1.

Distressed Asset Mergers (IBC)

2. Valuation Techniques
Distressed Asset Mergers under the Insolvency and Bankruptcy Code (IBC)

In the current global economic landscape, distressed asset mergers (DAM) are an important
and growing avenue for resolving financially troubled entities. India, being one of the world’s
fastest-growing economies, has adopted a structured legal framework for resolving distressed
assets, particularly through the Insolvency and Bankruptcy Code (IBC), 2016. This
mechanism allows for the restructuring of distressed companies and promotes the efficient
resolution of non-performing assets (NPAs), especially in the context of mergers and
acquisitions (M&As).
A distressed asset merger involves the acquisition of a company that is either under
insolvency proceedings or facing financial difficulties. Such mergers offer a mechanism to
rescue troubled companies, protect employment, and preserve value for creditors. The IBC
lays down the legal framework for these transactions, and they play a pivotal role in the
recovery process under India’s bankruptcy laws.
This comprehensive analysis will explore distressed asset mergers under the IBC, the legal
provisions governing them, the procedural steps involved, along with relevant case laws and
examples.

I. Introduction to Distressed Asset Mergers

A distressed asset merger (DAM) occurs when a financially troubled company (the target) is
merged with or acquired by another company (the acquirer). This transaction typically takes
place in situations where the target company is unable to meet its debt obligations, is facing
insolvency proceedings, or is under corporate restructuring.
Under the Insolvency and Bankruptcy Code, 2016 (IBC), such distressed assets can be
resolved through mergers and acquisitions. The IBC provides a legal mechanism through
which creditors and stakeholders can recover their dues, and businesses can be revived. The
aim is to ensure that the resolution process maximizes the value of assets, prevents protracted
liquidation, and ensures a fair and transparent recovery process.

II. Legal Framework Under the Insolvency and Bankruptcy Code (IBC)
The IBC, 2016, was enacted to address the growing problem of non-performing assets
(NPAs) in India and to streamline the insolvency process. It introduced a comprehensive legal
framework for the reorganization and liquidation of distressed companies, including
through mergers and acquisitions.
A. Key Legal Provisions Under IBC Relevant to Distressed Asset Mergers
 1. Section 5(25) – Corporate Debtor
Under this section, a corporate debtor refers to any company or limited liability
partnership (LLP) undergoing insolvency or bankruptcy proceedings. The distressed
company, often a corporate debtor, is eligible for restructuring through mergers under
the IBC framework.
2. Section 12 – Time Period for Completion of Corporate Insolvency Resolution
Process (CIRP)
This section mandates that the CIRP must be completed within 180 days from the
initiation date. An extension of up to 90 days is allowed, but no more. This creates a
sense of urgency in distressed asset mergers, ensuring that the distressed company is
not allowed to languish without resolution.
3. Section 25(2)(h) – Resolution Professional's Role in Facilitating Mergers
The resolution professional (RP) is responsible for managing the distressed
company during the insolvency process and for facilitating a potential merger with a
third-party acquirer. The RP has a duty to present a resolution plan that could involve
a merger, subject to approval by the creditors.
4. Section 30 – Approval of the Resolution Plan
A resolution plan, which may include a distressed asset merger, is submitted to
the Committee of Creditors (CoC). The plan must be approved by a majority
vote of the CoC members (representing at least 75% of the debt).
5. Section 31 – Approval of Resolution Plan by NCLT
After the resolution plan is approved by the CoC, it is submitted to the National
Company Law Tribunal (NCLT) for approval. If the NCLT approves the plan, it is
binding on all stakeholders, including creditors, the distressed company, and its
acquirer.
6. Section 230 to 232 – Merger and Amalgamation under Companies Act, 2013
The provisions of the Companies Act, 2013, allow the implementation of mergers
and amalgamations. These provisions apply to mergers involving distressed assets,
especially those that are part of insolvency proceedings.

