satwinder singh partner, vaish associates advocates · satwinder singh, partner, vaish associates...

Satwinder SinghPartner, Vaish Associates Advocates

Central Council Member, ICSI

Compromise/ Arrangement/ Amalgamation

Other Restructuring Aspects

CORPORATE RESTRUCTURING

ConceptualChanges

Capital Reduction

Further Issue

Capital Restructuring

ProceduralChanges

Contractual Arrangements

Others

Buyback

Redemption of preference

shares

Bonus Issue

Inter-se shareholding

Entrenchment

Forward / Insider Dealing

Legislative Changes

Satwinder Singh, Partner, Vaish Associates AdvocatesCentral Council Member, ICSI

ConceptualChanges

Capital Reduction

Further Issue


ProceduralChanges


Others

Buyback


shares

Bonus Issue


Entrenchment


Legislative Changes





1956 Act

Impact vis-à-vis other legislations

Chapter

Sections

Authority

Section 390-396A

Chapter V

High Court

Rules Company (Court) Rules, 1959

2013 Act

Part XV

Section 230-240 (Section 234 is yet to be notified)

NCLT

CompaniesCompanies (Compromise, Arrangement and

Amalgamation) Rules, 2016and

NCLT (Procedure for reduction of share capital of Company)

Rules, 2016

Corporate Restructuring


Legislative Changes


TRANSITIONAL PROVISIONS:

Whether, pursuant to enactment of 2013 Act, the provisions of any other legislationswould require amendment to the extent of making reference to the relevantprovisions of the 2013 Act, instead of 1956 Act?

Section 8 of the General Clause Act, 1897 provides the following:"8. Construction of references to repealed enactments –

(1) Where this Act, or any (Central Act) or regulation made after the commencement of thisAct, repeals and re enacts, with or without notification, any provision of a former enactment,then references in any other enactment or in any instrument to the provision so repealedshall, unless a different intention appears, be construed as references to the provision so re-enacted. ......”

The intent of section 8(1) of the General Clauses Act, 1897 would be that if there isany reference of a section of the 1956 Act (which has been repealed and re-enacted) in any other enactment (say, Income tax Act, like under section 2(18),2(19AA), 115JB, etc) or in any instrument, unless a different intention appears, beconstrued as references to the provision so re-enacted (i.e. corresponding notifiedsection of the 2013 Act)



Legislative Changes




Legislative Changes


Transfer of matters/pending proceedings to the Tribunal from High Courtunder Section 434(1) of the 2013 Act w.e.f 15th December, 2016 videnotification no. S.O. 3676(E) and 1119(E) dated 7th December, 2016 [2ndproviso to Section 465(1) of the 2013 Act]

Upon transfer of pending proceedings to Tribunal, the Tribunal may proceedto deal with such proceedings from the stage before their transfer [Section 434(1) (d) of the 2013 Act]

Winding up cases pending before the High Court of which orders arereserved or in which notice of petition is served on the respondent shall not betransferred to the NCLT [West Hills Realty Private Ltd. Vs. NeelkamalRealtors Tower Pvt. Ltd.]




Legislative Changes


On 1st December, 2016 , any appeal preferred to the AAIFR; or any referencemade or enquiry pending to or before BIFR; or any proceeding of whatevernature pending before the AAIFR; or the BIFR under the SICA immediatelybefore the commencement of 2013 Act (“Pending Proceedings”) shall standabated

Fresh reference w.r.t abated Pending Proceedings to be made to the Tribunalunder the 2013 Act within 180 days from the commencement of 2013 Act





ConceptualChanges

Capital Reduction

Further Issue


ProceduralChanges


Others

Buyback


shares

Bonus Issue


Entrenchment


Legislative Changes


Applicant to disclose following in the affidavit to NCLT:

all material facts related to the company;

investigation /proceedings pending against the company;

reduction of share capital included in the scheme;

details of corporate debt restructuring, if any



Procedural Changes

Application(Section 230)


Disclosure about Corporate Debt Restructuring (“CDR”):

creditor’s responsibility statement;

safeguards for protection of other creditors;

report by auditor that fund requirement after approval of CDR willconform to liquidity test;

statement if company proposes to adopt CDR guidelines by RBI;

valuation report on shares, property and assets by registered valuer.



