application in the manner indicated by the notice, be
furnished by the company, free of charge, with a copy of the statement.

(4) Where default is made in complying with any of the requirements of this section, the
company, and every officer of the company who is in default, shall be punishable with fine
which may extend to fifty thousand rupees and for the purpose of this sub-section any
liquidator of the company and any trustee of a deed for securing the issue of debentures of the
company shall be deemed to be an officer of the company:

Provided that a person shall not be punishable under this sub-section if he shows that the
default was due to the refusal of any other person, being a director, managing
director, manager or trustee for debenture holders, to supply the necessary particulars as to
his material interests.

(5) Every director, managing director, or manager of the company, and every trustee for
debenture holders of the company, shall give notice to the company of such matters relating
to himself as may be necessary for the purposes of this section; and if he fails to do so, he
shall be punishable with fine which may extend to five thousand rupees.

This section provides for the availability of the information required by the creditors and
members of the concerned company when acceding to such an arrangement. Under this
section, every notice calling the meeting of the creditors or members should be accompanied
by a statement setting forth the terms of compromise or arrangement and explaining its effect.
The statement should contain any material facts of the directors, managing directors etc. of
the company. In case the notice is advertised, then it should specify the venue and the manner
in which members attending the meeting can obtain copies of the statement of compromise or
arrangement.

18
Further, it provides that every creditor or member on making an application in the manner
indicated in the notice of advertisement, be furnished with a copy of the statement free of
charge. The refusal to supply particulars is punishable with fine.

Section 394: Provisions for facilitating reconstruction and amalgamation of companies6

According to section 394, where an application is made to the Tribunal under section 391 for
the sanctioning of a compromise or arrangement proposed between a company and any such
persons as are mentioned in that section, and it is shown to the Tribunal

(a) that the compromise or arrangement has been proposed for the purposes of, or in
connection with, a scheme for the reconstruction of any company or companies, or the
amalgamation of any two or more companies; and

(b) that under the scheme the whole or any part of the undertaking, property or liabilities of
any company concerned in the scheme (in this section referred to as a "transferor company")
is to be transferred to another company (in this section referred to as "the transferee
company");

The Tribunal may, either by the order sanctioning the compromise or arrangement or by a
subsequent order, make provision for all or any of the following matters:-

(i) The transfer to the transferee company of the whole or any part of the undertaking,
property or liabilities of any transferor company.

(ii) the allotment or appropriation by the transferee company of any shares, debentures
policies, or other like interests in that company which, under the compromise or arrangement,
are to be allotted or appropriated by that company to or for any person;

(iii) the continuation by or against the transferee company of any legal proceedings pending
by or against any transferor company

(iv) the dissolution, without winding up, of any transferor company. However no order for
dissolution of any transferor company can be made unless the official liquidator if of opinion

6
The Indian Companies Act, 1956.

19
that the affairs of the company have not been conducted in a manner prejudicial to the interest
of its members or public interest – Shankaranarayana Hotels (P.) Ltd v. Official Liquidator7

(v) the provision to be made for any persons who, within such time and in such manner as the
Court directs dissent from the compromise or arrangement; and

(vi) such incidental, consequential and supplemental matters as are necessary to secure that
the reconstruction or amalgamation shall be fully and effectively carried out:

However, the tribunal shall not sanction any compromise or arrangement for the
amalgamation of a company which is being wound up with any other company unless the
tribunal has receives a report from the registrar that the affairs of the company have not been
conducted in a manner prejudicial to the interest of its member or the public interest.
Similarly the tribunal will not make an order for dissolution of any transferor – company
unless the official liquidator has, on scrutiny of the books and paper of the company, made a
report to the tribunal that the affairs of the company have not been conducted in a manner
prejudicial to the interest of its member or to public interest.

(2) Where an order under this section provides for the transfer of any property or liabilities,
then, by virtue of the order; that property shall be transferred to and vest in and those
liabilities shall be transferred to and become the liabilities of the transferee company and in
the case of any property, if the order so directs, freed from any charge which is, by virtue of
the compromise or arrangement, to cease to have effect.

(3) Within thirty days after the making of an order under this section, every company in
relation to which the order is made shall cause a certified copy thereof to be filed with the
Registrar for registration.

If default is made in complying with this sub-section, the company, and every officer of the
company who is in default, shall be punishable with fine which may extend to [five hundred
rupees].

(4) In this section-

7
[1992] 74 Comp. Cas. 290 (Kar.)

20
 (a) "property" includes property rights and powers of every description; and "liabilities"
includes duties of every description; and
(b) "Transferee company" does not include any company other than a company within the
meaning of this Act; but "transferor company" includes any body corporate, whether a
company within the meaning of this Act or not.

Section 394 makes provisions for facilitating reconstruction and amalgamation of companies,
by making an appropriate application to the Tribunal.