III. Procedure for Distressed Asset Mergers under IBC

The process for distressed asset mergers involves a structured procedure, which begins with
the initiation of insolvency proceedings and culminates in the approval of a resolution plan
that may involve the merger of the distressed company.
A. Initiation of Insolvency Proceedings (Section 7, 9, 10)
The process for initiating insolvency proceedings under IBC begins when a financial
creditor, operational creditor, or the corporate debtor itself files an application with
the National Company Law Tribunal (NCLT).
  Section 7: This section allows financial creditors (those holding loans or financial
debt) to file an application to initiate insolvency proceedings.
 Section 9: This section allows operational creditors (those providing goods or
services to the debtor) to file a petition against the corporate debtor.
 Section 10: The corporate debtor itself can file for insolvency if it is unable to pay
its debts.
B. Appointment of Resolution Professional and Commencement of CIRP
Once the insolvency petition is admitted by the NCLT, the Resolution Professional (RP) is
appointed. The RP is responsible for managing the debtor's affairs and formulating
a resolution plan.
The RP plays a crucial role in facilitating a distressed asset merger by:
1. Identifying potential acquirers or merger partners.
2. Ensuring the resolution plan maximizes the value of the distressed company.
3. Presenting the plan to the Committee of Creditors (CoC).
C. Resolution Plan Submission and Approval (Section 30)
During the CIRP, the RP invites resolution plans from interested parties. A resolution plan
can include:
 Debt restructuring: Modification of terms of the distressed company's debt.
 Mergers or acquisitions: Proposals for merging the distressed company with another
solvent company, subject to the approval of the CoC and NCLT.
The resolution plan is put to a vote by the Committee of Creditors (CoC), and it must be
approved by a 75% majority of the CoC members, representing the majority of the
outstanding debt.
D. NCLT Approval of the Resolution Plan (Section 31)
After the CoC approves the resolution plan, the RP submits it to the NCLT for final approval.
Once the NCLT approves the plan, it becomes binding on all stakeholders, including the
creditors and shareholders of the distressed company.

IV. Distressed Asset Mergers and Their Strategic Importance

Distressed asset mergers offer several strategic advantages, particularly in cases where
companies are facing financial difficulties but still possess valuable assets. These mergers can
offer significant benefits for both the acquirer and the distressed company.
A. Benefits for the Acquirer
 1. Asset Acquisition at a Discount: The acquirer can acquire distressed assets at a much
lower price compared to purchasing assets in a healthy company, providing significant
value.
2. Reduction of Liabilities: The distressed company’s liabilities are either written off or
restructured, allowing the acquirer to inherit the company with cleaner finances.
3. Quick Market Entry: The acquirer can quickly gain a foothold in a new market or
sector by taking over a company with an existing customer base, brand recognition,
and infrastructure.
B. Benefits for the Distressed Company
1. Revival and Protection of Jobs: Merging with a solvent company can help preserve
the operations of the distressed company, thereby saving jobs and continuing business
activities.
2. Creditors’ Recovery: Creditors are more likely to recover their dues through a
successful merger than through prolonged liquidation processes.

V. Case Studies of Distressed Asset Mergers in India

A. Case Study 1: Essar Steel and ArcelorMittal (2019)
One of the landmark cases of distressed asset mergers under the IBC was the Essar Steel
case, where ArcelorMittalsuccessfully acquired Essar Steel, a major Indian steel producer,
which was facing insolvency proceedings. The acquisition was facilitated through the
resolution process under the IBC.
 Essar Steel was undergoing insolvency proceedings after defaulting on large debts.
 ArcelorMittal submitted a resolution plan to the Committee of Creditors, which
included the merger of Essar Steel with ArcelorMittal.
 After approval by the CoC and NCLT, the acquisition was completed, and
ArcelorMittal took control of Essar Steel, helping revive its operations.
B. Case Study 2: Jet Airways and Kalrock Capital (2021)
Jet Airways, a major airline in India, was grounded in 2019 due to insolvency proceedings
under IBC. In 2021, Kalrock Capital, an investment firm, submitted a resolution plan to
revive Jet Airways.
 The plan involved a distressed asset merger, where Kalrock Capital proposed the
acquisition of Jet Airways, leading to its revival.
 The NCLT and CoC approved the resolution plan, and Kalrock Capital took control of
Jet Airways to restore its operations, resulting in a successful distressed asset merger.
VI. Challenges in Distressed Asset Mergers
While distressed asset mergers offer several advantages, they also come with challenges,
including:
1. Uncertainty in Valuation: The distressed company’s assets and liabilities may be
difficult to value accurately due to their financial condition.
2. Regulatory Approvals: These mergers often require multiple regulatory approvals,
including from the NCLT, RBI, SEBI, and others.
3. Employee Retention: Mergers can lead to job losses or restructuring, which may
affect employee morale and retention.

