merger and amalgamation of sick industries

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CHAPTER 6

SICK INDUSTRIAL COMPANIES- MEASURESRESORTED TO EXPEDITE REVIVAL

A. INTRODUCTION

A restructuring wave is sweeping the corporate world. From banking to oil

exploration and telecommunication to power generation, companies are coming

together as never before. Corporate Restructuring through acquisitions, mergers,

amalgamations, arrangements and takeovers has become integral to corporate strategy

today.

In India, the concept has caught like wild fire with a merger or two being

reported every second day. The process of restructuring through mergers and

amalgamations has been a regular feature in the developed and free economy nations

like Japan, USA and European countries more particularly UK, where hundreds of

mergers take place every year. Also the mergers and takeovers of multinational

corporate houses across the borders has become a normal phenomenon. Never have

the mergers and amalgamations been so popular, from all angles policy

considerations, businessmens outlook and even consumers point of view. Even

though such transactions may create potential monopoly, consumer activities do not

oppose them. Courts too have been sympathetic towards mergers, the classic example

being the following remarks of Supreme Court in the HLLTOMCO merger case:

In this era of hypercompetitive capitalism and technological change,

industrialists have realized that mergers/acquisitions are perhaps the best route to

reach a size comparable to global companies so as to effectively compete with them.

The harsh reality of globalisation has dawned the companies which cannot compete

globally must sell out as an inevitable alternative.

The major marriages in the finance sector have included Traveller- Citicorp,

Nationsbank Bankamerica and Northwest Wells Fargo. The Great Western

FinancialH.F. Ahmanson merger created the largest thrift and savings institution in


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the US. A similar trend was also witnessed in Europe too. In Europe much of the

action- the mergers between Zurich group and BATS insurance interests, and between

Swedens Nordbankan and Finlands Merita, and the hostitle offer from italys

General FinanceAGF was in the financial sector.

(i) Cross Border Mergers and Acquisitions

There has been a substantial increase in the quantum of funds flowing across

nations in search of takeover candidates. The UK has been the most important

foreign investor in the USA in recent years, with British companies making large

acquisitions. With the advent of the Single Market, the European Union now

represents the largest single market in the world. European as well as Japanese andAmerican companies have sought to increase their market presence by acquisitions.

Many cross-border deals have been in the limelight. The biggest were those of

Daimler Benz-Chrysler, BP-Arnoco, Texas Utilities Energy Group, Universal

Studios Polygram, Northern Telecom- Bay Networks and Deutsche Bank-bankers

Trust. Nearly 80 percent of the transactions were settled in stock rather than through

case. The markets even witnessed merger between publishing groups Reed Elsevier

and Wolters Kluwer and a hostile bid for U.K. building materials company Red Linefrom the French Cement group Lafarge.

In telecommunications, the biggest deals include AT & T TCI: Bell Atlantic

GTE and SBC-Ameritech. The acquisition of MCI by World Com also took place.

Low international oil prices promoted huge oil sector mergers, the biggest being

Exxon-Mobil, BP-Amoco and Total Petrofina. The healthcare industry has also

witnessed significant activity. The major deals include Zeneca-Astra, Hoechst-Rhone

Poulenc and Sanofi-Synthelabo. Quite a few deals have even fallen through. This

category includes American Home Products-SmithKline Beecham, American Home

Products-Monsanto and Glaxo Welcome-SmithKline Beecham.

Not untouched by the Mergers and Acquisition wave has been the audit

business. Big audit firms are going in for mega mergers to become global auditors.

Price Water House has merged with Coopers and Lybrand, KPMG is planning to

merge with Ernst & young. The new Ernst-KPMG entity will be top dog, with $

billion in revenues, followed by Price-Coopers, Andersen Worldwide, and Deloittee


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& Touche. Executives at the merging firm say they need more bodies to meet client

needs for services worldwide Says James J Schiro, CEO of Price Waterhouse. There

is an almost insatiable demand for intellectual capital.

It is estimated that one-in-four US workers have been affected by the current

wave of Mergers and Acquisition activity. It is argued that the significant slowing of

Japanese FDI outflows at a time of major global growth in flows, and heightened US

and West Europe Cross-border M&A activity, may weaken Japanese global

competitiveness.

But it should also be noted that Mergers and Acquisitions are less relevant in

the Japanese context as they believe more in alliances and Joint Ventures thanMergers and Acquisitions. The Japanese consider acquisition to be a last resort

strategy, when all other alternatives are considered inappropriate. Their decision to

takeover an organization willusually imply that they already have previous experience

working with the company like in the case of the SONY-CBS partnership.

Interestingly, unlike British and American negotiating teams which depend heavily on

legal advisors and financial consultants, Japanese decision makers seek out the

opinion of their operational and human resources managers.

AT the same time other research has shown that the Japanese are the least

preferred merger partner/acquirer by the British, French, Germans and Americans.

The reasons that have been cited are incompatible language and understanding.

The British prefer Americans for their positive attitude, the French prefer only

French as they believe they know where they stand, Germans prefer only Germans

because of market access, and Americans prefer British because of their professional

approach.

Euroland would see hectic merger and acquisition activity in the next couple

of years, more for strategic reasons than operational due to the inherent strength of the

eleven European Union (EU) countries, the Euro.

The new currency is likely to lead to a wave of consolidation in the Eurozone

as seen from the recent merger of Bankers Trust with Deulsche Bank and the ongoing


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consolidation attempts involving Society Generate, Paribas and Banque Nationale de

Paris..

(ii) Why Companies Merge?

What are the key drivers of this unprecedented merger and amalgamation

activity globally? There is no doubt about the extent of excess capacity in almost all

industrial segments, across all regions. The excess capacity increases competition,

erodes profits and reduces growth. Instinctively, companies adopt the easiest way to

insulate themselves from competition induced pressures. As neither governments nor

consumers allow companies to insulate themselves through cartels, they have been

taken the M & A route to achieve earnings growth and competitiveness. M & A,which earlier used to be about conglomerates, is now about concentration.

(iii) Motivations behind Cross-border Acquisitions

Briefly stating, companies go in for international acquisitions for a number of

strategic or tactical reasons such as the following:

- Growth orientation : To escape small home market, to extend marketsserved, to achieve economy of scale.

- Access to inputs: To access raw materials to ensure consistent supply, toaccess technology, to access latest innovations, to access cheap and

productive labour.

- Exploit unique advantages: To exploit the companys brands, reputation,design, production and management capabilities.

- Defensive: To diversify across products and markets to reduce earningsvolatility, to reduce dependence on exports, to avoid home country

political and economic instability, to compete with foreign competitors in

their territory, to circumvent protective trade barriers in the host country.

- Response to client needs: To provide home country clients with service fortheir overseas subsidiaries, e.g. banks and accountancy firms.

- Opportunism: To exploit temporary advantages, e.g. a favourableexchange rate making foreign acquisitions cheap.


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(iv) Regulation of Mergers and Acquisitions OverseasA Brief

USA - In the United States, the Securities and Exchange Commission

regulates the conduct of takeovers. The Justice Department and the Federal Trade

Commission regulate economic and antitrust issues. Many industries also have their

own regulatory bodies, such as the Federal Reserve Board (banking), the Federal

Communications Commission (Broadcasting), the Interstate Commerce Commission

(railroads and trucking), and the Transportation Department (Airlines).

GermanyHostile takeovers in Germany are rare. The biggest impediment to

a hostile acquisition in Germany is the structure of the German supervisory board. A

majority of the stock in large public corporations is controlled by the corporationsHausbank. So the cooperation of this bank is essential support the labour force is also

necessary, because employees control one-half of the seats on the supervisory boards

of public corporations with more than two thousand employees. The effectively

eliminates the practice (more commonly seen in the United States) whereby a hostile

buyer moves production of a major product to foreign site to reduce costs.

FranceIn France the Treasury is responsible for regulating the conduct of

an acquisition, and the Monopolies Commission reviews antitrust considerations.

