The Companies Act, 1956 (‘Act’) was enacted with the basic objective inter-alia to govern the creation, continuation, winding up of the companies and formalize relationships between the shareholders, the company, the public and the government. However, with the passage of time to meet the changed national and international economic environment and further accelerate the expansion and growth of our economy the Government of India has decided to bring about a new fangled legislation.
The first attempt was made vide introduction of Companies Bill, 2009, subsequently incorporating suggestions and recommendations has evolved into Companies Bill 2012 (‘Bill’) which has recently got the approval of both the houses of the Parliament. It now awaits the assent of the President of India and post notification shall replace the existing Statue. The Bill once enacted shall swap more than 50 years old Companies Act, 1956 with its 29 chapters, 470 clauses and 7 schedules.
In this period of challenged macro economic situation, Merger and Acquisition (‘M&A’) is viewed as an important tool in improving the financial health of corporate sector. One of the key features of this Bill is promoting and regulating M&A activity in the country. The Bill intends to bring in reformatory and contemporary provisions, so as to make M& A environment more congenial.
For instance the existing provisions under the Companies Act, 1956 envisaged and provided for a restrictive scenario allowing only foreign companies to merge with Indian companies by following the procedures laid down in sections 391 to 394 of the Act and not the other way around. However, the Bill has widened the scope by allowing an Indian company to merge with a foreign company and thus can be a transferor company. For those uninitiated with Indian Law, the term foreign company has been defined as a company or body corporate incorporated outside India whether having a place of business in India or not.
Further, cross border is a merger between entities of two or more different countries to form a new entity. Cross border mergers and acquisitions have shown tremendous growth over time primarily due to a desire to circumvent tariff and non-tariff barriers arising from arm-length international trade and taxes, to obtain new options for new sources of financing, access technology and to distribute costs over a broader base. To facilitate, cross border mergers and acquisitions, a new clause has been provided as under:
- Merger of an Indian company can be either as a transferee company or a transferor company. This suggests that now an Indian Company can merge with a foreign company which earlier was not permitted. This is a major shift in the policy and is in consistence with the policy of liberalization, transparency, globalization and good governance of the corporate sector.
- The foreign company, with which the merger is proposed, should have been incorporated in the jurisdiction of such countries as may be notified from time to time by the Central Government.
- In order to regulate and monitor cross border merger and acquisitions the Central Government, in consultation with the Reserve Bank of India (RBI), shall make rules effecting merger and acquisitions involving cross border transactions. Thus, cross border mergers will be restricted to entities of those countries which the Central Government approves.
- Indian / foreign entities intending for cross border merger will have to draw a scheme of merger providing terms and conditions of the merger which along with other things shall also provide for the payment consideration to the shareholders of the merging company in cash or depository receipts or partly in cash and partly in depository receipts. These payments should be subject to the approval of Reserve Bank of India.
All along companies have traditionally created multiple investment subsidiaries at home or at overseas, particularly in tax efficient jurisdictions for routing investments into another company. Large Indian corporates have several subsidiaries to act as investment arms or the subsidiaries of the holding companies which are in turn used to start new ventures, acquire business etc. To curb/ check such layering of investments for funding new ventures or acquisitions, the Bill prohibits a company from making investment through more than two layers of investment companies i.e. a company whose principle business is to acquire shares, debentures or other securities. However, this restriction will not apply in case of cross- border mergers.
As per the existing Companies Act 1956, an essential requirement for approval of a restructuring scheme is to convene a creditors or members (shareholders) meeting. The new Bill intends to make things easier by allowing objection to the scheme to be made by only those persons holding not less than 10 % of the shareholding or having outstanding debt amounting to not less than 5% of the total outstanding debt as per the latest audited financial statement.
An important feature of the bill is the report of the registered valuer with regard to valuation. The valuer has been saddled with responsibility to be impartial, to make true and fair valuation, exercise due diligence and not to undertake valuations where he is directly or indirectly involved or becomes interested either at the time of valuation or after valuation of assets.
Another significant addition the bill provides, for safety of minority shareholders, is the ‘tag along’ and ‘drag along’ clause. The tag along clause permits a minority shareholder to sell his stake along with the majority shareholder while a drag along clause gives right to a majority shareholder to force a minority shareholder to sell its stake.
Considering the special needs of smaller companies or holding companies and subsidiaries companies, simpler provisions have been made regarding M&A. To cut short the bureaucratic delays, where the approval of statutory authorities are involved, a prescribed period of thirty days has been specified and in case of failure to make representation between the specified period, it shall be presumed that those authorities have no representations to make.
To conclude, the Companies Bill 2012 is modern and progressive in nature. It aims to align the law with current commercial realities. It has been drafted, keeping in mind the need of the hour, the necessity to boost the Indian economy, bring transparency in corporate restructuring. However, other allied laws and regulations such as Foreign exchange Management Act (‘FEMA’), Income tax Act, 1961 (‘IT Act’) and the proposed rules to be notified by the Central Government should fall in line with the provisions of the new Bill else, it would make the implementation inefficient and yield inconsistency which in the current economic environment would be an unwelcome experimentation.