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Executive Presentation
| May 28, 2011|
Merger and Acquisitions in
India India
Modes of M&Ain India
M&A
Amalgamations Acquisitions
© Nishith Desai Associates 2
Merger De-merger Asset Purchase
Stock Purchase/
Stock
Subscription
ItemizedSale
SlumpSale
Mergers
3
Mergers
© Nishith Desai Associates
Merger of two Indian companies
Shareholders Shareholders
Corporate Law Implications
� Sections 390 to 394 of the Companies Act
� Scheme of arrangement to be approved by High Court. Approx.
time - 4-6 months
� Shareholders / creditors approvals – 3/4th in value
Exchange Control Implications
� FIPB approval for issuance of shares to Non resident shareholders
not required if foreign shareholding is within sectoral caps
Securities Laws Implications (Listed target)
4
Indian Co.Indian Co.
Merger
Securities Laws Implications (Listed target)
� Prior stock exchange approval for the scheme under Listing
Agreement
� Issuance of shares to shareholders of merged entity to require
stock exchange approval
Stamp duty Implications
� High Court order liable to stamp duty
Income Tax Implications
� Capital gains exemption and carry forward of depreciation / loss
of foreign company subject to certain conditions
© Nishith Desai Associates
Merger of foreign co. with Indianco.
Shareholders
Consideration
in the form of
shares of
Corporate Law Implications
� Corporate laws of the foreign entity must permit merger
� Scheme of arrangement to be approved by High Court. Approx.
time - 4-6 months
� Shareholders / creditors approvals – 3/4th in value
Exchange Control Implications
� FIPB approval for issuance of shares to Non resident shareholders
not required if foreign shareholding is within sectoral caps
Securities Laws Implications (Listed target)
© Nishith Desai Associates 5
Indian Co.Foreign Co.
Merger
shares of
Indian Co.
Securities Laws Implications (Listed target)
� Open offer under Takeover Regulations may not get triggered on
account of the merger exemption
� Insider trading guidelines to be adhered to
� Prior stock exchange approval for the scheme under Listing
Agreement
� Issuance of shares to shareholders of merged entity to require stock
exchange approval
Stamp duty Implications
� High Court order liable to stamp duty
Income Tax Implications
� Capital gains exemption and carry forward of depreciation / loss of
foreign company subject to certain conditions
Asset Purchase
6
Asset Purchase
© Nishith Desai Associates
Acquisitions
Slump Sale Demerger Asset Sale Definition Transfer of an
undertaking for a lumpsum considerationwithout values beingassigned to the individualassets and liabilities insuch sales.
Transfer of an undertaking on a going concern basis under a court approved scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 in such a manner that inter-alia:
• all the property and liabilities of the undertaking, become the property, assets, liabilities of the resulting company by virtue of the demerger
The sale of the whole or part of the assets of the target to the acquirer with individual values assigned for each asset.
• the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis
• the shareholders holding not less than three-fourths in value of the shares in the demerged company become share-holders of the resulting company by virtue of the demerger,
• the property and the liabilities of the undertaking being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger
7© Nishith Desai Associates
Acquisitions
Slump Sale Demerger Asset Sal e
Pro’s No Value Added Tax liability No capital gains tax implications, if conditions are met
No Value Added Tax liability
Possible to carry forward accumulated losses
No successor liability issues for the acquirer
Step up basis available for claiming depreciation
Cherry picking of assets possible
Con’s Issue surrounding availability of depreciation on goodwill
No step up basis available in respect of the acquired assets for depreciation purposes
Successor liability issue in respect of direct and indirect taxes for the acquirer
Time line for undertaking a de-merger – may extend upto 6 months
Successor liability issue in respect of direct and indirect taxes for the acquirer
Value Added Tax liability in respect of the individual assets being transferred
Higher capital gains tax incidence on the transaction for the seller
8© Nishith Desai Associates
Stock Purchase/Subscription
9
Stock Purchase/Subscription
© Nishith Desai Associates
Income tax Act
Key Regulations
10
Exchange
Control
laws
Private Equity
Investments
© Nishith Desai Associates
�Foreign Direct Investment (FDI)
� Foreign Venture Capital Investment (FVCI)
� Foreign Institutional Investment (FII)
Investment Regimes
� Foreign Institutional Investment (FII)
© Nishith Desai Associates 11
� FDI: FDI means foreign direct investment by way of subscription and/or purchase of securities of
an Indian company by a non-resident investor. Foreign Exchange Management (Transfer or issue of
security by a person resident outside India) Regulations, 2000 (“TISPRO”) issued by the RBI along
with Consolidated FDI Policy issued by DIPP (“FDI Regulations”) are the relevant regulations for
this purpose. Thus, ‘direct’ investments by the concerned Fund vehicle/SPV would need to comply
with the provisions and restrictions as stipulated under the FDI Regulations.