Procedural Changes

Application(Section 230)


Annexure to Notice:

Explanatory statement; Valuation report; Report by Directors explain its impact oneach class of shareholders, KMP, promoterand non-promoter; etc.

In case of merger/demerger/slumpsale/reconstruction, additional documents:

Expert report on valuation Supplementary Accounting Statement

Last Accounts –31st March 2016

More than 6 months



Procedural Changes

Contents of Notice

(Section 230/ 232)


Notice of the meeting required to be sent to:

all creditors/ members/ debenture-holders Central Government Income-tax authoritiesRBI SEBI

Key Takeaway - In Securities and Exchange Board of India v. IkisanLimited, The Bombay High Court found that there was substantial delay inSEBI’s action in bringing the application for review. Although the schemewas sanctioned in 2011 and further complaints from shareholders followedsoon thereafter, SEBI acted only in 2013. In any event, given the grave natureof the allegations brought by SEBI, the court decided to delve into the meritsof the case. But, here too, the court did not find reason to overturn its earlierorder sanctioning the scheme. Hence, SEBI’s application was dismissed.

ROC, OL, CCI, Stock Exchanges other sectoral regulators/authorities likely to be affected



Procedural Changes

Service of Notice

(Section 230)


http://bombayhighcourt.nic.in/generatenewauth.php?auth=cGF0aD0uL2RhdGEvanVkZ2VtZW50cy8yMDE1LyZmbmFtZT1PU0NBODYxMy5wZGYmc21mbGFnPU4mcmp1ZGRhdGU9JnVwbG9hZGR0PTIzLzA5LzIwMTUmc3Bhc3NwaHJhc2U9MjgwOTE1MDYzNTQ0



Procedural Changes

Service of Notice

(Section 230)

POTENTIAL ISSUE

• Whether the obligation to serve notice on the afore-mentioned regulatoryauthorities applies when meetings have been dispensed by NCLT?


In person

Proxy

Postal Ballot

ElectronicVoting

Adoption

Minimum10%Shareholding

Minimum 5%OutstandingDebt

ByRegulatoryAuthorities

Representations

30 Days

Objection

At least 90%of the valueof creditors

Dispensation



Procedural Changes

Service of Notice

(Section 230)


NCLT Order to be filed within 30 days of receipt of order Scheme to be effective from appointed date and not subsequent date Annual certification to RoC till the scheme is fully implemented



Procedural Changes

NCLT Order(Section 230)

NCLT Order

Dividend in Cash

Option of conversion given to

Preference Shareholders

Reduction of Share Capital

Buyback of Shares

Variation of Rights

Exit Offer

Takeover OfferFee on

Authorized Capital

Dividend in the form of equity

shares

OR





ConceptualChanges

Capital Reduction

Further Issue


ProceduralChanges


Others

Buyback


shares

Bonus Issue


Entrenchment


Legislative Changes


70% Shares

Merger

Consideration in lieu of A’s

holding in B

Treasury Shares issued by A to be held by Trust on A’s behalf



Conceptual Changes

Treasury Shares (Section 232/233)


Transferee Company not to hold Treasury

Shares

Own name Own Behalf

On behalf of any of its Subsidiary

Name of Trust On behalf of

Associate Company

POTENTIAL ISSUE• Whether the bar on issuance of treasury shares will also apply to shares

issued to the trustee in respect of fractional entitlement ?



Conceptual Changes

Treasury Shares (Section 232/233)

Either


Transferor Listed

Transferee Unlisted

Amalgamated Unlisted

Transferee company shall remain unlisted until it becomes a listedcompany

Shareholders opting to exit :

to be paid value of shares

value not to be less than as per SEBI valuation guidelines

Merger of listed company with unlisted company may have majortax implications, in as much as the amalgamated company would betreated as a company in which public is not substantially interested



Conceptual Changes

Merger of listed with unlisted company

(section 232)


Merger / Amalgamation of : Small Companies upto paid capital of Rs. 50 lakh and turnover upto

Rs. 2 crores Holding and WOS such other class as may be prescribed

Notice of the Scheme inviting objections to be sent to: ROC; OL; Persons affected by Scheme

Scheme to be approved by members holding 90% shares / by 90% value ofcreditors

Companies to file declaration of solvency

POTENTIAL ISSUE• Who would be regarded as “persons affected by scheme” ?



