Mergers and Acquisitions – Companies Act Framework and Broad Process

Businesses in modern-day economies are comprehensively different from their counterparts in earlier times. Modern-day economies are characterized by an extremely dynamic, rapidly evolving and vibrant environment under which business models are put to trial on a regular basis. The increasing adaptation and proliferation of technology is further challenging the way in which established businesses operate. Under this backdrop coupled with a wave of globalization, the landscape of mergers & acquisitions (‘M&A’) has gained significant importance in recent times. An enabling framework under corporate and tax laws goes a long way in enhancing the effectiveness of a functional M&A regime in the economy. Mature economies invariably boast of a supportive and contemporaneous framework under its corporate and tax laws that act as a catalyst in facilitating inorganic growth in the economy.

Businesses are necessitated to undergo a M&A endeavor on account of various considerations. Some of them include:

– Achieving growth through inorganic pursuits
– Achieving synergies through complimentary pursuits
– Eliminate or reduce competition
– Market access, product access, technology access, etc.
– Diversification of business interests
– Regulatory, tax and fiscal considerations

A loosely referred term, M&A, as usually understood and also commonly used under this article includes the other forms of effectuating a transaction including demerger, amalgamation, spin-off, reverse merger, business transfer, etc. Under this backdrop let us discuss the broad regulatory framework surrounding the M&A regime in India in relation to corporate entities.

a. Companies Act, 2013
b. SEBI (Listing Obligation & Disclosure Requirements), 2015
c. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011
d. Income Tax Act, 1961
e. Competition Act, 2002
f. Foreign Exchange Management Act, 1999
g. Indian Stamp Act, 1899 and other state stamp acts
h. Central Goods & Services Act, 2017 and other state GST acts
i. Rules, regulations, circulars, directions, notifications issued under the above

Companies Act Framework

Section 230 to 240 of the Companies Act, 2013 cover the statutory provisions governing M&As including arrangements involving companies, their members and creditors. All sections other than section 234 have been notified effective from December 15, 2016 with section 234 being notified on April 13, 2017. Apart from the substantive provisions mentioned in Section 230-240, guidance on procedural aspects is covered in Companies (Compromises, Arrangements and Amalgamations) Rules, 2016 (‘CAA Rules’). The provisions relating to section 230 to 240 are different from erstwhile section 391 to 394 of the Companies Act, 1956 (‘1956-Act’) on account of various aspects. Some of them are as below:

a. Mandate of the National Company Law Tribunal (‘NCLT’): After a long legal encounter over constitutional validity of certain provisions, the NCLT saw light of the day in 2016. Delay in setting- up of NCLT and the surrounding infrastructure resulted in a delay in implementation of section 230- 240 of the Companies Act, 2013. In a marked departure from the 1956-Act, the body for adjudging on M&A matters involving an arrangement shifted from respective High Courts to a more specialized judicial body aka NCLT. NCLT being a focussed body for corporate law matters brings alongside the desired focus and the right understanding in dealing with complex corporate law matters. There are currently 11 benches of the NCLT including the principal bench being in Delhi. Appeals against the orders of the NCLT lie with the National Company Law Appellate Tribunal (‘NCLAT’) at Delhi.

b. Introduction of Fast-Track merger process: The entire process of effectuating a M&A involving an arrangement passes through various levels of filings, approvals, compliances and processes. A lot of these steps are extraneous when the companies involved in the M&A are extremely small companies or parent-subsidiary company. Accordingly, a fast-track merger process also commonly known as “House-Merger” is conceptualised in Companies Act, 2013. We discuss the process of a fast-track merger in latter part of this article.

c. Two-way cross-border amalgamations: The 1956-Act much like a one-way street allowed foreign companies to merge into Indian companies but did not specifically provide for the other way round. Companies Act, 2013 allows merger of Indian companies also into foreign companies subject to checks and balances as laid down. Section 234 deals with such schemes of mergers and amalgamations between companies registered under this Companies Act, 2013 and companies incorporated in the jurisdictions of such countries as may be notified from time to time by the Central Government. Further, the Companies Act, 2013 also requires prior approval of the Reserve Bank of India for effectuating such schemes. The Reserve Bank of India has issued draft rules in this matter which inter alia prescribes conditions for in-bound and outbound schemes. Further, Annexure – B of CAA Rule 25A also prescribes the jurisdictions in which the foreign company(ies) is incorporated, with which cross-border mergers can be undertaken.