Section 395: Power and duty to acquire shares of shareholders dissenting from scheme
or contract approved by majority8

Section 395 lays down that

1. Where the transferee company has offered to acquire the shares or any class of shares
of the transferor company, the scheme or contract embodying such offer has to be
approved by the shareholders concerned within four months. The approval must be
given by the holders of not less than 9/10ths in value of the shares whose transfer is
involved. In computing 9/10th value of shares, the shares already held by the
transferee company or its nominee or subsidiary are excluded.
2. If the offer is approved, the transferee company may, at any time within two months
of the expiry of the said four months, giving a notice to the dissenting shareholders
that it desires to acquire their shares. The transferee company is entitled and bound to
acquire the shares of dissenting shareholders on the same terms on which the shares of
approving shareholders were approved unless on the application of the dissenting
shareholders within one month of such notice, the tribunal orders otherwise.
3. If the transferee company already holds in the transferor company shares of the class
whose transfer is involved, of a value more than 1/10th of the total value of the shares
of that class in that company, then the above provisions will not apply and the
transferee company cannot acquire the shares of the dissenting members. However, it
may still acquire the shares if:

(a) It offers the same terms to all the shareholders of the same class, and

8
The Indian Companies Act, 1956.

21
(b)The shareholders who approve of the scheme, besides holding not less than 9/10ths in
value of the shares other than those already held by the transferee company by itself or
through nominees, are also not less than 3/4ths in number of the holders of those shares.

4. Where the transferor company or its nominee or subsidiary already holds in the
transferor company at least 9/10ths in value of shares of the class agreed to be
transferred in pursuance of the scheme, then the transferee – company must give
notice of the fact to the remaining dissenting shareholders of the transferor company
within one month of the date of transfer already made. On receipt of such notice, the
dissenting shareholders may, within three months, require the transferee company to
acquire the shares. Then the transferee company will be entitled and bound to acquire
such shares on the same terms as that of the approving shareholders or on such other
terms as may be agreed or as ordered by the tribunal, on the application of the
transferee company or the shareholder.

5. Where notice has been given by the transferee company to the dissenting
shareholder(s) expressing its desire their shares and the tribunal has not made an order
on the application of the dissenting shareholders modifying the scheme of transfer,
then the transferee company must send a copy of the notice to the transferor company
on the expiry of one month of the date of notice, together with an instrument of
transfer executed by the transferee company itself through any of its persons and the
deal also completed by the transferee company in the instrument. This time period of
one month shall also run in case where a tribunal reference was made by the
dissenting shareholder and the tribunal disposed of the petition only after the notice
was given, then from the date of petition was disposed of. The transferee company
must also pay or transfer to the transferor company the amount or consideration
representing the price of the shares which it is entitled to acquire under the section.
Thereupon, the transferor company shall register the transferee company as the holder
of those shares and inform the dissenting shareholder of the fact within one month of
registration.
 22

The transferor company will also deposit the amount so received in a separate bank
account to be held in trust for the holders of shares in respect of which amount has been
received.

Disclosure of information: As per sub – section (4A) of section 395, the following
provisions are to apply in relation to every officer or 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 officer or every circular containing such offer, or every recommendation
by the directors of the transferor company to its shareholders to accept such offer must
be accompanied by such information as may be prescribed by the central government.
(b) Every such offer must 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.
(c) Every circular containing or recommending acceptance of such offer must be
presented to the registrar for registration, and no such circular can be issued until it is
so registered.
(d) The registrar may refuse to register any such circular which does not contain the
prescribed information as per the clause (a) above, or which sets out such information
in a manner likely to give a false impression.
(e) An appeal may be made to the tribunal against an order of the registrar refusing to
register such circular.

Any person responsible for issue of a circular containing an offer involving transfer of shares
under a scheme or contract without getting the same registered shall be punishable with fine
upto rupees five thousand.

Section 396: power of central government to provide for amalgamation of companies in

national interest.9
9
The Indian Companies Act, 1956.
Notwithstanding anything contained in section 394 and 395, where the central government is
satisfied that it is essential in the public interest that two or more companies should
amalgamate, then the c

ntral government may order the amalgamation of those companies into a single company
with such constitution, with such property, powers, rights, interests, authorities and privileges
and with such liabilities, duties and obligation as may be specified in the order. The order of
the central government shall be notified in the official gazette.

Sub – section (3) of section 396 makes provisions for payment of compensation to any
member or creditor who stands to lose by the amalgamation. The amount of compensation is
to be assessed by the central government and has to be published in official gazette. The sub
– section provides shall have, as nearly as may be, the same interest in or rights against the
company resulting from the amalgamation as he had in the company of which he was
originally a member or creditor. To the extent the rights or interest of such member or
creditor against or in the original company, he shall be entitled to compensation which shall
be assessed by such authority as may be prescribed. The compensation so assessed shall be
paid to the member or creditor concerned by the company resulting from amalgamation.

Any person aggrieved by any assessment of compensation made by the prescribed authority
under sub – section (3) may, within 30 days from the date of publication of such assessment
in the official gazette, prefer an appeal to the tribunal and thereupon the assessment of the
compensation shall be made by the tribunal.

The government, before making the order, must:

(a) Send a draft copy of the proposed order to each of the companies concerned,
(b) have considered and made such modifications, if any, in the draft order as may seem
to it desirable in the light of any suggestions and objections which may be received by
it from the companies concerned, or from the shareholders therein, or from any
creditors thereof.

23
Copies of every order made under section 396 must, after it has been made, be laid before
both houses of parliament as soon as possible.

