What the Companies Act 2013 states:
Key requirements of the 2013 Act concerning mergers, amalgamation and reconstruction are given below:
- A company will file a scheme with Tribunal for approval for (i) reduction in share capital, (ii) making compromise/ arrangement with creditors and members, and (iii) merger/ amalgamation of companies.
- Subject to the RBI approval, both inbound and outbound cross-border mergers and amalgamations between Indian and foreign companies will be permitted. However, the overseas jurisdictions where cross-border mergers and amalgamations are allowed will be notified.
- An application can be made to the tribunal for making compromise or arrangement involving CDR. Any such scheme should, among other matters, include:
- A report by the auditors of the company to the effect that its fund requirements after the CDR will conform to liquidity test based on the estimates provided by the board of directors.
- A valuation report in respect of the shares and the property and all assets, tangible and intangible, movable and immovable, of the company by a registered valuer.
- 2013 Act permits Articles of the company to have entrenchment provisions/ amendments to include restrictive conditions
- Inter-se transfer agreements for public company shares now enforceable
- Right of first refusal, anti-dilution rights, liquidation preference, tag-drag along rights, veto rights, affirmative rights better enforceable
- Not more than two layers of investment company permissible, except in cases of outbound acquisitions with existing structures and statutory norms
- The tribunal will not sanction a scheme of capital reduction, merger, acquisition or other arrangement unless the accounting treatment prescribed in the scheme is in compliance with notified AS and a certificate to that affect by the company’s auditor has been filed with the tribunal. Hence, compliance with notified AS will be mandatory for all companies.
- A transferee company will not hold any shares in its own name or in the name of trust either on its behalf or on behalf of its subsidiary/associate companies. The 2013 Act will require such shares to be cancelled or extinguished. This will prohibit creation of any treasury shares under the scheme.
- In case of merger/amalgamation of companies, the following documents should also be circulated for meeting proposed between the company and concerned persons:
- Report of the expert on valuation, if any
- Supplementary accounting statement if the last annual financial statements of any of the merging company relate to a financial year ending more than six months before the first meeting of the company summoned for approving the scheme.
- Option has been given to the following companies to undertake corporate reorganisations like amalgamation, demerger, etc. without Court process:
- Between two or more small companies;
- Between holding company and WOS; and
- Other prescribed class of companies
- The merger of a listed company into an unlisted company will not automatically result in the listing of the transferee company.
- 2013 Act defines demerger as per the extant income-tax provisions. Accounting treatment on demerger prescribed.
- Slump sale of an undertaking/ substantially whole of the undertaking, now requires a Special Resolution.
- 2013 Act defines undertaking as having an investment of more than 20% of net worth; or generating 20% of total revenue of the company.
- Also defines the term “substantially whole of the undertaking” as at least 20% of the value of the undertaking.
- Only persons holding not less than 10% of the shareholding or having outstanding debt not less than 5% of total outstanding debt can raise objections to the scheme.
The provision of the 2013 Act concerning mergers, amalgamation and reconstruction of companies are yet to be notified. The MCA has issued the draft rules concerning these provisions. However, the final rules on this subject are still awaited. The date from which the provisions of the 2013 Act concerning mergers, amalgamation and reconstruction will apply is unknown.