A

REPORT
ON

A STUDY ON MERGERS AND ACQUISITIONS IN INDIA

A Project Submitted to
University of Mumbai for Partial Completion of the Degree of
Bachelors of Commerce in Accounting and Finance

SUBMITTED BY:
LAXMI SANJAY SONAR
TYBAF SEM:-6

ROLL NO:AF20052

GUIDED BY:-
Dr. SANTOSH KARMANI

SHRI SIDH THAKURNATH COLLEGE OF ARTS & COMMERCE

ULHASNAGAR - 421 004.
 ACKNOWLEDGEMENT

I the undersigned Miss / Mr. SONAR SANJAY LAXMI here by, declare that the work embodied in this project
work titled “Recent mergers and acquisitions in india company” forms my own contribution to the research work
carried out under the guidance of Dr. SANTOSH KARMANI of Guiding Teacher is a result of my own research work
and has not been previously submitted to any other University for any other Degree / Diploma to this or any other
University.

Wherever reference has been made to previous works of others, it has been clearly indicated as such and included
in the bibliography.

LAXMI SANJAY SONAR

(Your Name)
  Executive Summary
Merger is a combination of two or more industries into one companies . One or two industries can be merge with an
existing industries or the can be merge together to form a new industries
. the acquiring company, acquires the assets and liabilities of the target company

There are two ways to grow the company, first is internal growth and second is external growth. The internal growth
suffers from the drawbacks like problems of raising adequate finance, longer implementation time of the projects
etc. to overcome their problems of a company that can grow the externally by acquiring the existing business firms.
This is the route of the mergerand acquisition.

In this study the Indian banking sector is calculated on the basis of financial performance ratios and the paired t-test
statistical tool is been used in this study.
 Provided upon request only

Accolades
A brief chronicle of our firm’s global acclaim for its achievements and prowess through the years –

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2020, 2019, 2018, 2017, 2016, 2015

 IFLR1000: Tier 1 for Private Equity and Project Development: Telecommunications Networks.
2020, 2019, 2018, 2017, 2014

 AsiaLaw Asia-Pacific Guide 2020: Tier 1 (Outstanding) for TMT, Labour & Employment, Private
Equity, Regulatory and Tax

 FT Innovative Lawyers Asia Pacific 2019 Awards: NDA ranked 2nd in the Most Innovative Law
Firm category (Asia-Pacific Headquartered)

 RSG-Financial Times: India’s Most Innovative Law Firm 2019, 2017, 2016, 2015, 2014
 Benchmark Litigation Asia-Pacific: Tier 1 for Government & Regulatory and Tax 2019, 2018
 Who’s Who Legal 2019:
Nishith Desai, Corporate Tax and Private Funds – Thought Leader
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Vaibhav Parikh, Data Practices - Thought Leader (India)
Dr. Milind Antani, Pharma & Healthcare – only Indian Lawyer to be recognized for
‘Life sciences-Regulatory,’ for 5 years consecutively

 Merger Market 2018: Fastest growing M&A Law Firm in India

 Asia Mena Counsel’s In-House Community Firms Survey 2018: The only Indian Firm recognized
for Life Sciences

 IDEX Legal Awards 2015: Nishith Desai Associates won the “M&A Deal of the year”, “Best Dispute
Management lawyer”, “Best Use of Innovation and Technology in a law firm” and “Best Dispute
Management Firm”
 Mergers and Acquisitions

Contents
1. INTRODUCTION 01

I. Overview of the M&A Market 01

II. Conceptual Overview 01

2. MERGERS AND ACQUISITIONS: KEY CORPORATE AND

SECURITIES LAWS CONSIDERATIONS 04

I. Company Law 04
II. Securities Laws 05

3. ACQUISITIONS: KEY CORPORATE AND SECURITIES LAWS

CONSIDERATIONS 07

I. Company Law 07
II. Other Securities Laws 10

4. COMPETITION LAW 18

I. Anti-Competitive Agreements 18
II. Abuse of Dominant Position 18
III. Regulation of Combinations 18

4. EXCHANGE CONTROL 22

I. Foreign Direct Investment 22

II. Indirect Foreign Investment; Downstream investment 29
III. Transfer of equity instruments of an Indian company by or
to a person resident outside India 29
IV. Overseas Direct Investment 31