24

Section 396A: Preservation of books and papers of amalgamated company10

Section 396A requires that the books and papers of a company, which has been amalgamated
with, or whose shares have been acquired by, another company, must not be disposed of
without the prior permission of the central government. The central government, before
granting such permission, may appoint a person to examine the books and papers 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 first
mentioned company or its amalgamation or the acquisition of its shares.

3.2 Provisions under Income Tax Act

Merger has not been defined under the Income Tax Act but the term 'amalgamation' as
defined in section 2(1B) of the Act.11 “Amalgamation in relation to companies, means the
merger of one or more companies with another or the merger of two or more companies to
form one company in such a way that a way that:

i. all the property of the amalgamating company or companies immediately before the
amalgamation becomes the property of the amalgamated company by virtue of
amalgamation;
ii. all the liabilities of the amalgamating company or companies immediately before the
amalgamation become liabilities of the amalgamated company.

iii. Shareholders holding not less than three – fourths in value of shares in the
amalgamating company or companies become shareholders of the amalgamated
company by virtue of amalgamation.12

10
The Indian Companies Act.
11
Taxmann’s, ”Income Tax Act”, P – 1.1.
12
http://business.gov.in/growing_business/mergers_acq.php last visited on 25.08.2010.
In case of mergers and amalgamations, a number of issues may arise with respect to tax
implications. Some of the relevant provisions may be summarized as follows:

Depreciation: The amalgamated company continues to claim depreciation on the basis of

written down value of fixed assets transferred to it by the amalgamating company. The
depreciation charge may be based on the consideration paid and without any re-valuation.
However, unabsorbed depreciation, if any, cannot be assigned to the amalgamated company
and hence no tax benefit is available in this respect.13

Capital Expenditures: If the amalgamating company transfers to the amalgamated company

any asset representing capital expenditure on scientific research, then it is deductible in the
hands of the amalgamated company under section 35 of Income Tax Act, 1961.14

Exemption from Capital Gains Tax: The transfer of assets by amalgamating company to
the amalgamated company, under the scheme of amalgamation is exempted for capital gains
tax subject to conditions namely (i) that the amalgamated company should be an Indian
Company, and (ii) that the shares are issued in consideration of the shares, to any shareholder,
in the amalgamated company. The exchange of old share in the amalgamated company by the
new shares in the amalgamating company is not considered as sale by the shareholders and
hence no profit or loss on such exchange is taxable in the hands of the shareholders of the
amalgamated company.15

Carry Forward Losses of Sick Companies: Section 72A(1) of the Income Tax Act, 1961
deals with the mergers of the sick companies with healthy companies and to take advantage
of the carry forward losses of the amalgamating company. But the benefits under this section
with respect to unabsorbed depreciation and carry forward losses are available only if the
followings conditions are fulfilled:

1. The amalgamating company is an Indian company.

2. The amalgamating company should not be financially viable.
3. The amalgamation should be in public interest.

25
13
http://www.mbaknol.com/legal-framework/laws-governing-merger-in-india/ last visited on 25.08.2010.
14
Ibid.
15
Ibid.

26
 4. The amalgamation should facilitate the revival of the business of the amalgamating
company.
5. The scheme of amalgamation is approved by a specified authority, and
6. The amalgamated company should continue to carry on the business of the
amalgamating company without any modification

Amalgamation Expenses: In case an expenditure is incurred towards professional charges of

Solicitors for the services rendered in connection with the scheme of amalgamation, then
such expenses are deductible in the hands of the amalgamated firm.16

3.3 Provisions under the Competition Act

On August 28 2009 the Ministry of Corporate Affairs issued a notification pursuant to which
the Monopolies and Restrictive Trade Practices Act 1969 was repealed and replaced by the
Competition Act 2002 with effect from September 1 2009. The Competition Act attempts to
make a shift from curbing monopolies to curbing practices that have adverse effects on
competition both within and outside India. The competition act governs only those Mergers
which satisfy the threshold limits prescribed under the act and are referred to as
combinations.17 The act does not prohibit combinations of enterprises and individuals but
seeks to regulate such combinations. The provisions relating to merger control under the act
are given below:

Section 3 of the act governs anti-competitive agreements and prohibits:

"Agreements involving production, supply, distribution, storage, acquisition or control of

goods or provision of services, which cause or are likely to cause an 'appreciable adverse
effect on competition' in India."18

Section 4 of the act prohibits the abuse of a dominant position by an enterprise. There shall
be an abuse of dominant position if an enterprise or a group

(a) directly or indirectly, imposes unfair or discriminatory—

16
http://www.mbaknol.com/legal-framework/laws-governing-merger-in-india/ last visited on 25.08.2010.
17
http://www.lexvidhi.com/article-details/merger-amalgamation-and-competition-act-2002-317.html last visited
on 25.08.2010.
18
The Competition Act, 2002.

27
(i) condition in purchase or sale of goods or service; or

(ii) price in purchase or sale (including predatory price) of goods or service.