U.K.- In the United Kingdom takeover rules are determined by the City Panel

on Takeovers, a self-regulatory agency of the London Stock Exchange. The

Monopolies and Mergers Commission handles antitrust issues and has the power to

stop mergers and acquisitions that it considers anticompetitive. Rather than having a

separate regulatory body for each industry, the Secretary of State for Trade and

Industry regulates all U.K. industries, Governmental policies are more likely to be

consistent across industries with a single regulatory body but the cost of this

regulatory consistency in the United Kingdom is the lower level of regulatory

expertise in any single industry.

Japan In Japan most of the takeovers are friendly acquisitions between

related companies and the sums involved are usually small relative to the size of the

Japanese stock market.


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Foreign acquisitions of Japanese firms are extremely rare given the size of the

Japanese economy and the number of Japanese acquisitions of Japanese companies.

There are three impediments to a hostile foreign acquisition of a Japanese

company. The first and weakest barrier is a requirement that foreign bidders notify the

Japanese Ministry of Finance of their intention to acquire a Japanese company. The

Ministry of Finance and the Japanese Fair Trade Commission can delay acquisitions

(especially foreign acquisitions) for a suspense period that can last for several months.

This allowed target management time to erect takeover defenses.

A second and more important barrier to hostile foreign acquisitions is a

cultural aversion to hostile and aggressive social behaviour. Japanese businesspractices place a heavy emphasis on reciprocity and cooperation. Keiretsu members

strive for harmony within the keiretsu group, and they prize trust, loyalty and

friendship in their business dealings. It is not surprising that most Japanese find

American style takeovers to be repugnant Institutional owners and other Keirelsu

members strongly resist foreign intrusion into their keiretsu relationships.

The third and most powerful barrier to a hostile foreign acquisition of a

Japanese firm is the convention of reciprocal share cross-holdings among themembers of each keiretsu. These cross-holdings ensure that a large fraction of

outstanding shares are in the hands of friendly business partners, including the

keiretsus main bank. When faced with a hostile acquisition, Japanese managers rely

on the shares held by their business partners as a source of stability during turbulent

times.

Sick Industrial Companies (Special Provisions) Act, 1985, (SICA) which is

being repealed, and the Companies (Second Amendment) Act, 2002, replacing

SICA provides for the rehabilitation of a sick industrial company through various

measures including the change in or take over of the management, sale of assets,

transfer of property or liability, or amalgamation and any other incidental,

consequential and supplemental measure necessary for a sick industrial company to

revitalize itself. The measures as resorted for the revival of a company for the

rehabilitation under the old enactment are almost identical in the new enactment with


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the only distinguishing feature of the new Act aiming at expediting the process of

revival.

A scheme entails for the revival of a Sick Industrial Company as a sick

industrial company is not in a position to revive itself on its own in the absence of the

external support. As such in a proper planned manner and with the requisite assistance

of the secured lenders and other parties a sick industrial company can rehabilitate

itself.

B. MEASURES RESORTED TO EXPEDITE REVIVAL

(i) Release of Financial Assistance

The most common measure for the rehabilitation of a sick industrial company

is the release of financial assistance by the Banks and FIs along with the induction of

the funds by the promoters of a company. Revival strategy envisions relief and

concessions in the form of waiver of interest and at times through the One Time

Settlement of the dues of the secured lenders. The scheme may also entail sacrifices

from the statutory authorities. The scheme may further provide for payment of the

dues of the unsecured creditors of the Company. As such the dues payable by a sick

industrial company are re-structured substantially and the terms of payment eased in

accordance with cash flows ensuring sustained revival of a sick industrial company.

The provision of requisite financial assistance though initially creates a dent on the

finances of the Banks and FIs, subsequently results in facilitating the payment of the

dues of the Banks and FIs through improved working of the sick company and thus

contain the aggravating problem of Non-performing assets. 1

(ii) Change in Management of A Sick Industrial Company

In a situation where the existing management due to skewed financial

capability or for any other reason is unable to carry on the industrial activity the

provision for change in management is resorted to. This measure is most commonly

resorted to but with the limited success through replacement of the old management

with a new management by change in, or takeover of, the management of the sick

industrial company. It may include a change in, or the appointment of the board of

1

Naik, S.A.: The Law of Sick Industrial Companies, 2

nd

Edn. (1999) Wadhwa and Company,Nagpur, 208


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directors or reduction of the interest or rights, which the shareholders have in that

company through taking over the controlling shares, or substantial shareholders

interest.

Change in management of the company is also possible through the sale of the

assets of a Sick Industrial Company on a going concern basis or otherwise i.e. the

whole of the sick industrial Company or any of its undertaking is disposed off. Where

the whole of the undertaking of the sick industrial company is sold under a sanctioned

scheme, the sale proceeds may be distributed to the parties entitled thereto in

accordance with the provisions of section 529A and other provisions of the

Companies Act, 1956 or in the alternate the distribution can take place through the

terms of a scheme formulated by the Authority sanctioning the scheme.

The need for change in management is felt when the promoters of a sick

industrial company do not have the resources to revive the Company and the Banks

and FIs as also the other parties including the State and the Central Government who

are to provide relief and concessions express reservation dissent in providing the relief

and concessions which are envisaged for the rehabilitation as they apprehend that

provision of relief and concessions may further prejudice their interest. The under

lying reason may be lack of faith and confidence in the existing management or the

change in management is contemplated in a situation where the sickness is

management induced. The new management inducted through the process of the

change of management is expected to be financially strong with a good track record

and through their efficient management of operations are likely to bring out the sick

company from the purview of SICA.

However, the process of change of management is usually opposed by the

existing promoters of a sick industrial company and the issue of change of

management normally results in litigation which, in turn, prolongs the rehabilitation.

One of the latest schemes sanctioned by the BIFR involving change of management

of a sick company through sale of its assets to another company is the case of

Hindustan Flurocarbons Ltd. In that case the sale of assets is being disputed and the


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matter is subjudice and the scheme would remain a non-starter till the matter is finally

adjudicated upon.2

(iii). Transfer of Property or Liability of Sick Industrial Company

A sanctioned scheme may provide for the transfer of any property or liability

of the sick industrial company in favour of any other company or person or where

such scheme provides for the transfer of any property or liability of any other

company or person in favour of the sick industrial company, then the property shall be

transferred to and vested in, and the liability shall become the liability of such other

company or person or as the case may be, the sick industrial company. It is by virtue

of and to the extent provided in the scheme, on or from the date of coming intooperation of the sanctioned scheme or any provision thereof.

Transfer and vesting of property provides inter alia by virtue of, and to the

extent provided in the scheme, on or from the date of coming into operation of the

sanctioned scheme or any provision thereof, the property shall be transferred to and

vest in such other company or person or , as the case may be, the sick industrial

company. The expression transfer and vest in means that not only the property is

transferred but should also vest in the transferee. The property vests in title as well asin possession. From such date the company, as the case may be, has the rights, power,

and authority in respect of the vested property.3

As a result of vestment of the property or the liability of a sick industrial

company to any company having the substantial resources, the Company who takes

over the liability or a property of a sick industrial Company pays off the debts to the

creditors. A sick Industrial company with the reduced debts is in a position to

rehabilitate itself. On the other hand if a sick industrial company procure the property,

it can utilise the same for the rehabilitation.

(iv). Revival of a Sick Industrial Company Through Amalgamation

Amalgamation is another effective measure for rehabilitation of a sick

industrial company. It envisages amalgamation of a sick company with any other

company or vice versa through the process of reverse merger.

2

Re.Hindustan Flurocarbons Ltd., Order Dated 24.7.2003 in BIFR Case No. 507/94 (unreported)3 Supra note 1 at 201-203


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Amalgamation implies the merger of the one industrial company with the

other company. Two companies may join to form a new company, but there may be

absorption or blending of one by the other. Both amount to amalgamation. When

two companies are merged and are so joined to form a third company, or one is

absorbed into one or blended with another, the amalgamating company loses its

identity without being wound up. The transferor Company does not die either on

amalgamation or on dissolution without winding up. It only merges into the transferee

Company shedding its corporate shell and forming part of one corporate shell and

because a company cannot have two shells and its corporate name being superfluous,

the dissolution is death of its independent corporate name and shell but for all

purposes remaining alive and thriving as part of the larger whole not being wound up

on merger, as winding up unnecessary. On amalgamation and consequential

dissolution all the attributes of the company which are not synonymous with the shell

or name such as members comprising it, assets, property rights, and liabilities

continue to live as part of larger entity.

