PROJECT REPORT ON:
New provisions relating to Mergers in Companies Act, 201
Submitted by GOKUL RUNGTA Division- B Class- BA LLB
Of AMITY Law School II, NOIDA AMITY Univerity NOIDA
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Under the !uidance of Ms. Priyanka Dhar Course in Charge A!i"y La# $%hool && NO&DA '()*()
Acknowledgement
I, express my sincere gratitude to my Mergers and acquisition teacher, Ms. Priyanka Dhar for giving me the opportunity to work under his guidance on the project on “!" P#$%I&I$& #!'()I* )$ M!#*!#& I +$MP(I!& (+), -/0. &evera1 peop1e have 2een instrumenta1 in a11owing this project to 2e comp1eted. (ny attempt at any 1eve1 cannot 2e satisfactori1y comp1eted without the support and guidance of 1earned peop1e, friends and fami1y. I have endeavoured my 2est to make this project and wou1d 2e gratefu1 for any suggestions for improvement.
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T+ANK&NG ,OU
GOKUL RUNGTA BA.LLB B /nroll!en" No. A))0))))'))1
!ntro"#ction )he 1ong3awaited +ompanies 4i11 -/ got its assent in the 'ok &a2ha on 5 Decem2er - and in the #ajya &a2ha on 5 (ugust -/. (fter having o2tained the assent of the President of India on 6 (ugust -/, it has now 2ecome the much awaited +ompanies (ct, -/ 7-/ (ct8. (n attempt has 2een made to reduce the content of the su2stantive portion of the re1ated 1aw in the +ompanies (ct, -/ as compared to the +ompanies (ct, 69: 769: (ct8. In the process, much of the aforesaid content has 2een 1eft, ;to 2e prescri2ed<, in the #u1es 7/=->8 which are yet to 2e fina1ised and notified. (s of the date of this pu21ication, 66 sections have 2een notified and a few circu1ars have 2een issued c1arifying the app1ica2i1ity of these. )he -/ (ct introduces significant changes in the provisions re1ated to governance, e3management, comp1iance and enforcement, disc1osure norms, auditors and mergers and acquisitions. (1so, new concepts such as one3person company, sma11 companies, dormant company, c1ass action suits, registered va1uers and corporate socia1 responsi2i1ity have 2een inc1uded. )he (ct of -/ intends to promote se1f3regu1ation and has a1so introduced some progressive concepts 1ike $ne3 Person +ompany, &ma11 +ompany, Dormant +ompany, !3governance, etc. )he concept of +orporate &ocia1 #esponsi2i1ity has 1 PwC India- “Companies Act, 2013: Key highlights & analysis !igni"cant changes & implications, Pg-3#
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a1so 2een introduced to encourage a socia11y, environmenta11y and ethica11y responsi21e 2ehavior 2y companies. )his project 2rings out the significant changes proposed 2y the -/ (ct as compared to the 69: (ct and our initia1 ana1ysis thereon.
Nee" $or Companies Act, 201 )he 69: (ct has 2een in need of a su2stantia1 revamp for quite some time now, to make it more contemporary and re1evant to corporate, regu1ators and other stakeho1ders in India. "hi1e severa1 unsuccessfu1 attempts have 2een made in the past to revise the existing 69: (ct, there have 2een quite a few changes in the administrative portion of the 69: (ct. )he most recent attempt to revise the 69: (ct was the +ompanies 4i11, --6 which was introduced in the 'ok &a2ha, one of the two ?ouses of Par1iament of India, on / (ugust --6. )his +ompanies 4i11, --6 was referred to the Par1iamentary &tanding +ommittee on @inance, which su2mitted its report on / (ugust -- and was withdrawn after the introduction of the +ompanies 4i11, -. )he 69: (ct was passed in the first decade of free India, when methods of 2usiness were different as compared to new era. Methods of 2usiness have changed radica11y from 1ast :- years. / +ompanies (ct, -/ is a vi2rant step, which p1ay a major ro1e in attaining the u1timate ends of socia1 A economic po1icy of the government and in the deve1opment of companies in India on hea1thy 1ines.
