Guidelines on

Mergers &
Acquisitions in
India

1
 Submitted by:
Sanket Jha
1405C00088
th
4 Year B.B.A-LL.B (Hons.)
ICFAI LAW SCHOOL, Dehradun
INDEX

Sr. Particulars Page

No.
1. ABSTRACT 3
2. INTRODUCTION 4
3. TYPES OF MERGERS 5
4. REVIEW OF LITERATURE 6
5. SEBI REGULATION IN RELATION TO MERGERS & ACQUISITION 7

6. GUIDELINES OF THE RESERVE BANK OF INDIA IN RELATION TO 10

MERGER AND ACQUISITION
7. 12
GUIDELINES FOR MERGER/AMALGAMATION OF PRIVATE
SECTOR BANKS
8. 15
GUIDELINES FOR AMALGAMATION OF AN NBFC WITH A
BANKING COMPANY
9. 16
GUIDELINES ON MERGER/AMALGAMATION OF URBAN BANKS

10. PROVISION OF THE INDIAN COMPANIES ACT 2013 IN RELATION 18

TO MERGER AND ACQUISITION

11. REGULATION OF COMBINATIONS (SEC 6, THE COMPETITION 18

ACT, 2002)

12. PROVISION OF THE INCOME TAX ACT, IN RELATION TO 19

MERGER & ACQUISITIONS

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 13. SIGNIFICANT DEALS & HIGHLIGHTS 21
14. CONCLUSION 23
15. BIBLIOGRAPHY 24

GUIDELINES ON MERGER AND ACQUISITION IN INDIA

Sanket Jha*
Copyright © 2018

ABSTRACT

Indian Corporations were subjected to a strict control regime before 1990s. This has resulted in
the erratic growth of Indian enterprises during that period. The radical Indian economic reforms
commencing from 1991 has opened up the challenges both in domestic and international
spheres. The reform process has influenced the functioning and governance of Indian
Corporations, which has resulted in adoption of different strategies by the affected entities. In
lieu of the same, Mergers and Acquisitions have become a common practice.

The increased competition in the global market has prompted the Indian companies to go for
Merger and Acquisitions as an important strategic choice. India in the recent years has showed
tremendous growth in the Mergers & Acquisitions deals. The increasing volumes is witnessed in
various sectors like that of Finance, Pharmaceuticals, Telecom, FMCG, Automobiles and Metal
industries. Some of the major factors resulting in this sudden growth of merger and acquisition
deal in India are favourable government policies, excess of capital flow, economic stability,
corporate investments and dynamic attitude of Indian companies.

3
 * Student, 4th Year B.B.A-LL.B (Hons.) at Institute of Chartered Financial Analysts of India
Law School, The ICFAI University, Dehradun.

INTRODUCTION

A merger is a combination of two companies where one corporation is completely absorbed by

another corporation. The less important company loses its identity and becomes part of the more
important corporation, which retains its identity. It may involve absorption or consolidation.
Merger is the fusion of two or more existing companies.
All assets, liabilities and the stock of one company stand transferred to Transferee Company in
consideration of payment in the form of:
(i) Equity shares in the transferee company,
(ii) Debentures in the transferee company,
(iii) Cash, or
(iv) A mix of the above mode

Motives Behind Mergers of The Company

 Economies of Scale: This generally refers to a method in which the average cost per unit
is decreased through increased production.
 Increased revenue /Increased Market Share: This motive assumes that the company will
be absorbing the major competitor and thus increase its to set prices.
 Cross selling: For example, a bank buying a stock broker could then sell its banking
products to the stock brokers customers, while the broker can sign up the bank
customers for brokerage account.
 Corporate Synergy: Better use of complimentary resources. It may take the form of
revenue enhancement and cost savings.
 Taxes: A profitable can buy a loss maker to use the target’s tax right off i.e. wherein a sick
company is bought by giants.

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  Geographical or other diversification: This is designed to smooth the earning results of a
company, which over the long term smoothens the stock price of the company giving
conservative investors more confidence in investing in the company. However, this does
not always deliver value to shareholders.