Chapter V of the Companies Act deals with the aspect of merger and

amalgamation.4 However, in the case of merger of a sick industrial company with the

healthy Industrial Company or vice versa through the process of reverse merger, the

legislation meant to deal with the revival of sick industrial companies exclusively

govern the same. Earlier SICA and now the Companies (Second Amendment) Act,

2002 provides wide powers to the respective authorities in regard to a scheme of

amalgamation between a sick industrial company and a healthy company such as

Change of constitution, name, memorandum articles, Board of Directors; Alteration,

re-organization or reduction of capital; Transfer of property, assets or liabilities; and

any other measure necessary to effectively carry out the scheme of amalgamation. On

the amalgamation becoming effective, the sick companys name may be changed to

that of the healthy company.

Scheme of merger results in amalgamation of the constitution, name and

registered office, the capital assets, powers, rights, interests, authorities and privileges,

duties and obligation of the sick industrial company or, as the case may be, of the

4 Ramaiya, A.: Guide to the Companies Act, (15th Edn.),(2001), Wadhwa and Company Nagpur, 2903


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transferor company; the transfer to the transferee company of the business, properties,

assets and liabilities of the sick industrial company on such terms and conditions as

may be specified in the scheme; the alteration of the memorandum or articles of

association of the sick industrial company or, as the case may be, of the transferee

company for the purpose of altering the capital structure thereof, or for such other

purposes as may be necessary to give effect to the reconstruction or amalgamation;

the continuation by or against the sick industrial company or, as the case may be, the

transferee company of any action or other legal proceeding pending against the sick

industrial company immediately before the date of order made the allotment to the

shareholders of the sick industrial company, of the shares in such company or, as the

case may be , in the transferee company and where any shareholder claims payment in

cash and not allotment of shares, or where it is not possible to allot shares to any

shareholder, the payment of cash to those shareholders in full satisfaction of their

claims in respect of their interest in shares in the sick industrial company before its

reconstruction or amalgamation; and any other terms and conditions for the

reconstruction or amalgamation of the sick industrial company.

Scheme of amalgamation requires the approval by the shareholders of the

transferor and the transferee Company through a special resolution. The scheme as

prepared by the Tribunal is to be laid before the company other than the industrial

company in the general meeting for approval by its shareholders. No scheme shall be

proceeded with unless it has been approved, with or without modification, by a

special resolution passed by the shareholders of the transferee company.

Amalgamation is a blending of two of more existing undertakings into one

undertaking, the shareholders of each blending company substantially the

shareholders in the company, which is to carry on the blended undertaking. There

may be amalgamation either by the transfer of two or more undertakings to a new

company or by the transfer of one or more undertakings to an existing company.

The scheme of merger as such provides for the proper utilisation of the assets

and the sick industrial company when its entity is dissolved and merged with a

healthy company. The merger of Annapurna Foils Ltd. with Indian Aluminium


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Company5 is an example of a Sick Company merging into a healthy Industry.

Merger if successful facilitates productive use of the assets of a sick company which

is in wider public interest and provides an impetus to the industrial growth.

As per the Companies (Second Amendment) Act, 2002, the time period for

sanctioning the scheme of merger after the passing of the Special Resolution by the

transferor company has been specified. It has been laid down that that within sixty

days which could be extended to ninety days the scheme requires to be sanctioned and

it is binding on all concerned.

The provisions contained in Chapter V of the Companies Act, 1956 are all

engrafted in Section 18 of SICA and also in the Amendment to the Companies Actwhich replaces SICA. Under the new dispensation once an order is made as to chart

out the course of revival for a sick company the provisions analogous to Section 18 of

SICA can be fully used to achieve expeditiously all the necessary approvals/ consents

including change in management structure, reorganization of capital structure (which

may include reduction of capital), change in the name of the sick company, change in

the registered office and so on. Although Section 18 of SICA omits the use of

expressions like compromise or arrangement there are indicated in good measure in

sub-section 2 (f) and (g) and the analogous section 424 D subsection 2 (f) and (g) of

the proposed amendment to the Companies act.

What is unique in these provisions relating to merger, demerger etc. is that the

areas of controversies are quite limited. For example a scheme sanctioned can also

provide for rationalization of managerial personal supervisory staff and workmen in

accordance with law.

A sick industrial company can also be revived through the process of the de-

merger which in relation to the Companies means the transfer pursuant to a scheme of

arrangement by a Company of one or more of its undertakings to any resulting

company on a going concern basis in such a manner that all the assets and liabilities

of the undertaking being transferred by the de-merged Company becomes the

property of the resulting Company. Though it has not been clearly entailed as a

measure to revive a sick industrial company but it has been used by the BIFR/AAIFR

5Indian Aluminum Company v. BIFR & Ors. (Order dated 8.3.2002 in AAIFR Appeal No. 87/2001)


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for the purpose of the revival of a sick industrial company as the viable units of the

Sick Industrial Company are de-merged and the remaining units revival is focused.

This process is followed in the case of a Company having many units and some units

are operating profitably. The noteworthy scheme of de-merger sanctioned by AAIFR

is the de-merger of the cement undertakings ofJK Synthetics Ltd. into JK Cements

Ltd.6, whereby the JK Cements Ltd. proposes to clear the dues of the secured lenders

with the resultant vacation of the charge on the assets of the whole of JK Synthetics

Ltd. and the remaining units of the JK Synthetics Ltd. are to be revived on the

vacation of charge.

Both the SICA and the Companies (Second Amendment) Act, 2002 as such

have laid down various measures to revive a Company, which is facing financial

constraints and it is expected that a sick Company shall be able to revive itself with

the measures so provided. However, the revival efforts of any sick company is

possible only on the commitment of its promoters and the timely provision of the

requisite financial help along with relief/ concession by the secured creditors and the

others concerned to a sick industrial company. Indeed the market for the product

being manufactured and its competition are the other external factors which govern

the revival of a company. But a willing promoter with the tied up resources is

essential to the rehabilitation of any sick industrial company.

(v) Revival of a Sick Industrial Company through Merger7

An extensive appraisal of each merger scheme is done to patternise the causes

of mergers. These hypothesized causes (motives) as defined in the mergers schemes

and explanatory statement framed by the companies at the time of mergers can be

conveniently categorized based on the type of merger. The possible causes of

different type of merger schemes are as follows:

(a) Horizontal merger: These involve mergers of two business companies

operating and competing in the same kind of activity. It is a merger of two or

more companies that compete in the same industry. It is a merger with a direct

competitor and hence expands as the firms operations in the same industry.

6

J.K.Synthetics Ltd. v. BIFR & Ors. (Order dated 21.3.2003 in AAIFR Appeal No. 301/2000)7 http://www.mbaknol.com/strategic-management/types-of-merger/


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Horizontal mergers are designed to produce substantial economies of scale and

result in decrease in the number of competitors in the industry. The merger of

Tata Oil Mills Ltd. with the Hindustan lever Ltd. was a horizontal merger.

In case of horizontal merger, the top management of the company being meted

is generally, replaced, by the management of the transferee company. One potential

repercussion of the horizontal merger is that it may result in monopolies and restrict

the trade. Weinberg and Blank define horizontal merger as follows:

A takeover or merger is horizontal if it involves the joining together of two

companies which are producing essentially the same products or services

which compete directly with each other (for example sugar and artificialsweetness). In recent years, the great majority of takeover and mergers have

been horizontal. As horizontal takeovers and mergers involve a reduction in

the number of competing firms in an industry, they tend to create the greatest

concern from an anti-monopoly point of view, on the other hand horizontal

mergers and takeovers are likely to give the greatest scope for economies of

scale and elimination of duplicate facilities.