(b) limits or restricts—

(i) production of goods or provision of services or market therefor; or

(ii) technical or scientific development relating to goods or services to the prejudice of

consumers; or

(c) indulges in practice or practices resulting in denial of market access in any manner; or

(d) makes conclusion of contracts subject to acceptance by other parties of supplementary

obligations which, by their nature or according to commercial usage, have no connection with
the subject of such contracts; or

(e) uses its dominant position in one relevant market to enter into, or protect, other relevant
market.19

Section 6 of the competition Act states that ‘no person or enterprise will enter into
Combination which causes or is likely to cause an appreciable adverse effect on competition
within the relevant market in India and such a combination will be void. A ‘combination’ is
either a merger of two enterprises or the acquisition of the control, shares, voting rights or
assets of an enterprise or an enterprise that belongs to a group if it meets the jurisdictional
requirements set forth below. Although the Act does not expressly so state, the term
‘combination’ include horizontal, vertical and conglomerate mergers.20

Criteria under Section 5

Section 5 of the competition act defines combination by providing threshold limits on assets
and turnovers. At present, any acquisition, merger or amalgamation falling within the ambit
of the thresholds constitutes a combination. The following transactions will constitute a
combination:21
19
The Competition Act, 2002.
20
Ibid.
21
Ibid.

28
(a) any acquisition where—

(i) the parties to the acquisition, being the acquirer and the enterprise, whose control, shares,
voting rights or assets have been acquired or are being acquired jointly have,—

(A) either, in India, the assets of the value of more than rupees one thousand crores or
turnover more than rupees three thousand crores; or

(B) in India or outside India, in aggregate, the assets of the value of more than five hundred
million US dollars, including at least rupees five hundred crores in India, or turnover more
than fifteen hundred million US dollars, including at least rupees fifteen hundred crores in
India; or

(ii) the group, to which the enterprise whose control, shares, assets or voting rights have been
acquired or are being acquired, would belong after the acquisition, jointly have or would
jointly have,—

(A)either in India, the assets of the value of more than rupees four thousand crores or
turnover more than rupees twelve thousand crores; or

(B)in India or outside India, in aggregate, the assets of the value of more than two billion US
dollars, including at least rupees five hundred crores in India, or turnover more than six
billion US dollars, including at least rupees fifteen hundred crores in India; or

(b) acquiring of control by a person over an enterprise when such person has already
direct or indirect control over another enterprise engaged in production, distribution or
trading of a similar or identical or substitutable goods or provision of a similar or
identical or substitutable service, if—

(i) the enterprise over which control has been acquired along with the enterprise over which
the acquirer already has direct or indirect control jointly have,—

(A) either in India, the assets of the value of more than rupees one thousand crores or
turnover more than rupees three thousand crores; or

(B) in India or outside India, in aggregate, the assets of the value of more than five hundred
million US dollars, including at least rupees five hundred crores in India, or turnover more
than fifteen hundred million US dollars, including at least rupees fifteen hundred crores in
India; or

29

(ii) the group, to which enterprise whose control has been acquired, or is being acquired,
would belong after the acquisition, jointly have or would jointly have,

(A) either in India, the assets of the value of more than rupees four thousand crores or
turnover more than rupees twelve thousand crores; or

(B) in India or outside India, in aggregate, the assets of the value of more than two billion US
dollars, including at least rupees five hundred crores in India, or turnover more than six
billion US dollars, including at least rupees fifteen hundred crores in India; or

(c) any merger or amalgamation in which—

(i) the enterprise remaining after merger or the enterprise created as a result of the
amalgamation, as the case may be, have,—

(A) either in India, the assets of the value of more than rupees one thousand crores or
turnover more than rupees three thousand crores; or

(B) in India or outside India, in aggregate, the assets of the value of more than five hundred
million US dollars, including at least rupees five hundred crores in India, or turnover more
than fifteen hundred million US dollars, including at least rupees fifteen hundred crores in
India; or

(ii) the group, to which the enterprise remaining after the merger or the enterprise created as a
result of the amalgamation, would belong after the merger or the amalgamation, as the case
may be, have or would have,—

(A) either in India, the assets of the value of more than rupees four-thousand crores or
turnover more than rupees twelve thousand crores; or
(B) in India or outside India, in aggregate, the assets of the value of more than two billion US
dollars, including at least rupees five hundred crores in India, or turnover more than six
billion US dollars, including at least rupees fifteen hundred crores in India.

30

Filing of notice

Section 6 of the regulation makes it mandatory to give notice in form 1 and form 2 to the
commission within 30 days of the decision of the parties' boards of directors or of execution
of any agreement or other document for effecting the combination.22

As per section 10(2) In case of a merger or an amalgamation, all persons or enterprises to the
combination, who or which propose such merger or amalgamation, as the case may be, shall
jointly file the notice.23

Fee- as provided under regulation 12

(1) The notice, in Form 1 or Form 2, shall be accompanied with proof of payment of the
required fee in accordance with this regulation;

(2) The fee to be paid for any combination shall be:

(a) Rupees twenty lacs along with the notice in Form 1 or Form 2;

(b) Rupees twenty lacs along with the response to the communication to show cause of the
Commission received by the parties under sub-section (1) of section 29 of the Act; Provided
that where a notice has not been filed under regulation 6, Form 1 filed in response to show
cause under regulation 8 of the Act shall be accompanied by a fee of rupees forty lacs;

(c) Rupees twenty lacs along with the proof of publishing details of combination under sub
section (2) of section 29 of the Act;

22
The Competition ct, 2002.
23
Ibid.
31
 (3) The fee payable shall be net of any charges, fees, or taxes, if any, payable by the parties
on its remittance to the Commission.