TYPES OF MERGERS

From the perception of business organizations, there is a whole host of different mergers.
However, from an economist point of view i.e. based on the relationship between the two
merging companies, mergers are classified into following:

(1) Horizontal merger:- Two companies that are in direct competition and share the same
product lines and markets i.e. it results in the consolidation of firms that are direct rivals. E.g.
Exxon and Mobil, Ford and Volvo, Volkswagen and Rolls Royce and Lamborghini.
(2) Vertical merger:- A customer and company or a supplier and company i.e. merger of firms
that have actual or potential buyer-seller relationship eg. Ford- Bendix
(3) Conglomerate merger:- Generally a merger between companies which do not have any
common business areas or no common relationship of any kind. Consolidated firma may sell
related products or share marketing and distribution channels or production processes.

On a general analysis, it can be concluded that Horizontal mergers eliminate sellers and hence
reshape the market structure i.e. they have direct impact on seller concentration whereas vertical
and conglomerate mergers do not affect market structures e.g. the seller concentration directly.

The circumstances and reasons for every merger are different and these circumstances impact the
way the deal is dealt, approached, managed and executed. .However, the success of mergers
depends on how well the deal makers can integrate two companies while maintaining day-to-day
operations. Each deal has its own flips which are influenced by various extraneous factors such
as human capital component and the leadership. Much of it depends on the company’s leadership

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and the ability to retain people who are key to company’s ongoing success. It is important, that
both the parties should be clear in their mind as to the motive of such acquisition. 1

In this backdrop, Indian corporate enterprises have undertaken restructuring exercises primarily
through M & A within legal framework to create a better presence and expand in their core areas
of interest. The legal framework for Merger & Acquisitions in India is governed through the
following regulations:
 SEBI & RBI Regulations in relation to Mergers and Acquisition.
 Indian Companies Act 2013 in relation to Mergers and Acquisition.
 The Competition Act 2002.
 Income-Tax Act 1961.

REVIEW OF LITERATURE
A survey of the available literature on M & As and its impact on the different aspects of
corporate entities has been carried out. Further, research studies specific to India and their
limitations and research dimensions for the present study has been found out. Industrial
organization studies normally considers longer time horizons than the share price studies. Most
of the firms do not show significant improvement in long term profitability after acquisition
(Scherer 1988)2. Due to the existence of strict government regulations Indian companies were
forced to go to new areas where capabilities are difficult to develop in the short run. In pursuit of
this strategy, they often change their organization and basic operating characteristics to meet the
diverfied business and management within a legal framework. Das (2000)3 compares the pre-
merge and post merger operating profit margins for a sample of 14 acquiring firms and find a
decline in profitability in 8 of these companies after merger. Overall the results point to the
possibility of merger driven by managerial self-interest motive of growth maximization within
the legal framework. This is also verified by Ganapathy etl. (2010)4, who found that mergers and
1
Available at http://www.legalserviceindia.com/article/l463-Laws-Regulating-Mergers-&-Acquisition-In-India.html
accessed on March 11, 2018.
2
Scherer(1988). Corporate takeovers: the efficiency arguments, Journal of Economic Perspectives,2, pp-68-
83.
3
Das, Nandita (2000). “A Study of the Corporate Restructuring of Indian Industries in the Post New
Industrial Policy Regime. The Issue of Amalgamations and Mergers” Unpublished Ph.d. Thesis submitted to
University of Calcutta.
4
Ganapathy, K., Joshipura, N., Rana, S and Agarwal, R “Mergers and Acquisitions in India: with Specific

6
acquisitions are powerful indicators of a robust and growing economy. The legal framework for
such corporate restructuring must be easy and facilitative and not restrictive and mired, in
bureaucratic and regulatory hurdles. He has recommended that legal recognition to “contractual
merger” can go a long way in eliminating the obstructions to mergers & acquisitions in India.

OBJECTIVE OF THE STUDY

To study the legal environment for merger and acquisition in India.

LEGAL FRAMEWORK OF MERGER & ACQUISITION: AN ANALYSIS

The primary economic motives of merger and acquisition in India are synergy in operating
economies, tax advantages, growth and diversification etc. However, the practice of M & A must
be within the following legal framework:

A. SEBI REGULATION IN RELATION TO MERGERS & ACQUISITION

1. Takeover and listing agreement exemption clauses 40A and 40B of listing agreement.5

i) Clause 40A of Listing Agreement: It deals with substantial acquisition of shares and requires
the offeror and the offeree to inform the stock exchange when such acquisition results in an
increase in the shareholding of the acquirer to more than 10%.

ii) Clause 40B of Listing Agreement: It deals with takeover efforts. It refers to change in
management. Where there is no change in management, clause 40B of listing agreement will
not be applied. However sub clause 13 of amendment of clause 40B also provides an
exemption to the scheme approved by BIFR. There is no provision under clause 40B for
exemption of non BIFR companies.