5. TAXES AND DUTIES 35

I. Income Tax Act, 1961 35

II. Goods and Services Tax 43
III. Stamp Duty 43

6. CONCLUSION 45
 Mergers and Acquisitions

1. Introduction
of this pandemic including the privatization
I. Overview of the M&A of Air India and Bharat Petroleum Corporation
Market Limited. Once the world is able to curtail
the spread of the virus and lift the lockdown
With a few highs and lows, the merger and across the globe, countries will look up to their
acquisition (“M&A”) activity in India during governments to propose measures to revive the
the period from 2015-2019 has been largely economy and help revive M&A activity.
resilient. During this period, India has witnessed
more than 3,600 M&A deals with an aggregate
value of more than USD 310 billion.1
II. Conceptual Overview
Sectors such as industrial goods, energy, telecom In this section, we have briefly explained the
& media represented more than 60% of deals different types of M&As that may be undertaken
by volume and value.2 A few of the largest deals and an overview of certain laws that would be of
include Walmart’s USD 16 billion acquisition of significance to M&A in India.
Flipkart (2018), the USD 13 billion acquisition
of Essar Oil by a Rosneft-led Russian consortium
A. Mergers and Amalgamations
(2017), and Adani Transmission’s USD 3 billion
acquisition of Reliance Infrastructure’s integrated The term ‘merger’ is not defined under the
Mumbai power distribution business (2018).3 Companies Act, 2013 (“CA 2013”) or under
Income Tax Act, 1961 (“ITA”). As a concept,
The second term of the Modi government brought
‘merger’ is a combination of two or more entities
back tremendous faith in investor community in
into one; the desired effect being not just the
India. The government’s reform agenda and the
accumulation of assets and liabilities of the
policies were largely formulated to encourage
distinct entities, but organization of such entity
foreign investments. There was also a surge
into one business. The possible objectives of
in M&A activity due to the new bankruptcy
mergers are manifold - economies of scale,
law, the faster pace of approvals initiated by the
acquisition of technologies, access to varied
government as part of its ease of doing business
sectors / markets etc. Generally, in a merger, the
in India campaign and the relaxation in Foreign
merging entities would cease to exist and would
Direct Investment (“FDI”) norms.
merge into a single surviving entity.
However, India started seeing a slump in deal
The ITA does however define the analogous
making in the third and fourth quarters of
term ‘amalgamation’ as the merger of one or
2019. Inter alia the US-China trade war, Brexit,
more companies with another company, or the
the situation in Hong Kong, the drone strike
merger of two or more companies to form one
on Saudi Arabia’s oil facilities had indicated a
company. The ITA goes on to specify certain
dawning recession.
other conditions that must be satisfied for
In addition, the COVID-19 outbreak which an ‘amalgamation’ to be eligible for benefits
disrupted the world in 2020 has not left the accruing from beneficial tax treatment
Indian economy untouched. Several M&A deals (discussed in Part VI of this Paper).
in the country have been stalled in the wake
Sections 230-234 of CA 2013 (the “Merger
Provisions”) deal with the schemes of
arrangement or compromise between a
1. [Link]
port_india_m_a_report_2019.pdf
company, its shareholders and/or its creditors.
2. Ibid.
These provisions are discussed in greater detail
3. Ibid.
in Part II of this Paper. Commercially, mergers

