The Companies Bill, 2012 (“Companies Bill”) proposes a number of key changes to the manner of implementing mergers and amalgamations in India. Let us have a look at Clauses 230 to 240, the provisions that impact the mergers and amalgamations regime as a whole.
Recognition of the forms of business restructuring
In the explanation to Clause 232(8), the Companies Bill has recognised, for the first time, the various forms of business restructuring used in the market.
A merger by absorption: The undertaking, property, and liabilities of one or more companies, including the company in respect of which the compromise or arrangement is proposed, are to be transferred to another existing company.
A merger by formation of new company: The undertaking, property, and liabilities of two or more companies, including the company in respect of which the compromise or arrangement is proposed, are to be transferred to a new company.
A scheme: The undertaking, property, and liabilities of the company in respect of which the compromise or arrangement is proposed, are to be divided among and transferred to two or more — existing or new — companies.
Regulatory approval for mergers and de-merger schemes
The Companies Bill has also proposed replacing the High Court with the National Company Law Tribunal (“NCLT”). All merger and de-merger schemes would now have to be filed before the NCLT for approval. While the creation of a single forum for approving mergers and amalgamations is welcome, it is still to be seen when the NCLT will be established. After all, even the Companies Act, 1956 (“Companies Act”) had provided for its establishment. Till the NCLT is formed, the power to approve schemes will continue to lie with the High Courts.
Currently mergers between listed companies need prior approval from the securities regulator, the Securities and Exchange Board of India (“SEBI”) (Feb 4, 2013 SEBI circular), and certain combinations need approval from the competition regulator, the Competition Commission of India (“CCI”). Clause 230 (5) of the Companies Bill, makes it mandatory that a notice for a merger or de-merger to be sent to the:
- Central Government,
- Income tax authorities,
- Reserve Bank of India (“RBI”),
- Stock exchanges,
- official liquidator, and
- any other sectoral regulator.
These notices need be sent only if the particular regulator has jurisdiction over the deal. For instance, a merger between two unlisted companies need not be notified to the stock exchanges or the SEBI. However, depending on the market share in question, it may need to be notified to the CCI. Each regulator has also been given a time period of thirty days to file any representations or objections it may have. Once the thirty-day period expires, it is deemed that the regulator has no objections.
It will be interesting to see how these provisions tie in with the current notification requirements under the Competition Act, 2002 and the SEBI regulations. The Companies Bill does not remove the requirement for notification under the other laws. Notification requirements under the Companies Bill therefore, may amount to an additional procedural step. It is however a step in the right direction because an attempt has been made to consolidate different requirements under one main law.
NCLT can dispose of a creditors meeting
Another interesting proposal is to empower the NCLT to dispense with creditors meetings. Under the Companies Act, all schemes must be approved at a shareholders and creditors meeting, by a majority in number, representing three-fourths of the value, of those present and voting. While this requirement has been retained, given the serious nature of a merger or de-merger, the NCLT can now dispense with calling of a meeting of creditors or a class of creditors where those creditors or class of creditors, having at least ninety per cent value, agree and confirm, by way of affidavit, to the scheme of compromise or arrangement (Clause 230(9), Companies Bill).
This should go a long way in simplifying the process for a merger or de-merger, while at the same time ensuring that a majority of the creditors agree to such a fundamental change in the company.
The new Companies Bill seeks to simplify the merger process for a certain types of companies. In a “fast-track approval”, companies need not file schemes with the NCLT. The Central Government has the power to approve the scheme. Once approved, the scheme may be filed with the Registrar of Companies within thirty days. On registration, the scheme will be effective.
Clause 233 of the Companies Bill permits fast-track mergers or de-mergers, between:
- Two or more small companies;
- A holding company and a wholly-owned subsidiary company; and
- Such other classes of companies as may be prescribed.
A small company has been defined to mean a ‘private company’ that has paid-up capital that does not exceed Rupees Fifty lakh (or higher amount as may be prescribed but not be more than Rupees Five crore), or turnover (as per its last profit and loss account) that does not exceed Rupees Two crore (or higher amount as may be prescribed but not more than Rupees Twenty crore) (Clause 2(85), Companies Bill).
This definition is important because the Companies Bill does not provide this exemption to small companies that are public companies. Only small private companies that are merging with each other are entitled to this relaxation.
Clause 234 of the Companies Bill permits mergers and amalgamations between Indian and foreign companies subject to rules prescribed by the Central Government in consultation with the RBI. A foreign company can, subject to the prior approval of the RBI, merge, or amalgamate into an Indian company or vice-versa. The Companies Act on the other hand, only permitted a merger of a foreign company with an Indian company.
These are just a few of the broad changes proposed in relation to mergers and amalgamations. In the next post, we will explore the law in relation to the acquisition of minority interests in mergers and amalgamation schemes, and how these changes affect other aspects of M&A law.
(Deepa Mookerjee is a member of the faculty at myLaw.net.)