2. SEBI (Substantial Acquisition of Shares and Takeover) Regulations

SEBI announced on Febuary 20, 1997 the revised takeover codes as per Securities and
Refernces to Competition Law”, 2010.

5
Notification No. EBI/LAD-NRO/GN/2015-16/013 “Securities and exchange board of india (listing obligations and
disclosure requirements) regulations, 2015”

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Exchange Board of India (Substantial Acquisitions of shares and Takeovers) Regulations,
1997. The objective of these regulations is to provide an orderly framework within
which substantial acquisitions and takeovers can take place. These have been amended
time and again by the capital market regulator in lieu of the changing M&A landscape.

SEBI has introduced more checks and balances for mergers and acquisitions (M&A) involving
unlisted companies to curb manipulation. The move comes in the wake of instances where
unlisted companies are merged with listed companies with ulterior motives.

Salient features of this takeover codes (Regulations 2017) may be enumerated as

follows:

I. Triggers Redefined

Mandatory open offer obligations

The crucial obligation under the takeover regulations is the requirement to make an ‘open offer’
to the public shareholders of the target company upon a substantial acquisition of shares or
voting rights or acquisition of control of the target company, directly or indirectly. The thresholds
for acquisition of shares have been redefined by the Takeover Code from those under the 1997
Code. Regardless of the level of shareholding, acquisition of control continues to trigger the
obligation to make an open offer. Mandatory open offer = At least 26% of the shareholding of
the target company. Acquisition of shares or voting rights entitling the acquirer and PAC to
exercise 25% or more of voting rights in the target company;6
Acquisition of additional shares or voting rights entitling the acquirer and PAC to exercise more
than 5% of voting rights in a financial year by an acquirer who together with PAC already holds
25% or more but less than 75% of the capital in the target company;7 Acquisition of Control over
the target
company.8

i. Voluntary Open Offer

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Regulation 3(1) of the Takeover Code.
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Regulation 3(2) of the Takeover Code; SEBI has clarified in the informal guidance dated March 27, 2012 issued to
Khaitan Electricals Limited that the creeping acquisition window of 5% per financial year is available to an acquirer
in every financial year subject to fulfilment of all the other prescribed conditions.
8
Regulation 4 of the Takeover Code.

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The Takeover Code provides for an acquirer holding 25% or more of the shareholding of the
target company to make a voluntary open offer. Acquisitions pursuant to the voluntary open offer
will not trigger the mandatory open offer obligations. Voluntary open offer = At least 10% of the
shareholding of the target company. SEBI has clarified in the FAQs dated December 12, 2011
that a person holding less that 25% shall also be entitled to make a voluntary offer subject to the
fulfilment of the prescribed conditions. The acquirer is required to make a voluntary open offer
for at least such number of shares as would entitle the acquirer to exercise an additional 10% of
the total shares of the target company.9

ii. Competing Offers

Similar to the 1997 Code, the Takeover Code provides for competing offers to be made within 15
working days of the detailed public announcement being published for the acquisition of shares
in the target company.

Competing offer = At least such number of shares equal to shares held by acquirer in target
company + shares to be acquired as part of open offer + shares to be acquired vide the primary
transaction.

II. Disclosure Obligations

As under the 1997 Code, the acquirer is required to make necessary disclosures to the target
company and to each of the stock exchanges on which target company’s shares are listed within
2 working days of: (a) receipt of allotment intimation; or (b) acquisition of shares / voting rights,
when such acquisition exceeds the required thresholds:

The Takeover Code provides for lesser triggers for disclosures as opposed to the 1997 Code.

III. Open Offer Obligations

Making of an ‘open offer’ in effect means making an offer to buy shares from the public
shareholders of the target company. One of the objectives of the Takeover Code is to provide the
public shareholders an opportunity to exit their investment in the target company when a

9
Regulation 7(2).

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substantial acquisition of shares in, or takeover of the target company takes place, on terms that
are not inferior to the terms on which substantial shareholders make their investments. 10 The
Takeover Code sets out in more detail the manner in which the open offer is required to be
carried out. Key changes in the Takeover Code include: (i) Pricing of the offer, (ii) Timing of the
offer especially where indirect acquisitions are concerned, (iii) the manner in which the open
offer is conducted and withdrawn, and (iv) role and duties of the intermediaries in the open offer
process.