VII. Conclusion
Distressed asset mergers under the Insolvency and Bankruptcy Code, 2016 provide an
important tool for resolving financially troubled companies in India. By offering a framework
for restructuring and allowing for the sale or merger of distressed assets, the IBC has
significantly improved the insolvency resolution process. The involvement of resolution
professionals, creditors, and the NCLT ensures that distressed asset mergers are fair,
transparent, and provide the best outcome for all stakeholders.
Despite the challenges, distressed asset mergers present an opportunity to revive struggling
companies, protect employment, and preserve value, making them a critical component of
India’s financial restructuring ecosystem.
Valuation Techniques for Mergers and Acquisitions: Legal Analysis and Provisions

I. Introduction
Valuation is a critical component in mergers and acquisitions (M&A), serving as the
foundation for negotiations, structuring deals, and ensuring compliance with legal and
regulatory frameworks. In India, the Income Tax Act, 1961, and various corporate laws
provide guidelines and provisions that influence valuation practices in M&A transactions.
This article delves into the primary valuation techniques employed in M&A, examines their
legal implications under Indian law, and provides illustrative examples to elucidate their
application.

II. Valuation Techniques in M&A

1. Discounted Cash Flow (DCF) Analysis
Overview: DCF analysis estimates the value of a business based on the present value of its
expected future cash flows. It involves projecting future cash flows and discounting them to
their present value using a discount rate.
Legal Implications: Under the Income Tax Act, 1961, particularly Section 56(2)(x), the
valuation of shares in private companies is subject to scrutiny. The DCF method, being
forward-looking, requires careful consideration of assumptions to ensure compliance with tax
regulations.
Example: In the merger between HDFC Ltd. and HDFC Bank, valued at $40 billion, the
DCF method was employed to project future cash flows and determine the present value,
highlighting the potential synergies and growth prospects of the combined entity.
2. Comparable Company Analysis (CCA)
Overview: This approach values a company by comparing it to similar publicly traded
companies. Key multiples used include Price-to-Earnings (P/E), Enterprise Value-to-EBITDA
(EV/EBITDA), and Price-to-Book (P/B) ratios.
Legal Implications: The Companies Act, 2013, mandates that valuations for certain
transactions, such as mergers and demergers, be conducted by a registered valuer. The CCA
method is commonly used in such valuations, provided that the selected comparables are
truly comparable.
Example: In the legal case between ICICI Bank and Satyam Computer Services Ltd., the
Bombay High Court upheld the use of the DCF method for valuing Satyam’s shares,
considering the company’s future growth prospects and inherent risks.
3. Precedent Transactions Analysis
Overview: This method involves analyzing recent M&A transactions involving similar
companies to determine a fair valuation. Multiples derived from these transactions are
applied to the target company.
Legal Implications: The Securities and Exchange Board of India (SEBI) regulations require
that valuations for listed companies be conducted in a manner that ensures fairness and
transparency. The precedent transactions method provides a market-based perspective,
aligning with these regulatory requirements.
Example: In the acquisition of Ambuja Cements and ACC by Adani Group for $10.5 billion,
the precedent transactions method was utilized to assess the fair value based on recent
industry transactions.
4. Asset-Based Valuation
Overview: This approach values a company based on the value of its assets minus its
liabilities. It can be conducted on a going concern or liquidation basis.
Legal Implications: Under the Insolvency and Bankruptcy Code, 2016, asset-based valuation
is often employed during liquidation proceedings to determine the distribution of proceeds
among creditors.
Example: During the insolvency proceedings of a distressed company, an asset-based
valuation was conducted to ascertain the realizable value of assets for creditor settlement.
 5. Sum-of-the-Parts (SOTP) Valuation
Overview: SOTP valuation involves valuing each business segment or subsidiary of a
company independently and summing these values to determine the total enterprise value.
Legal Implications: The Companies Act, 2013, requires that valuations for demergers and
spin-offs be conducted using appropriate methods, including SOTP, to ensure fairness to all
stakeholders.
Example: United Technologies employed SOTP valuation to assess the value of its business
segments before deciding to break up the company into three units.