!ncorporation o$ Compan% )he -/ (ct introduces a new form of entity ;one3person company< and incorporates certain new provisions in respect of memorandum and artic1es of
2 $%ant ho%nton India ''P- “he Companies Act, 2013: he dawn o( a new e%a# 3 A#)# $awade & C*# “P%esentation on new Companies +ill, 2013#
association. @or instance, the concept of inc1uding entrenchment provisions in the artic1es of association has 2een introduced. )he -/ (ct mandates inc1usion of dec1aration to the effect that a11 provisions of the 69: (ct have 2een comp1ied with, which is in 1ine with the existing requirement of 69: (ct. (dditiona11y, an affidavit from the su2scri2ers to the memorandum and from the first directors has to 2e fi1ed with the #$+, to the effect that they are not convicted of any offence in connection with promoting, forming or managing a company or have not 2een found gui1ty of any fraud or misfeasance, etc., under the -/ (ct during the 1ast five years a1ong with the comp1ete detai1s of name, address of the company, particu1ars of every su2scri2er and the persons named as first directors. )he -/ (ct further prescri2es that if a person furnishes fa1se information, he or she, a1ong with the company wi11 2e su2ject to pena1 provisions as app1ica21e in respect of fraud i.e. section ==B of -/ (ct Csection B7=8 of -/ (ct (1so refer the chapter on other areasE Memorandum of (ssociation3 )he -/ (ct specifies the mandatory content for the memorandum of association which is simi1ar to the existing provisions of the 69: (ct and refers inter3a1ia to the fo11owingF G ame of the company with 1ast word as 1imited or private 1imited as the case may 2e. G &tate in which registered office of the company wi11 2e situated. G 'ia2i1ity of the mem2ers of the company. ?owever, as against the existing requirement of the 69: (ct, the -/ (ct does not require the o2jects c1ause in the memorandum to 2e c1assified as the fo11owingF 7i8 )he main o2ject of the company. 7ii8 $2jects incidenta1 or anci11ary to the attainment of the main o2ject 7iii8 $ther o2jects of the company Csection =78 of -/ (ctE )he 2asic purpose in the 69: (ct for such a c1assification as set out in section =6 of the 69: (ct, is to restrict a company from commencing any 2usiness to pursue ;other o2jects of the company< not incidenta1 or anci11ary to the main o2jects except on satisfaction of certain requirements as prescri2ed in the 69: (ct 1ike passing a specia1 reso1ution, fi1ing of dec1aration with the #$+ to the effect of reso1ution. #eservation of nameF )he -/ (ct incorporates the procedura1 aspects for app1ying
for the avai1a2i1ity of a name for a new company or an existing company in sections =7=8 and =798 of -/ (ct.=
&'are Capitals ( )e*ent#res )he chapter on share capita1 and de2entures introduces some key changes in the -/ (ct. )o i11ustrate, the -/ (ct does not give any cognisance to the existing requirement of section 6- of the 69: (ct that provided some saving grace to private companies. )herefore, the app1ica2i1ity of fo11owing sections of the -/ (ct is no 1onger restricted to pu21ic companies and private companies which are su2sidiaries of a pu21ic company and are now app1ica21e to private companies a1so.
E+!T- &.ARE CAP!TA/ “!quity share capita10 means a11 share capita1 which is not preference share capita1. !quity share capita1 may 2e divided into 7i8 !quity share capita1 with voting right or 7ii8 !quity share capita1 with differentia1 rights. )hese differentia1 rights may have difference re1ated to dividend, voting or otherwise in accordance with ru1es. )he term otherwise 2ring scope for innovation with in 1imit of ru1es. It may 2e difference re1ated to managing contro1, power to appoint director, or power to appoint proxy and so on.