IV. Exemptions
The Takeover Code exempts some acquisitions of shares, voting rights or control from the
requirements of making an open offer. The Takeover Code streamlines some of the exemptions
earlier provided under the 1997 Code. Some forms of passive transactions such as increase in
voting rights due to buy back of shares, schemes of arrangements involving the target company,
inter-se transfer of shares amongst promoters, relatives and acquisitions in the ordinary course of
business by merchant bankers, stock brokers are also some of the exemptions provided.

Over and above the exempt transaction specifically provided for under the Takeover Code, SEBI
continues to have the power to grant exemptions from making an open offer under the Takeover
Code. Additionally, SEBI also has the power to grant relaxation from strict compliance with the
procedural requirements of the Takeover Code as opposed to a full-fledged exemption.

B. GUIDELINES OF THE RESERVE BANK OF INDIA IN RELATION TO MERGER

AND ACQUISITION

1. Foreign Exchange Management (Cross Border Merger) Regulations, 2017

Inbound merger: A merger or amalgamation of foreign company with an Indian company

In case of cross border mergers where the resultant company is an Indian company,

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TRAC Report

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 A. Any issue or transfer of security by the resultant company to a person resident outside
India shall be in accordance with the Foreign Exchange Management (Transfer or Issue
of Security by a Person Resident outside India) Regulations, 2000.
B. Any borrowing or impending borrowing of the foreign company from overseas sources
which becomes the borrowing of the resultant company or any borrowing from overseas
sources entering into the books of resultant company arising shall conform to the
External Commercial Borrowing norms or Trade Credit norms or other foreign borrowing
norms, as laid down under Foreign Exchange Management (Borrowing or Lending in
Foreign Exchange) Regulations, 2000 or Foreign Exchange Management (Guarantee)
Regulations, 2000, as applicable.

C. The resultant company may acquire and hold any asset outside India which an Indian
company is permitted to acquire under the provisions of the Act, rules or regulations
framed thereunder. Such assets can be transferred in any manner for undertaking a
transaction permissible under the Act or rules or regulations framed thereunder.

D. Where the asset or security is not permitted to be acquired or held by the resultant
company under the Act, rules or regulations, the resultant company shall sell such asset or
security within a period of 180 days from the date of sanction of the Scheme of cross
border merger and the sale proceeds shall be repatriated to India immediately through
banking channels.

Outbound merger: A merger or amalgamation of Indian company with a foreign company

In case of cross border mergers where the resultant company is a foreign company,

A. A person resident in India may acquire or hold securities of the resultant company in
accordance with the Foreign Exchange Management (Transfer or issue of Foreign
Security) Regulations, 2000 or the provisions of the Liberalized Remittance Scheme, as
applicable.
B. The resultant company shall be liable to repay outstanding borrowings or impending
borrowings as per the Scheme sanctioned by the National Company Law Tribunal in
terms of the Companies (Compromises, Arrangement or Amalgamation) Rules, 2016.

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 C. The resultant company may acquire and hold any asset in India which a foreign company
is permitted to acquire under the provisions of the Act, rules or regulations framed
thereunder. Such assets can be transferred in any manner for undertaking a transaction
permissible under the Act or rules or regulations framed thereunder.

D. Where the asset or security is not permitted to be acquired or held by the resultant
company under the Act, rules or regulations, the resultant company shall sell such asset or
security within a period of 180 days from the date of sanction of the Scheme of cross
border merger and the sale proceeds shall be repatriated outside India immediately
through banking channels.

Valuation of companies involved in cross border merger

The valuation of the Indian company and the foreign company for the purpose of cross border
merger shall be done as per internationally accepted pricing methodology for valuation of shares
on arm’s length basis which should be duly certified by a Chartered Accountant/public
accountant/merchant banker authorized to do so in either jurisdiction.

Reporting

1. Any transaction arising due to cross border merger shall be reported to the Reserve Bank
in the same manner in which it is otherwise required to be reported under the Act or rules
or regulations framed thereunder.