d. Quantified threshold for objecting to the scheme: The Companies Act, 2013 prescribes a threshold beyond which a stakeholder can object to the scheme of arrangement. A proposed scheme can be objected only by shareholders having not less than 10% shareholding or creditors whose debt is not less than 5% of total outstanding debt as per the last audited financial statement or the provisional financial statements which is not older than six months 1956.Act did not have any threshold.

e. Certification from statutory auditors: The Companies Act, 2013 prescribes that no arrangement shall be sanctioned by the NCLT unless a certificate by the company’s auditor has been filed with the NCLT to the effect that the accounting treatment, if any, proposed in the scheme of arrangement is in conformity with the accounting standards prescribed under section 133 of the Companies Act, 2013. Such a requirement has hitherto been applicable in case of listed companies only.

f. Procedural ease: Companies Act, 2013 proposes certain smaller process eases to facilitate a smoother approval. These include flexibility of e-voting, electronic submission of documents with NCLT, exit offer to dissenting shareholders under section 235, obligation to purchase of minority shareholders share under section 236, etc.

Representation by other professionals: Since Chartered Accountants, Company Secretaries and Cost Accountants can also appear (besides Advocates) before NCLT, they will be able to take up M&A cases before NCLT which earlier they could not as earlier respective High Courts were handling schemes of arrangement.

Process for effectuating a M&A through a scheme of arrangement (NCLT route) under section 232 of Companies Act, 2013:

Broad Procedure to be followed for scheme of amalgamation or arrangement (involving a listed company) under section 232 of the Companies Act, 2013:

Step Broad Process for scheme involving a listed company
1 Conceptualisation stage and pre-board meeting preparations
• Evaluation of transaction structure and review of all aspects before taking final decision on M&A involving a scheme of arrangement.
• Review of relevant documents and preparation of project activity plan basis of the shortlisted option.
• Preparation and finalisation of Scheme of Amalgamation / Arrangement.
• Complete valuation of the companies and obtain valuation reports from Registered ValuerObtain Fairness Opinion from a registered merchant banker.
• Call for an audit committee and approve the valuation report in the audit committee.
• Obtain auditors report for (a) scheme being in compliance with the requirements of Accounting Standards (b) scheme being in compliance with the requirements of SEBI circulars/LODR provisions.
• Preparation of secretarial documents in relation to calling of a board meeting and intimation to recognised stock exchange(s), regarding holding of board meeting and outcome board meeting.
2 Convene the Board Meeting for approval of the Scheme of Amalgamation and Arrangement and appointment of professionals, etc.
3 Application to Stock Exchange(s) (electronic mode) for Approval\Observations on the Scheme and \ or Application to RBI (physical mode) for Foreign Company amalgamation. Obtain Approval\Observation Letter from stock exchanges.
4 Initial Application for Scheme of Amalgamation and Arrangement involving Merger/Demerger
• After approval from Stock Exchange(s) has been received, file application with the NCLT alongwith below documents:
– Application seeking NCLT order for holding meeting(s) (Form NCLT-1)
– Notice of admission (Form NCLT-2)
– Affidavit (Form NCLT-6)
– Copy of scheme which should include disclosures required u/s 230(2) such as latest financial position, auditor’s report and details about pending investigations/proceedings, etc
• Hearing of application at the NCLT and directions w.r.t members/creditors meeting which may cover matters stated in Rule 5 of CAA Rules.
5 Drafting of Advertisements, Notices of Meeting of Members, Creditors and Statutory Authorities along with Explanatory Statement as per Rule 6 of CAA Rules, 2016;
6 Convene the Board Meeting for approval of draft notices of Shareholders and Creditors meeting as directed by the NCLT for the Shareholders and Creditors
7 Filing of Draft Scheme of Amalgamation & Arrangement with the Registrar of Companies – Physically & Electronically through Form GNL – 1. Filing of draft scheme with Income Tax department, sectoral regulators seeking objections, if any.
8 Calling and Convening Meeting of Members and Creditors
• Dispatch of Notice and Explanatory Statement (as per Rule 6) in Form No. CAA.2 to each member/creditor of the Companies atleast 1 month before date fixed for meeting;
• Advertisement of such notice in Form no. CAA.2 in newspapers (1 English and 1 vernacular), on company website atleast 1 month before date fixed for meeting;
• Dispatch of Notice and Explanatory Statement in Form No. CAA.3 to prescribed Statutory Authorities (RD, ROC, IT, SEBI, Official Liquidator, RBI, etc.) forthwith after notice is sent to members and creditors with a time frame of 30 days to make any representation to the NCLT and Company;
• Filing of Affidavit of Service by Chairperson of the Meeting with the NCLT along with copy of Advertisements published, acknowledgement of dispatch of notices to Members, Creditors, Statutory Authorities atleast 7 days before the date of meeting stating that all directions w.r.t notices and advertisements have been complied with;
• Convening of Meeting(s) as per the Order and passing Resolutions for approval of the Scheme with such majority as required under the Companies Act, 2013;
• Filing of Chairman’s Report by the Chairperson of the Meeting in Form no. CAA.4 with the NCLT within 3 days of the conclusion of meeting or such other days as directed by the Tribunal
• Application for in-principle approval for listing of new securities can also be applied at this stage.
9 Petitioning the NCLT and Obtaining Final Order
• Once the Scheme has been agreed by the members and creditors, the Companies shall file a petition in Form no. CAA.5 with the NCLT for sanction of scheme, within 7 days of filing of Chairman’s report
• Admission of Petition for fixing the date of final hearing – NCLT
• Response to Notice received from the Registrar of Companies, Regional Director and Official Liquidator and follow-up with them
• Advertisement for Petition to be advertised in the same newspapers as the notice in Form No. CAA.2 was advertised atleast 10 days prior to the scheduled hearing & Filing of Affidavit of Service
• Obtain approval of RBI and all other sectoral regulators as applicable.
• NCLT shall pass an Final Order on the petition in Form no. CAA.7
10 Post Final Order compliances
• Stamp duty Adjudication as per the State Stamp Duty Acts;
• On receipt of Certified Copies of the Final Order, the Company shall file Certified Copy of Order with the ROC within 30 days of its’ receipt in Form INC-28 along with Acknowledgement of payment of Fees to RD and OL for the companies;
• Allotment and credit of Shares to shareholders pursuant to the Scheme of Amalgamation and Arrangement;
• Application to Stock Exchanges for Listing of New Equity Shares issued as consideration;
• Intimation to Stakeholders w.r.t effectiveness of Scheme of Amalgamation and Arrangement.


Eligibility and Process for effectuating a Fast-Track M&A through a scheme of arrangement

Fast track merger route is eligible for (a) merger between two or more small company(ies) or (b) merger between a holding company and its wholly owned subsidiary. Section 2(85) of the Companies Act, 2013 defines Small Company as below:

“small company” means a company, other than a public company, —
(i) paid-up share capital of which does not exceed fifty lakh rupees, or such higher amount as may be prescribed which shall not be more than ten crore rupees; and

(ii) turnover of which as per profit and loss account for the immediately preceding financial year does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees

Provided that nothing in this clause shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act;

Fast Track merger does not involve NCLT approval but post the approval of the board of directors of the company, notice would be sent to the registrar of companies and official liquidator inviting objections/suggestions to scheme.

