Liberalization & Law: Twist in M&A tale
“Ignorantia juris non excusat” (Ignorance of the law is no excuse)
Liberalization has brought changes in the corporate landscape. It has left the corporate with two options “Competition or Collaboration”. Corporate chose M&A as the best strategic option to collaborate to face competition. Today, the volume and value of mergers and acquisitions is mushrooming in India. The recent mergers and takeovers in 2011 are ACC ltd with Lucky Minmat Ltd; Crompton Greaves Ltd. with C G Capital & Investments Ltd; Jaiprakash Power Ventures Ltd. with Jaypee Karcham Hydro Corpn. Ltd.; Tata Communications Ltd. with Tata Communications Internet Services Ltd and Intas Pharmaceuticals Ltd. taking over Intas Biopharmaceuticals Ltd. Even prior to 1991, the business houses like Goenka and Manu Chabaria grew through Acquisitions. It is therefore necessary to understand and comprehend the rules and regulations governing the Mergers and Acquisitions in India. The rules and regulations relating to M&A administration do not harm investment climate or economic growth as generally perceived, but rather it aids to growth. As said by Dhanenendra Kumar, Chairman CCI “wherever competition laws are in place, large M&As have legal certainty”.
M&A… The legal definition
The legal definition of amalgamation comes under Section 21B of Income Tax Act which means merger of either one or more companies with another company or merger of two or more companies to form one company in such a manner that (a) all the assets and liabilities of the target company/companies become the assets and liabilities of acquirer company (b) shareholders holding not less than 75% of the value of shares in the target company (other than shares which are held by, or by a nominee for, the transferee company or its subsidiaries) become shareholders of the acquirer company. (c) the consideration for the amalgamation receivable by those equity shareholders of the target company who agree to become equity shareholders of the acquirer company is discharged by the acquirer company wholly by the issue of equity share in the acquirer company, except that cash may be paid in case of any fractional shares (d) the business of the target company is intended to be carried on, after the amalgamation, by the acquirer company (e) No adjustment is intended to be made in the book values of the assets and liabilities of the target company when they are incorporated in the financial statements of the acquirer company except to ensure uniformity of accounting policies.
Laws governing M&A in India...A Plethora of Acts
The various laws that govern mergers and acquisitions in India are Companies Act 1956, SEBI Takeover Code, Monopolies and Restrictive Trade Practices (MRTP) Act 1969, Industries (development and Regulation) Act 1951, Sick Industries Companies Act (SICA) 1985 and Section 72A of Income Tax Act 1961, SCRA 1956. The sectors that are mostly affected by these regulations are public utilities, banking & insurance, broadcasting, telecommunication and transportations.
The Companies Act 1956 contains provisions relating to amalgamations like the definition of amalgamation, arrangement, unsecured creditors; the provisions that give power to the high court to sanction and enforce the amalgamation, provisions relating to proving of necessary information to parties concerned in the scheme of amalgamation, provisions relating to preservation and protection of account books and papers of amalgamated company.
The Industries Development and Regulation Act, 1951 enacted to develop and regulate certain companies and it contain provisions relating to liquidation and reconstruction of companies where Central Government manages and controls such companies.
Section 72A of Income Tax Act, 1961 made provisions to encourage restructuring of companies by giving special treatment/benefits to companies. The benefit is that the loss of amalgamating/target company shall be allowed to set off and carried forward by amalgamated/ acquirer company. But the benefit will be available only if certain conditions are fulfilled like (a) there is an amalgamation of the company of an industrial undertaking (b) the amalgamated company continues to hold 75% in value of assets of amalgamating which is acquired as a result of amalgamation for five years from effective date of amalgamation (c) the amalgamated company carry out the business of amalgamating company at least for period of five years (d) the amalgamated company fulfils others such conditions as may be prescribed (by Rule 9c) to ensure revival of business of amalgamating/target company or to ensure that amalgamation is for general business purpose.
The cross border deals were regulated by Foreign Exchange Regulation Act (FERA) 1983.
The Monopolistic and Restrictive Trade Practices (MRTP) Act 1969, was enacted to ensure that the various activities in the economic system does not result in the concentration of economic power in hands of few business houses by controlling monopolies and by prohibiting monopolistic and restrictive trade practices. But this power has been removed in MRTP Act 1991 and the companies need not have any permission required for going into scheme of amalgamation. But this Act no more valid.