1
and amalgamations may be of several types, iv. Conglomerate Mergers
depending on the requirements of the merging
A conglomerate merger is a merger between two
entities. Although corporate laws may be
entities in unrelated industries. The principal
indifferent to the different commercial forms
reason for a conglomerate merger is utilization of
of merger/amalgamation, the Competition Act,
financial resources, enlargement of debt capacity,
2002 does pay special attention to the forms.
and increase in the value of outstanding shares
by increased leverage and earnings per share, and
i. Horizontal Mergers by lowering the average cost of capital.4 A merger
with an unrrelated business also helps the
Also referred to as a ‘horizontal integration’, this
company to foray into diverse businesses without
kind of merger takes place between entities
having to incur large start-up costs normally
engaged in competing businesses which are
associated with a new business.
at the same stage of the industrial process. A
horizontal merger takes a company a step
closer towards monopoly by eliminating a v. Cash Merger
competitor and establishing a stronger presence
In a ‘cash merger’, also known as a ‘cash-out
in the market. The other benefits of this form of
merger’, the shareholders of one entity receives
merger are the advantages of economies of scale
cash instead of shares in the merged entity.
and economies of scope. These forms of merger
This is effectively an exit for the cashed-out
are heavily scrutinized by the Competition
shareholders.
Commission of India (“CCI”).

ii. Vertical Mergers vi. Triangular Merger

A triangular merger is often resorted to, for
Vertical mergers refer to the combination of
regulatory and tax reasons. As the name
two entities at different stages of the industrial
suggests, it is a tripartite arrangement in which
or production process. For example, the merger
the target merges with a subsidiary of the
of a company engaged in construction business
acquirer. Based on which entity is the survivor
with a company engaged in production of
after such merger, a triangular merger may
brick or steel would lead to vertical integration.
be forward (when the target merges into the
Companies stand to gain on account of
subsidiary and the subsidiary survives), or
lower transaction costs and synchronization
reverse (when the subsidiary merges into the
of demand and supply. Moreover, vertical
target and the target survives).
integration helps a company move towards
greater independence and self-sufficiency.
B. Acquisitions
iii. Congeneric Mergers An ‘acquisition’ or ‘takeover’ is the purchase by
one person, of controlling interest in the share
A congeneric merger is a type of merger where
capital or of all or substantially all of the assets
two companies are in the same or related
and/or liabilities, of the target. A takeover may
industries or markets but do not offer the
be friendly or hostile and may be structured
same products. In a congeneric merger, the
either by way of agreement between the offer
companies may share similar distribution
or and the majority shareholders or purchase of
channels, providing synergies for the merger.
shares from the open market or by making an
The acquiring company and the target company
offer for acquisition of the target’s shares to the
may have overlapping technology or production
entire body of shareholders.
systems, making for easy integration of the two
entities. This type of merger is often resorted to
by entities who intend to increase their market
shares or expand their product lines. 4. Ibid, note 4, at p. 59

2
 Mergers and Acquisitions

Acquisitions may also be made by way of facilitating the restructuring or sale of the sick
acquisition of shares of the target, or acquisition business, without affecting the assets of the
of assets and liabilities of the target. In the latter healthy business unit(s). Conversely, a demerger
case, entire business of the target may be acquired may also be undertaken for moving a lucrative
on a going concern basis or certain assets and business into a separate entity. A demerger may
liabilities may be cherry picked and purchased be completed through a court process under the
by the acquirer. The transfer when a business is Merger Provisions or contractually by way of a
acquired on a going concern basis is referred to business transfer agreement.
as a ‘slump sale’ under the ITA. Section 2(42C) of
the ITA defines slump sale as a “transfer of one
C. Joint Ventures
or more undertakings as a result of the sale for a
lump sum consideration without values being A joint venture is the coming together of two or
assigned to the individual assets and liabilities more businesses for a specific purpose, which
in such sales”. The legal and tax considerations may or may not be for a limited duration. The
of slump sale vis a vis an asset sale is discussed in purpose of the joint venture may be an entry
greater detail in Part VI of this Paper. into a new business, or an entry into a new
market (which requires specific skills, expertise
Another form of acquisition may be by way
or the investment by each of the joint venture
of demerger. A demerger is the opposite of a
parties). Parties can either set up a new company
merger, involving the splitting up of one entity
or use an existing entity, through which the
into two or more entities. An entity which has
proposed business will be conducted.
more than one business, may decide to ‘hive
off’ or ‘spin off’ one of its businesses into a new The parties typically enter into an agreement to
entity. The shareholders of the original entity set out the rights and obligations of each joint
would generally receive shares of the new entity. venture party and the broad framework for the
management of the company, and such terms
In some cases, if one of the business units of a
are then incorporated in the byelaws of the
company is financially sick and the other business
company for strengthening the enforceability.
unit(s) is financially sound, the sick business units
may be demerged from the company, thereby