� FVCI: The SEBI (Foreign Venture Capital Investors) Regulations, 2000 (“FVCI
Regulations”) has been formulated for venture capital investments primarily in Indian unlisted
Investment Regimes
Regulations”) has been formulated for venture capital investments primarily in Indian unlisted
companies. FVCI’s registered with the SEBI are accorded a different route for investments into India
vide Schedule 6 of TISPRO (i.e. Investment in an Indian Venture Capital undertaking by a registered
Foreign Venture Capital Investor).
� FII: The SEBI (Foreign Institutional Investors) Regulations, 1995 (“SEBI FII Regulations”),
govern the registration of foreign institutional investors (“FIIs”) desirous of making portfolio
investments into listed Indian securities. The FII route as such is the preferred route for foreign
investors who want to make portfolio investments under Schedule 2 of TISPRO (i.e. Purchase/sale
of shares and/or convertible debentures of an Indian company by a registered Foreign Institutional
Investor under Portfolio Investment Scheme) and trade in Indian listed stocks on the floor of the
stock exchange
12© Nishith Desai Associates
�Restriction in terms of sector
FDI Regime
Restricted sector
� Atomic Energy,� Lottery business, � Gambling and Betting� Retail trading (except single brand retailing)
Regulated Sector (few examples)
� Banking (74%) � Telecom services (49%)*� Insurance (26%)� ARCs (49%)
© Nishith Desai Associates 13
retailing)� ARCs (49%)� Single brand retail (51%)� NBFCs and Real Estate
�Restriction in terms of securities
- Fully paid-up equity shares (including shares with differential rights)
- Compulsorily Convertible Preference Shares (CCPSs)
- Compulsorily Convertible Debentures (CCDs)
FDI Regime (Contd.)
�Restriction in terms of price
- Entry and exit price subject to – DCF valuation.
- Fixed pricing for convertibles OR prescribing a conversion formula, subject to the FEMA /
SEBI guidelines on pricing (latter inserted by the revised Consolidated FDI Policy, 2011;
effective from April 1, 2011).
�Previous venture/tie up in India
© Nishith Desai Associates 14
�Previous venture/tie up in India
-ConsolidatedFDI Policy 2011 has dispensed away with the condition whereby a foreign
investor, which was already engaged in a joint venture or technical collaboration (entered
before January 12, 2005), could not make a new investment into a similar venture unless the
existing Indian partner gave its no objection and a specific prior Government approval
(FIPB) was obtained in this regard.
FVCI Regime
Over FII and FDI regime
� Free entry and exit pricing
� No lock-in post IPO, subject to compliance with minimum holding requirement
Over FDI regime� FVCIs get the status of Qualified Institutional
Buyers (QIBs)
� Benefits
� Challenges
�Investment Conditions/Restrictions
� Min 2/3rd in unlisted equity shares or equity linked instruments of VCU
� Not more than 1/3rd in IPO of a VCU, debt or debt instruments of a VCU in which VCF hasalready invested by way of equity
� Negative List for investment by FVCI
� NBFSs
� gold financing
� activities not permitted under the FDI regime
� All new FVCIs to invest only in specified 10 sectors to get FVCI benefits
© Nishith Desai Associates 15
� Challenges
� Portfolio Investment route for participation in the capital markets
� Requires registration with SEBI under the SEBI (FII) Regulations, 1995
�Can invest as FII or as a sub-account to a FII
� Permitted to invest in:
� Shares of listed and unlisted entities
FII Regime
� Commercial papers and corporate bonds
� units of mutual funds
� government securities
� exchange traded derivatives
� security receipts of ARCs
� Investment under the FII regime is a preferred route for investment in listed entities
© Nishith Desai Associates 16
Deal Structuring
17
Deal Structuring
© Nishith Desai Associates
Investment Structure
Financing Financing
ModeMode
Nature and reason why usedNature and reason why used Income streamIncome stream
EquityEquity � Equity share capital is principally used to finance a
subsidiary as it allows retaining the profits
offshore and allows structural flexibility to time
the repatriation
� Repatriation of equity-financed stake could be by way
of dividends and / or capital gains. Dividends can only
flow out from profits of the company , such
repatriation would happen without disturbing
ownership structure of the subsidiary. On the other
hand capital gains would arise upon sale of the share,
buyback of the shares or capital reduction . Further ,in
the case of a buy back or capital reduction the equitythe case of a buy back or capital reduction the equity
base of the company would stand eroded.
