VARIOUS LAW RELATING TO MERGER.
Various Laws governing merger in India are as follows:
1. Indian Companies Act, 1956
This has provisions specifically dealing with the amalgamation of a company or certain other entities with similar status. The most common form of merger involves as elaborate but time-bound procedure under sections 391 to 396 of the Act.
Powers in respect of these matters were with High Court (usually called Company Court). These powers are being transferred to National Company Law Tribunal (NCLT) by companies (second Amendment) Act, 2002.
The Compromise, arrangement and Amalgamation/reconstruction require approval of NCLT while the sale of shares to Transferee Company does not require approval of NCLT.
Sec 390 This section provides that “The expression ‘arrangement’ includes a reorganization of the share capital of the company by the consolidation of shares of different classes, or by the division of shares into shares of different classes, or by both these methods”
Sec 390(a) As per this section , for the purpose of sections 391 to 393,’Company’ means any company liable to be wound up under the Act.
Sec 390(b) As per this section, Arrangement can include reorganization of share capital of company by consolidation of shares of different classes or by division of shares of different classes.
Sec 390(c) As per this section, unsecured creditors who have filed suits or obtained decrees shall be deemed to be of the same class as other unsecured creditors. Thus, their separate meeting is not necessary.
Sec 391 This section deals with the meeting of creditors/members and NCLT’s sanction to Scheme.
If majority in number representing at least three-fourths in value of creditors or members of that class present and voting agree to compromise or arrangement, the NCLT may sanction the scheme. NCLT will make order of sanctioning the scheme only if it is satisfied that company or any other person who has made application has disclosed all material facts relating to the company, e.g. latest financial position, auditor’s report on accounts of the company, pendency of investigation of company etc. NCLT should also be satisfied that the meting was fairly represented by members/creditors.
Sec 391(1) As per this sub-section, the company or any creditor or member of a company can make application to NCLT. If the company is already under liquidation, application will be made by liquidator. On such application, NCLT may order that a meeting of creditors or members or a class of them be called and held as per directions of NCLT.
Sec 391 (2) As per this sub-section, if NCLT sanction, it will be binding on all creditors or members of that class and also on the company, its liquidator and contributories.
Sec 391(3) As per this sub-section, Copy of NCLT order will have to be filled with Registrar of Companies.
Sec 391(4) As per this sub-section, A copy of every order of NCLT will be annexed to every copy of memorandum and articles of the company issued after receiving certified copy of the NCLT order.
Sec 391(5) In case of default in compliance with provisions of section 391(4), company as well as every officer who is in default is punishable with fine upto Rs 100 for every copy in respect of which default is made.
Sec 391(6) After an application for compromise or arrangement has been made under the section, NCLT can stay commencement of any suit or proceedings against the company till application for sanction of scheme is finally disposed of.
Sec 391(7) As per this sub-section, Appeal against NCLT order can be made to National Company Law Appellate Tribunal (NCLAT) where appeals against original order the NCLT lies.
Sec. 392 This section contains the powers of NCLT to enforce compromise and arrangement
Sec 392 (1) As per this section, where NCLT sanctions a compromise or arrangement, it will have powers to supervise the carrying out of the scheme. It can give suitable directions or make modifications in the scheme of compromise or arrangement for its proper working.
Sec 392 (2) As per this section, if NCLT finds that the scheme cannot work, it can order winding up.
Sec 393 This section contains the rules regarding notice and conduct of meeting.
Sec.393 (1) Where a meeting of creditors or any class of creditors, or of numbers 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 directors, 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 person, 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 creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid.
Sec 393 (2) As per this sub-section, if the scheme affects rights of debenture holders, statement should give details of interests of trustees of any deed for securing the issue of debentures as it is required to give as respects the companies directors.
Sec 393 (3) As per this sub-section, the copy of scheme of compromise or arrangement should be furnished to creditor/member free of cost.
Sec 393 (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 Rs. 50,000 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.
Sec 393 (5) As per this section, any director, managing director, manager or trustee of debenture holders shall give notice to the company of matters relating to himself which the company has to disclose in the statement, if he unable to do so, he is punishable with fine upto Rs.5,000.
Sec 394 This section contains the powers while sanctioning scheme of reconstruction or amalgamation.
Sec 394(1) NCLT can sanction amalgamation of a company which is being wound up with other company, only if Registrar of Companies (ROC) has made a report that affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest.
Sec 394 (2) As per this sub-section, if NCLT issues such an order, NCLT can direct that the property will be vest in the transferee company and that the transfer of property will be freed from any charge.
Sec 394 (3) As per this sub-section, Copy of NCLT order shall be filed with Registrar within 30 days. In case of default, company as well as every officer who is in default is punishable with fine upto Rs.500.
Sec 394A As per this section, if any application is made to NCLT for sanction of arrangement, compromise, reconstruction or amalgamation, notice of such application must be made to Central Government. NCLT shall take into consideration any representation made by Central Government before passing any order.