PREERENCE &.ARE CAP!TA/ Preference share capita1 of the issued share capita1 of the company which carries or wou1d carry a preference right with respect to H 7a8 Payment of dividend, either as a fixed amount or an amount ca1cu1ated at a fixed rate. "hich may 2e either 2e free of or su2ject to income tax and 728 #epayment of amount of share capita1 or share capita1 deemed to 2e paid up, whether or not, there is preferentia1 right specified in the memorandum or artic1e of the company.
PwC India- “Companies Act, 2013: Key highlights & analysis !igni"cant changes & implications, Pg-11#
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)his (ct does not interfere in rights of preference shareho1ders who are entit1ed to participate in the proceeds of winding up 2efore commencement of this (ct. 9
!MPORTANT C.ANE& REAR)!N &.ARE CAP!TA/ Issue of shares at discount is permitted us B6 of +ompanies (ct, 69: su2ject to comp1iance with conditions 2ut on other hand provision under +ompanies (ct, -/ issue of shares at discount is not a11owed other than sweat equity share. Issue of preference shares for more than - years was prohi2ited us 5- of o1d act 2ut preference share have to 2e redeemed within - years of issue except for the share issued for prescri2ed infrastructure projects, provided a certain percentage of share are redeemed annua11y at the option of shareho1ders.
3OT!N R!.T )he provisions of -/ (ct regarding voting rights are simi1ar to the existing section 5B of the 69: (ct. )he on1y change noted in the -/ (ct is the remova1 of distinction provided 2y the 69: (ct with respect to the entit1ement to vote in case the company fai1s to pay dividend to its cumu1ative and non3cumu1ative preference share ho1ders Csection =B of -/ (ctE )he provisions regarding private p1acement and additiona1 disc1osures in prospectus wi11 a1so he1p to strengthen the capita1 markets. )he -/ (ct proposes to re3instate the existing concept of shares with differentia1 voting rights. Pursuant to this section the company may face hardship with regards to computation of proportionate voting rights.
Merger ( ac4#isitions )he -/ (ct features some new provisions in the area of mergers and acquisitions, apart from making certain changes from the existing provisions. "hi1e the changes are aimed at simp1ifying and rationa1ising the procedures invo1ved, the new
Asim $ha%ana 'aw go/e%nance %esponsiility http:aishmgh%ana#me201302sha%e-capital-companies-act-20134
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provisions are a1so aimed at ensuring higher accounta2i1ity for the company and majority shareho1ders and increasing f1exi2i1ity for corporate. )he changes proposed wou1d require companies to consider the sca1e and extent of comp1iance requirements whi1e formu1ating their restructuring p1ans once the -/ (ct is enacted. )hese changes are quite constructive and cou1d go a 1ong way in stream1ining the manner in which mergers and other corporate scheme of arrangements are structured and imp1emented in India.