3
2. Mergers and Amalgamations: Key Corporate
and Securities Laws Considerations
approve and sanction such reduction in share
I. Company Law capital and companies will not be required to
follow a separate process for reduction of share
The Merger Provisions govern schemes
capital as stipulated under the CA 2013.
of arrangements between a company, its
shareholders and creditors. The Merger Provisions
are in fact worded so widely that they provide for B. Fast track merger
and regulate all kinds of corporate restructuring
The Fast Track merger covered under
that a company can possibly undertake, such as
section 233 of CA 2013 requires approval
mergers, amalgamations, demergers, spin-off/
from shareholders, creditors, the Registrar of
hive off, and every other compromise, settlement,
Companies, the Official Liquidator and the
agreement or arrangement between a company
Regional Director. Under the fast track merger,
and its members and/or its creditors.
scheme of merger shall be entered into between
the following companies:
A. Procedure under the Merger
i. two or more small companies (private
Provisions companies having paid-up capital of less
than INR 100 million and turnover of less
Since a merger essentially involves an
than INR 1 billion per last audited financial
arrangement between companies, those
statements); or
companies which intend to merge must make
an application to the National Company Law ii. a holding company with its wholly owned
Tribunal (“NCLT”) having jurisdiction over subsidiary; or
such company for (i) convening meetings of
iii. such other class of companies as may be
its respective shareholders and/or creditors;
prescribed.
(ii) or seeking dispensation of such meetings
basis the consents received in writing from the The scheme, after incorporating any suggestions
shareholders and creditors. Basis the NCLT order, made by the Registrar of Companies and
either a meeting is convened or dispensed with. the Official Liquidator, must be approved by
If the majority in number, representing 3/4th shareholders holding at least 90% of the total
in value of the creditors or shareholders present number of shares, and creditors representing
and voting at such meeting (if the meeting 9/10th in value, before it is presented to the
is held) agree to the merger, then the merger, Regional Director and the Official Liquidator
if sanctioned by the NCLT, is binding on all for approval. Thereafter, if the Regional
creditors and shareholders of the company. The Director/ Official Liquidator has any objections,
Merger Provisions constitute a comprehensive they should convey the same to the central
code in themselves, and under these provisions, government. The central government upon
the NCLT has full power to sanction any receipt of comments can either direct NCLT to
alterations in the corporate structure take up the scheme under Section 232 (general
of a company. For example, in ordinary process) or pass the final order confirming the
circumstances a company must seek the scheme under the Fast Track process.
approval of the NCLT for effecting a reduction of
its share capital. However, if a reduction of share
C. Cross Border Mergers
capital forms part of the corporate restructuring
proposed by the company under the Merger Section 234 of the CA 2013 permits mergers
Provisions, then the NCLT has the power to between Indian and foreign companies with