Waiting Period

The Competition Act provides for a post-filing review period of 210 days, during which the
merger cannot be consummated and within which the Competition Commission is required to
pass its order with respect to the notice received. If the commission fails to pass an order
within the time limit, the proposed combination will be deemed to be approved. The 210-day
period applies in case of cross-border transactions outside India where one of the contracting
parties has a substantial presence in India. Regardless of the size of the transaction,
notification is required where the combined asset value or turnover in India exceeds a certain
value. This means that it is mandatory for a foreign company with assets of more than $500
million that has a subsidiary or joint venture in India with a substantial investment (above
$125 million) to notify the Competition Commission before acquiring a company outside
India.24

Exemptions

The Competition Commission of India (Combination) Regulations, provides for thirteen

Categories of transactions not likely to have appreciable adverse effect on competition in
India.

Extra Territorial Jurisdiction of the competition act

In the Indian Competition Act, 2002 has the extra territorial jurisdiction. Section 32 provides
that the commission shall have the power to Competition Commission shall have the power
to enquire into an agreement or abuse of dominant position or combination even if the act has
taken place outside India or the party or enterprise is outside India provided it has an
appreciable adverse effect on competition in India. Further the Commission is allowed under
proviso to section 18 to enter in to memorandum or arrangement with the prior approval of
the Central Government. Section 32 states that, notwithstanding that any restrictive
agreement, any party to such agreement, any enterprise abusing the dominant position, or any
combination or party to the combination is outside India, the Competition Commission of

24
http://www.lexvidhi.com/article-details/merger-amalgamation-and-competition-act-2002-317.html last visited
on 26.09.2010.
India has the power to enquire into if it has an anti competitive effect within the relevant
market in India.25

Thus the competition act does not seeks to eliminate combinations and only aims to eliminate
their harmful effects, so that mergers and amalgamations are not adversely affected.26

3.4 Provisions under the Foreign Exchange Management Act

During recent years there has been substantial augment tin the figures of cross border mergers
in India resulting into truly global enterprise. Cross border merger takes place when two
companies of different countries merge together.

Under FEMA, general permission has been granted to any non-resident to purchase shares or
convertible debentures of an Indian company under Foreign Direct Investment Scheme,
subject to the terms and conditions specified in Schedule 1 thereto. However citizens of
Bangladesh, Pakistan or Sri Lanka resident outside India and entities in Bangladesh or
Pakistan are not permitted to purchase shares or debentures issued by Indian companies or
any other Indian security without the prior approval of the RBI.27

Further, persons resident outside India are permitted to purchase shares or convertible
debentures offered on a rights basis by an Indian company which satisfies the conditions
restated hereinbelow.

(i) The offer on right basis does not result in increase in the percentage of foreign equity
already approved, or permissible under the Foreign Direct Investment Scheme in
terms of FEMA 2000;

(ii) The existing shares or debentures against which shares or debentures are issued by
the company on right basis were acquired and are held by the person resident outside
India in accordance with FEMA 2000;

(iii) The offer on right basis to the persons resident outside India is at a price which is not
lower than that at which the offer is made to resident shareholders;

25
Ibid.
26
T. Ramappa, “Competition Law in India, policy issue and developments”, 1st ed. 2006, P – 190.
32
27
Regulation 5 (1), FEMA 2000.
The rights shares so acquired shall be subject to the same conditions regarding repatriation as
applicable to original shares.28 Further, under FEMA 20, an Indian company has been
permitted to issue shares to its employees or employees of its joint venture / subsidiary
abroad, who are non-resident, either directly or through a trust.29

Under Regulation 7 of FEMA 2000, once a scheme of merger, demerger or amalgamation has
been approved by the court, the transferee company (whether the survivor or a new company)
is permitted to issue shares to the shareholders of the transferor company who are persons
resident outside India, subject to the condition that the percentage of non resident holdings in
the company does not exceed the limits for which approval has been granted by the RBI or
the prescribed sectoral ceiling under the foreign direct investment policy set under the FEMA
laws. If the new share allotment exceeds such limits, the company will have to obtain the
prior approval of the FIPB and the RBI before issuing shares to the non residents.30

General permission has also been granted for transfer of shares / convertible debentures by a
non-resident as follows:31

(i) Non-residents other than non-resident Indians (“NRIs”) or Overseas Corporate

Bodies (“OCBs”)32 may transfer shares / convertible debentures to any non-resident,
provided that the transferee should have obtained permission of the Central
Government, if he had any previous venture or tie-up in India through investment in
any manner or a technical collaboration or trademark agreement in the same or allied
field in which the Indian company whose shares are being transferred is engaged;

(ii) NRIs or OCBs are permitted to transfer by way of sale, any shares or convertible
debentures of Indian companies to other NRIs or OCBs only;

(iii) Non-residents are permitted to transfer shares / debentures of any Indian company to
a resident by way of gift.