Retaine" Provisions (1though su2stantia1 changes have 2een incorporated in the ew (ct, severa1 key provisions remain unchanged. @or examp1e, the acceptance of a scheme or merger or ama1gamation 2y three3fourths of the shareho1ders, 1ike in section /678 of the $1d (ct, is sti11 a pre3condition to a merger or ama1gamation. )he power of the +entra1 *overnment to order a merger or ama1gamation in the interest of the nation is untouched and is p1aced in &ection /B. @urther, the o21igation to maintain records of the mergersama1gamations is retained in &ection /6 as its importance cannot 2e ignored. $ther matters 1ike convening meetings, o2taining the permission of the regu1atory authorities and the +entra1 *overnment in cases of mergers or ama1gamations remain una1tered. )he +ompanies (ct -/ 7“-/ (ct08 has come into force, the sections re1ated to MA( is yet to 2e notified and the Ministry of +orporate (ffairs 7M+(8 is striving hard to notify the aforesaid sections and the ru1es thereon. &ection /-3=- of the -/ (ct contains the provision re1ated to MA( as compared to &ection /6-3 /6:( of the +ompanies (ct 69: 7“69: (ct08, which is sti11 in presence. (s the M+( notifies the sections of the new (ct, the -/ (ct wi11 rep1ace the 69: (ct. )he coming in force of the -/ (ct wi11 he1p in reducing shareho1ders< 1itigation and make corporate restructuring process smooth and efficient. )he new act a1so promises to 2ring easy and efficient ways of doing 2usiness in India with 2etter governance and improved 1eve1 of transparency. (ccounta2i1ity and making corporate
)he section dea1ing with compromises and arrangements, dea1s comprehensive1y with a11 forms of compromises as we11 as arrangements, and extends to the reduction of share capita1, 2uy32ack, takeovers and corporate de2t restructuring as we11. (nother positive inc1usion within this section is that o2jection to any compromise or arrangement can now 2e made on1y 2y persons ho1ding not 1ess than -J of share ho1ding or having an outstanding de2t amounting to not 1ess than 9J of the tota1 outstanding de2t as per the 1atest audited financia1 statements. Csection /- of the -/ (ctE @urther, current1y, under the 69: (ct, an order does not have any effect unti1 the same is fi1ed with the #$+. ?owever, such requirement has 2een done away with under the -/ (ct. )he -/ (ct mere1y requires fi1ing of the order with the #$+.
CRO&& 5OR)ER MERER )he 69: (ct prohi2ited the merger demerger of Indian company with the foreign company, however, the vice versa was possi21e. 4ut as per the -/ (ct, 2oth types of mergers have 2een a11owed with on1y those foreign entities which have 2een notified 2y the government. #4I approva1 is a1so required to 2e taken for conc1uding these types of dea1s. #4I wi11 a1so notify the regu1ation which has to 2e comp1ied to enter into this transaction. )he payment in the scheme can 2e done through cash or through depository receipts or 2oth.
&.ORT ORM MERER6A&T TRAC7 MERER )his type of mergers inc1udes merger 2etween3 7a8 two or more sma11 companies 728 parent and who11y owned su2sidiary company. “&ma11 +ompany means a company, other than a pu21ic company 8 paid3up share capita1 of which does not exceed 9- 1akh rupees or such higher amount as may 2e prescri2ed which sha11 not 2e more than 9 crore rupees or 8 )urnover of which as per its 1ast PA' account does not exceed crore rupees or such higher amount as may 2e prescri2ed which sha11 not 2e more than - crore rupees/0
)herefore, in this form of mergers demergers no prior approva1s of +') is required and even the approva1 of various other regu1atory 2odies is not needed. ?owever, the +entra1 *overnment, #$+, $' approva1 is necessary a1ong with the approva1 of shareho1ders ho1ding 6-th portion of tota1 shares and majority creditors representing 6-th in va1ue. Moreover, the auditor
RE3ER&E MERER )he merger of a company with a financia11y weak company, in order to get various tax exemptions is known as reverse merger. It is a1so a kind of merger of 1isted company with an un1isted company 7private or pu21ic8 2y which the un1isted company gets 1isted in the stock exchange wherein the 1isted company has a1ready 2een 1isted ear1ier. In this kind of merger, as per 69: (ct, the un1isted company automatica11y gets a 2ack door entry to 2ecome a 1isted company without an IP$. It means the un1isted company can enjoy a11 the 2enefits of 2ecoming a 1isted company without di1uting its shares in the pu21ic. ?owever, as per &ection / 7h8, if the transferee company is an un1isted company, it sha11 not automatica11y 2ecome a 1isted company 2y merging with a 1isted company. It has to fo11ow the process of 1isting as per &!4I 7I+D#8 #egu1ation --6 in order to 2ecome 1isted. During merger the un1isted company a1so has to grant an exit opportunity to the existing shareho1ders of the 1isted company. )herefore, the process of 2ackdoor 1isting wi11 end as soon as these provisions of -/ (ct are notified.