4
 Mergers and Acquisitions

prior approval of the Reserve Bank of India Further, if the acquirer already holds 25% or
(“RBI”). A foreign company means any company more but less than 75% of the target company
or body corporate incorporated outside India, and acquires at least 5% shares or voting rights
whether having a place of business in India or in the target company within a financial
not. The following conditions must be fulfilled year, it shall be obligated to make an open
for a cross border merger: offer. However, this obligation is subject to the
exemptions provided under the Takeover Code.
i. The foreign company should be
Exemptions from open offer requirement under
incorporated in a permitted jurisdiction
the Takeover Code include inter alia acquisition
which meets certain conditions.
pursuant to a scheme of arrangement approved
ii. The transferee company is to ensure that the by the NCLT. Further, SEBI has the power
valuation is done by a recognized professional to grant exemption or relaxation from the
body in its jurisdiction and is in accordance requirements of the open offer under the
with internationally accepted principles of Takeover Code in the interest of investors
accounting and valuation. and the securities market. Such relaxations or
exemptions can be sought by the acquirer by
iii. The procedure prescribed under CA 2013 for
making an application to SEBI.
undertaking mergers must be followed.
The RBI also issued the Foreign Exchange
B. Listing regulations
Management (Cross Border Merger) Regulations,
2018 (“Merger Regulations”) on March The SEBI (Listing Obligations and Disclosure
20, 2018 which provide that any transaction Requirements) Regulations, 2015 (“Listing
undertaken in relation to a cross-border merger Regulations”) provides for a comprehensive
in accordance with the FEMA Regulations shall framework governing various types of listed
be deemed to have been approved by the RBI. securities. Under the Listing Regulations, SEBI
has laid down conditions to be followed by a
listed company while making an application
II. Securities Laws before the NCLT, for approval of a schemes of
merger/amalgamation/reconstruction. Certain
A. Takeover Code key provisions under the Listing Regulations
applicable in case of a scheme involving a listed
The Securities and Exchange Board of India (the
company are as follows:
“SEBI”) is the nodal authority regulating entities
that are listed or to be listed on stock exchanges  Filing of scheme with stock exchanges: Any
in India. The SEBI (Substantial Acquisition of listed company undertaking or involved in
Shares and Takeovers) Regulations, 2011 (the a scheme of arrangement, must file the draft
“Takeover Code”) restricts and regulates the scheme with the relevant stock exchanges,
acquisition of shares, voting rights and control prior to filing them with the NCLT (as per the
in listed companies. Acquisition of shares or process laid down under CA 2013), to seek an
voting rights of a listed company, entitling the observation letter or no-objection letter from
acquirer to exercise 25% or more of the voting the relevant stock exchanges.6
rights in the target company or acquisition of
 Compliance with securities law: The listed
control, obligates the acquirer to make an offer
companies shall ensure that the scheme
to the remaining shareholders of the target does not violate, limit or override any of the
company. The offer must be to further acquire at provisions of the applicable securities law or
least 26% of the voting capital of the company.5 requirements of the stock exchanges. 7

6. Regulation 37(1) of Listing Regulations.

5. Regulation 3 read with Regulation 7 of the Takeover Code. 7. Regulation 11 of the Listing Regulations.

5
 Change in shareholding pattern: The listed  Corporate actions pursuant to merger: The
companies are required to file the pre and listed company needs to disclose to the stock
post arrangement shareholding pattern and exchanges all information having a bearing
the capital structure with the stock exchanges on the performance/operation of the listed
as per requirements of the listing authority entity and/or price sensitive information. 9
or stock exchanges of the home country in
which the securities are listed.8