III. Legal Framework Governing Valuation in M&A

1. Income Tax Act, 1961
o Section 56(2)(x): Governs the taxation of gifts and specifies that the fair
market value of shares in private companies must be determined using
prescribed methods, such as DCF or CCA.
o Section 50B: Addresses the taxation of capital gains in the case of slump sales,
where the transfer of assets is not itemized, and the entire business is
transferred as a going concern.
2. Companies Act, 2013
o Section 230-232: Provides the legal framework for mergers and demergers,
requiring that valuations be conducted by a registered valuer to ensure fairness
to creditors and shareholders.
o Rule 8 of the Companies (Compromise, Arrangements, and
Amalgamations) Rules, 2016: Specifies the qualifications and responsibilities
of registered valuers in conducting valuations for M&A transactions.
3. Securities and Exchange Board of India (SEBI) Regulations
o SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,
2011: Mandates that valuations for open offers be conducted by independent
valuers to protect the interests of minority shareholders.
o SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018:
Requires that valuations for listed companies be conducted in a fair and
transparent manner, ensuring compliance with market regulations.

IV. Challenges in Valuation for M&A

1. Subjectivity in Assumptions
Valuation methods, particularly DCF, rely heavily on assumptions regarding future cash
flows, growth rates, and discount rates. Variations in these assumptions can lead to
significantly different valuations.
2. Lack of Comparable Data
In emerging markets like India, finding truly comparable companies for CCA can be
challenging due to differences in size, market conditions, and financial structures.
3. Regulatory Scrutiny
Valuations are subject to scrutiny by regulatory authorities, and deviations from prescribed
methods or failure to justify assumptions can lead to legal challenges and delays in M&A
transactions.

V. Conclusion
Valuation is a pivotal aspect of mergers and acquisitions, influencing the structure and
success of transactions. In India, the legal framework provides guidelines to ensure that
valuations are conducted fairly and transparently. However, challenges such as subjectivity in
assumptions and lack of comparable data necessitate careful consideration and adherence to
prescribed methods. By understanding and addressing these challenges, parties involved in
M&A can navigate the complexities of valuation and achieve successful outcomes.
I. Detailed Examples of M&A Valuation
1. Tata Steel's Acquisition of Corus
Background: Tata Steel, part of the Tata Group, acquired Corus Group Plc (a major steel
producer in Europe) for $12.1 billion in 2007, marking the largest overseas acquisition by an
Indian company at the time. The deal was seen as a strategic move for Tata Steel to gain
access to European markets, enhance its global footprint, and expand its product portfolio.
Valuation Process: Tata Steel's valuation of Corus involved a combination of two methods:
 Discounted Cash Flow (DCF): Projecting the future cash flows of Corus based on its
operational performance and growth projections in the European market.
 Comparable Company Analysis (CCA): Comparing Corus's financial metrics
(EBITDA, P/E ratio) to other publicly traded steel companies to determine a fair
market value.
However, the valuation process faced several challenges:
 Declining Profits and Overpayment Concerns: Corus was facing declining
profitability and struggled with high debt levels, which raised questions about the fair
value of the company. Tata Steel paid a premium over the market value of Corus's
stock, which led to concerns over whether the acquisition was too expensive.
  Strategic Synergies Justification: Tata Steel justified the high valuation based
on synergies, such as access to European markets and technological expertise in steel
manufacturing. These synergies were factored into the long-term growth projections
and supported the justification for a higher purchase price.
Legal Scrutiny: While the deal was approved by various regulatory authorities, including
the European Commission, it faced intense scrutiny by shareholder groups who questioned
whether the valuation was fair. In India, under Section 230-232 of the Companies Act, 2013,
and SEBI guidelines, valuations are required to be fair and transparent to avoid potential
legal disputes and to ensure that minority shareholders are not disadvantaged.
The Tata-Corus merger also underlined the importance of independent valuations in cross-
border M&A deals, especially where different jurisdictions apply differing regulatory
frameworks.

