New Cos Act – facilitating M&A or holding it back?

Caucasian businessman using digital tablet in cafeAfter several unsuccessful attempts to revise the Companies Act 1956 (Old Act) the task of enacting a new statute to regulate corporate entities in India has eventually been completed. The Companies Act, 2013, (New Act) in its revamped avatar, brings in a fresh set of changes to the existing regime governing Indian company law, with majority of its provisions being brought into effect. Some of these changes have been long anticipated, whereas some were unexpected.

Although the New Act seeks to bring in transparency in the system and the way corporate entities operate, one may still say that it leaves some room open for buoyant interpretation. However, the New Act ensures that certain operating structures/mechanisms are plugged, which were prevalent primarily due to ambiguity in the Old Act.

Issuance of shares and their regulation is one such facet, which has seen the advent of transparency and consequentially has made some of the structures employed by corporate houses inoperable. To illustrate, regulations pertaining to issuance of treasury shares would have a deep impact on the way certain transactions are entered into, especially by listed companies.

Another facet that will likely help promote operation ease is the introduction of fast-track mergers. Though the applicability of these provisions are restricted to a limited number of companies, the procedure involved is less cumbersome and could help cut the timelines involved in a merger to a substantial extent, once these provisions are brought into force. Moreover, the insertion of provisions pertaining to cross border mergers is another welcome move.

Issuance of treasury shares
Issuance of treasury shares was one option, which facilitated consolidation of holdings, control of voting rights and a quick fix for raising funds by companies, especially listed ones. The modus operandi of this structure was as under:

• A listed company (say List Co) would contribute shares of its subsidiaries (say Sub Co) to a Trust;
• These subsidiaries (which are held by the Trust) would then be merged into the List Co; and
• As a consideration for merger, List Co would issue its own shares to the Trust.

Under a typical merger scenario, the consideration for merger is discharged by the merged company by issuing its own shares to the shareholders of the merging company. However, in the case of a merger of a subsidiary into its parent, the shares of the subsidiary would have to be cancelled since the Old Act prohibited a company from owning its own shares.

Accordingly, had List Co held the shares of Sub Co at the time of merger, the same would have been required to be cancelled. However, since the shares of Sub Co would be held by the Trust and the merger scheme would provide for issuance of shares to the Trust, shares of List Co would be issued to it. This was facilitated by provisions which allowed a company to purchase, or subscribe to fully paid shares in itself or its holding company where the subscription is made by trustees.

Therefore, by following this route, various listed companies held a pool of their own equity shares, which could be used by them for consolidation of holdings and voting power. This structure also helped conglomerates such as Reliance, Escorts, Mahindra & Mahindra, Jaiprakash Associates etc., to raise funds without undergoing the onerous procedures of obtaining shareholder approvals, changes in the charter documents, follow-up public offering/rights issues, etc. Monetization could be simply achieved with the Trust offloading the stake (or a part thereof) held by it, in the stock market.

However, the New Act restricts a transferee company from holding shares in its own name or in the name of a trust. Furthermore, any inter-company investments between companies involved in mergers needs to be mandatorily cancelled in such an event.

With the introduction of this change, increased transparency should emerge in the market and reduce the scope of unconventional practices, especially where valuation and accounting considerations are involved.

Mergers

The New Act has introduced a concept of fast- track mergers and demergers prevalent in some of overseas jurisdictions. Although, the same are not yet notified, the provisions released in this regard provide the option of a simplified and fast-track merger/demerger (for simplicity, referred to as mergers) process, which can be used for the following:

• Merger of two or more specified small companies (as defined)
• Merger between holding company and its wholly owned subsidiary
• Such other classes of companies as may be prescribed

Under such fast-track mergers, the schemes approved by the boards of directors of companies will be sent to Registrar of Companies (ROC) and the Official Liquidator (OL) for their suggestions or objections, which both the authorities would have to provide within 30 days. The scheme will then be considered in meetings of shareholders or creditors, along with their suggestions or objections, and will have to be approved by the prescribed number of shareholders and creditors.

After the approval mentioned above, the scheme will have to be filed with the OL, RoC and the Central Government. In the event of there being “no objection,” this will be deemed as approved. However, in the event of objections from the RoC or OL, the scheme may be referred by the Central Government to the National Company Law Tribunal for it to be considered the scheme under the normal process of a merger. In addition to the above, both companies (transferor and transferee) will need to file a declaration of solvency with the RoC.

Among various features of fast-track mergers of companies, one is the exemption from the need to obtain auditors’ certificates of compliance with applicable accounting standards. This is a welcome step that will result in reduction in the administrative burden, timelines and costs of small companies that fall within threshold limits. On the flip side, there is ambiguity on whether fast-track mergers will be allowed prior to NCLT becoming operational.

With respect to cross border mergers, the Old Act only permitted inbound mergers, i.e., where a foreign company merged into an Indian company. The New Act proposes to allow both inbound and outbound mergers between Indian companies and foreign ones. Though the applicability of these provisions is currently restricted and such cross border mergers will be allowed between India and certain notified jurisdiction only, these provisions could have far reaching effects on the Indian business environment. To illustrate, cross-border M&As are supported by and sometimes driven by technological advancements, low-cost financing arrangements and robust market conditions, which can provide the much needed impetus to a plethora of industries, and help them tap global markets.

Therefore, with a few welcome changes and a few unexpected ones, it can be said that the New Act has endeavoured to bring out transparency and operational ease in the Indian M&A space. However, certain avenues for planning still exist and if structured appropriately, the same objectives can be achieved – albeit in a different manner.


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