8. Regulation 69(2) of Listing Regulations. 9. Regulation 51 of Listing Regulations.

6
 Mergers and Acquisitions

3. Acquisitions: Key Corporate and Securities

Laws Considerations
I. Company Law more of the shares of a company by virtue of
an amalgamation, share exchange, conversion
of securities or for any other reason, then such
A. Acquisition of Shares10
person(s) shall besides notifying the company
Acquisitions may be via acquisition of existing of their intention to buy the remaining equity
shares of the target, or by subscription to new shares of the company, have a right to make
shares issued by the target. an offer to buy out the minority shareholders
at a price determined by a registered valuer,
which shall be determined based on the fair
i. Transferability of shares value of shares of the company after taking
Broadly speaking, an Indian company can be set into account valuation parameters including
up as a private company or as a public company. return on net worth, book value of shares,
A restriction on transferability of shares is earning per share, price earning multiple
inherent to a private company, such restrictions vis-a-vis the industry average, and such other
are contained in its articles of association (the parameters as are customary for valuation of
byelaws of the company) and are usually in the shares of such companies.12
form of a pre-emptive right in favor of the other
b. Section 230 of CA 2013
shareholders. With the introduction of CA 2013,
although shares of a public company are freely Section 230 read with Rule 3 of the
transferable, share transfer restrictions for even Companies (Compromises, Arrangements
public companies’s shares have been granted and Amalgamations) Rules, 2016 made
statutory sanction.11 The articles of association effective from February 7, 2020, permits the
may prescribe certain procedures for transfer of shareholders of unlisted companies holding
shares that must be adhered to in order to effect at least 75% of the securities (including
a transfer of shares. It is therefore advisable for depository receipts) with voting rights to
the acquirer of shares of a private company to make an offer for acquisition of any part
ensure that the non-selling shareholders (if of the remaining shares in such company,
any) waive their rights of pre-emption and any pursuant to an application of compromise or
other preferential rights that they may have arrangement to be filed before the NCLT. Once
under the articles of association. Any transfer of NCLT approves such offer for acquisition, the
shares, whether of a private company or a public minority shareholders would mandatorily be
company, must comply with the procedure for required to sell their shares to the acquiring
transfer specified under its articles of association. shareholder. This method of squeeze-out is
only available to unlisted companies and listed
companies will be subject to the regulations
ii. Squeeze Out Provisions prescribed by SEBI in this regard.
a. Section 236 of CA 2013
c. Scheme of capital reduction
Section 236 of CA 2013, provides that, if a
Section 66 of the CA 2013 permits a company
person or group of persons acquire 90% or
to reduce its share capital and prescribes the
procedure to be followed for the same. The
10. Specific considerations when shares of an Indian company
are acquired by a non-Indian acquirer is briefly addressed in
our section on Exchange Control in Chapter V
11. Public company can refuse registration of share transfers 12. Rule 27 of the Companies (Compromises, Arrangements and
pursuant to section 58(4) of the CA 2013 for a ‘sufficient cause’ Amalgamations) Rules, 2016