Sec 395 This section provides that reconstruction or amalgamation without following NCLT procedure is possible by takeover by sale of shares. Selling shareholders get either compensation or shares of the acquiring company. This procedure is rarely followed, as sanction of shareholders of at least 90% of value of shares is required, and not only of those attending the meeting. This procedure can be followed only when creditors are not involved in reconstruction and their interests are not affected.
Sec 395(1) As per this sub-section, the transferee company has to be give notice in prescribed manner to dissenting shareholder that it desires to acquire his shares. The transferee company is entitled and bound to acquire those shares on the same terms on which shares of approving share holders are to be transferred to the transferee company. The dissenting shareholder can make application within one month of the notice to NCLT. The NCLT can order compulsory acquisition or other order may be issued.
Sec 395(2) As per this sub-section, if the transferee company or its nominee holds 90% or more shares in the transferor company, it is entitled to and is also under obligation to acquire remaining shares. The transferee company should give notice within one month to dissenting shareholders. Their shares must be acquired within three months of such notice.
Sec395 (3) As per this section, if shareholders do not submit the transfer deeds, the transferee company will pay the amount payable to transferor company along with the transfer deed duly signed. The transferor company will then record name of the transferee company as holder of shares, even if transfer deed is not signed by dissenting shareholders.
Sec395 (4) As per this section, The sum received by transferor company shall be kept in a separate account in trust for the dissenting shareholders.
Sec395 (4A) When the transferee company makes offer to shareholders of transferor company, the circular of offer shall be accomplished by prescribed information in form 35A. Offer should contain statement by Transferee Company for registration before it is sent to shareholders of Transferor Company.
Sec 396 This section contains the power to Central Government to order amalgamation.
Sec.396 (1) As per this sub-section, if central government is satisfied that two or more companies should amalgamate in public interest, it can order their amalgamation, by issuing notification in Official Gazette. Government can provide the constitution of the single company, with such property, powers, rights, interest, authorities and privileges and such liabilities, duties and obligations as may be specified in the order.
Sec 396(2) The order may provide for continuation by or against the transferee company of any legal proceedings pending by or against Transferor Company. The order can also contain consequential, incidental and supplemental provisions necessary to give effect to amalgamation.
Sec396 (3) As per this sub-section, every member, creditor and debenture holder of all the companies will have same interest or rights after amalgamation, to the extent possible. If the rights and interests are reduced after amalgamation, he will get compensation assessed by prescribed authority. The compensation so assessed shall be paid to the member or creditor by the company resulting from amalgamation.
Sec 396A This section deals with the preservation of books and papers of amalgamated company. Books and papers of the company which has amalgamated or whose shares are acquired by another company shall be preserved. These will not be disposed of without prior permission of Central Government. Before granting such permission, Government may appoint a person to examine the books and papers to ascertain whether they contain any evidence of commission of an offence in connection with formation or management of affairs of the company, or its amalgamation or acquisition of its shares.
2. Monopolies and Restrictive Trade practices Act, 1969 (MRTP 1969)
Certain Amendments in the MRTP Act were brought about in 1991. The Government has removed restrictions on the size of assets; market shares and on the requirement of prior government approvals for mergers that created entities that would violate prescribed limits. The Supreme Court, in a recent judgment, decided that “prior approval of the central government for sanctioning a scheme of amalgamation is not required in view of the deletion of the relevant provision of the MRTP Act and the MRTP Commission was justified in not passing an order restraining implementation of the scheme of amalgamation of two firms in the same field of consumer articles”.
3. Foreign Exchange Regulation Act 1973 (FERA 1973)
FERA is the primary Indian Law which regulates dealings in foreign exchange. Although there are no provisions in the Act which deal directly with transactions relating to amalgamations, certain provisions of the Act become relevant when shares in Indian companies are allotted to non- residents, where the undertaking sought to be acquired is a company which is not incorporated under any law in India. Section 29 of FERA provides that no foreign company or foreign national can acquire any share of an Indian company except with prior approval of the reserve Bank of India. The Act has been amended to facilitate transfer of shares two non residents and to allow Indian companies to set up subsidiaries and joint ventures abroad without the prior approval of the Reserve Bank of India.
4. Income Tax Act, 1961
Income Tax Act, 1961 is vital among all tax laws which affect the merger of firms from the point view of tax savings/liabilities. However, the benefits under this act are available only if the following conditions mentioned in Section 2 (1B) of the Act are fulfilled:
a) All the amalgamating companies should be companies within the meaning of the section 2 (17) of the Income Tax Act, 1961.
b) All the properties of the amalgamating company (i.e., the target firm) should be transferred to the amalgamated company (i.e., the acquiring firm).
c) All the liabilities of the amalgamating company should become the liabilities of the amalgamated company, and
d) The shareholders of not less than 90% of the share of the amalgamating company should become the shareholders of amalgamated company.
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.
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.
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.
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:
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The amalgamating company is an Indian company.
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The amalgamating company should not be financially viable.
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The amalgamation should be in public interest.
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The amalgamation should facilitate the revival of the business of the amalgamating company.
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The scheme of amalgamation is approved by a specified authority, and
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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.
The above notes can be downloaded from
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