28
Regulation 6 (3), FEMA 2000.
29
Regulation 8, FEMA 2000.
33
30
Proviso to Regulation 7 (1) (a), FEMA 2000.
31
Regulation 9, FEMA 2000.
32
‘Overseas Corporate Body’ or OCB means a company, partnership firm, society and other corporate body
owned directly or indirectly to the extent of at least 60% by NRIs and includes overseas trust in which not less
than 60% beneficial interest is held by NRIs, directly or indirectly, but irrevocably. See, MASTER CIRCULAR
ON FOREIGN INVESTMENT IN INDIA, p. 4, Master Circular No.2/2009-10, dated 1 July 2009.
FEMA 2000 further stipulates that any transfer of security by a resident to a non-resident
would require the prior approval of the RBI. For the transfer of existing shares/convertible
debentures of an Indian company by a resident to a non resident by way of sale, the transferor
will have to obtain the approval of the Central Government before applying to the RBI.33 In
such cases, the RBI may permit the transfer subject to such terms and conditions, including
the price at which the sale may be made.34

For the purpose of FEMA 2000, investment in India by a non-resident has been divided into
the following five categories and the regulations applicable have been specified in respective
schedules as under:

(i) Investment under the Foreign Direct Investment Scheme (“the FDI Scheme”).

(ii) Investment by Foreign Institutional Investors (“FIIs”) under the Portfolio Investment
Scheme (“the Portfolio Investment Scheme”).

(iii) Investment by NRIs/OCBs under the Portfolio Investment Scheme.

(iv) Purchase and sale of shares by NRIs/OCBs on non-repatriation basis.

(v) Purchase and sale of securities other than shares or convertible debentures of an
Indian company by non-residents.

The following are the prominent features of the schemes listed above:

FDI Scheme

Under the FDI Scheme, a non resident or a foreign entity, whether incorporated or not, may
purchase shares or convertible debentures of an Indian company. Any Indian company which
is not engaged in the activity or manufacture of items listed in Annexure A to the FDI
Scheme has been permitted to issue shares to a non resident up to the extent specified in
Annexure B to the FDI Scheme, on a repatriation basis, provided that:35

(i) The issuer company does not require an industrial licence;

33
Regulation 10A (b), FEMA 2000.

34
34
Regulation 10A (b), FEMA 2000.
35
Schedule 1 to FEMA 2000.

35
(ii) The shares are not being issued for acquiring existing shares of another Indian
company;

(iii) If the non resident to whom the shares are being issued proposes to be a collaborator,
he should have obtained the Central Government’s approval if he had any previous
investment/collaboration/tie-up in India in the same or allied field in which the Indian
company issuing the shares is engaged.

Further, a trading company incorporated in India may issue shares or convertible debentures
to the extent of 51% of its capital, to persons resident outside India subject to the condition
that remittance of dividend to the shareholders outside India is made only after the company
has secured registration as an export/trading/star trading /super trading house from the
Directorate General of Foreign Trade, Ministry of Commerce, Government of India, New
Delhi.

It also prescribes a ceiling of 10% of the total paid-up equity capital or 10% of the paid-up
value of each series of convertible debentures, and provides that the total holdings of all
FIIs/sub-accounts of FIIs put together shall not exceed 24% of paid-up equity capital or paid
up value of each series of convertible debentures.36 A registered FII is also permitted to
purchase shares/convertible debentures of an Indian company through private
placement/arrangement, subject to the prescribed ceiling.37

RBI may also permit a domestic asset management company or a portfolio manager
registered with SEBI as FIIs for managing the sub-account to make investment under the
Portfolio Investment Scheme on behalf of non-residents who are foreign citizens and bodies
corporate registered outside India, provided such investment is made out of funds raised or
collected or brought from outside India through normal banking channel. Such investment is
restricted to 5% of the equity capital or 5% of the paid-up value of each series of convertible
debentures within the overall ceiling of 24% or 40% as applicable for FIIs for the purpose of
the Portfolio Investment Scheme.38

The designated branch of an authorised dealer is authorised to allow remittance of net sale
proceeds (after payment of taxes) or to credit the net amount of sale proceeds of shares /

36
However, under the Proviso to Paragraph 4, the limit of 24% may be increased to 40% by the Indian company
concerned by passing a resolution by its Board of Directors followed by passing of a special resolution to that
effect by its general meeting.
37
Paragraph 1(5) of Schedule 2 to FEMA 2000.
38
Paragraph 4 of Schedule 2 to FEMA 2000.
convertible debentures to the foreign currency account or a non-resident rupee account of the
registered FII concerned.39

Investment by NRIs/OCBs under the Portfolio Scheme

Under Schedule 3, a NRI/OCB is permitted to purchase/sell shares and/or convertible

debentures of an Indian company, through a registered broker on a recognised stock
exchange, subject to the following conditions:40

(i) The NRI/OCB designates a branch of an authorised dealer for routing his/its
transactions relating to purchase and sale of shares/ convertible debentures under the
Portfolio Investment Scheme, and routes all such transactions only through the branch
so designated;

(ii) The paid-up value of shares of an Indian company, purchased by each NRI/OCB both
on repatriation and on non-repatriation basis, does not exceed 5% of the paid-up value
of shares issued by the company concerned;

(iii) The paid-up value of each series of convertible debentures purchased by each
NRI/OCB both on repatriation and non-repatriation basis does not exceed 5% of the
paid-up value of each series of convertible debentures issued by the company
concerned;

(iv) The aggregate paid-up value of shares of any company purchased by all NRIs and
OCBs does not exceed 10% of the paid up capital of the company and in the case of
purchase of convertible debentures the aggregate paid-up value of each series of
debentures purchased by all NRIs and OCBs does not exceed 10% of the paid-up
value of each series of convertible debentures.41

(v) The NRI/OCB takes delivery of the shares purchased and gives delivery of shares
sold;

39
Paragraph 3 of Schedule 2 to FEMA 2000.

36
40
Paragraph 1 of Schedule 3 to FEMA 2000.
41
Ibid.