7
 scheme of capital reduction under section 66  The issuance must be authorized by the
of the CA 2013 must be approved by, (i) the articles of association of the company 15
shareholders of the company vide a special and approved by a special resolution
resolution; and (ii) by the NCLT by an order passed by shareholders in a general
confirming the reduction. When the company meeting, 16 authorizing the board of
applies to the NCLT for its approval, the directors of the company to issue the
creditors of the company would be entitled shares.17 A special resolution is one that is
to object to the scheme of capital reduction. passed by at least 3/4th of the shareholders
The NCLT will approve the reduction only present and voting at a meeting of the
if the debt owed to the objecting creditors shareholders. If shares are not issued
is safeguarded/provided for. In addition, within 12 months from date of passing
the NCLT is also required to give notice of of such special resolution, the resolution
application of reduction of capital to the will lapse and a fresh resolution will be
Central Government and SEBI (in case of required for the issuance. 18
a listed company) who will have a period
 The explanatory statement to the notice
of 3 (three) months to file any objections.
for the general meeting should contain
Companies will have to mandatorily publish
key disclosures pertaining to the object of
the NCLT order sanctioning the scheme
the issue, pricing of shares including the
of capital reduction. The framework for
relevant date for calculation of the price,
reduction of capital under section 66 (and the
shareholding pattern, change of control, if
erstwhile Section 100 under CA 1956) has been
any, pre-issue and post-issue shareholding
used by companies to provide exit to certain
pattern of the company, whether the
shareholders, as opposed to all shareholders
promoters/directors/key management
on a proportionate basis. The courts have
persons propose to acquire shares as part of
held that reduction of share capital need not
such issuance, etc. 19
necessarily be amongst all the shareholders of
the company.13  Shares must be allotted within a period of 60
days of receipt of application money, failing
d. New share issuance which the money must be returned within
Section 42 and 62 of CA 2013 read with a period of 15 days thereafter. Interest is
Rule 13 of the Companies (Share Capital payable @ 12%p.a. from the 60th day.20
and Debenture) Rules 2014 and Rule 14
 These requirements apply to equity
of Companies (Prospectus and Allotment shares, fully convertible debentures,
of Securities) Rules, 2014 prescribe the partly convertible debentures or any
requirements for any new issuance of shares other financial instrument convertible
on a preferential basis (i.e. any issuance that into equity.21
is not a rights or bonus issue to existing
shareholders) by an unlisted company. Some
of the important requirements under these
15. Rule 13(2)(a) of the Companies (Share Capital and
provisions are described below: Debenture) Rules 2014
16. Rule 13(2)(b) of the Companies (Share Capital and
 The company must engage a registered Debenture) Rules 2014
valuer to arrive at a fair market value of the
17. Rule 13(1) of the Companies (Share Capital and Debenture)
shares proposed to be issued.14 Rules 2014
18. Rule 13(2)(f) of the Companies (Share Capital and Debenture)
Rules 2014
19. Rule 13(2)(d) of the Companies (Share Capital and
Debenture) Rules 2014
13. Sandvik Asia Limited vs. Bharat Kumar Padamsi and Ors
[2009]92SCL272(Bom); Elpro International Limited (2009 4 20. Section 42(6) of CA 2013
Comp LJ 406 (Bom)) 21. Rule 13(1) of the Companies (Share Capital and Debenture)
14. Section 62(1) (c) of CA 2013 Rules

8
 Mergers and Acquisitions

e. Issue of shares with differential voting rights22 shares beyond such limits, if it is authorized
by its shareholders vide a special resolution
The CA 2013 also allows for issuance of
passed in a general meeting. These limits
equity shares with differential voting rights
are not applicable in case of purchase of
as to dividend, voting or otherwise, provided
securities of a wholly owned subsidiary.
that the company complies with the rules
prescribed in this regard,23 which require that: g. Asset/ Business Purchase

 The articles of association of the company Besides share acquisition, the acquirer
authorizes issue of shares with differential may also decide to acquire the business
voting rights; of the target which could typically entail
acquisitions of all or specific assets and
 The issue of shares is authorized by an
ordinary resolution passed at a general liabilities of the business for a pre-determined
meeting of the shareholders; consideration. Therefore, depending upon
the commercial objective and considerations,
 The voting power in respect of the shares an acquirer may opt for (i) an asset purchase,
with differential rights shall not exceed whereby one company purchases all of part of
74% of the total voting power including the assets of the other company; or (ii) a slump
voting power in respect of equity shares sale, whereby one company acquires the
with differential rights issued at any point ‘business undertaking’ of the other company
in time; on a going concern basis i.e. acquiring all
 The company shall not have defaulted assets and liabilities of such business.
in filing financial statements and Under CA 2013, the sale, lease or other
annual returns for 3 financials years disposition of the whole or substantially
immediately preceding the financial year the whole of any undertaking of a company
in which it has decided to issue shares (other than a private company24) requires
with differential voting rights. Private
the approval of the shareholders through a
companies may be exempt from these
special resolution. 25 The term “undertaking”
requirements if their memorandum and
means an undertaking in which the
articles of association so provide.
investment of the company exceeds 20%
f. Limits on acquirer of its net worth as per the audited balance
sheet of the preceding financial year, or
Section 186 of the CA 2013 provides for
an undertaking which generated 20% of
certain limits on inter-corporate loans
the total income of the company during
and investments. An acquirer that is an
the previous financial year. Further this
Indian company might acquire by way of requirement applies if 20% or more of the
subscription, purchase or otherwise, the
undertaking referred to above is sought to be
securities of any other body corporate up to
sold, leased or disposed of.
(i) 60% of the acquirer’s paid up share capital
and free reserves and securities premium, or An important consideration for these options
(ii) 100% of its free reserves and securities is the statutory costs involved i.e. stamp duty,
premium account, whichever is higher. tax implications etc. We have delved into this
However, the acquirer is permitted to acquire in brief in our chapter on ‘Taxes and Duties’.