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MERER O A /!&TE) COMPAN- !NTO AN N/!&TE) ONE: )he -/ (ct specifica11y provides for the )ri2una1
PENA/T!E& )he pena1ties for contravention of the provisions under the 69: (ct were a maximum of I# 9-,--- 7approximate1y K&L 5-:B8 which app1y to the company as we11 as officer3in defau1t. ?owever under the -/ (ct, separate pena1ties have 2een 1evied on the company and its defau1ting officer. )o 2ring in more accounta2i1ity, quantum for companies has 2een increased from the aforesaid sum to a minimum of I# --,--- 7approximate1y K&L ,:8 and maximum of I# ,9--,--- 7approximate1y K&L =-,/8. Defau1ting officer7s8 wi11 a1so 2e
5 !ee !ection 23234h4 o( the 2013 Act Kamal P%eet Ka9% , ;-)ewsline P!A legal- “7e%ge%
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punisha21e with imprisonment up to one year or with a minimum fine of I# --,--- 7approximate1y K&L ,:8 and maximum I# /--,--- 7approximate1y K&L =,5/58 or 2oth.5 &uch stringent pena1 provisions wi11 not app1y to mergers of sma11 companies and that of a ho1ding company with its who11y3owned su2sidiaries un1ess their merger is transferred to the )ri2una1 and approved 2y it. 6
&'are'ol"er )emocrac% )he strongest dimension of democracy is the highest degree of participation and not with the Ndegree of freedom or equa1ityN. &hareho1ders are one of the vita1 or shou1d say are the supreme components in the corporate scenario. )hey are theoretica11y empowered to inf1uence and even frame major corporate decisions and are the managers of their company. )he aim of 1egis1ature gets fu1fi11ed when shareho1ders are free to exercise their rights in a democratic way and the device through which shareho1ders inf1uence, 1ies in the voting rights, attached to ordinary shares. (n ordinary share usua11y grants on its ho1ders the right to cast vote on a11 matters, p1aced in the shareho1ders meeting except few provisions. &hareho1ders can exercise contro1 over the +ompany in severa1 ways. )he one way to exert contro1 over the decision making process in corporate is 2y uti1iOing their rights attached and can exp1ore opportunities 2y raising their voices. (nother way to contro1 in todayNs era, rests on the market forces. )he &hareho1ders can express their content 2y reacting through market forces 2y way of se11ing or 2uying the shares. )he management of the +ompany is responsi21e towards invo1vement of shareho1ders in the decision making process in order to create a check and 2a1ance system. )his wi11 ensure transparency in a11 the acts done 2y the company or 2y the shareho1ders. In shareho1ders Democracy everyone has equa1 opportunity to e1ect Kamal P%eet Ka9% , ;-)ewsline P!A legal- “7e%ge%
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and constitute a 2oard to manage and conduct the affairs of the company and to decide the future course of events of the company. )he centra1 issue of shareho1ders participation in +orporate *overnance is that of disc1osure and information f1ow to the shareho1ders. Informed participant can active1y participate in companyNs affairs, contri2ute effective1y in the discussions and he1p the management in decisions and the participation of the shareho1ders has 2een increased, 2y way of proxies. )he new right which a11ows them to take part in meeting without attending it is passing of reso1ution 2y posta1 2a11ot system. )he need for proxies and posta1 2a11ot systems arises as companies in various instances ho1d their meetings in the remote p1aces of the country and it is very trou21esome for the mem2ers to access those meetings. o one can cha11enge the corporate as they ho1d their meetings as per the 1aws. )he net effect is that a minute num2er of shareho1ders are rea11y a21e to access those meetings and exercise their voting rights. )hus, where a reso1ution has 2een passed 2y them at a genera1 meeting which has 2een attended 2 y say, hard1y J of the tota1 num2er of shareho1ders ho1ding say 9J of the voting power, it cannot 2e said that the shareho1dersN democracy has 2een esta21ished in true spirit a1though there is no contravention of 1aw . )o overpower the aforesaid situation that has 2een in existence for decades in India, the inauguration of the concept of posta1 2a11ot in the 1aw 2ooks is rea11y we1come. It provides for true shareho1dersN democracy. )he 1isting agreement has a1so provided for companies passing certain reso1utions through posta1 2a11ot. )hrough the posta1 2a11ot system, every mem2er can make hisher contri2ution in the important decisions of the company without attending any meeting. )he justification 2ehind proxies is that, it is not suita21e for every mem2er to attend meeting every time when it is ca11ed 2ut they may 2e very interested in the proposed reso1utions which have to 2e passed in the proposed meeting and wants to take part
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in it2y empowering and appointing any person on their 2eha1f to vote on the concerned matter. )his approach ena21es the participation indirect1y. )he &hareho1ders have 1imited access to the information on the po1icies and practices and a1so have very 1imited access to corporate proxy machinery. )his is the 1imitation of the proxy system that shareho1ders are not aware a2out their rights and 1ack of information avai1a2i1ity is a1so the main hurd1e in imp1ementing the 1aw in true 1etter and spirit -.