37
(vi) Payment for purchase of shares and/or debentures is made by inward remittance in
foreign exchange through normal banking channels or out of funds held in
NRE/FCNR account maintained in India if the shares are purchased on repatriation
basis and by inward remittance or out of funds held in
NRE/FCNR/NRO/NRNR/NRSR account of the NRI/OCB concerned maintained in
India where the shares/debentures are purchased on non-repatriation basis;

(vi) The OCB informs the designated branch of the authorised dealer immediately on the
holding/interest of NRIs in the OCB becoming less than 60%.

Paragraph 2 of Schedule 3 further provides that the link office of the designated branch of an
authorised dealer is obliged to furnish furnish daily report to the Chief General Manager,
Reserve Bank of India (ECD) detailing the name of the NRI/OCB and the company wise
number of shares and/or debentures and paid-up value thereof, purchased and/or sold by each
NRI /OCB.

3.5 Provisions under Sick Industrial Companies (Special Provisions), Act 1985

This act facilitates the amalgamation of sick company with a healthy company through board
of industrial and financial reconstruction.42 BIFR has been granted immense powers under the
act to facilitate the rehabilitation of sick industries. It may conduct enquiry into the working
of the sick industrial companies and have various other powers.43 Under this act the sick
companies gets various benefits under the income tax act as well.

3.6 Provisions under Industries (Development and Regulation) Act, 1951

As per section 18FA of this act, the central government has enormous powers to amalgamate
or merge the companies.44 However the scope of this act is limited and is not applicable to
mergers or amalgamations of the companies inter se.

3.7 Provisions under respective Stamp Act

42
Section 18 of the sick industrial companies (special provisions) act, 1985.
43
Section 16 of the sick industrial companies(special provisions), act, 1985.
44
Section 18FA of the industries(development and regulation) act, 1951.

38
Stamp duty is payable on the value of immovable property transferred by the amalgamating/
transferor company or value of shares issued/consideration paid by the resulting/
amalgamated/ transferee company. The stamp acts of the respective states lays the amount of
stamp duty to be paid on the conveyance of movable and immovable property from transferor
to transferee company as a result of business combinations.45 The rates vary from state to
state.

3.8 Provisions under the Companies Bill, 2009

Clause 201 to clause 211 of the companies Bill, 2009 deals with Mergers and
Amalgamations. Clause 204, 205, 209, 211 are the new clauses introduced in the companies
Bill, 2009.

Clause 201: Power to compromise or make arrangements with creditors and members46

This clause corresponds to section 391 of the Companies Act, 1956 and seeks to
provide powers to Tribunal to make order on the application of the company or any creditor
or member or in case of company being wound up, of liquidator for the proposed compromise
or arrangements including debt restructuring, etc., between company, its creditors and
members. An application by affidavit shall disclose all material facts relating to company,
reduction of share capital, etc. Where a meeting is called, a notice shall be sent to all
creditors, members, debenture holders individually or by advertisement which shall be
accompanied by statement disclosing the details of compromise or arrangement. The order of
the Tribunal sanctioning compromises or arrangement shall be filed with the Registrar.
Takeover of companies have been included in compromises or arrangements. An aggrieved
party may appeal to the Tribunal in the event of any grievances with respect to the takeover
offer in case of companies other than listed companies.

Clause 202: Power of Tribunal to enforce compromise or arrangement47

This clause corresponds to section 392 of the Companies Act, 1956 and seeks to
provide powers to Tribunal to enforce compromise or arrangements with creditors and

45
http://www.e-mergersandacquisitions.com last visited on 25.08.2010
46
Taxmann’s, “Guide to Companies Bill 2008 and Limited liability Partnership bill 2008”, Pg - 98
47
Ibid.

39
members as ordered under clause 201. The clause also provides that, if the Tribunal is
satisfied that such compromise or arrangement cannot be implemented satisfactorily with or
without modifications, and the company is unable to pay its debts as per the scheme, it may
make an order for winding up of the company.

Clause 203: Merger and Amalgamation of Companies48

This clause corresponds to section 394 of the Companies Act, 1956 and seeks to
provide powers to Tribunal to order for holding meeting of the creditors or the members and
to make orders on the proposed reconstruction, merger or amalgamation of companies. The
clause provides for the manner and procedure in which the meeting so ordered by the
Tribunal to be held. Where the Tribunal orders for transfer of any property or liability, that
property or liability shall be transferred to and become the property or the liabilities of the
transferee company and any property may, if the orders so directs, be freed from of any
charge by virtue of compromises or arrangement. Every company shall file a certified copy of
the order within thirty days with the Registrar for registration.