Conceptual Changes

Fast Track Mergers

(Section 233)


Foreign Company

Foreign Company

India

Notified Jurisdiction

Indian Company

Indian Company

1956 Act 2013 Act

RBI Approval may not be required

Prior Approval of RBI

mer

ger

mer

ger



Conceptual Changes

Cross Border Merger

(Section 234)


Foreign Company

Foreign Company

India

Notified Jurisdiction

Indian Company

Indian Company

1956 Act 2013 Act

Prior Approval of RBI

mer

ger

mer

ger



Conceptual Changes

Cross Border Merger

(Section 234)


Hospital Hospital Education



Conceptual Changes

Mergers of Charitable

Companies (Section 8)

Section 8 company to merge with section 8 company only having similarobjects

Overrules Walvis Flour Mills Case wherein trading companies were mergedwith section 25 companies


Majority Protection ?

Minority Protection ?



Conceptual Changes

Minority Protection

(Section 235/ 236)





ConceptualChanges

Capital Reduction

Further Issue


ProceduralChanges


Others

Buyback


shares

Bonus Issue


Entrenchment


Legislative Changes


Further issue of shares can be made to any person, other than existingshareholders, by passing special resolution, if the price is determined byvaluation report of a registered valuer, subject to such conditions as may beprescribed

Erstwhile provision conferring right of pre-emption on the existingshareholders after the expiry of two years from the date of incorporation or afterone year from the date of first allotment, whichever is earlier, has beendispensed with


Other Restructuring

Aspects


Further Issue of Capital

(Section 62)


Approving Authority – NCLT

Key Conditions:

No arrears in repayment of deposits (or interest payable thereon)

Notice to CG, ROC, SEBI (listed company) and creditors – Representation within 3months, else deemed “no objection”

Accounting treatment to be in conformity with AS and auditors’ certificatecertifying such compliance

Power of NCLT to dispense with requirement of consent of the creditor in case ofreduction of capital by way of either diminution in any liability in respect of the unpaidshare capital or payment to any shareholder of any unpaid share capital has beenwithdrawn


Other Restructuring

Aspects


Capital Reduction

(Section 66)


Cooling period of 1 year applicable even in case of buy back by specialresolution

Route of buy-back from odd lots – withdrawn

Buy-back possible in case of following defaults, provided the defaults havebeen remedied, and 3 yrs have lapsed:

repayment of deposit/interest payable

redemption of preference shares/debentures

payment of dividend

repayment of any term loan or interest


Other Restructuring

Aspects


Buyback(Section 68-70)


Issue of redeemable preference shares for a period more than 20 yrs but upto 30years

ONLY for funding of specified infrastructure projects (viz., power generation,trading and distribution of power, transportation, telecommunication services,etc.); and

Subject to annual redemption of minimum 10% of such preference shares, atthe shareholders’ option to whom such preference shares are issued from 21st

year onward or earlier, on proportionate basis.


Other Restructuring

Aspects


Redemption of Preference Shares

(Section 55)


Inability to redeem any preference shares (or payment of dividend on suchshares)

Redemption by further issue of preference shares equal to the amount due onthe preference shares which have not been redeemed (including the dividendthereon) with the approval of: (i) 3/4th (in value) of preference shareholderswhose preference shares are due to be redeemed; and (ii) Tribunal.

Tribunal may order redemption of preference shares of dissenting preferenceshareholders forthwith

Certain class of companies (to be prescribed) and whose financial statementscomply with accounting standards to be prescribed for such class of companiesunder section 133 have been allowed to pay premium on redemption only outof profits of the company as against an option given to other companies to payout of profits or securities premium account


Other Restructuring

Aspects


Redemption of Preference Shares

(Section 55)


Critical Issues in

Restructuring


Companies Act, 1956 (“1956 Act”) facilitates compromise, arrangement orreconstruction of a business (sections 390 to 396A of 1956 Act);

The terms ‘merger’ and ‘amalgamation’ are synonymous;

In amalgamation, the undertaking, i.e. property, assets and liability of one ormore company (amalgamating company) are absorbed by an existing or a newcompany (amalgamated company);

The amalgamating company integrates with amalgamated company and theformer is dissolved without winding up


Critical Issues in

Restructuring

What is Merger or

Amalgamation?