They seek to consolidate operations of both companies. These are generallyundertaken to:

Achieve optimum size Improve profitability Carve out greater market share Reduce its administrative and overhead costs.

(ii) Vertical merger: These are mergers between firms in different stages of

industrial production in which a buyer and seller relationship exists. Vertical

merger are an integration undertaken either forward to come close to customers or

backwards to come close to raw materials suppliers.

It is a merger which takes place upon the combination of two

companies which are operating in the same industry but at different stages of

production or distribution system. If a company takes over its


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supplier/producers of raw material, then it may result in backward integration

of its activities. On the other hand, Forward integration may result if a

company decides to take over the retailer or Customer Company. Vertical

merger may result in many operating and financial economies. The transferee

firm will get a stronger position in the market as its production/distribution

chain will be more integrated than that of the competitors. Vertical merger

provides a way for total integration to those firms which are striving for

owning of all phases of the production schedule together with the marketing

network (i.e., from the acquisition of raw material to the relating of final

products).

A takeover of merger is vertical where one of two companies is an

actual or potential supplier of goods or services to the other, so that

the two companies are both engaged in the manufacture or provision

of the same goods or services but at the different stages in the supply

route (for example where a motor car manufacturer takes over a

manufacturer of sheet metal or a car distributing firm). Here the object

is usually to ensure a source of supply or an outlet for products or

services, but the effect of the merger may be to improve efficiency

through improving the flow of production and reducing stock holding

and handling costs, where, however there is a degree of concentration

in the markets of either of the companies, anti-monopoly problems may

arise.

These mergers are generally endeavored to:

Increased profitability Economic cost (by eliminating avoidable sales tax and excise duty

payments)

Increased market power Increased size

(iii) Conglomerate merger: These are mergers between two or more companies

having unrelated business. These transactions are not aimed at explicitly sharing


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resources, technologies, synergies or product .They do not have an impact on the

acquisition of monopoly power and hence are favored through out the world.

These mergers involve firms engaged in unrelated type of business

activities i.e. the business of two companies are not related to each other

horizontally ( in the sense of producing the same or competing products), nor

vertically (in the sense of standing towards each other n the relationship of

buyer and supplier or potential buyer and supplier). In a pure conglomerate,

there are no important common factors between the companies in production,

marketing, research and development and technology. In practice, however,

there is some degree of overlap in one or more of this common factors.

Conglomerate mergers are unification of different kinds of businesses

under one flagship company. The purpose of merger remains utilization of

financial resources enlarged debt capacity and also synergy of managerial

functions. However these transactions are not explicitly aimed at sharing these

resources, technologies, synergies or product market strategies. Rather, the

focus of such conglomerate mergers is on how the acquiring firm can improve

its overall stability and use resources in a better way to generate additional

revenue. It does not have direct impact on acquisition of monopoly power and

is thus favored through out the world as a means of diversification.

They are undertaken for diversification of business in other products,

trade and for advantages in bringing separate enterprise under single control

namely:

Synergy arising in the form of economies of scale. Cost reduction as a result of integrated operation. Risk reduction by avoiding sales and profit instability. Achieve optimum size and carve out optimum share in the

market.

(iv) Reverse merger: Reverse mergers involve mergers of profir making

companies with companies having accumulated losses in order to:


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Claim tax savings on account of accumulated losses that increaseprofits.

Set up merged asset base and shift to accelerate depreciation.(v) Group company mergers: These mergers are aimed at restructuring the

diverse units of group companies to create a viable unit. Such mergers are initiated

with a view to affect consolidation in order to:

Cut costs and achieve focus. Eliminate intra-group competition Correct leverage imbalances and improve borrowing capacity.

(A) Laws Governing Merger in India8

(i) Banking Regulation Act, 1949

Amalgamation of One Banking Company with Another Banking Company

Provisions of Banking Regulation Act, 1949

- Amalgamation of one banking company with another banking company isgoverned by the provisions of Banking Regulation Act, 1949. The

provisions of the Companies Act, 1956 are not applicable in this case.

- According to section 2 (5) of the Companies Act, 1956 Bankingcompany has the same meaning as in the Banking Companies Act, 1949.

(now the Banking Regulation Act, 1949).

- Section 44A of the Banking Regulation Act, 1949 provides for theprocedure for amalgamation of banking companies.

- The RBIs power under section 44A shall not affect the power of theCentral government to provide for the amalgamation of two or more

banking companies under section 396 of the companies Act. But, in such

a case the Central Government must consult the RBI before passing any

order under section 396.

Approval of Scheme of Amalgamation

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- To amalgamate one banking company with another banking company, ascheme of amalgamation must be placed in draft before the shareholders of

each of the banking companies concerned separately.

- To approval of the shareholders must be secured at an extraordinarygeneral meeting of each of the concerned companies, specially convened

for the purpose of approving the scheme.

- In the first instance, the scheme shall be placed before the Board ofDirectors of each of the concerned companies.

- The Board will pass resolutions to(a)approve the scheme of amalgamation;(b)fix the time date and place of the extraordinary general meeting.(c)Authorize the Managing Director/Company Secretary/ any director or officer

of the company to issue notice of the meeting.

(d)Do such other acts, things and deeds as may be necessary or expedient to dofor the purpose of securing approval of the shareholders or others to the

scheme and becoming it effective.

Convening General Meeting

- Notice of every extraordinary general meeting as is referred to above mustbe given to every shareholder of each of the banking companies concerned

in accordance with the relevant articles of association.

- The notice of the meeting must indicate the time, place and object of themeeting.9

- The notice of the meeting must also be published at least once a week forthree consecutive weeks in not less than two newspapers which circulate in

the locality or localities where the registered offices of the banking

companies concerned are situated, one of such newspapers being in a

language commonly understood in the locality or localities.10

9

Section 44A (2) of Banking Regulation Act, 194910Section 44A (2) of Banking Regulation Act, 1949.


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- It is advisable to explain in a note the salient features of the scheme andalso to enclose to the notice full scheme of amalgamation.

Resolution for Approval of the Scheme.

- The scheme of amalgamation must be approved by means of a resolutionpassed at the general meeting, by a majority in number representing two-

third in value of the shareholders of each of the said companies, present

either in persons or proxy at a meeting called for the purpose.11

Dissenting Shareholders Right to Claim Return of Capital

- Any shareholder who has voted against the scheme of a amalgamation atthe meeting or has given notice in writing at or prior to the meeting to the

company concerned or to the presiding officer of the meeting that he

dissents from the scheme of amalgamation, shall be entitled in the event of

the scheme being sanctioned by the RBI, to claim from the banking

company concerned, in respect of the shares held by him in that company

their value as determined by the RBI when sanctioning the scheme.12

- The determination by the RBI the value of the shares to be paid to thedissenting shareholders shall be final for all purposes.13

Approval by the Reserve Bank of India

- If the scheme of amalgamation is approved by the requisite majority ofshareholders in accordance with the provisions of this section shall be

submitted to the RBI (reserve Bank of India) for its sanction to the

scheme.14

- The RBI may sanction a scheme, but if the RBI decides to sanction it, itmust be sanctioned by an order in writing.

- A scheme sanctioned by the RBI shall be binding on the bankingcompanies concerned and also on all the shareholders thereof.

11Section 44A (1) of Banking Regulation Act, 1949.12 Section 44A (3) of Banking Regulation Act, 1949.13Ibid.14

Section 44A (4)of Banking Regulation Act, 1949.