The Competition Act 2002 is incorporated replacing MRTP Act, in same objectives to prevent practices that have adverse effect on competition, to promote and sustain competition in market, to protect the interest of consumers, to ensure freedom of the trade carried on by any other participants in market and to regulate mergers and acquisitions. The reason is that competition enhances capacity and capability and increases competitiveness which is essential in market.
Sick Industrial Companies (Special Provisions) Act (SICA), 1985 contains provisions to relating to sick companies. This act objective is to find out any sick or potentially sick companies so that quick preventive and remedial measures can be taken to revive the company.
Indian Stamp Act 1989 is enacted to collect stamp duty which varies from state to state in relation to conveyance during amalgamation to raise government revenues.
The New Takeover Code...Problems and Prospects
There are certain amendments made in the Competition Act of 2002 which will be effective from June 2011. As per the new provision, Clause (A) section 54 of Competition Act 2002 (12, 2003), the Central Government, in public interest, will exempts an enterprise, whose control, shares, voting rights or assets are being acquired has assets of the value of not more than 250/- crores or turnover of not more than 750/- crores from the provisions of section 5 of the said Act for a period of five years. The Central Government, in public interest will exempt the ‘Group’ exercising less than fifty per cent of voting rights in other enterprise from the provisions of section 5 of the said Act for a period of five years. As per sub-section (3) of section 20, of the Competition Act, 2002 (12 of 2003), the Central Government, in consultation with the Competition Commission of India enhanced on the basis of the wholesale price index, the value of assets and the value of turnover, by fifty per cent for the purposes of section 5 of the said Act. CCI will give its approval for all high value M&A as per the notification of merger control provisions under Competition Act of 2002. It has however created lots of criticisms in some aspects. While of the criticisms are answered others are yet to be worked on.
The asset and thresholds (for bringing M&A under CCI scrutiny have been increased by 50%. The definition of a “group entity” has been changed for 5 years period from an entity that holds 26% voting rights to 51% shareholdings. The turnover thresholds will affect Indian company and will make way for foreign company to move ahead with any CCI approval. Say, an Indian company with turnover of Rs. 3000 crores cannot acquire another Indian company unless it gets approval of the CCI. But, a foreign company with turnover outside India of more than USD 1.5 billion (or in excess of Rs. 4500 crores) may acquire a company in India with sales just short of Rs. 1500 crores without any prior notification to (or approval of) the CCI. These are not warmly welcomed by industry. Apart from it, re-defining the term “combination” was considered unnecessary and confusing.
There were also some arguments whether M&A in banking sector will be taken care by RBI or CCI. It was held that CCI will not be given permission to scrutine M&A in banking sector because they are generally sanctioned by the RBI and central government taking into consideration the public interest, the interest of depositors. It was said that if RBI is the expert in banking sector, CCI is the newly born entity to handle the matter. It may also cause unnecessary avoidable delays in the M&A clearance process.
As per the new takeover code, it will be 180 or 128 days to clear major M&A in India, apart from the small M&A which are out of scrutiny of CCI will cleared within 30 days. The following are the International practices for number of days in M&A clearance process.
Indian and International Practices to sanction M&A
Time limit to clear major M&A
90-125 working days or 224 days
4 month with provision for another month Extension
90-150 working days
Rules and Regulations… The Last Line
The main motive behind these rules and regulations should be to encourage more of mergers and acquisitions along with transparency, fairness and equal opportunities for all in all activities relating to acquisition of shares or taking over ownership and control of companies. It is not enough to make policy and prohibitions to meet current needs; rather it must allow the industries to evolve, with speed and commercial viability to meet future needs. Take for example, the current telecoms M&A rules restrictive and it is expected from the government to relax these norms to facilitate mergers and acquisitions in the 15-operator market. One way as suggested by telecom minister is the number of players in each telecoms zone should not fall below six, including the state-run operator.
· Das Bhagban et al. (2009). “The Legal And Regulatory Framework”, Corporate Restructuring
· Dash AP (2010). “Companies Act and SEBI Takeover Code”, Mergers and Acquisitions
· Dash AP (2010). “Legal Procedures for Mergers and Acquisitions”, Mergers and Acquisitions
· Ernst & Young Master Guide to Mergers and Acquisitions in India: Tax and Regulatory
· Kumar, B.R. (2011). “Regulatory Framework of Mergers and Acquisitions”, Mergers and Acquisitions, Text and Cases, pp. 230-255
· Government of India , Ministry of Corporate Affairs, Notifications dated March 2011