Clause 204: Merger and Amalgamation of certain Companies49

This is a new clause and seeks to provide for merger or amalgamation between two
small companies or between a holding company and its wholly owned subsidiary company
by giving a notice of the proposed scheme inviting comments or objections by both the
transferor and the transferee company. The scheme is to be approved by the respective
members at a general meeting by passing a special resolution and by three fourths in value of
the creditors of respective companies. Transferee Company shall file a copy of the approved
scheme with the Registrar and the Official Liquidator. If the Registrar is of the opinion that
such a scheme is not in public interest or in interest of the creditors, he may file an
application before the Tribunal stating his objections and requesting it to consider the scheme
for reconstruction merger or amalgamation, etc., under clause 203. The Tribunal may direct
accordingly or it may confirm the scheme by passing such order as it deems fit. The
transferor company shall be deemed to be dissolved on registration of the scheme. This
clause also provides for effects of registration of the scheme with the Registrar.
48
Taxmann, “Guide to Companies Bill 2008 and Limited liability Partnership bill 2008”, Pg - 98
49
http://www.mca.gov.in/Ministry/actsbills/pdf/Companies_Bill_2009_24Aug2009.pdf last visited on
25.08.2010.

40
Clause 205: Amalgamation by mutual Consent50

This is a new clause and seeks to provide the mode of merger or amalgamation
between registered companies under the proposed legislation and companies incorporated in
the jurisdictions of such countries, as notified from time to time by the Central Government,
by mutual agreement. This clause further provides that foreign company may merge or
amalgamate into a company or vice versa and the terms and conditions of the scheme of
merger or amalgamation may provide for the payment of consideration to the shareholders of
the merging company in cash or partly in cash or partly in Indian Depository Receipts.

Clause 206: Power to acquire shares of shareholders dissenting from scheme or contract
approved by majority51

This clause corresponds to section 395 of the Companies Act, 1956 and seeks to
provide the manner in which the transferee company shall acquire shares of the shareholders
dissenting from the scheme or contract as approved by the majority shareholders holding not
less than nine-tenths in value of the shares whose transfer is involved. The transferee
company shall send a copy of the notice to the transferor company together with an
instrument of transfer, to be executed and pay the consideration representing the price
payable by the transferee company for the shares. Such consideration received by transferor
company shall be paid into separate bank account and any other consideration shall be held
by company in trust and shall be disbursed to the entitled shareholders.

Clause 207: Purchase of Minority Shareholding52

This clause corresponds to section 395 of the Companies Act, 1956 and seeks to
provide the procedure and manner in which the registered holder of at least 90 per cent shares
of a company shall notify the company of their intention to buy the remaining equity shares

50
http://www.mca.gov.in/Ministry/actsbills/pdf/Companies_Bill_2009_24Aug2009.pdf last visited on
25.08.2010.
51
Ibid.
52
Ibid.

41
of minority shareholders, by virtue of an amalgamation, share exchange, conversion of
securities, etc., provision for valuation of shares have been provided by a registered valuer.
This clause provides for the procedure to be followed for acquiring shares held by minority
shareholders.

Clause 208: Power of Central Government to provide for Amalgamation of Companies

in Public Interest53

This clause corresponds to section 396 of the Companies Act, 1956 and seeks to
provide power to Central Government to provide for amalgamation of two or more
companies in public interest by passing an order to be notified in the Official Gazette. Every
member or creditor or debenture holder shall have same interest or rights against transferee
company as he had in original company and where the interest or right is less than his interest
or right, he shall be entitled to compensation by transferee company. Any aggrieved person
may approach Tribunal for reassessment of compensation.

Clause 209: Registration of offer of Schemes involving transfer of shares54

This clause seeks to provide mode of registration of offer of schemes or contract

involving the transfer of shares. Every circular containing such offer and recommendation
and containing a statement shall be accompanied by requisite information and must be
registered with the Registrar before issue. The Registrar may refuse to register any such
circular which does not contain the requisite information. This clause further seeks to provide
that power to appeal shall lie with Tribunal in the event of refusal of registration of offer of
scheme by Registrar of companies.

Clause 210: Preservation of books and papers of Amalgamated Companies55

This clause corresponds to section 396A of the Companies Act, 1956 and seeks to
provide that no company which has been amalgamated or whose shares has been acquired by
another company to dispose of its books of account and papers without the prior permission
of the Central Government. The Government may appoint a person to examine books and
53
http://www.mca.gov.in/Ministry/actsbills/pdf/Companies_Bill_2009_24Aug2009.pdf last visited on
25.08.2010.
54
Taxmann’s, “Guide to Companies Bill 2008 & Limited Liability Partnership Bill, 2008”, Pg - 29
55
Ibid.

42
papers to ascertain whether they contain any evidence of commission of offence in
connection with promotion, formation, management, etc., of the company.

Clause 211: Liability of the officers in respect of offences committed prior to

Amalgamation, Transfer etc.56

This clause seeks to provide that the liability in respect of offences committed by the
officers in default of transferor company prior to its merger or amalgamation or acquisition
shall continue after such merger or amalgamation or acquisition.

56
Taxmann’s, “Guide to Companies Bill 2008 & Limited Liability Partnership Bill, 2008”, Pg – 29.

43