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- An order sanctioning a Scheme of Amalgamation, passed by the RBIunder section 44A (4) shall be conclusive evidence that all the

requirements of this section relating to amalgamation have been complied

with.15

- A copy of the said order certified in writing by an officer of the RBI to bea true copy of such order and a copy of the scheme certified in the like

manner to be a true copy thereof shall, in all legal proceedings (whether in

appeal or otherwise) be admitted as evidence to the same extent as the

original order and the original scheme.16

Transfer of Property

- On the sanctioning of a scheme of amalgamation by the RBI, the propertyof the amalgamated banking company, i.e. the transferor company, shall,

by virtue of the order of sanction, be transferred to and vest in the

transferee company. No other or further document will be necessary for

effecting the transfer and vesting of the property from the transferor

company to the transferee company.17

Dissolution of Transferor Company

- Where a scheme of amalgamation is sanctioned by the RBI, the RBI mayby a further order in writing direct that on the date specified in the order

the amalgamated banking company i.e. the transferor company, shall stand

dissolved.18

A copy of the order directing dissolution of the amalgamated banking company shall

be forwarded by the RBI to the office of the Registrar of companies at which it has

been registered. On receipt of such order the Registrar shall strike off the name of the

company.

15Section 44A (6C) of Banking Regulation Act, 1949.16Ibid.17 Section 44A (6) of Banking Regulation Act, 1949.18

Section 44A (6A) of Banking Regulation Act, 1949.


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(ii) Indian Companies Act, 1956

This has provisions specifically dealing with the amalgamation of a company

or certain other entities with similar status. The most common form of merger

involves as elaborate but time-bound procedure under sections 391 to 396 of the Act.

Powers in respect of these matters were with High Court (usually called

Company Court). These powers are being transferred to National Company Law

Tribunal (NCLT)19 by Companies (Second Amendment) Act, 2002.

The Compromise, arrangement and Amalgamation/reconstruction require

approval of NCLT while the sale of shares to Transferee Company does not require

approval of NCLT.

(a) Power to compromise or make arrangements (Sec. 391):

Where a compromise or arrangement is proposed:

(a)between a company and its creditors or any class of them; or

(b)between a company and its members or any class of them;

the 20[Tribunal] on the application of the company or of any creditor or member of

the company, or, in the case of a company which is being wound up, of the liquidator,

order a meeting of the creditors or class of creditors, or of the members or class of

members to be called, held and conducted in such manner as the 21[Tribunal]

directs.22

If a majority in number representing three-fourths in value of the creditors,

agree to any compromise or arrangement, the compromise or arrangement shall, if

sanctioned by the 23[Tribunal],be binding on all the creditors, all the members, and

also on the company, or in the case of a company which is being wound up, on the

liquidator and contributories of the company.

No order sanctioning any compromise or arrangement shall be made by the

19Substituted for Court Companies (Second Amendment) Act , 2002yet to take effect.

20 Ibid.21Ibid.22

Sec. 391 (1).23 Substituted for "Court" by the Companies (Second Amendment) Act, 2002yet to take effect.


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24[Tribunal] unless the 25[Tribunal] is satisfied that the company or any other person

by whom an application has disclosed to the 26[Tribunal], by affidavit or otherwise,

all material facts relating to the company, such as the latest financial position of the

company, the latest auditor's report on the accounts of the company, independency of

any investigation proceedings in relation to the company under sections 235 to 251,

and the like.27 An order made by the [Tribunal] shall have no effect until a certified

copy of the order has been filed with the Registrar.28

A copy of every such order shall be annexed to every copy of the

memorandum of the company.29

If default is made, the company, and every officer of the company who is indefault, shall be punishable with fine which may extend to [one hundred rupees] for

each copy in respect of which default is made. 30

The 31[Tribunal] may, at any time after an application has been made to it,

stay the commencement or continuation of any suit or proceeding against the

company on such terms as the 32[Tribunal] thinks fit, until the application is finally

disposed of.

(b) Power of Tribunal to enforce compromise and arrangement [Sec. 392] 33

Where the Tribunal makes an order under section 391 sanctioning a

compromise or an arrangement in respect of a company, it-

(a) shall have power to supervise the carrying out of the compromise or an

arrangement; and

(b) may, at the time of making such order or at any time thereafter, give such

directions in regard to any matter or make such modifications in the compromise orarrangement as it may consider necessary for the proper working of the compromise

24 Ibid.25Ibid.26Ibid..

27 Sec. 391 (2).28 Sec. 391 (3).29 Sec. 391 (4).30 Sec. 391 (5).31 Substituted for "Court" by the Companies (Second Amendment) Act, 2002yet to take effect.32

Ibid.33Ibid.


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or arrangement.34

If the Tribunal is satisfied that a compromise or an arrangement sanctioned

under section 391 cannot be worked satisfactorily with or without modifications, it

may, either on its own motion or on the application of any person interested in the

affairs of the company, make an order winding up the company, and such an order

shall be deemed to be an order made under section 433 of this Act.35

Where a meeting of creditors or any class of creditors, or of members or any

class of members, is called under section 391,

(a) with every notice calling the meeting which is sent to a creditor or

member, there shall be sent also a statement setting forth the terms of the

compromise or arrangement and explaining its effect, and in particular, stating

any material interests of the directors, managing director or manager of the

company, whether in their capacity as such or as members or creditors of the

company or otherwise, and the effect on those interests, of the compromise or

arrangement, if, and in so far as, it is different from the effect on the like

interests of other persons; and

(b) in every notice calling the meeting which is given by the advertisement,

there shall be included either such a statement as aforesaid or a notification of

the place at which and the manner in which creditors or members entitled to

attend the meeting may obtain copies of such a statement as aforesaid.36

Where the compromise or arrangement affects the rights of debenture holders

of the company, the said statement shall give the like information and explanation as

respects the trustees of any deed for securing the issue of the debentures as it is

required to give as respects the company's directors.37

Where a notice given by advertisement includes a notification that copies of a

statement setting forth the terms of the compromise or arrangement proposed and

explaining its effect can be obtained by creditors or members entitled to attend the

meeting, every creditor or member so entitled shall, on making an application in the

34 Sec. 392 (1).35 Sec. 392 (2).36

Sec. 393 (1).37 Sec. 393 (2).


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manner indicated by the notice, be furnished by the company, free of charge, with a

copy of the statement.38

Where default is made in complying with any of the requirements of this

section, the company, and every officer of the company who is in default, shall be

punishable with fine which may extend to fifty thousand rupees and for the purpose of

this sub-section any liquidator of the company and any trustee of a deed for securing

the issue of debentures of the company shall be deemed to be an officer of the

company.

A person shall not be punishable under this sub-section if he shows that the

default was due to the refusal of any other person to supply the necessary particularsas to his material interests.39

Every director, managing director or manager of the company, and every

trustee for debenture holders of the company, shall give notice to the company of such

matter relating to himself as may be necessary for the purposes of this section; and if

he fails to do so, he shall be punishable with fine which may extend to five thousand

rupees.40

(c) Reconstruction and Amalgamation of Companies (Sec. 394)

Where an application is made to the 41[Tribunal] under section 391 as are

mentioned in that section, and it is shown to the 42[Tribunal].

(a) that the compromise or arrangement has been proposed for the purposes of, or in

connection with, a scheme for the reconstruction of any company or companies, or the

amalgamation of any two or more companies; and

(b) that under the scheme the whole or any part of the undertaking, property orliabilities of any company concerned in the scheme is to be transferred to another

company; the 43[Tribunal] may, sanctioning the compromise or arrangement or by a

subsequent order, make provision for all or any of the following matters:-

38 Sec. 393 (3).39 Sec. 393 (4).40 Sec. 393 (5).41 Substituted for "Court" by the Companies (Second Amendment) Act, 2002yet to take effect42

Ibid.43 Ibid.


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(i) the transfer to the transferee company of the whole or any part of the

undertaking, property or liabilities of any transferor company;

(ii) the allotment or appropriation by the transferee company of any shares,

debentures, policies, or other like interests in that company which, under the

compromise or arrangement, are to be allotted or appropriated by that

company to or for any person;

(iii) the continuation by or against the transferee company of any legal proceedings

pending by or against any transferor company;

(iv) the dissolution, without winding up, of any transferor company;

(v) the provision to be made for any person who, within such time and in such

manner as the 44[Tribunal] directs, dissent from the compromise or

arrangement; and

(vi) such incidental, consequential and supplemental matters as are necessary to

secure that the reconstruction or amalgamation shall be fully and effectively

carried out:

No compromise or arrangement proposed for the purposes of, or in connectionwith, a scheme for the amalgamation of a company, which is being wound up, with

any other company or companies, shall be sanctioned by the 45[Tribunal] unless the

46[Tribunal] has received a report from the Registrar that the affairs of the company

have not been conducted in a manner prejudicial to the interests of its members or to

public interest.47

No order for the dissolution of any transferor company under clause (iv)shall

be made by the48

[Tribunal] unless the Official Liquidator has made a report to the49[Tribunal] that the affairs of the company have not been conducted in a manner

prejudicial to the interests of its members or to public interest.

