Published Editorial

Companies Act: The new law should set the M&A market on fire

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The Economic Times

by

Amrish Shah
Partner & Transaction Tax Leader
EY

Last week, Parliament passed a younger, thoughtful and austere Companies Act with radical changes. How will it impact businesses and companies in the years to come? When growth returns to the West, Indian investors will get exposure to global economies, assuming multinationals take advantage of the new provisions.

Since the new law opens up the economy even more, one can think of scenarios where strategic alliances take simpler routes. There are likely to be cases where global consolidation and fund raising are desired.

Pooling of assets under a single company in any jurisdiction is achievable. Global integration and cross-border mergers are now permitted; the older law only welcomed foreign companies into India. Some provisions on mergers bring in benefits for all investor classes, including minority investors. Exits will be easier, because the new law allows the consideration on a merger to be settled in the form of cash or depository receipts.

Simplicity and quick execution can bring in relief on procedures involving mergers between "small companies", holding companies and subsidiaries. Court and tribunal approvals are done away with in these scenarios.

These measures can mean shorter implementation time and trigger fast movement on certain internal reorganizations. This can also boost strategic alliances among smaller or startup companies. This is most welcome in an economic scenario where consolidation may help smaller companies. Whether the beneficial provisions can be applied even in a demerger or other restructuring scenarios is something that the government must clarify.

For good governance and investor protection, the Act advocates price determination by a registered valuer for any preferential allotment of equity. Such a measure is in sync with the principals set out under the exchange laws and the tax framework. This should prevent the dilution of existing investors' interests at an unfair price. One contentious point has been the enforceability of certain pre-agreed terms. Based on today's laws, a group of investors capable of forming majority may pass a resolution that may nullify a past understanding. As a welcome change, entrenchment provisions are now to be included in the charter documents.

This shall empower the enforcement of any pre-agreed rights and provide greater certainty to investors, especially in joint ventures. To protect investors, the Act seeks to resolve the long-standing confusion on enforceability of rights of first refusal, drag or tag along, and so on for public companies. To our relief, the law says that private arrangements or contracts between two or more persons would become enforceable contracts. This provision is most welcome.

Earlier, companies used to get sleepless nights wondering about minority shareholder issues after delisting. The Act provides a right for companies to compulsorily acquire such minority (less than 10%) shares, based on valuation norms that are prescribed.

The law is modern because it takes positive steps on corporate governance and regulatory reform. For the first time, class action suits have been written into law. It also tries to curb multiple layers of investment companies.

Other new things like the criteria of "control" to determine a holding subsidiary relationship and the introduction of arm's-length principles on transactions between related parties show that the law is intended to align with the Takeover Code and income-tax provisions.

Issuance of treasury shares in schemes of arrangements has been prohibited. This needs a rethink as it can impact mergers after acquisition due to accounting issues.

Greater clarity will emerge from the rules that should say more on procedural aspects. The passage of the Act by the Rajya Sabha is a huge boost for the mergers and acquisitions segment. This clarity will be welcomed by foreign and domestic stakeholders.

Deal volumes in India, inbound and outbound, should see a major surge. However, some income-tax and foreign exchange provisions need to be streamlined with the provisions of the Act. We hope that Pranabda will sign on the dotted line at his earliest convenience.