DebtDebt � Interest receipts allow for periodic and steady
income flow
� Interest payments can be offset against operating
profits, and accordingly, the borrower’s taxable income
reduces
18© Nishith Desai Associates
Hybrid Hybrid
instrumentsinstruments� Combination of debt and equity features in
varying degree merging the economic benefits of
the two. The choice is linked with the nature of
the transaction being undertaken and exchange
control regime
� The tax treatment of the instrument would be
dependent on the jurisdiction – usually treated as debt
in one jurisdiction and equity in other jurisdiction
Types of Instruments
Equity
Fully / Compulsorily Convertible
Voting
Non-voting
Typesof Instruments
Typesof Instruments
Preference
Shares
Partly / Optionally Convertible
Redeemable
Debentures
Debt
Other External Commercial Borrowings
Fully / Compulsorily Convertible
Partly / Optionally Convertible
Non-convertible
Typesof Instruments
Typesof Instruments
19© Nishith Desai Associates
Strategizing Shareholding Patterns
Shareholding % Rights under Companies Act, 1956
>10 % Right to institute action against the Company for oppression andmismanagement and all other rights as a minority shareholders such asrights against variation, to call for a general meeting etc.
20
>25% Right to block resolutions on special matters (requiring the consent of atleast 75% of the shareholders present and voting in any shareholders’meeting)
>50% Right to block resolutions on ordinary matters (requiring the consent ofat least a simple majority of the shareholders present and voting in anyshareholders’ meeting)
>75 % All the rights of a majority shareholder
© Nishith Desai Associates
� Structuring of Investment Instruments
� From June 08, 2007, any security that is not compulsorily convertible into equity is treated as
debt under exchange control regulations
� Equity shares and securities compulsorily convertible into equity such as compulsorily
convertible preference shares and compulsorily convertible debentures are thus preferred
instruments of investment – any other security considered an “External Commercial Borrowing”
Deal Structuring- Issues
� Structuring transfer of shares and purchase consideration:
� Lump Sum payment for transfer of all the shares
� Staggered payment/ Payment linked to achieving certain milestones or business plan for the
transfer of shares in tranches.
� Payment subject to the escrow arrangement; (Circular 58 permits AD Category-I banks to open
and maintain escrow accounts on behalf of residents and / or non-residents for the purpose of
keeping shares or purchase or subscription money / consideration in an escrow for a maximum
period of 6 months)
© Nishith Desai Associates 21
� Restriction on yield
� Dividends
• only out of profits, mandatory transfer of upto 10% of profits to general reserve
• Capped at SBI PLR + 300 basis points (approx. 14-15%) for CCPS
� Interest - amount paid to non-residents on CCDs may be capped
Deal Structuring- Issues
� Structuring distribution waterfall
� Shares with differential rights difficult in a public company or a private company whichis a subsidiary of a public company
� New Company Law Bill proposes to do away with shares carrying differential votingrights
� Other Investor Protection Rights such as Anti-Dilution, Veto Rights, Pre-emptive Rights etc. – Enforceability?
� Is it necessary to reproduce these rights in the Articles of the Company?
22© Nishith Desai Associates
� Exits� IPO
• All outstanding convertible instruments to be converted prior to filing ofProspectus with RoC
• lock in of shares
� Buy Back
Deal Structuring - Issues
• Buy back offer to be made to all shareholders
• buy back permitted only out of free reserves / profits or fresh issue of shares
• capped at 25% of the outstanding capital and 25% of the net worth in a year
� Tag Along/Drag Along and Put Options• Sale to a resident may attract the pricing restrictions
� Liquidation/Liquidity Event• Winding Up: Long drawn process – could take up to one year or more
© Nishith Desai Associates 23
M&A Transactions and Takeover Code
24
M&A Transactions and Takeover Code
© Nishith Desai Associates
Applicability of theTakeover Code
“control” shall include:
a. the right to appoint majority of the directors
or
b. to control the management or policy
decisions exercisable by a person or persons
acting individually or in concert, directly or
Person (Acquirer) Persons Acting in Concert (PAC)+
Shares, Voting Rights, Control
XYZ“Shares” means shares in the share
capital of the company & carrying
voting rights
Any security which would entitle the
holder to receive shares with voting indirectly including by virtue of their
shareholding or management rights ,
shareholders agreement or voting agreement
or in any other manner
c. in case of joint control , if one person ceases
to be in control then it is not change in
control
Target Company
An “acquirer” means any person who directly or indirectly
acquires or agrees to acquire:
a. shares
b. voting rights
c. control
in a company either by himself or with Persons acting in concert
(“PAC”)
“ Target Company ” means a listed
company whose shares or voting rights or
control is directly or indirectly acquired or
is being acquired.