Where an order provides for the transfer of any property or liabilities, then, by

44Ibid..

45 Substituted for "Court" by the Companies (Second Amendment) Act, 2002yet to take effect.46Ibid.47 Sec. 394 (1).48

Substituted for "Court" by the Companies (Second Amendment) Act, 2002yet to take effect.49 Ibid.


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virtue of the order, that property shall be transferred to and vest in, and those

liabilities shall be transferred to and become the liabilities of the transferee company;

and in the case of any property, if the order so directs, freed from any charge which is,

by virtue of the compromise or arrangement, to cease to have effect.50

Within thirty days after the making of an order, every company shall cause a

certified copy to be filed with the Registrar for registration.

If default is made, the company, and every officer of the company who is in

default, shall be punishable with fine which may extend to five hundred rupees.51

The 52[Tribunal] shall give notice of every application made to it under

section 391 or 394 to the Central Government, and shall take into consideration the

representations, made to it by that Government before passing any order under any of

these sections.53

(d) Purchase of Shares of one company by another company (Sec. 395)

Where a scheme or contract involving the transfer of shares or any class of

shares in a company to another company has, within four months after the making of

the offer in that behalf by the transferee company, been approved by the holders of

not less than nine-tenths in value of the shares whose transfer is involved. The

transferee company may, at any time within two months after the expiry of the said

four months give notice in the prescribed manner to any dissenting shareholder, that it

desires to acquire his shares; and when such a notice is given, the transferee company

shall, unless on an application made by the dissenting shareholder within one month

from the date on which the notice was given. the 54[Tribunal] thinks fit to order

otherwise, be entitled and bound to acquire those shares on the terms on which, under

the scheme or contract. The shares of the approving shareholders are to be transferred

to the transferee company.55

Where, in pursuance of any such scheme or contract, share, or shares of any

50 Sec. 394 (2).51 Sec. 394 (3).52Substituted for Court by the Companies (Second Amendment) Act, 2002yet to take effect.53 Sec. 394A.54

Sec. 394A.55 Sec. 395 (1).


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class, in a company are transferred to another company or its nominee. and those

shares together with any other shares or any other shares (the same class, as the case

may be, in the first-mentioned company held at the date of the transfer by, or by a

nominee for, the transferee company or in subsidiary comprise nine-tenths in value of

the shares, or the shares of that class the case may be. in the first-mentioned company,

then:

(a) the transferee company shall, within one month from the date of the

transfer (unless on a previous transfer in pursuance of the scheme or contract it

has already complied with this requirement), give notice of that fact in the

prescribed manner to the holders of the remaining share or of the remaining

shares of that class, as the case may be, who have not assented to the scheme

or contract; and

(b) any such holder may, within three months from the giving of the notice to

him require the transferee company to acquire the shares in question.

and where a shareholder gives notice under clause (b)with respect to any share the

transferee company shall be entitled and bound to acquire those shares on the terms

on which, under the scheme or contract. The sharesof the approval shareholders weretransferred to it, or on such other terms as may be agreed, or the 56[Tribunal] on the

application of either the transferee company or the shareholder thinks fit to order. 57

Where a notice has been given by the transferee company under sub-section

(1) and the 58[Tribunal] has not, on application made by the dissenting shareholder,

made an order to the contrary, the transferee company shall, on the expiry of one

month from the date on which the notice has been given, or, if application to the

59

[Tribunal] by the dissenting shareholder is then pending, at that application has

been disposed of, transmit a copy of the notice to transferor company together with an

instrument of transfer executed on behalf the shareholder by any person appointed by

the transferee company and on own behalf by the transferee' company, and on its

transfer to the transfer company the amount or other consideration representing the

56Substituted for Court by the Companies (Second Amendment) Act 2002yet to take effect.57 Sec. 395 (2).58

Substituted for Court by the Companies (Second Amendment) Act 2002yet to take effect.59Ibid.


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price payable by transferee company for the shares which, by virtue of this section,

that company is entitled to acquire; and [the transferor company shall-

(a) thereupon register the transferee company as the holder of those shares, and

(b) within one month of the date of such registration, inform the dissenting

shareholders of the fact of such registration and of the receipt of the amount or

other consideration representing the price payable to them by the transferee

company]60

Any sums received by the transferor company under this section shall be paid

into a separate bank account, and any such sums and any other consideration so

received shall be held by that company in trust for the several persons entitled to the

shares in respect of which the said sums or other considerations were respectively

received.61

The following provisions shall apply in relation to every offer of a scheme or

contract involving the transfer of shares or any class of shares in the transferor

company to the transferee company, 62 namely:

(i) every such offer or every circular containing such offer or every

recommendation to the members of the transferor company by its directors toaccept such offer shall be accompanied by such information as may be

prescribed63;

(ii) every such offer shall contain a statement by or on behalf of the tranferee

company, disclosing the steps it has taken to ensure that necessary cash will be

available;

(iii) every circular containing or recommending acceptance of, such offer shall be

presented to the Registrar for registration and no such circular shall be issued

until it is so registered;

(iv) the Registrar may refuse to register any such circular which does not contain

the information required to be given under sub-clause (i) or which sets out

such information in a manner likely to give a false impression; and

60 Sec. 395 (3).61 Sec. 395 (4).62

Inserted by Act 31 of 1965, Section 51. w.e.f. 15-10-196563 Form 35A. Companies (Central Government's) General Rules and Forms, 1956


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(v) an appeal shall lie to the 64[Tribunal] against an order of the Registrar refusing

to register any such circular.

(b) Whoever issues a circular which has not been registered, shall be punishable

with fine which may extend to five thousand rupees. 65

(e) Amalgamation of Companies in National Interest (Sec. 396)

Where the Central Government is satisfied that in amalgamation of two or

more companies is essential in public interest 66 than the Central Government may by

an order notified in the Official Gazette, provide for the amalgamation of those

companies into a single company. The amalgamated company shall have such

constitution, property, powers, rights, interests and privileges as well as such

liabilities, duties and obligations as may be specified in governments order.67

Every member or creditor of each of the companies shall have, the same

interest in or rights as he had in the company of which he was originally a member or

creditor; and to the extent to which the interest or rights of such member or creditor in

or against the company resulting from the amalgamation are less than his interest in or

rights against the original company, he shall be entitled to compensation which shall

be assessed by such authority and every such assessment shall be published in the

Official Gazette. The compensation so assessed shall be paid to the member or

creditor concerned by the company resulting from the amalgamation.68

Any person aggrieved by any assessment of compensation made by the

prescribed authority may, within thirty days from the date of publication of such

assessment in the Official Gazette, prefer an appeal to the 69[Tribunal] and thereupon

the assessment of the compensation shall be made by the 70[Tribunal].71

Order shall not be made, unless a copy of the proposed order has been sent in

draft to each of the companies concerned. The Central Government has consideredand made such modifications, if any, in the draft order as may seem to it desirable in

the light of any suggestions and objections which may be received by it. Copies of

64 Substituted for "Court" by the Companies (Second Amendment) Act, 2002yet to take effect.65 Substituted for "five hundred rupees" by the Companies (Amendment) Act, 2000, w.e.f. 13-12-2000.66 Substituted by Art. 65 of 1960, section 152 for "national interest"67 Section 396(1).68 Section 396 (3).69 Substituted for "Company Law Board" by the Companies (Second Amendment) Act, 2002 yet totake effect.70

Ibid.71 Section 396 (3A).