2. Vodafone-Idea Cellular Merger

Background: In 2018, Vodafone India merged with Idea Cellular to form Vodafone Idea
Limited, the largest telecom operator in India by subscribers. The merger created a massive
entity that dominated the Indian telecom sector.
Valuation Process: The valuation of Vodafone India and Idea Cellular required careful
consideration of their financials, market share, and spectrum holdings:
 DCF Analysis was applied to project the future cash flows of both companies in the
competitive and highly regulated telecom sector.
 Precedent Transaction Analysis (PTA) was used to evaluate similar mergers and
acquisitions in the telecom industry to determine the fair market value.
Key Challenges in Valuation:
 Regulatory Scrutiny: The Competition Commission of India (CCI) played a key
role in analyzing whether the merger would result in anti-competitive behavior. The
CCI reviewed the merger to ensure that it would not unduly restrict competition in the
telecom market, which would harm consumers.
 Synergies: Vodafone and Idea were struggling with massive debts due to the
competitive pricing of services in the Indian market, which made it difficult to arrive
at a fair valuation. However, synergies from the merger were projected to lead to cost
savings and market leadership in the long run.
Legal Framework: The merger complied with the provisions of the Companies Act, 2013,
and SEBI’s Takeover Regulations, which govern the valuation of shares in M&A
transactions involving listed companies. The SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011 required an independent valuation report to ensure
transparency and fairness in the transaction process.
Despite challenges, the merger was approved by the Indian authorities, but it also highlighted
the need for careful financial structuring and fair valuation when integrating distressed
companies in the highly competitive telecom industry.

II. Judicial Case Laws on Valuation Disputes in M&A

Valuation disputes often arise during M&A transactions, especially when minority
shareholders or stakeholders challenge the fairness of the agreed-upon value. Several judicial
precedents have shaped the legal landscape of valuation in India.
1. Satyam Computers Case: Use of Fair Valuation in M&A
In the Satyam Computers case, a significant valuation dispute arose following the fraud
scandal in 2009 when the company was acquired by Tech Mahindra. The merger was
challenged by stakeholders, including investors who argued that the valuation did not
accurately reflect the true value of the company due to manipulated financial statements.
Judicial Analysis: The Bombay High Court and the Securities Appellate Tribunal
(SAT) emphasized the need for independent, fair valuations in M&A transactions.
The court ruled that the valuation of shares should not be based solely on historical
financial performance but should take into account the future potential and the value of
intangible assets such as intellectual property and customer relationships. This case
established the importance of using multiple valuation methods to reach a fair conclusion.
Legal Implication: This case reaffirms that, under Section 230-232 of the Companies Act,
2013, companies involved in M&A transactions must appoint an independent registered
valuer to ensure a fair and accurate valuation. The judgment also pointed to the need
for transparency and integrity in the financial statements used for valuation purposes.