2. The Indian company and the foreign company involved in the cross border merger shall
be required to furnish reports as may be prescribed by the Reserve Bank.11

Any transactions undertaken in accordance with these Regulations shall be deemed to be

approved by the Reserve Bank as required under Rule 25A of the Companies (Compromises,
Arrangement and Amalgamations) Rules, 2016.

2. GUIDELINES FOR MERGER/AMALGAMATION OF PRIVATE SECTOR BANKS

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Draft regulations Available at https://rbi.org.in/scripts/Bs_viewcontent.aspx?Id=3343 accessed on March 11, 2018.

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1. General

1.1 The Reserve Bank has discretionary powers to approve the voluntary amalgamation of two
banking companies under the provisions of Section 44A of the Banking Regulation Act, 1949.

1.2 These powers do not extend to the voluntary amalgamation of a banking company with a
non-banking company where amalgamations are governed by sections 391 to 394 of the
Companies Act, 1956 in terms of which, the scheme of amalgamation has to be approved by the
High Court.

1.3 However, in both situations, the Reserve Bank is concerned that while amalgamations are
normally decided on business considerations such as the need for increasing the market shares,
synergies in the operations of businesses, acquisition of a business unit or segment etc., it is
essential that considerations like sound rationale for the amalgamation, the systemic benefits and
the advantage accruing to the residual entity are evaluated in detail.

1.4 These guidelines cover two situations namely :-

(a) An amalgamation of two banking companies

(b) An amalgamation of a non-banking finance company (NBFC) with a banking company.

2. Amalgamation between two banking companies

2.1.1 Section 44A of the Banking Regulation Act, 1949 requires that the draft scheme of
amalgamation has to be approved by the shareholders of each banking company by a resolution
passed by a majority in number representing two-thirds in value of the shareholders, present in
person or by proxy at a meeting called for the purpose.

2.1.2 Before convening the meeting for the purposes of obtaining the shareholders' approval, the
draft scheme of amalgamation needs to be approved individually by the Boards of Directors of
the two banking companies. When according this approval, the Boards need to give particular
consideration to the following matters :-

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(a) The values at which the assets, liabilities and the reserves of the amalgamated company are
proposed to be incorporated into the books of the amalgamating banking company and whether
such incorporation will result in a revaluation of assets upwards or credit being taken for
unrealized gains.

(b) Whether due diligence exercise has been undertaken in respect of the amalgamated company.

(c) The nature of the consideration, which, the amalgamating banking company will pay to the
shareholders of the amalgamated company.

(d) Whether the swap ratio has been determined by independent valuers having required
competence and experience and whether in the opinion of the Board such swap ratio is fair and
proper.

(e) The shareholding pattern in the two banking companies and whether as a result of the
amalgamation and the swap ratio the shareholding of any individual, entity or group in the
amalgamating banking company will be violative of the Reserve Bank guidelines or require its
approval.
(f) The impact of the amalgamation on the profitability and the capital adequacy ratio of the
company.

(g) The changes which are proposed to be made in the composition of the board of directors of
the amalgamating banking company, consequent upon the amalgamation and whether the
resultant composition of the Board will be in conformity with the Reserve Bank guidelines in
that behalf.

2.2.1. Section 44A of the Banking Regulation Act, 1949 also requires that after the scheme of
amalgamation is approved by the requisite majority of shareholders in accordance with the
provisions of the Section, it shall be submitted to the Reserve Bank for sanction.

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2.2.2. To enable the Reserve Bank to consider the application for sanction, the amalgamating
banking company should submit to the Reserve Bank the information and documents specified
in Annexure A.

2.3.1 The aforementioned Section provides that a dissenting shareholder is entitled, in the event
of the scheme being sanctioned by the Reserve Bank, to claim from the banking company
concerned, in respect of the shares held by him in that company, their value as determined by the
Reserve Bank when sanctioning the scheme and such determination by the Reserve Bank as to
the value of the shares to be paid to the dissenting shareholders shall be final for all purposes.

2.3.2 To enable the Reserve Bank to determine such value, the amalgamated banking company
should submit the following: -

(a) A report on the valuation of the share of the amalgamated company made for this purpose by
the valuers appointed for the determination of the swap ratio.
(b)Detailed computation of such valuation.
(c) Where the shares of the amalgamated company are quoted on the stock exchange:-

(i) Details of the monthly high and low of the quotation on the exchange where the shares are
most widely traded together with number of shares traded during the six months immediately
preceding the date on which the scheme of amalgamation is approved by the Boards.
(ii) The quoted price of the share at close on each of the fourteen days immediately preceding the
date on which the scheme of amalgamation is approved by the Boards.