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every order made shall be laid before both Houses of Parliament. The books and

papers of a company which has been amalgamated with, or whose shares have been

acquired by, another company shall not be disposed of without the prior permission,

of the Central Government and before granting such permission, that Government

may appoint a person to examine the books and papers or any of them for the purpose

of ascertaining whether they contain any evidence of the commission of an offence in

connection with the promotion or formation, or the management of the affairs, of the

first-mentioned company or its amalgamation or the acquisition of its shares.

Amalgamation of two companies also possible under Sec. 494 of Companies Act,

where the liquidator of a company transfer its assets and liability to another company.

(iii) Monopolies and Restrictive Trade practices Act, 1969 (MRTP 1969)

Certain Amendments in the MRTP Act were brought about in 1991. The

Government has removed restrictions on the size of assets; market shares and on the

requirement of prior government approvals for mergers that created entities that

would violate prescribed limits. The Supreme Court, in a recent judgment, decided

that prior approval of the central government for sanctioning a scheme of

amalgamation is not required in view of the deletion of the relevant provision of the

MRTP Act and the MRTP Commission was justified in not passing an order

restraining implementation of the scheme of amalgamation of two firms in the same

field of consumer articles.

(iv) Foreign Exchange Regulation Act 1973 (FERA 1973)

FERA is the primary Indian Law which regulates dealings in foreign

exchange. Although there are no provisions in the Act which deal directly with

transactions relating to amalgamations, certain provisions of the Act become relevant

when shares in Indian companies are allotted to non- residents, where the undertakingsought to be acquired is a company which is not incorporated under any law in India.

Section 29 of FERA provides that no foreign company or foreign national can acquire

any share of an Indian company except with prior approval of the reserve Bank of

India. The Act has been amended to facilitate transfer of shares two non residents and

to allow Indian companies to set up subsidiaries and joint ventures abroad without the

prior approval of the Reserve Bank of India.


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(v) Income Tax Act, 1961

Income Tax Act, 1961 is vital among all tax laws which affect the merger of

firms from the point view of tax savings/liabilities. However, the benefits under this

act are available only if the following conditions mentioned in Section 2 (1B) of the

Act are fulfilled:

a) All the amalgamating companies should be companies within the

meaning of the section 2 (17) of the Income Tax Act, 1961.

b) All the properties of the amalgamating company (i.e., the target firm)

should be transferred to the amalgamated company (i.e., the acquiring

firm).

c) All the liabilities of the amalgamating company should become the

liabilities of the amalgamated company, and

d) The shareholders of not less than 90% of the share of the

amalgamating company should become the shareholders of

amalgamated company.

In case of mergers and amalgamations, a number of issues may arise with

respect to tax implications. Some of the relevant provisions may be summarized as

follows:

Depreciation: The amalgamated company continues to claim depreciation on the

basis of written down value of fixed assets transferred to it by the amalgamating

company. The depreciation charge may be based on the consideration paid and

without any re-valuation. However, unabsorbed depreciation, if any, cannot be

assigned to the amalgamated company and hence no tax benefit is available in this

respect.

Capital Expenditures: If the amalgamating company transfers to the amalgamatedcompany any asset representing capital expenditure on scientific research, then it is

deductible in the hands of the amalgamated company under section 35 of Income Tax

Act, 1961.

Exemption from Capital Gains Tax: The transfer of assets by amalgamating

company to the amalgamated company, under the scheme of amalgamation is

exempted for capital gains tax subject to conditions namely (i) that the amalgamated

company should be an Indian Company, and (ii) that the shares are issued in


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consideration of the shares, to any shareholder, in the amalgamated company. The

exchange of old share in the amalgamated company by the new shares in the

amalgamating company is not considered as sale by the shareholders and hence no

profit or loss on such exchange is taxable in the hands of the shareholders of the

amalgamated company.

Carry Forward Losses of Sick Companies: Section 72A(1) of the Income Tax Act,

1961 deals with the mergers of the sick companies with healthy companies and to take

advantage of the carry forward losses of the amalgamating company. But the benefits

under this section with respect to unabsorbed depreciation and carry forward losses

are available only if the followings conditions are fulfilled:

1. The amalgamating company is an Indian company.2. The amalgamating company should not be financially viable.3. The amalgamation should be in public interest.4. The amalgamation should facilitate the revival of the business of the

amalgamating company.

5. The scheme of amalgamation is approved by a specified authority, and6. The amalgamated company should continue to carry on the business of the

amalgamating company without any modification

Amalgamation Expenses: In case an expenditure is incurred towards professional

charges of Solicitors for the services rendered in connection with the scheme of

amalgamation, then such expenses are deductible in the hands of the amalgamated

firm.

(vi) SICK Industrial Companies (Special Provisions) Act, 1985

(a) Merger Through BIFR (Board For Industrial and Financial

Reconstruction)72

The Companies (Amendment) Act, 2002 has repealed the Sick Industrial

Companies Act (SICA) 1985, in order to bring sick industrial companies within the

purview ofCompanies Act 1956 from the jurisdiction ofSICA, 1985. The Act has

introduced new provisions for the constitution of a tribunal known as the National

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Company Law Tribunal with regional benches which are empowered with the powers

earlier vested with the Board for Industrial and Financial reconstruction (BIFR).73

Before the evolution of SICA, the power to sanction the scheme of

amalgamation was vested only with the high court. However, sec. 18 of the SICA

1985 empowers the BIFR to sanction a scheme of amalgamation between sick

industrial company and another company over and above the power of high court as

per section 391-394 of Companies Act, 1956. The amalgamation take place under

SICA have a special place in law and are not bound by the rigor ofCompanies Act,

1956, and Income Tax Act, 1961.

There is no need to comply with the provisions of sec. 391-394 ofCompaniesAct, 1956 for amalgamation sanctioned by BIFR. The scheme of amalgamation

however must be approved by shareholders of healthy company after getting approval

from BIFR. Sec. 72A of the Income Tax Act has been enacted with a view to

providing incentives to healthy companies to takeover and amalgamation with

companies which would otherwise become burden on the economy. The accumulated

losses and unabsorbed depreciation of the amalgamating company is deemed to loss

or allowance for depreciation of the amalgamated company. So amalgamated

company gets the advantage of unabsorbed depreciation and accumulated loss on the

precondition of satisfactory revival of sick unit. A certificate from specialized

authority to the effect that adequate steps have been taken for rehabilitation or revival

of sick industrial undertaking has to be obtained to get these benefits. Thus the main

attraction for the healthy company to takeover a sick company through a scheme of

amalgamation is the tax benefits that may be available to it consequent to

amalgamation. The approach usually followed is to quantify the possible tax benefits

first and then get an order as part of rehabilitation package from BIFR. Once BIFR is

convinced about the rehabilitation benefit it passes an appropriate order to see that

benefits of tax concessions properly ensure to the transferee isolation

73 Board for Industrial and Financial Reconstruction (BIFR) was established by central governmentunder SICA, 1985 for detection of sick and potentially sick industrial units and speedy determination pf

their remedial measures and to exercise the jurisdiction and powers and discharge the functioning andduties imposed on the Board by or under the Act.


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Various measures to be recommended by the operating agency in the scheme

to be prepared by it for submission to the BIFR concerning the sick industrial unit.74

Before the amendment, in 1994 under SICA, only normal amalgamation (of sick

company with healthy one) was possible and the Act did not provide for reverse

merger of a profitable company with sick company. Now the amended Sec.18 of the

Act contains provision for effecting both normal and reverse merger. It provides for

the amalgamation of

Sick industrial company with any other company Any other company with the sick industrial company.