2. Hindustan Lever vs. Hindustan Dorr-Oliver

In Hindustan Lever Ltd. (HLL) vs. Hindustan Dorr-Oliver, a valuation dispute arose
when Hindustan Leverattempted to acquire Hindustan Dorr-Oliver (HDO), but the
valuation of the target company was challenged by its minority shareholders.
Judicial Analysis: The Delhi High Court ruled that the fair valuation of shares was
necessary to protect the interests of the minority shareholders in the acquisition process. The
judgment made it clear that the acquirer should provide a reasoned and objective
justification for the valuation used in the transaction.
Legal Implication: This case reiterates the importance of conducting valuations in
compliance with the provisions of SEBI’s Takeover Regulations, ensuring that minority
shareholders receive fair treatment and that valuations are carried out in a transparent
manner. Section 27 of the Companies Act, 2013, which governs the valuation of assets
during mergers, mandates that a “fair” value be determined, and this should be supported
by relevant documentationand independent reports.
III. Cross-Border Valuation Regulations
M&A deals that involve cross-border transactions introduce additional complexities in the
valuation process. Different countries have varied legal frameworks and regulations that
govern valuation methodologies in M&A transactions. Cross-border M&A deals must
navigate these international laws while ensuring compliance with local regulations.
1. United States: Internal Revenue Code and Fair Value
In the United States, cross-border M&A valuations are often guided by the Internal Revenue
Code (IRC), which provides tax treatment for mergers and acquisitions, particularly
concerning capital gains and the tax consequences of reorganizations.
 IRC Section 368: This section defines the tax treatment of reorganizations,
including Type A, B, and C reorganizations, and dictates that these mergers should
not trigger capital gains tax if certain conditions are met. The valuation process must
ensure that the deal is structured in a way that qualifies for tax exemptions, such as
ensuring continuity of ownership and business activity.
 Fair Value for Minority Shareholders: U.S. law emphasizes the protection of
minority shareholders in cross-border transactions. Fair value is considered the most
reasonable measure of valuation, especially when the valuation process includes
a judicial appraisal of the shares.
2. United Kingdom: The Companies Act and Valuation Framework
The UK Companies Act, 2006, governs mergers and acquisitions, and it provides a legal
framework for the valuation of shares in the event of an acquisition or squeeze-out of
minority shareholders.
 Valuation for Dissenting Shareholders: The law in the UK requires the payment of a
fair value for shares when minority shareholders dissent to a merger or acquisition.
This is particularly relevant in cross-border mergerswhere foreign
buyers acquire UK-listed companies.
 Independent Valuer: UK law mandates that an independent valuer be appointed
when determining the fair value of shares in an M&A transaction, ensuring that the
valuation is conducted fairly and impartially.
3. Singapore: Tax Incentives and Valuation for Cross-Border M&A
In Singapore, cross-border M&A transactions benefit from the International Enterprise
Singapore (IES) and the Inland Revenue Authority of Singapore (IRAS), which offer tax
incentives and guidance for cross-border mergers.
 Valuation Methodology: Singapore follows an arms-length principle, which
ensures that transactions are priced as if the entities were unrelated, providing a more
 transparent and fair valuation process. The Singapore Companies Act requires an
independent valuer to assess the transaction to ensure fairness to shareholders.
 Tax Treatment: Singapore provides tax exemptions for mergers and acquisitions that
meet the tax residency test, which is especially beneficial for cross-border deals. This
regulatory environment encourages cross-border M&A by offering clarity on tax
treatment and valuation.

Conclusion
Valuation is one of the most crucial and complex aspects of mergers and acquisitions. In
India, the regulatory frameworks provided by the Income Tax Act, 1961, the Companies
Act, 2013, and SEBI regulations offer essential guidance for carrying out fair and
transparent valuations. Judicial case laws such as Satyam Computers and Hindustan
Lever illustrate the importance of independent valuations to protect shareholders' interests,
while cross-border valuation regulations like those in the United States, UK, and
Singapore ensure that international M&A deals are structured in compliance with local laws.
Understanding these complexities ensures that M&A transactions are fair, transparent, and
compliant, helping stakeholders navigate legal challenges and achieve favorable outcomes.