Merger of two or more companies in such a manner that all assets andliabilities of the amalgamating company immediately before the amalgamation,become the assets and liabilities of the amalgamated company

and

Shareholders holding not less than 3/4th in value of the shares in theamalgamating company become shareholders of the amalgamated company byvirtue of the amalgamation


Critical Issues in

Restructuring

Amalgamation(Section 2(1B) Income

Tax Act, 1961)


Section 2(19AA) of the Income-tax Act defines demerger as under:

‘demerger’ in relation to companies means the transfer, pursuant to a scheme ofarrangement under section 391 to 394 of the Companies Act, 1956 by a demergedcompany of its one or more undertakings to the resulting company in such a mannerthat-

(i) all the property of the undertaking, being transferred by the demerged company,immediately before the demerger, becomes the property of the resulting companyby virtue of demerger;

(ii) all the liabilities relatable to the undertaking, being transferred by the demergedcompany, immediately before the demerger, become the liabilities of the resultingcompany by virtue of the demerger;

(iii) the property and the liabilities of the undertaking or undertakings, beingtransferred by the demerged company are transferred at values appearing in itsbooks of account immediately before the demerger;

(iv) the resulting company issues, in consideration of the demerger, its shares to theshareholders of the demerged company on a proportionate basis;


Critical Issues in

Restructuring

What is Demerger?


(v) the shareholders holding not less than three-fourth in value of shares in the demergedcompany(other than shares already held therein immediately before the demerger, orby a nominee for, the resulting company or, its subsidiary) becomeshareholders of the resulting company or companies by virtue of the demerger;otherwise than as a result of the acquisition of the property or assets of the demergedor any undertaking thereof by the resulting company;

(vi) the transfer of the undertaking is on a going concern basis.


Critical Issues in

Restructuring

What is Demerger?


“Slump Sale” means the transfer of one or more undertakings as a result of thesale for a lump sale consideration without values being assigned to individualassets and liabilities in such sales. [Sec. 2(42C) of the Income Tax Act, 1961]

Determination of the value of an asset or liability for the sole purpose ofpayment of stamp duty, registration fee or other similar taxes or fees shall notbe regarded as assignment of values to individual assets or liabilities


Critical Issues in

Restructuring

What is Slump Sale?


Appointed Date: date on which assets and liabilities of the transferor companyvest in and stand transferred to the transferee company

Accounts on the appointed date form the basis for valuation of shares anddetermination of share exchange ratio

Appointed date relevant for the purpose of assessment of income of the transferorand transferee companies

[In Re: Marshall Sons (1997) 88 Comp Cases 528 SC]

Effective Date: date on which scheme is complete & effective, i.e. certified copy ofthe High Court order is filed with Registrar of Company or the last of theapprovals obtained

From the effective date amalgamation becomes effective and transferor companystands dissolved


Important aspects in Drafting of Scheme

Appointed Date &

Effective Date


One of the most important part of the M&A Scheme

Valuation is an art and not a science

The Process involves:

evaluating the value of the merging company or its business and/or of itsshares

evaluating the securities of the issuing company on a stand alone basis

determining the Exchange Ratio for the securities so as to ensure fairconsideration

The Report is subject to scrutiny by the lending and investment institutions,Regional Director, Official Liquidator


Valuation Aspects



Approval of the Scheme and the Valuation Report by majority of the shareholdersand creditors does not mean that the Court is bound to treat the same as faitaccompli-Court can view it from the test of fairness

On some occasion, the Court does appoint independent valuers where dissentingshareholders or creditors make a strong case for such an action

