Regulatory Framework Governing Mergers and Acquisitions in India
Businesses should note the company, securities, tax, foreign exchange, and sector-specific laws and regulations impacting M&A in India. Besides technological disruptions, regulatory reforms have enabled an upsurge of M&A activity in India.
With the exception of a few lows, merger and acquisition (M&A) activity in India during the 2015-2021 period has been robust and resilient.
This momentum, particularly in sectors like finance, retail, technology, automotive, manufacturing, logistics, etc., has been leveraged by startups and digital insurgents owing to buoyant cash reserves and FDI inflows.
The disruptions led by the Covid-19 pandemic has further accelerated the acquisition trend in India, where companies are opting this strategy to secure higher rates of growth.
This upward deal momentum has also been sustained by pragmatic reforms in the Indian regulatory landscape governing M&A.
The reforms have fast tracked the process of amalgamation in India, with exceptions in few cases.
What types of deals are considered mergers and acquisitions in India?
As a concept, a merger refers to a combination of two or more entities into one, the desired effect being not just the accumulation of assets and liabilities of the distinct entities, but organization of such entity into one business.
In India, the term merger is not defined under the Companies Act, 2013 or the Income-tax Act, 1961.
However, Section 2 (1B) of the Income-tax Act defines the synonymous term “amalgamation” in relation to companies, as the merger of one or more companies with another company or the merger of two or more companies to form one company, subject to following conditions:
- All properties to be transferred to the amalgamated company
- All liabilities to be transferred to the amalgamated company
- Shareholders holding at least 3/4th in value of shares of the amalgamating company should become shareholders of the amalgamated company
Sections 230-234 of the Companies Act, 2013 deal with merger provisions, which outline the schemes of arrangement or compromise between a company, its shareholders, and/or its creditors.
Depending on the type of economic activity, mergers can be classified as below:
- Horizontal merger: Merger between companies dealing in the same nature of products.
- Vertical merger: Merger between companies dealing in the same nature of products but operating at different stages of production.
- Co-generic merger: Merger between companies serving the same set of customers.
- Conglomerate merger: Merger between two unrelated companies.
- Forward merger: Merger between a company and its customer.
- Reverse merger: Merger in which a business establishment chooses to merge or combine with its raw material suppliers.
- Cash merger: Merger in which shareholders receive cash rather than shares in the amalgamated business.
Mergers can also be classified based on the type of integration, namely:
An acquisition or takeover is the purchase by one party – of controlling interest in the share capital or of all or substantially all the assets and/or liabilities – of the target. It may be friendly or hostile. An acquisition can be structured in either of the following ways:
- Share acquisitions
- Share purchase from existing shareholders
- Subscription of fresh shares
- Asset transfers
- Business sales
In case of the acquisition of assets and liabilities, the entire business of the target may be acquired on a going concern basis or certain assets and liabilities may be cherry picked and purchased by the acquirer.
When a business is acquired on a going concern basis, it is referred to as a ‘slump sale’, as defined under the Income-tax Act, 1961.
Additionally, the acquisition can also be done by way of de-merger, involving the splitting up of one entity into two or more entities. The shareholders of the original entity would generally receive shares of the new entity.
A joint venture is the coming together of two or more businesses for a specific purpose. Parties can either set up a new company or use an existing entity, through which the proposed business will be conducted.
Laws governing M&A in India
The regulations governing Indian companies differ, among other things, depending on the following distinctions:
- Private or public companies
- Listed or unlisted companies
- Non-resident (foreign-owned and foreign controlled companies) or resident companies
- Operating in specified sectors
The following legislation constitute the regulatory ecosystem, which oversee M&A transactions in India.
Companies Act, 2013
Section 230-240 of the Companies Act, 2013 and the rules, orders, notifications, and circulars issued thereunder prescribe the general framework governing companies in India, including the manner of issuance and transfer of securities of a company incorporated in India and the process for schemes of arrangements of such companies.
The Merger Provisions (Sections 230-234) govern schemes of arrangements between a company, its shareholders, and creditors.
Section 233 of the Companies Act, 2013 covers fast-track mergers. As per the provision, under the fast-track merger, scheme of merger shall be entered into between the following companies:
- Two or more small companies (private companies having paid-up capital of less than INR 100 million and turnover of less than INR 1 billion per last audited financial statements); or
- A holding company with its wholly owned subsidiary; or
- Such other class of companies as maybe prescribed.
Section 234 of the Act permit cross-border mergers (mergers between Indian and foreign companies). It stipulates the conditions and states that such merger shall be done with prior approval of the Reserve Bank of India (RBI).
Contract Act, 1872
The Indian Contract Act, 1872 lays down the general principles relating to the formation, validity, and enforceability of contracts and the consequences of breach of contracts.
Specific Relief Act, 1963
The Specific Relief Act, 1963 provides recourse to the aggrieved party to enforce specific performance of contracts and for injunctions to prevent breach of contract. Civil and commercial courts and arbitral tribunals apply the applicable provisions of the Contract Act and the Specific Relief Act to the dispute.
The Securities and Exchange Board of India (SEBI) Act, 1992 as well as the rules and regulations issued thereunder, regulate the securities markets in India, including acquisitions involving companies listed on stock exchanges in India.
- SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover Code): This code restricts and regulates the acquisition of shares, voting rights, and control in listed companies. In December 2021, SEBI amended the Takeover Regulations. Under the new framework, the existing obligation – of first selling down to 75 percent and then attempting a delisting process as per the reverse book building process – has been scrapped and the new delisting threshold has been set at 90 percent. The new framework has prioritized investor interest by doing away with the complexities and contradictions in the existing process. This amendment in regulations will also aid first-time acquirers.
- SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations): The Listing regulations provide a comprehensive framework governing various types of listed securities. Under these regulations, SEBI has laid down conditions to be followed by a listed company while making an application before the National Company Law Tribunal (NCLT), for approval of a schemes of merger/amalgamation/reconstruction.
- SEBI (Prohibition of Insider Trading) Regulations, 2015 (Insider Trading Regulations): They govern information flow about the target and insider trading.
- SEBI (Delisting of Equity Shares) Regulations, 2009: They are applicable where an acquisition may involve delisting of a listed company.
Merger control law
The merger control law in India is primarily governed by the Competition Act, 2002, which was recently amended in 2023 to streamline processes and enhance competition enforcement. While Section 3 of the Act covers anti-competitive agreements, Section 4 deals with abuse of dominant position. Other sections including Section 5, 6, 20, 29, 30, and 31 deal with various types of combinations.
Additionally, the Competition Commission of India (CCI) (Procedure in regard to the Transaction of Business relating to Combinations) Regulations, 2011 (Combination Regulations) govern the manner in which the CCI will regulate combinations that have caused or are likely to cause an appreciable adverse effect on competition (AAEC) in India.
Recently, the CCI revised reporting requirements for companies planning to execute an M&A deal in India. For the purpose, Form-II has been amended.
It must be noted that Form II is required for cases necessitating detailed examination to assess the likely effect of the combination on competition in India. In the case of less significant deals, Form-I is filed that seeks basic information of mergers and queries are lesser and generic.
According to new requirements, which were enforced from May 1, 2022, companies are mandated to disclose the extent of “complimentary linkages” between them and their impact on the market.
The entities may also have to provide market facing data of the past five years with respect to their market size, market share of the parties, and also the competitors along with customers and suppliers. At present they seek data for only one year.
Exchange control law
In addition to the provisions of Companies Act, 2013, the cross-border M&A transactions are also governed by the requirements of the Foreign Exchange Management Act, 1999 (FEMA) and the rules and regulations made thereunder, including the Foreign Exchange Management (Non-debt Instruments) Rules, 2019, and the Foreign Direct Investment Policy of India (FDI Policy).
Insolvency and Bankruptcy Code, 2016 (IBC)
The IBC has become a popular route for acquisition of companies in India. The IBC provides the framework for insolvency resolution of insolvent companies, which involves, at the first stage, an attempt to sell the company on a going concern basis, failing which, liquidation of the assets of the insolvent company can take place.
By the end of FY 2020-21, a total of 348 acquisitions had been completed through the corporate insolvency resolution process under the IBC.
The NCLT oversees the corporate insolvency process and appeals on the orders of the NCLT go before the National Company Law Appellate Tribunal (NCLAT) and thereafter, the Supreme Court.
Tax and duties
Income-tax Act, 1961
In addition to prescribing the tax treatment of M&As in India, the Income-tax Act, 1961 also issued the General Anti-Avoidance Regulations in 2017, under which an arrangement may be voided if it is an impermissible avoidance arrangement.
Goods and Services Tax (GST)
While there will be no GST incidence in case of a slump sale; it will be applicable in case of asset purchase and the GST rates will vary depending on the type of asset.
Further, there will be no GST incidence upon transfer of shares, including in case of amalgamations and demergers.
Indian Stamp Act, 1899
Whenever there is a conveyance or transfer of any movable or immovable property, the instrument or document effecting the transfer is liable to payment of stamp duty.
It will be applicable on the following:
- NCLT order for merger or demerger, depending on state specific stamp law
- Stamp duty on share transfer at 0.015 percent
- Stamp duty on share purchase agreements
- Stamp duty on shareholder agreement/ joint venture agreement
The Indian Penal Code, 1860 as well as the Code of Criminal Procedure, 1973 determine the penalty and the procedure of investigation, respectively, in case of M&A disputes pertaining to allegations of fraud and cheating. Additionally, cases involving money laundering are investigated by the ED under the Prevention of Money Laundering Act, 2002.
It must be noted that apart from the above-mentioned legislation, sector specific laws, such as the Banking Regulation Act, 1949, Insurance Act, 1938, Mines and Minerals (Development and Regulation) Act, 1957, Drugs and Cosmetics Act, 1940, and Telecom Regulatory Authority of India Act, 1997, apply to transactions involving Indian companies operating in the relevant sector.
In case of highly regulated sectors, such as insurance and banking, the relevant sector-specific regulators – the Insurance Regulatory and Development Authority of India (IRDAI) and the RBI, respectively – lay down guidelines for companies operating in the concerned sector.
Companies may also be required to seek a prior approval for the acquisition of shares, business, or assets of companies operating in such sectors.
The FEMA Regulations also prescribe certain sector-specific conditions, and FDI in such sectors should be permitted in compliance with such prescribed conditions.
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(This article was originally published on November 15, 2022 and last updated on July 11, 2023.)
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