(d) Such other information and explanations as the Reserve Bank may require.12

3. GUIDELINES FOR AMALGAMATION OF AN NBFC WITH A BANKING

COMPANY

3.1 Where the NBFC is proposed to be amalgamated into a banking company, the banking
company should obtain the approval of the Reserve Bank of India after the scheme of
amalgamation is approved by its Board but before it is submitted to the High Court for approval.
12
RBI Notification no.RBI/2004-05/462Ref.DBOD.No.PSBS.BC. 89/16.13.100/2004-05 available at
https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=2247 accessed on March 11, 2018.

15
3.2 When according its approval to the scheme, the Board should give consideration to the
matters listed in paragraph 2.1.2 above. In addition, it should examine whether:-

(a) The NBFC has violated / is likely to violate any of the RBI/SEBI norms and if so, ensure that
these norms are complied with before the scheme of amalgamation is approved.
(b) The NBFC has complied with the 'Know Your Customer' norms for all the accounts, which
will become accounts of the banking company after amalgamation.
(c) The NBFC has availed of credit facilities from banks/FIs and if so, whether the loan
agreements mandate the NBFC to seek consent of the bank/FI concerned for the proposed
merger/amalgamtion.

3.3 To enable the Reserve Bank of India to consider the application for approval, the banking
company should furnish to Reserve Bank of India information and documents listed in Annexure
A excluding item 4 and also the information and documents listed in paragraph 2.3.2 above.

3.4 The provision of paragraphs 3.1 to 3.3 above will also apply mutatis mutandis in the rare
cases where a banking company is amalgamated into an NBFC.

4. Norms for promoter buying or selling shares directly/indirectly, before, during and after
discussion period:

4.1 Regulation 2(ha) of the SEBI (Prohibition of Insider Trading) Regulations, 1992, which is
applicable to the securities of listed companies, defines price sensitive information, as "any
information which relates directly or indirectly to a company and which if published is likely to
materially affect the price of the securities of the company".

4.2 SEBI regulations on Prohibition of Insider Trading should be strictly complied with, as the
various information relating to takeover/merger and transfer of shares of listed banks / NBFCs
are price sensitive. Even the unlisted banks / companies should follow the SEBI guidelines in
spirit and to the extent applicable.13

13
Notification no. RBI/2004/237 DBOD.BP.BC. 89/21.02.043/2003-04 Available at
https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=1657 accessed on March 11, 2018.

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3. GUIDELINES ON MERGER/AMALGAMATION OF URBAN BANKS

According to the guidelines, the Reserve Bank of India will consider proposals for merger and
amalgamation in the urban banks sector in the following circumstances:

1. When the networth of the acquired bank is positive and the acquirer bank assures
to protect entire deposits of all the depositors of the acquired bank;
2. When the networth of acquired bank is negative but the acquirer bank on its own
assures to protect deposits of all the depositors of the acquired bank; and
3. When the networth of the acquired bank is negative and the acquirer bank assures
to protect the deposits of all the depositors with financial support from the State
Government extended upfront as part of the process of merger.

The Reserve Bank has further stated that in all cases of merger/ amalgamation, the financial
parameters of the acquirer bank post merger will have to conform to the prescribed minimum
prudential and regulatory requirement for urban co-operative banks. The realisable value of
assets will have to be assessed through a process of due diligence.

While considering such proposals, the Reserve Bank will confine itself to the financial aspects of
the merger and to the interests of depositors as well as the stability of the financial system.

Who can merge?

A cooperative bank can merge only with another cooperative bank situated in the same state or
with a cooperative bank registered under Multi State Cooperative Societies Act.

Procedure for Merger

An application for merger giving the proposed scheme will have to be submitted by the banks
concerned to the Registrar of Cooperative Societies/Central Registrar of Cooperative Societies
(RCS/CRCS). The acquirer bank will also forward a copy of the scheme to the Reserve Bank
along with the draft scheme, valuation report and other information relevant for consideration of
the scheme of merger. The Reserve Bank will examine the scheme with reference to the financial
aspects and the interests of depositors based on the criteria/factors and convey its decision to the

17
concerned State RCS and in case the acquirer is a multi-state cooperative bank, to the CRCS and
the RCS of the State in which the acquired bank is situated.

