Issues and Challenges of Legal Framework on Mergers and Acquisition in India

Abstract

The world of corporate growth today concentrates on M&As, which allow companies to merge the market share, achieve competitive results, and produce cost-efficient resources. Having experienced a high growth since the last few decades in India, the overall M&A market has been relatively static however, there has been a boost in the M&A market after the advent of a liberalized economic emancipation and the emergence of the globalized marketplace. The ecosystem that regulates M&A is very complex and at least four legislations and regulatory bodies are involved, including Companies Act, 2013, SEBI Regulations, Competition Act, FEMA and the Income Tax Act. Although, there is a formal structure, procedural hold ups, valuation variations, regulatory conflicts, and deficiency of minority protection still plagued M&A transaction. In the current paper, the fundamental elements of Indian system of M&A are dissected, particularly important case laws discussed, and the comparative analysis is made with the international best, largely in United States and United Kingdom. It also identifies gaps and provides substantive suggestions so as to streamline corporate restructuring activities protect the interest of the stakeholders and allow India to become a global M\&A hub.

KEYWORDS: Mergers & Acquisitions, Corporate Law, Regulatory Framework, Shareholder Protection, Cross-Border M&A.

Introduction

Mergers and Acquisitions (M&A) is one such phenomenon which has gained a lot of significance in the corporate and financial landscape of the current world as organizations aim at strategic consolidation and diversification. The idea of the merger of two companies is no longer confined to this; it has expanded the complex multi-jurisdiction transactions that transform the entire industry. India started its affair with M&A in early stages, after 1991 economic reforms were first realized when liberalization policies were introduced which enabled both domestic and foreign players to participate in streamlining activities.

Merger is usually the amalgamation of two or more with one entity into another where one of the merging entities still remains in existence but the other loses its respective identity. Acquisition is the handed over control of one company over another either with or without amalgamation. The reasons are different, including market expansion, technological benefit, synergy achievement, and diversification, or the tax efficiency. However, in company with financial aspects, there is an inseparable set of legal factors, the rights of the stakeholders, registration approvals, and the taxes, which determine the plausibility and success of any M&A transaction.

Indian legal system of M&A is marked with interconnection of numerous legislations, rules and industry-wise codes. The procedural roadmap of the mergers and demergers is contained in the Companies Act, 2013[1] whereas the SEBI rules govern the acquisitions by a listed company[2]. Moreover, the Competition Act makes sure that transactions do not negatively affect the competition[3] within the market, and the involvement of foreigners is controlled by FEMA[4]. The post merger tax liability and exemptions would be influenced by provisions contained in the Income Tax Act.

In India despite having a regulated regime they still face numerous problems, that is, regulatory delay, confusion in valuation, overlap in jurisdictions, absence of a nodal agency and absence of a central specialized bench or separate court to assist the quick resolution of their dispute.

This paper discusses the legal code of M&As in India in detail. It looks at what regulatory authority does, reviews landmark rulings that define corporate law, and puts its finger on the patchy gaps in the laws, and contrasts the M&A legislations with that of international best practices. Lastly, it makes suggestions on the need to streamline legal reforms and procedure to ensure a more efficient environment and to secure stakeholders on the one hand and also make the M&A environment in India commensurate with the best practices of the global environment.

Research Methodology

The research undertaken is in the doctrinal category whose main source is based on statutory interpretation, judicial pronouncement, administrative directions and literature in the field. The Companies Act 2013; SEBI Takeover Code, 2011; the Competition Act, 2002; FEMA regulations and the Income Tax Act, 1961 are considered as the primary sources. A big component of the data set consists of regulatory circulars issued by SEBI, RBI and MCA. Secondary sources include law reviews, case commentary, comparative legal studies and books written by major scholars of corporate law[5]. Supreme Court and High Courts’ judicial precedents have been reached to determine the changing judicial trends. The legal system of India has been compared using a comparative methodology with that of the U.S. and the U.K with special reference to procedural deadlines, disclosure standards and shareholder-protection restrictions.