Valuation report is to be mandatorily filed with the NCLT

Valuation report shall be made by a registered valuer, and till the registration ofpersons as valuers is prescribed under section 247 of the Act, the valuation reportshall be made by an independent merchant banker who is registered with the SEBIor an independent chartered accountant in practice having a minimum experienceof 10 years. (Explanation (b) to Rule 6(3) of the Companies (Compromise,Arrangement and Amalgamation) Rules, 2016)


Valuation Aspects



Class must be confined to those persons whose rights are not so dissimilar as tomake it impossible for them to consult together with a view to their commoninterest;

The group who are styled as class must have commonality of interest andordinarily be homogeneous and they have been offered identical compromise –(In Re: Maneck Chowk and Ahmedabad Manufacturing Ltd. (1970) 40 Com Cas819);

The difference in terms of the scheme can only be the criteria for identifying classfor the purpose of convening a separate meeting of such class


What constitute “Class”



Suppose “A” is being merged with “B”

Likely Situations:

a) “A” is a shareholder of “B”

b) “B” is a shareholder of “A”

c) “C”, subsidiary of “B” is a shareholder of “A”

May result into reduction/cancellation of share capital

Controversy over adoption of separate procedure under section 100 set at rest - InRe: Manekchowk and Ahmedabad Manufacturing Company Limited.(Supra)


Cross Holdings



Sanction of a Scheme without power to amalgamate in the memorandum ofassociation

[Hari Krishna Lohia v. Hoolungoree Tea Co. Ltd. (1996) : 4 Comp LJ 353 (Cal) ]

Increase of authorized capital - Post amalgamation events cannot be made subject-matter of objections to scheme of compromise or arrangement

[Winfield Agro Services (P) Ltd. v. Hindustan Antipest (P) Ltd. (1996) : 3 Comp. LJ347 (AP)]

Change of object clause through the Scheme [In Re: HCL Infosystems Ltd.]


Single Window

Clearance



Change of name of the amalgamated company to the name of amalgamatingcompany [In Re: Novapan India Ltd., (1997) 88 Com Cases, 596]

Change of Registered Office of the transferee company (In the matter of IndoRama Synthetics Ltd.)

Reduction of Share capital [In Re: ManekChowk and Ahmedabad Mfg. Co. Ltd]

Conversion of status of a company (Private Limited to Public Limited and vice-versa) [In Re: Maharishi Ayurveda Corporation Pvt. Ltd.]


Single Window

Clearance



Accounting Aspects

Amalgamation Demerger Slump sale

Governed by AS-14 Not Governed by Any Specific AS


Accounting Treatment



Accounting aspects: Key Provisions of AS 14

2 Types of merger

Amalgamation in the nature of merger

Amalgamation in the nature of purchase

Pooling of interest method Purchase method





Accounting aspects: Key Provisions of AS 14

Amalgamation in the nature of merger

Amalgamation in the nature of purchase

Treatment

Identity maintained Identity not maintainedReserves

Aggregated with corresponding balance

or transferred to general reserve

Loses identityProfit & Loss A/c

Adjusted in reserveCapital reserve /

goodwill created and amortised

Difference between the consideration and

assets taken over








Ind AS 103 prescribes purchase ( acquisition) method for accounting of acquisitions.Business combinations involving entities or businesses under common control shallbe accounted for using the pooling of interests method.

Description Purchase Method Pooling of Interest Method

Measurement of

Identifiable assets

and liabilities of

acquiree

All identifiable assets and liabilities have to be

measured at the acquisition at fair value.

The assets and liabilities of the

combining entities are reflected at their

carrying Amounts ,no adjustments are

made to reflect fair values.

Intangible assets

not recognised by

the acquiree

The acquirer’s application of the recognition

principle and conditions may result in recognising

some assets and liabilities that the acquiree had not

previously recognised as assets and liabilities in its

financial statements – even if such assets or

liabilities were not recognised by the acquire.

No new assets or liabilities are

recognised

Balance of retained

earnings in the

books of acquiree

\transferor

The balance of the retained earnings appearing in

the financial statements of the acquiree never get

reflected in the financial statements of the acquirer.

The balance of the retained earnings

appearing in the financial statements

of the transferor is aggregated with the

corresponding balance appearing in

the financial statements of the

transferee. Alternatively, it is

transferred to General Reserve, if any.

