Companies Bill to cushion ride for M&As; implementation holds the key
The Economic Times
Transactions Tax Leader, EY
Senior Tax professional, Ernst and Young
In the ever-evolving M&A space, the corporate world keenly looks forward to easy regulation. From that perspective, the recently-tabled Companies Bill, 2011, has been eagerly awaited. It has to be seen how many positive votes it can earn from India Inc.
To start with, the new provisions allow Indian companies to merge into companies in foreign jurisdictions (to be notified) and vice versa. This is a positive step that clearly exceeds expectations: opening doors to corporate strategies on a global scale. While the new Bill seeks to leap forward by permitting such mergers, the need to have a nod from RBI as well as the issue about tax neutrality would, in fact, negate the step taken in the new Bill to a large extent.
The overall theme of addressing the balance of power between majority shareholder/promoters and minority shareholders has been visibly incorporated in the M&A provisions as well. The new Bill has extended the concept of providing exit opportunities to dissenting shareholders in case of any restructuring.
Additionally, any significant transfer of undertaking (now defined at 20% or more of net worth) would also require the company to provide similar exit to dissenting shareholders. Discretion as to whether or not an exit opportunity will be needed and what form it will need to take has been left solely with the Tribunal. Who will be exactly classified as a 'dissenting shareholder' will define the manner in which this provision comes into play.
Thus, corporate strategies attempting business carveouts in order to raise funds or aggressive M&A strategies for achieving business objectives are all likely to become more cautious. Infrastructure business, carveouts by telecom operators and R&D business carveouts by pharma companies are key examples of past transactions that may prove to be an arduous task for corporate under the new provisions. On the other hand, no longer can a shareholder owning 'one share' hold a scheme of restructuring to ransom. The limit has been set at 10% for shareholders and 5% (in value) for creditors.
It has always been a challenge to hold shareholders and creditors meet under one roof. Granting dispensation was discretionary. Dispensation will now be available on consent of 90% of stakeholders given via an affidavit. Having regard to the complex legal procedures, only time will say if the purpose of the new provision is well achieved.
The four pillars holding the foundation of the Bill are accountability, procedural simplification, disclosure and unification across various regulatory authorities. The simple process of submitting documents before the court registrar is now a multi-party affair with a series of documents. Corporates will now necessarily have to deal with multiple authorities — income tax, RBI, Sebi, central government and CCI — as opposed to single-window clearance.
Onerous disclosures such as details of valuation report, statement giving effect of the restructuring on promoters, auditor's certificate (which was earlier mandated by Sebi for listed companies) stating compliance with accounting standards, are required to be given. The attempt to get a larger number of regulatory authorities, in particular the incometax authorities involved from the preliminary stages, could be another indicator of the new Bill's desire to provide greater certainty to companies in an M&A process, at an earlier stage of transaction.
It is common to have a multi-layered structure in order to facilitate investment by financial or strategic investors at various levels. The new Bill is set to curb the number of holding companies to two. While there may be an aim to achieve transparency, the move may hinder genuine need for Indian multilayered structures. On the other hand, outbound acquisition of (foreign) multi-layered structure may still be allowed in certain situations.
Another provision that may practically go a long way in impacting intragroup restructuring is the prohibition from holding treasury shares by the transferee company (through a trust mechanism). Trust structures were often used to retain a company's equity stake and have been fairly beneficial to the company and its shareholders.
The need to prohibit is a bit perplexing. Thanks to the new Bill for small mercies, it sets simple and shorter process for the merger of small companies and the merger of parent companies and their subsidiaries. Such mergers are to be effected without involving the Tribunal, by approaching the relevant Registrar and Official Liquidator.
For the merger of subsidiary companies into parent, hitherto, companies were granted dispensation by the courts on a case-to-case basis. Such a simplification would be welcomed and result in certainty of timelines. Another candy in the box is an option to obtain approvals of shareholders through postal ballot in place of meetings.
A long-awaited relief has also been provided in the form of recognition of agreements for transfer of shares. The move seems to be aligned with the recent amendment by Foreign Investment Promotion Board, not prohibiting options/rights to transfer shares in relation to foreign investment in India. On the whole, the provisions of the new Bill with regards to M&A seem to be a calibrated act trying to manage the needs of India Inc, the country's growing economy and the shareholders. The key would be in terms of 'on-ground' implementation, as several facets would be further unveiled when rules are framed. Till then, it would be as usual: wait and watch.
(Authors’ views are personal)