An objective threshold of approval from at least 90% shareholders and 90% creditors (value) would be required. This threshold is higher than the approval threshold required in case of a normal NCLT-route merger being that of majority of shareholder(s) and/or creditor(s) present and validly voting and representing ¾ in value. The broad process for scheme under Fast-Track Route is envisaged as below:

Step Broad Process for scheme under Fast-Track Route
1 Conceptualisation stage and pre-board meeting preparations
• Review of relevant documents and preparation of project activity plan basis of the shortlisted option.
• Preparation and finalisation of Scheme of Amalgamation / Arrangement.
• Complete valuation of the companies and obtain valuation reports from Registered Valuer Obtain Fairness Opinion from a merchant banker.
• Preparation of secretarial documents in relation to calling of a board meeting.
2 Filing of Notice of the proposed Scheme with the ROC and OL or persons affected by the scheme in Form No CAA.9 for inviting their objections/suggestions to the Scheme along with Proof of Dispatch to the Persons affected by the Scheme
3 Filing of Declaration of Solvency by all the Companies with the Registrar of Companies in Form No. CAA.10 after 30 days of Filing CAA-9 as above along with Balance Sheets
4 Drafting of Notices of Meeting of Members, Creditors along with Explanatory Statement as per Rule 6 of CAA Rules, 2016;
5 Convene the Board Meeting for approval of draft notices of Shareholders and Creditors meeting and determination of Record Date (latest possible) for the Shareholders and Creditors
6 Convening Extra Ordinary General Meeting of Members and Obtaining Written Consent from the Creditors for the approval of Scheme.
7 Filing of Approved Scheme along with results of the Meeting and Written Consent from Creditors in Form CAA.11 with RD, ROC, OL for obtaining their approval – Physically + Electronically through Form GNL-1 within 7 days of the conclusion of the Meeting
8 In case there are no objections on the Scheme, the Central Government through RD shall pass
the Final Order in Form No. CAA.12
9 Stamp Duty Adjudication on RD Order
10 Filing of the Final order with the ROC in Form INC-28 within 30 days of receipt of Final order
11 Intimation to Stakeholders w.r.t effectiveness of Scheme of Amalgamation and Arrangement


Nuances involving companies whose securities are listed and traded on recognized stock exchanges

Securities and Exchange Board of India (Listing Obligation & Disclosure Requirements), 2015 (‘Listing Regulations’) more specifically Regulations 11 and 37 govern the requirements applicable to listed companies. Regulation 11 of the Listing Regulations, interalia, provides that any scheme of arrangement / amalgamation / merger / reconstruction / reduction of capital etc. to be presented to any Court or Tribunal does not in any way violate, override or limit the provisions of securities laws or requirements of the Stock Exchanges. Regulation 37 of Listing Regulations provides that the listed entities desirous of undertaking scheme of arrangement or involved in a scheme of arrangement shall file the draft scheme with Stock Exchange(s) for obtaining Observation Letter or No-objection Letter (which shall be valid for period of six months), before filing such scheme with any court or Tribunal.
In order to effectively implement the compliance under above regulations, SEBI issued Circular No. CFD/DIL3/CIR/2017/21 dated March 10, 2017 laying down the framework for Schemes of Arrangement by Listed Entities and relaxation under Rule 19 (7) of the Securities Contracts (Regulation) Rules, 1957. Certain amendments were also effectuated to this circular via Circular CFD/DIL3/CIR/2018 issued on January 3, 2018. The broad requirements under this circular which are peculiar to listed companies are as below:

a. Applicability of the requirements: All schemes filed by companies whose securities are listed on a stock exchange except schemes which solely provides for merger of a wholly owned subsidiary or its division with the parent company. However, even under such exempted cases, draft schemes shall be filed with the stock exchanges for the purpose of disclosures and the stock exchanges shall disseminate the scheme documents on their websites.

b. Choosing of designated stock exchange: Listed companies have a choice to choose one of the stock exchanges having nationwide trading terminal on which its securities are traded as a designated stock exchange. The listed company shall before filing the scheme with the NCLT obtain approval from the designated stock exchange. The designated stock exchange shall in-turn obtain comments\consent of SEBI.