Legal Framework for M&A in India

Companies Act, 2013

Part X of the Companies Act, 2013 covers mergers, amalgamations, arrangements and compromises[6], the provisions of which override the provisions consisting of sections 391 to 394 of the Companies Act, 1956. One of the main developments is the role of granting powers to National Company Law Tribunal (NCLT) so that it approves the schemes of mergers and demergers without the need to go to the High Courts as was the practice earlier.

The following is involved in the procedure:

• A thorough plan of either a merger or an amalgamation is drawn.
• Submission of an application in the NCLT as provided in section 230.
• Giving notices to creditors, the shareholders and the regulating bodies.
• Holding of meetings to vote and approve.
• Receiving the final validation of NCLT using Section 232[7].

Section 234 of the Act also allows cross border mergers[8] though such scheme has to be approved by the Reserve Bank of India and within the territories so permitted. Section 236 brings in the concept of the buying out of minority shareholding[9], where majority investors will be able to amalgamate the power.

SEBI (SAST) Regulations, 2011

Takeover Code is applicable to every listed company[10]. It tries to maintain open transactions, fair prices, as well as protect the small shareholders.

• In a case where a bidder has acquired over 25 percent of voting rights in the company, then an open offer has to be made to all the public shareholders.
• Competitive bidding regulations and voluntary offer make more buyers enter the market.
• The indirect acquisitions also are addressed in the code.

Lately, in amendment of Takeover Code, disclosures are being made more forceful and regulatory provisions more clear.

Competition Act, 2002

The fact is said in sections 5 and 6 of the Act[11], that whoever intends to merge or acquire or joint venture or do a deal similar to that, must inform the Commission on whether the deal will be of specified limits in size. The CCI needs to take a decision within 210 days whether it should approve, transform, or block the deal. In case the CCI believes that the merger is anticompetitive, they can impose a fine and also negate the deal.

There are exemptions to some deals. Transactions that are exempted are those involving intra-group banks restructurings and takeovers of small companies. Despite all these exemptions there are still concerns:

• The word ‘control’ is not very clear in meaning.
• The extensive time to review of the pre-merger of the CCI.
• The necessity to store sensitive commercial information as a secret.

FEMA and RBI Regulations

In accordance with the provisions of the Foreign Exchange Management Act (FEMA), the Reserve Bank of India (RBI) lays down comprehensive regulations on foreign direct investment (FDI), in those sectors, where there exists statutory restriction, such as, in defense, insurance, telecommunication and aviation sectors. Under such rules, RBI lays down various norms[12] which are:

• Pricing determinants that regulate sales of corporate equity or sale of stock;
• Reporting conditions which should be followed by foreign investors;
• Picked some sector-specific limits and circumstances, which impose the requirement of pre-approval by the RBI.

At the same juncture, 2018 Cross-Border Merger Regulations of FEMA give authority to Indian firms to merge with companies in other countries, so long as it is within the context of the sectoral framework and has gained the consent of National Company Law Tribunal (NCLT).

Income Tax Act, 1961

The Act shifts the merger of the companies by:

• Providing an exemption to the payment of fee on permitting certain mergers (section 47).
• The provision to allow a carrying forward of merger tax losses by companies (section 72A)[13].
• The establishment of a capital gain tax in case of an exchange of shares in merging companies.
• Direct taxes cover all the assets relocated in the case of a merger.

The stamp duties are different in each state and it is a source of a problem since some states have no regulations and others do.

Judicial Interpretation and Case Law

• Miheer H. Mafatlal v. Mafatlal Industries Ltd., (1997) 1 SCC 579

The Court held that the judiciary should not get involved in the commercial aspects of mergers unless the scheme is manifestly unfair or unlawful[14]. It sets the precedence of the concept of business wisdom of the shareholders.

• Sesa Industries Ltd. v. Krishna H. Bajaj, (2011) 3 SCC 218

The court has indicated that upon the passing of a scheme by a court, the interests of minority shareholders cannot be relegated[15]. National Company Law Tribunal (NCLT) should be able to think like a judge and make sure that all legal regulations are observed.