The registrars, being the authorities vested with the responsibility of administering the Acts,
would ensure that the due process prescribed in the Statutes has been complied with before they
seek the approval of the Reserve Bank. They would also ensure compliance with the statutory
procedures for notifying the amalgamation after obtaining the sanction of the Reserve Bank.14

C. PROVISION OF THE INDIAN COMPANIES ACT 2013 IN RELATION TO MERGER

AND ACQUISITION

Sec 230 to Sec 234 of the Indian Companies Act 2013 govern the merger in India. The
provisions of the above stated sections are outlined below..
Sec 230- This section provides that the expression “arrangement” includes a reorganization of
the share capital of a company by the consolidation of shares of different classes or by both these
methods.
Sec 231- This section deals with the meeting of creditors/members and National Company Law
Tribunal (NCLT’s) sanction to scheme.
If majority of the 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.
Sec 232- This section contains the powers of NCLT to enforce compromise and arrangement.
Sec 233- This section contains the rules regarding notice and conduct of meeting.
Sec 234- This section contains the power to Central Government to order amalgamation.

C. REGULATION OF COMBINATIONS (SEC 6, THE COMPETITION ACT, 2002)

Following provisions of the Competition Act, 2002 deals with mergers of the company:-
Section 5 of the Competition Act, 2002 deals with “Combinations” which defines combination
14
RBI Press release available at https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=11154 accessed on
March 11, 2018.

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by reference to assets and turnover
(a) exclusively in India and
(b) in India and outside India.

For example, an Indian company with turnover of Rs. 3000 crores cannot acquire another Indian
company without prior notification and approval of the Competition Commission. On the other
hand, a foreign company with turnover outside India of more than USD 1.5 billion (or in excess
of Rs. 4500 crores) may acquire a company in India with sales just short of Rs. 1500 crores
without any notification to (or approval of) the Competition Commission being required.
(2) Section 6 of the Competition Act, 2002 states that, no person or enterprise shall enter into a
combination which causes or is likely to cause an appreciable adverse effect on competition
within the relevant market in India and such a combination shall be void.

All types of intra-group combinations, mergers, demergers, reorganizations and other similar
transactions should be specifically exempted from the notification procedure and appropriate
clauses should be incorporated in sub-regulation 5(2) of the Regulations. These transactions do
not have any competitive impact on the market for assessment under the Competition Act.

D. PROVISION OF THE INCOME TAX ACT, IN RELATION TO MERGER &

ACQUISITIONS

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 condition 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

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 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:

a. Depreciation U/S 32: 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.

b. 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.

c. 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.

d. 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 fake 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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 I. The amalgamating company is an Indian company.
II. The amalgamating company should not be financially viable.
III. The amalgamation should be in public interest.
IV. The amalgamation should facilitate the revival of the business of the
amalgamating company.

V. The scheme of amalgamation is approved by a specified authority, and

VI. The amalgamated company should continue to carry on the business of the
amalgamating company without any modification.

e. Amalgamation Expenses: In case 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.

SIGNIFICANT DEALS & HIGHLIGHTS

Rosneft and Essar

Russian state energy giant Rosneft along with others struck a $12.9 billion deal with India’s
second-biggest private oil firm, Essar Oil, in a transaction that involves the largest inflow of
foreign direct investment into the country.
Rosneft bought a 49% stake in Essar Oil’s refinery, port and petrol pumps while the Netherlands-
based Trafigura Group Pte, one of the world’s biggest commodity trading companies, and
Russian investment fund United Capital Partners split another 49% equity equally.
The deal will give Rosneft access to Essar’s fuel retailing network of 2,700 fuel pumps. It factors
in Essar Oil’s debt of about $4.5 billion and about $2 billion debt with the port company.

HDFC Life and Max Financial

Analjit Singh-promoted Max Financial Services Ltd and mortgage lender Housing Development
Finance Corporation have proposed to merge their life insurance businesses to create the largest
private-sector life insurer in the country.
KKR-backed Max Financial, the listed holding firm for Max Life, would hive off the non-

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insurance business into Max India. The proposed transaction creates a company with annual
premium of Rs 25,500 crore and will have a differentiated portfolio and wider reach to expand in
a growing life insurance sector. The merged company will be listed on the stock exchange
wherein HDFC Life will hold a 69% stake while Max Life will hold the remaining.
Currently, India’s life insurance sector is dominated by state-run Life Insurance Corp. SBI Life, a
joint venture of State Bank of India and BNP Paribas, and ICICI Prudential Life Insurance are
the top two private-sector life insurers by premium income with HDFC Life ranked third.