(vi) REVIVAL OF SICK INDUSTRIAL COMPANY THROUGH TAKE

OVER

(a) Meaning of Takeover

Takeover has been defined as a business transaction whereby an individual or

a group of individuals or a company acquires control over the assets of a company,

either directly by becoming owner of those assets or indirectly by obtaining control of

the management of the company. In the ordinary case, the company taken over is

smaller but in a reverse takeover a smaller company gains control over the larger

company. This is different from merger wherein the shareholding in the combined

enterprise will be spread between the shareholders of the two companies. Normally

the company which wants to takeover the other company acquires the shares of the

target company either in a single transaction or a series of transactions. In case of

amalgamation under Section 391-394 of the Companies Act, 1956 the amalgamating

as well as amalgamated company have to apply to the High Court(s) for making order

of amalgamation. However the regulatory framework for controlling the takeover

activities of a company consists of the Companies Act, 1956 Listing Agreement with

Stock Exchange and SEBIs Takeover Code.

74 Section 18 of Sick Industrial Companies Act, 1985.


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(b) Takeover Bid

In simple language a takeover is acquisition of shares voting rights in a

company with a view to gaining control over the management of the company. A

takeover bid is an offer addressed to each shareholder of a company, whose shares are

not closely held to buy his shares in the company at the offered price within the

stipulated period of time. It is addressed to the shareholders with a view to acquiring

sufficient number of shares to give the offered price within the stipulated period of

time. It is addressed to the shareholders with a view to acquiring sufficient number of

shares to give the offeror company, voting control of the largest company. It is

usually expressed to be conditional upon a specified percentage of shares being the

subject-matter of acceptance by or before a stipulated date.

A takeover bid is a technique, which is adopted by a company for taking over

control of the management and affairs of another company by acquiring its controlling

shares.

(c) Kinds of Takeovers

1. Friendly takeover2. Hostile takeover

(i) Friendly Takeover

A friendly takeover is with the consent of taken over company. There is an

agreement between the management of two companies through negotiations and the

takeover bid may be with consent of majority or all shareholders of the target

company, which is referred to as friendly takeover bid.

(ii) Hostile Takeover

When an acquirer company does not offer the target company the proposal to

acquire its undertaking but silently and unilaterally persues efforts to gain control

against the wishes of existing management such acts of acquirer are known as

takeover raids or hostile takeover bids. The main distinction between a friendly

takeover and hostile takeover is whether there is a mutual understanding between the

acquirer and the taken over company. When there is a mutual understanding, it is


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friendly takeover otherwise it is termed as hostile takeover. Few instances of note

worthy takeovers are

(1) Swaraj Paul and Sethia groups attempted raids on Escorts Ltd. andDCM Ltd. but did not succeed.

(2) NRI Chhabria Group acquired crucial stake in Shaw Wallace,Mather & Plant Hidnustan Dock Oliver, Dunlop India.

(3) The Goenkas of Calcutta have during 1988 successfully taken overCeat Typres, Herdillia Chemicals, Polychem etc.

(4) Oberoi Group has taken over Pleasant Hotels of Rane Group.(5) Mahendra and Mahendra Ltd. (M&M) has taken over the

automotive pressing unit of Guest Keen Williams Ltd.

(6) Shalimar Paints by Jindals.(7) Crystal Investment & Finance by MRF.(8) Tata Tea in 1988 had made public offer to take over Consolidated

Coffee Ltd. (CCL) and acquired 50% stake.

(d) Types of Takeovers

In a takeover the taking over company has two options, viz. (1) to merge both

companies into one and operate both the undertakings as a single entity and (ii) to

keep the takenover company a separate and independent company, with changed

management changed policies or even with a changed name.

Takeover may be of different types depending upon the intention of the

management of the taking over company.

1. A takeover may be a straight takeover which is accomplished by themanagement of the taking over company by acquisition of shares of

another company with an intention to maintain and operate the takeover

company as an independent legal entity.

2. Another type of takeover may be with an intention of capluring theownership of the takenover company in order to merge both companies


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into one and operate business and undertakings of both the companies as a

single legal entity.

3. A third type of take over is the takeover of a sick industrial company forthe purpose of revival of its business. This is accomplished by an order of

the Board of Industrial and Financial reconstruction (BIFR) under the

provisions of the Sick Industrial Companies (Special Provisions) Act 1985.

4. Bail out takeover, is substantial acquisition of shares in a financially weakcompany not being a sick industrial company, in pursuance to a scheme of

rehabilitation approved by a public financial institution or a scheduled

bank (hereinafter referred to as the lead institution). The lead institution isresponsible for ensuring compliance with the provisions of the SEBI

(Substantial Acquisition and Takeovers) Regulations, 1997 which regulate

the bail out takeovers.

C. FACTORS TO CONSIDER IN A CROSS-BORDER MERGER OR

ACQUISITION75

Cross border mergers and acquisitions are playing an important role in the

growth of international production. Not only they dominate FDI flows in developing

countries, they have also begun to take hold as a mode of entry into developing

countries and economies in transition.

Although the basic merger or acquisition is the same worldwide, undertaking a

cross-border transaction is more complex than those conducted in market because

of the multiple sets of laws, customs, cultures, currencies, and other factors that

impact the process.

(a) How should the transaction be financed?

The financial structure of the transaction might be impacted by which country

the target is in. For example, from a valuation perspective, flowback can have a

negative impact on the acquirors stock price and cause regulatory problems (i.e.

stock flowing back to the acquirors home jurisdiction). Other types of

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considerations include the change in the nature of the investments held by institutional

investors caused by a stock exchange merger these investors may be compelled

under their own investment guidelines to sell newly acquired stock in the acquiror;

and the possible change in the tax treatment of dividends that encourages the sale of

the stock (e.g. foreign tax credit is useless to US tax-exempt investors).The following

are issues for an acquiror to address when structuring the transaction.

If the transaction involves issuing stock, will the stock be common or preferredstock, and will the stock be issued directly to the target the transaction. or to the

targets stockholders? Is the acquiror prepared to be subject to the laws of the

targets country if it issues stock in the transaction, particularly the financial

disclosure laws?

After issuing stock, how will the acquirors stockholder base be composed?How many shares are held by cross-border investors? Does the new composition

shift stockholder power dramatically? Will any of the new stockholders cause

problems?

If the transaction involves debt, where will the debt be issued, from incountry or cross-border? What type of debt will be issued senior, secured,

unsecured, or mezzanine?

If the transaction involves cash, will cash be raised by raising capital in thepublic markets, and if so, in which market will the stock be issued? If cash

financing is obtained in the targets country, can the acquiror comply with any

applicable margin requirements, such as those promulgated by the Federal

Reserve Board in the US?

(b) How are the customs and cultures of the parties different?

Before contemplating the transaction, the acquiror should be able to express a

clear vision of how the target will be operated and funded. This will be necessary to

share with the target and its employees and shareholders, as well as with its own

shareholders.

Public relations are important in winning the hearts of the targets employees,

communities, and shareholders. One cultural issue is whether the target will still be


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managed in country, or whether it will be part of a regional center or managed

solely from the acquirors headquarters. Employees worry about overseas managers

and communities wonder about loss of jobs. From a financial perspective, investors

will want pro forma information to understand how the combined company will

operate going forward. This may require disclosure of financial information to which

the targets investors are accustomed, but which is new for the acquiror.

(c) How do the applicable laws govern the transaction?

If the transaction is public, such as a tender offer, the parties generally must

abide by the law of the country where the offer will be made. In comparison, the

parties can choose which law governs if the transaction is private. They can selectground rules that are the laws from either of the home countries, or even a third -

party country with established merger laws like the US. If two sets of laws are

involved, particularly if one is based on a code system and the other is common law, it

is common for both the acquiror and target to have two sets of advisors, one from the

country of each party. It is also fairly routine for non-US parties to have their own US

investment banker and law firm as advisors in a transaction even if neither party is

from the US.

Even if the parties do not use the targets countrys laws as the ground

rules, an acquiror must consider the laws of the target in deciding whether to pursue

a combination. For example, there could be laws that pose substantial obstacles to

consummating a deal, such as restrictions on ownership. There are more than a few

instances of cross-border bids that have failed because the targets government

blocked the transaction to stop a company from falling into the hands of another

country.

The following are issues for an acquiror to address before a deal is struck with

a target.

Will the target insist on in market customs, an

Documents

merger and amalgamation of sick industries