• Reliance Industries Ltd. and Reliance Petroleum Ltd., (2009) 149 Comp Cas 214 (Bom)

A valuation report by the auditors prevented complaints among shareholders. The court emphasized on fairness and openness[16].

• Holcim-Ambuja Cements Merger (2013)

This case is not a litigation case, but it is mainly used due to the reasons that the acquirer installs the bunch of intermediate companies and in such way the structure appears to be very complex and the question of the openness and the fair competitive level is raised.

Critical Analysis: Challenges in M&A Execution

• Regulatory Complexity and Overlap

The economy has different sections with various parts being regulated by various government agencies with overlapping rules. CCI, SEBI, RBI, MCA, and NCLT do their work in a co-ordinated manner to a very limited degree. No single central body exists to coordinate the approvals or resolve any conflict thereof.

• Valuation Conflicts

Where a set method fails to value a company, disputes come along. Most of the times, courts place confidence in independent experts of valuation and indeed issues can arise when:

• The valuation is done by only one company.
• Depending upon various models, the results may vary significantly.
• Minority shareholders believe that share price they get is too low.
• Minority Shareholder Exploitation

Even though the legislation safeguards minority shareholders, they tend to grasp power once one company merges with another one. Squeeze-outs stipulated in Section 236 of Companies Act are less vigilantly accounted for, therefore eliciting concerns that individuals may be coerced.

• Judicial Delays and Infrastructure Bottlenecks

NCLT was established as the body to complete corporate restructurings within short time but currently it has three major issues:

• Backlogs of the worst kind.
• Not sufficient benches or personnel trained.
• Inadequate digital aptitude to do documentation in great quantities.
• Cross-Border Challenges

Although programs of FEMA and MCA give such authority, it is still complicated to obtain complete correspondence with such agreements. Some of the challenges include the following:

• Acquiring recognition under the law in the two jurisdictions.
• Setting tax treatment.
• Dealing with the limitations in regard to exchange controls.
• Uncertainty in Anti-Competition Review

CCI often faces uncertainty in what is the meaning of control. The investor who still possesses minority equity but enjoys special privileges that include having veto rights or having the right to appoint directors may be considered to be engaging in control and therefore is subjected to excess scrutiny.

Comparative Jurisdictional Analysis

United States

Regulatory control in mergers and acquisitions that occurs in United States is mainly disclosure based. The Hart-Scott-Rodino Act of Antitrust Improvement puts in place the provisions of pre-merger notification[17] and the Securities and Exchange Commission carries out antitrust transparency support through the element of tender offers. At the same time, the Delaware judicial system has provided a highly effective specialized corporate law.

United Kingdom

Apparently, the U.K. system puts strong reliance on pre-deal transparency and creditor protection. When a merger goes beyond the bounds of what can be described as a normal market activity to enter the realm of competition-fixing, it must obtain the approval of Competition and Markets Authority (CMA)[18]. Both shareholder activism and judicial review is more formalized than in the United States.

Comparative Lessons

There are three strategies that have already been adopted in other parts of the world that India can employ in order to increase its M&A activity, at least with the domestic M&As:

• A short-cut process of merging. The U.K. has the short-form merger after all, and there is basically the same thing in any jurisdiction, so why not in India? This would help in satisfying the local corporates that feared a long process of approval.
• Procedures of dealing with protection. Break fees, reverse break fees and others operate in most jurisdictions and enable both parties to better have a roadmap over whether a deal will or will not happen.
• Arbitration bodies of valuation. The price disputes arbitration clauses have existed since the creation of time but having the independent valuation experts involved would simplify the procedure and introduce more objectivity.

Recent Legal and Policy Developments

• The amendments (2023) of SEBI: SEBI made an amendment regarding the public shareholding requirements[19] in cases where mergers of listed companies are involved.
• NCLT E-Court Pilot Projects: Digitization has led to some improvement in the time used in processing but it is yet to be completely integrated.
• CCI new Green Channel Route: This, which was launched in 2019, permits selected mergers without overlap to be green lighted automatically[20].