Aircel and Reliance Communication

In the biggest consolidation deal in India’s telecom sector, Reliance Communications and
Aircel announced the merger of their wireless operations to create a combined entity with assets
worth Rs 65,000 crore.
RCom and Maxis Communications Berhad will hold 50% each of the merged entity with equal
representation on the board and committees. The transaction will reduce RCom’s debt by Rs
20,000 crore while Aircel’s debt will fall by Rs 4,000 crore on closing in 2017.
The merger will create India’s fourth-largest telecom operator by customer base and revenues.
The merged entity will have the second-largest spectrum holding among all operators.

Jaiprakash Associates and UltraTech Cement

Jaiprakash Associates Ltd closed a deal to sell nearly two-thirds of its cement business to
UltraTech Cement Ltd. The transaction gives debt-laden Jaiprakash a breather in its attempt to
stave off creditors seeking to take over the company.
The deal was valued at Rs 16,189 crore ($2.4 billion) including debt. UltraTech will also spend
Rs 470 crore to complete an under-construction grinding unit. The deal will help UltraTech, the
single-largest cement firm in the country in terms of capacity, to again overtake its Swiss
construction materials rival LafargeHolcim, which controls Ambuja Cements and ACC in the
country.

Lafarge and Nirma

Ahmedabad-based cement player Nirma Ltd trumped the bigger boys of India Inc including
billioniare Ajay Piramal and Sajjan Jindal-led JSW Cement to lap up Lafarge India for an

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enterprise value of about $1.4 billion (Rs 9,400 crore) including debt.
The deal will complete the India leg of the global merger of French cement giant Lafarge and
Swiss building materials group Holcim. The transaction is part of LafargeHolcim’s 3.5 billion
Swiss franc ($3.6 billion) divestment programme and is essential for completing the merger
announced last year.
LafargeHolcim had been trying to sell Lafarge India for the past year after the Competition
Commission of India, in April 2015, asked the company to divest some assets to complete the
merger.15

CONCLUSION

Merger and acquisition are showing rising trends and opportunities of profit and growth for
big firms which has direct and indirect bearings on the market and there is the possibility of
the manipulation and monopolization of business world. Keeping in mind this fear, the
government of India has enacted the Competition Act, 2002 to check the negative impact of
business combinations over the upcoming business market. At present we have full fledged
Competition Commission of India which regulates the interest of budding businessman and
poor customers from the dominance of big business players while the Income Tax Act 1961
introduced certain tax saving and tax management provisions to facilitate the benefits of
Merger and Acquisitions.

Overall, there is a robust development in the M&A regime worldwide and India is keen to
make its mark in this niche segment. Only time will tell whether the regulatory policies are
conducive to the achievement of this goal.

15
Available at https://www.vccircle.com/top-ma-deals-india/ accessed on March 11, 2018.

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Scherer(1988). Corporate takeovers: the efficiency arguments, Journal of Economic

Perspectives,2, pp-68-83.

Das, Nandita (2000). “A Study of the Corporate Restructuring of Indian Industries in the
Post New Industrial Policy Regime. The Issue of Amalgamations and Mergers”
Unpublished Ph.d. Thesis submitted to University of Calcutta.

Ganapathy, K., Joshipura, N., Rana, S and Agarwal, R “Mergers and Acquisitions in India:
with Specific Refernces to Competition Law”, 2010.

Notification No. EBI/LAD-NRO/GN/2015-16/013 “Securities and exchange board of india

(listing obligations and disclosure requirements) regulations, 2015”

TRAC Report

Draft regulations Available at https://rbi.org.in/scripts/Bs_viewcontent.aspx?Id=3343 accessed

on March 11, 2018.

RBI Notification no.RBI/2004-05/462Ref.DBOD.No.PSBS.BC. 89/16.13.100/2004-05 available

at https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=2247 accessed on March 11,
2018.

Notification no. RBI/2004/237 DBOD.BP.BC. 89/21.02.043/2003-04 Available at

https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=1657 accessed on March 11, 2018.

RBI Press release available at https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=11154

accessed on March 11, 2018.

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India.html

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