holder to receive shares with voting
rights
Excludes preference shares
© Nishith Desai Associates 25
Disclosures – Trigger Events
The acquirer should make necessary disclosures to the target company AND to each of the stock exchanges
on which the target company’s shares are listed within 2 days of: (a) receipt of allotment intimation; or (b)
acquisition of shares / voting rights, when such acquisition exceeds the following thresholds:
74%
55% Every purchase or sale of 2% or more of the target company’s share capital by an
5%
14%
10%
54%55%
acquirer holding between 15% and 55% requires disclosure
15%Anyacquisition entitling the acquirer to more than 5 %, 10%, 14%,
54% or 74% shares or voting rights in the target company requires
disclosure
© Nishith Desai Associates 26
Public Announcement – Trigger Events
Creeping Acquisition: can acquire upto 5% every
FY without making a PA Any acquisition of 5% or more of voting rights through
open market purchases (other than block and bulk deals)
Public Announcement to purchase shares = minimum 20% of the voting capital of the company
PA also required for any acquisition of
“control” irrespective of whether there has
been any acquisition of shares or voting
rights – unless pursuant to a special
resolution
Any acquisition entitling the acquirer to 15% or more of the voting
rights in a company
Any acquisition of 5% or more of the voting rights in a company
open market purchases (other than block and bulk deals)
© Nishith Desai Associates 27
M&A Transactions and Competition Act
28
M&A Transactions and Competition Act
© Nishith Desai Associates
Combinations
Combination includes:
a) an acquisition of control, shares or voting rights or assets by a person;
b) an acquisition of control of an enterprise where the acquirer already has direct or
indirect control of another engaged in identical business; or
c) a merger or amalgamation between or among enterprises;
that cross the financial thresholds as set out in the next slide.
29
Acquisition
Directly or indirectly acquiring or agreeing to acquire (a) shares, voting rights of an enterprise; or
(b) control over management or control over assets of any enterprise’.
Merger or Amalgamation
Not specifically defined under the Act and may need to be interpreted as understood in the
Indian parlance. The Act refers to transactions involving (i) a merging entity dissolving into the
merged entity; or (ii) two merging entities merging to form a new entity.
© Nishith Desai Associates
Thresholds For Combinations
• The thresholds for a combination pertain to the asset value and the turnover.
• In case of the an acquisition, the thresholds relate asset value / turnover to of the acquirer and the target,
on an aggregate basis.
• In case of a merger or amalgamation, the thresholds pertain to the enterprise remaining / created pursuant
to the merger or amalgamation.
For Parties in India For Parties world-wide For the Group in India For the Group world-wide
Assets Assets Assets Assets
30
AssetsINR 15 billion(approx. USD 333million)
OR
TurnoverINR 45 billion(approx. USD 1billion)
AssetsUSD 750 millionORTurnoverUSD 2,250 million
AND
In India
AssetsINR 7.5 billion (approx. USD 167 million)ORTurnoverINR 22.5 billion (approx. USD 500 million)
AssetsINR 60 billion (approx.USD 1.3 billion)
OR
TurnoverINR 180 billion (approx.USD 4 billion)
AssetsUSD 3 billionORTurnoverUSD 9 billion
AND
In India
AssetsINR 7.5 billion (approx. USD167 million)ORTurnoverINR 22.5 billion (approx.USD 500 million)
© Nishith Desai Associates
Computation of Turnover / Asset Value
• For determining whether or not the prescribed thresholds have been triggered, the value of the
assets / turnover of the entities forming part of the ‘group’ to be computed on a consolidated
basis.