Listing of a company without IPO

Activity A Activity B Activity B

A Ltd. (Listed Company) B Ltd. (Listing through Scheme)

Compliance of SEBI (Listing Obligations and DisclosureRequirements) Regulations, 2015 and Circular of SEBI CIR/CIR/CFD/CMD/16/2015 dated 30th November, 2015


Back Door Listing



What do stock exchanges normally consider?

Entry norms compliance

Pre & Post Scheme shareholding pattern & financial statements

Net worth post merger

Continuous listing requirements

Resumed trading price after cooling off period

Continuous follow up required

Lock in requirements

Placing the Information Memorandum on website-post approval of theScheme


Consideration by Stock

Exchanges



Description of companies

Capital Structure of companies and its alteration

Rationale of the Scheme

Transfer of Assets and liabilities of transferor company

Continuation of legal proceedings

Declaration of Dividend

Charges

Inter-part Transactions

Transfer of employees

Conduct of business till effective date

Conditionality of Scheme



Other aspects in Drafting of Scheme

The Court’s Order sanctioning scheme of arrangement is an instrument ofconveyance;

Stamp duty in Delhi on instrument of conveyance for transfer of property is 3%on the consideration set forth in the instrument and in case of transfer ofimmovable property, and additional transfer duty of 3% of the considerationamount shall be applicable

Stamp duty in Maharashtra on order of High Court under section 394 of the 1956Act is 10% of the aggregate market value of shares issued or allotted andconsideration paid for such amalgamation.

For amalgamation, the amount of duty shall not exceed

5% of the market value of immovable property of Transferor Companysituated in state of Maharashtra; or

5% of the aggregate of market value of shares issued or allotted andconsideration paid;

whichever is higher



Stamp Duty Aspects

For Reconstruction or Demerger, duty shall not exceed

5% of the true market value of immovable property situated in state ofMaharashtra transferred by Demerged Company to the Resulting Company;or

0.7% of the aggregate of market value of shares issued or allotted to theResulting company and consideration paid ;

whichever is higher



Stamp Duty Aspects

In L and T Finance Limited vs The Superintendent of Stamps and the Collector ofStamps, Mumbai (Appeal No. 36/2005) wherein 4 companies (i.e. transferorcompanies) were merged with L and T Finance Limited, (i.e. Transferee Company)and out of which 4th transferor company was a WoS’s of the transferee company.Pursuant to the said merger, the shares held by transferee company in the 4th

transferor company were cancelled and no consideration was paid to the 4th

transferor company or its shareholders; the point for consideration before CCRAwas whether transferee company was liable to pay stamp duty for transfer ofassets and liabilities of the 4th transferor company as no consideration was paid bythe transferee company. CCRA while deciding the issue in favour of the transfereecompany stated that the stamp duty is payable on consideration and since the 4th

transferor company was the WoS’s of the transferee company, no considerationwas paid under the scheme for merger of 4th transferor company with thetransferee company. CCRA also held that the transferee company is the owner ofthe 4th transferor company, irrespective of the fact that legally it is a separateentity and in such circumstances, there cannot be a conveyance from the owner toitself.



Stamp Duty Aspects

New Delhi

1st, 9th & 11th Floor,

Mohan Dev Building

13 Tolstoy Marg

New Delhi 110001 (India)

Tel: 91 11 49292525

Fax: 91 11 23320484

E-mail: [email protected]

Bangalore

305, 3rd Floor,

Prestige Meridian-II,

Building No. 30, M.G. Road,

Bengaluru - 560001

Tel: 91 80 40903588/89

Fax: 91 80 40903584


Mumbai

106 Penninsula Centre

(Behind Piramal Chambers),

Income tax Office

Dr. S.S. Rao road, Parel

Mumbai-400012

Tel: 91 22 42134101

Fax: 91 22 42134102


Disclaimer: While every care has been taken to ensure accuracy of this presentation, Vaish Associates shall not assume any liability/ responsibility for any

errors that might creep in. The material herein does not constitute/ substitute professional advice that may be required before acting on any matter.

M&A THANK YOU

satwinder singh partner, vaish associates advocates · satwinder singh, partner, vaish associates...

Documents