5#%5ac8 o$ &'are Knder the 69: (ct, companies cou1d do mu1tip1e 2uy32acks of shares in the same financia1 year except in certain specific facts where there was a coo1ing off period of one year. ?owever, now the -/ (ct requires a mandatory one3year time period 2etween any type of 2uy32ack, even if the 2uy32ack was achieved through a scheme approved 2y an Indian court. )he -/ (ct a1so stipu1ates that a 2uy32ack is not possi21e if the company has made any defau1t in the repayment of deposits or interest, or redemption of de2entures, or preference shares, or payment of dividend, or in the repayment of a term 1oan to a 2ank or financia1 institution. ?owever, the 2uy32ack may 2e possi21e if the defect is remedied, and a three3year time period has e1apsed. )he ear1ier common practice of a 2ack3to32ack shareho1der3approved 2uy32ack fo11owing a 2oard mandated 2uy32ack is no 1onger possi21e under the -/ (ct, and this is 1ike1y to significant1y de1ay and adverse1y impact investor exit options. It is noteworthy that with the introduction of a non3credita21e tax on 2uy32ack distri2utions under tax 1aw, this route had a1ready 2ecome 1 ess attractive.
10 >emant $oyal & !andhya Agga%wal , $loal ?9%i@, Ad/ocates & !olicito%s- “!9p%emacy *( !ha%eholde%s & hei% emoc%acy In 'ine Bith )ew Act, 2013
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)ecision Ma8ing power o$ t'e 5oar" Kn1ike under the Indian +ompanies (ct 69: 7“69: (ct08, where an ordinary reso1ution 7requiring a simp1e majority of shareho1ders8 was sufficient, under the -/ (ct, certain powers of the 2oard of directors can now on1y 2e exercised su2ject to a favoura21e specia1 reso1ution 7requiring a three3fourth majority of shareho1ders8 2eing passed. )hese inc1ude important su2jects such as the right to se11 a su2stantia1 part of the undertaking or 2orrow money a2ove certain specified thresho1ds. &pecia1 reso1utions may a1so inc1ude conditions and the app1ica2i1ity of the provision has 2een extended to private companies as we11. @urther, there have 2een severa1 important additions to the 1ist of powers which are to 2e exercised 2y 2oard of directors on1y at a meeting of the 2oard, and cannot therefore 2e de1egated. )hese inc1ude things such as the approva1 of financia1 statements, diversification of 2usiness and the approva1 of mergers and takeovers. (dditiona11y, a1though the -/ (ct recognises and permits 2oard meetings to 2e conducted via video conference, certain decisions, inc1uding those re1ating to the approva1 of financia1 statements and mergers, cannot 2e made via video conference. @oreign investors ought to 2e wary of these changes, as they significant1y curtai1 the decision3making power of the 2oard and require increased shareho1der support for positive company outcomes.
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