• Where an entity is in a position to (a) exercise 50% or more of the voting rights in the other
enterprise, or (b) appoint more than 50% of the members of the board of directors of the
other enterprise, or (c) control the management or affairs of the other enterprise, such
enterprises are considered to be part of the same group.
31
enterprises are considered to be part of the same group.
• The book value of assets of the enterprise and the turnover of the enterprise as provided in
the audited books of accounts of the enterprise in the financial year immediately preceding
year in which the date of the proposed combination to be considered.
© Nishith Desai Associates
Filing Requirements
• Any proposed combination requires filing to be made regarding such combination to the CCI
in a prescribed format.
• In case of an acquisition, the acquirer is required to file necessary information to the CCI,
within 30 days from the date on which the agreements for acquisition have been entered into.
• In case of a merger or amalgamation, the parties to the merger or amalgamation are required
to jointly file all necessary information to the CCI within 30 days from the date of the
32
to jointly file all necessary information to the CCI within 30 days from the date of the
resolution of the board of directors of the parties approving the said merger or amalgamation
.
• The Combination Regulations provide for two separate forms (Form I and Form III) for filing
of information regarding a proposed combination to the CCI. Form I is a simple form
requiring basic information regarding the combination while Form II appears to be a much
more exhaustive.
© Nishith Desai Associates
Filing Requirements (contd)
• Transactions may be notified to the CCI in either Form I or Form II. Form I is a simple form
requiring basic information and is accompanied by a filing fee of INR 50,000. Form II is an
exhaustive form requiring detailed information is accompanied by a filing fee of INR 1 million
(approx USD 22,000). The Combination Regulations only prescribe an inclusive list of
transactions that would necessarily require to be notified in Form I with the CCI. For other
transactions the onus lies on the acquirer. CCI has the power to seek information to be filed in
Form II in the event the parties have filed information in Form I. Time taken for filing of the
additional information in Form II is excluded from the 210 day limit.
33
additional information in Form II is excluded from the 210 day limit.
• CCI also has powers to require further information, irrespective of whether Form I or Form II
has been filed and the time taken for filing this additional information is again excluded from
the 210 day limit.
• Penalty for not complying with the filing requirement under the Act may extend to the higher
of 1% of the total turnover, or 1% of the assets value, involved in such combination.
• Penalty for making false statements or omitting to furnish material information may range
between INR 5 million ( approx. USD 110,000) to INR 10 million (approx. USD 220,000).
© Nishith Desai Associates
Filing Procedure
Filing of notice with the CCI within 30 days from the date of (a) board resolution approving the merger / amalgamation, or (b) execution of agreements
for acquisition have been entered into, as the came may be
Scrutiny of the notice by the CCI. CCI may require additional information or remove defects, if
any
CCI to form prima facie opinion on whether the combination has caused / likely to cause AAE on competition within 30 days of
filing (excluding the time taken for filing of additional information)
Determine whether transaction is a combination
Parties to the combination to inform the CCI of change in information provided in the notice. After assessment of changes in notice, CCI may treat it as valid or not
Proceed with the
combination
Yes
No
34
CCI to issue show cause notice to the parties calling upon them to respond as to why investigation should not be taken + CCI may call for report of director general
Secretary to intimate the parties to publish the details of the combination within 10 working days of such direction
CCI, if it deems it necessary, to give an opportunity of being heard to the parties. Secretary to convey direction to appear
CCI to pass an
order
cancelling the
transaction
Order of the CCI within 210 days of filing or deemed approval
CCI to pass an
order
approving the
transaction
CCI to propose appropriate modifications to the transaction
Parties to accept the modifications or CCI
accepts the parties modifications.
Order of the CCI approving the transaction
Parties fail to accept the modifications.
CCI to issue appropriate directions
Yes
© Nishith Desai Associates
Disclaimer
The information provided in this presentation is for informational purposes only, and should notbe construed as legal advice on any subject matter. No recipients of this presentation, clients orotherwise, should act or refrain from acting on the basis of any content included in thispresentation without seeking the appropriate legal or other professional advice on the particularfacts and circumstances at issue from an attorney licensed in the recipient's state. The content ofthis presentation contains general information and may not be accurate or reflect current legaldevelopments, verdicts or settlements. Nishith Desai Associates expressly disclaims all liability inthis presentation contains general information and may not be accurate or reflect current legaldevelopments, verdicts or settlements. Nishith Desai Associates expressly disclaims all liability inrespect to actions taken or not taken based on any or all the contents of this presentation.