c. Disclosure in relation to unlisted entities being a party to the scheme: In schemes involving unlisted entities and listed company, the listed company is required to disclose in the explanatory statement or notice or proposal accompanying resolution to be passed sent to the shareholders, all applicable information pertaining to the unlisted entity/ies involved in the scheme in the format specified for abridged prospectus. The accuracy and adequacy of such disclosures shall be certified by a SEBI Registered Merchant Banker after following the due diligence process. Such disclosures shall also be submitted to the Stock Exchanges for uploading on their websites.

d. Additional disclosures in explanatory statement sent to shareholders: In addition to the above, the listed company shall ensure the following additional details are sent as part of the explanatory statement to shareholders:

• Observation letter received from stock exchanges
• Pre-and post arrangement capital structure
• Fairness opinion obtained from merchant banker on valuation of assets\shares done by the independent chartered accountant

e. Disclosure on websites and redressal of complaints: Immediately upon filing of the Draft Scheme of arrangement with the stock exchanges, the listed entity shall disclose the draft scheme of arrangement and related documents on its website. The Listed entity shall submit to stock exchanges a ‘Report on Complaints’ which shall contain the details of complaints/comments received by it on the draft scheme from various sources (complaints/comments written directly to the listed entity or forwarded to it by the stock exchanges/SEBI) prior to obtaining observation letter from Stock Exchanges on Draft Scheme.

f. Public shareholder approval for the scheme: As an anti-abuse measure, in certain cases, the circular mandates approval of public shareholders as a pre-requisite for passing of the scheme. i.e the Scheme of arrangement shall be acted upon only if the votes cast by the public shareholders in favour of the proposal are more than the number of votes cast by the public shareholders against. Such a requirement in applicable in five instances as mentioned in the circular. In case the scheme is not covered under the five instances, a certificate of the auditor duly approved by the board to this effect shall obtained and hosted on the website.

Valuation under schemes of amalgamations and arrangements

The Companies Act, 2013, more specifically section 247 therein introduces the concept of ‘registered valuers’. Where any valuation is required to be made in respect of any property, stocks, shares, debentures, securities or goodwill or any other assets or net worth of a company or its liabilities under the provision of the Companies Act, 2013, it shall be valued by a person having such qualifications and experience, registered as a valuer and being a member of an organisation recognised, in such manner, on such terms and conditions as may be prescribed. Such a valuer would be appointed by the audit committee or in its absence by the Board of Directors of that company.

Subsequently, the Ministry of Corporate Affairs has notified Companies (Registered Valuers & Valuation) Rules, 2017, wherein detailed framework and provisions governing registered valuers have been prescribed. The rules are currently in their transitory implementation phase and will come into full effect from October, 2018. Until such time, an independent merchant banker registered with the Securities and Exchange Board of India or an independent chartered accountant in practice having a minimum experience of ten years shall be regarded as registered valuers.

Typically, schemes of amalgamation and arrangement require a swap ratio to be determined basis on a valuation exercise performed on both the transacting companies. Such a swap ratio is certified by the registered valuer. The Companies Act, 2013 also makes it mandatory that notice of meeting to discuss the scheme of amalgamation\arrangement must be accompanied by valuation report. Further, incase of listed companies in addition to the valuation report issued by the registered valuer, a merchant banker registered with SEBI shall issue a fairness opinion on the derived swap ratio.

In case of schemes involving foreign companies, valuation of the foreign company shall be conducted by valuers who are members of a recognised professional body in the jurisdiction of the transferee company and further that such valuation is in accordance with internationally accepted principles on accounting and valuation. A declaration to this effect shall be attached with the application made to Reserve Bank of India for obtaining its approval.


As briefly discussed in this article, the landscape of M&A’s is India is fairly contemporary and also equally evolving with modern-day realities. While a lot can be desired in relation to the timeframe involved for implementation of a M&A transaction in India, the other aspects of an enabling legal framework are very much in place. The Companies Act, 2013 provided the much desired shot-in-the-arm for upgrading the M&A architecture in the India context. The coming years hold a lot of promise for the growth of Indian economy and having the M&A framework in place will certainly play its role in managing the growth going forward.


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