The other reforms that were pending were a proposal of a unified single-window of M&A clearance and benches in NCLT in high value mergers.

Suggestions / Way Forward

To boost up India’s M & A market:

• Streamline approvals by means of a single clearance entity.
• Fast-track straight forward mergers with defined schedules.
• Defend minority shareholders through fair evaluation and informing.
• Harmonize valuations to cut down contention.
• Empower NCLT by special benches and computerization.
• Support cross-border deals by clarity of the law and tax benefits.
• Encourage ADR as a quick way of resolving M&A conflicts.
• Improving disclosures to develop the trust of people.

These reforms will greatly simplify M&A and will boost investor confidence.

Conclusion

India has substantially developed the legal framework that facilitates mergers and acquisitions, but this is still under development. Although detailed by the companies act and SEBI regulations, the procedures are compromised due to the presence of procedures, boundaries, interpretational confusions, and regulatory overlap. The commercial logic and shareholder primacy hold force as judicial precedent but case laws and the application of stated law of the legislature may be poorly applied, depending on the circumstance.

The legal regime should adopt a form of transparency, speed and predictability in becoming an attractive destination of choice when it comes to M&A activity in India. The employment of international good practices, streamlining the procedures and shoring up institutional foundations will usher in effective and fair corporate restructuring in the 21^st century.

Reference(S):

• The Companies Act, 2013, §§ 230–240 (India).
• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011.
• The Competition Act, 2002, §§ 5–6 (India).
• Foreign Exchange Management (Cross Border Merger) Regulations, 2018 (India).
• Sesa Industries Ltd. v. Krishna H. Bajaj, (2011) 3 SCC 218 (India).
• Miheer H. Mafatlal v. Mafatlal Industries Ltd., (1997) 1 SCC 579 (India).
• In Re: Scheme of Arrangement between Reliance Industries and Reliance Petroleum, (2009) 149 Comp Cas 214 (Bom).
• K. Sharma, Mergers & Acquisitions: Indian Legal Perspective (Eastern Book Company, 2021).
• Eric Posner, More on Section 7 of the Torture Convention, THE VOLOKH CONSPIRACY (Jan. 29, 2009).
• SEBI, Consultation Paper on Review of Takeover Regulations, 2023.

[1] The Companies Act, No. 18 of 2013, India Code (2013).

[2] Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, Gazette of India, Part III, Sec. 4.

[3] The Competition Act, No. 12 of 2003, India Code (2003).

[4] Foreign Exchange Management (Cross Border Merger) Regulations, 2018, Gazette of India, Extraordinary, Part III, Sec. 4.

[5] V.K. Sharma, Mergers & Acquisitions: Indian Legal Perspective 67–70 (Eastern Book Co., 2021).

[6] Companies Act, 2013, §§ 230–240.

[7] Id. § 232.

[8] Id. § 234.

[9] Id. § 236.

[10] SEBI (SAST) Regulations, 2011, Reg. 3.

[11] The Competition Act, 2002, §§ 5–6.

[12] Reserve Bank of India, Master Circular on Foreign Investment (July 1, 2022).

[13] Income Tax Act, 1961, §§ 47, 72A.

[14] Miheer H. Mafatlal v. Mafatlal Indus. Ltd., (1997) 1 SCC 579 (India).

[15] Sesa Indus. Ltd. v. Krishna H. Bajaj, (2011) 3 SCC 218 (India).

[16] In re Reliance Indus. Ltd. and Reliance Petroleum Ltd., (2009) 149 Comp Cas 214 (Bom) (India).

[17] Hart–Scott–Rodino Antitrust Improvements Act, 15 U.S.C. § 18a (U.S.).

[18] Financial Conduct Authority, U.K. Mergers and Takeovers Code (2023).

[19] SEBI, Consultation Paper on Review of Takeover Regulations (2023).

[20] Competition Commission of India, “Green Channel” Approval Notification, 2019.