22. Section 43 of CA 2013 24. Private companies are exempted from this provision with
effect from June 2015
23. Rule 4 of the Companies (Share Capital and Debenture) Rules,
2014 25. Section 180 of CA 2013

9
II. Other Securities Laws or value of price per share arrived under the
scheme pursuant to which the equity shares of
the issuer were listed; or (b) the average of the
A. Securities and Exchange Board
weekly high and low of the volume weighted
of India (Issue of Capital and average prices of the stock of the company
Disclosure Requirements) during the period the stock has been listed prior
Regulations, 2018 (“ICDR to the relevant date; or (c) the average of the
Regulations”) weekly high and low of the volume weighted
average prices of the related equity shares
quoted on a recognized stock exchange during
If the acquisition of an Indian listed company
the two weeks preceding the relevant date. 28
involves the issue of new equity shares or
securities convertible into equity shares
(“Specified Securities”) by the target (issuer) ii. Lock-in
to the acquirer, the provisions of Chapter V
Securities issued to the acquirer (who is not a
(“Preferential Issue Regulations”) contained
promoter of the target) are locked-in for a period
in ICDR Regulations will apply (in addition
of 1 year from the date of trading approval.
to company law requirements mentioned
The date of trading approval is the latest date
above). We have highlighted below some of
when approval for trading is granted by all
the important provisions of the Preferential
stock exchanges on which the securities of
Allotment Regulations.
the company are listed. Further, if the acquirer
holds any equity shares of the target prior to
i. Pricing of the Issue such preferential allotment, then such prior
holding will be locked-in for a period of 6
The Preferential Allotment Regulations set a
months from the date of the trading approval. If
floor price for an issuance. If the equity shares of
securities are allotted on a preferential basis to
the issuer have been listed on a recognized stock
promoters/ promoter group,29 they are locked-in
exchange for a period of 26 weeks or more as on
for a period of 3 years from the date of trading
the relevant date, 26 the floor price of the shares
approval, subject to a limit of 20% of the total
shall be higher of the average of the weekly high
capital of the company.30
and low of the volume weighted average prices
of the stock of the company either (a) over a 26 The locked-in securities may be transferred
week period; or, (b) a 2 week period preceding amongst promoter/ promoter group or any
the relevant date. 27 If the equity shares of the person in control of the company, subject to the
issuer have been listed on a recognized stock transferee being subject to the remaining period
exchange for a period of less than 26 weeks as of the lock-in.31
on the relevant date, the floor price of the shares
shall be higher of (a) the price at which the
equity shares were issued via initial public offer

28. Regulation 164(2) of ICDR Regulation.

29. The terms ‘promoter’ and ‘promoter group’ are defined in
26. relevant date’ in case of (a) preferential issue of equity
great detail by the ICDR Regulations. Generally speaking,
shares shall be 30 (thirty) days prior to the date on which
promoters would be the persons in over-all control of the
the shareholders meeting is held to consider the proposed
company or who are named as promoters in the prospectus
preferential issue (in case of a preferential issue pursuant to
of the company. The term promoter group has an even
a resolution plan under Insolvency and Bankruptcy Code,
wider con- notation and would include immediate relatives
2016 or any resolution of stressed assets framework specified
of the promoter. If the promoter is a company, it would
by RBI, the relevant date shall be the date of approval of the
include, a subsidiary or holding company of that company,
resolution plan or the corporate debt restructuring package);
any company in which the promoter holds 10% or more of
and, (b) in case of a preferential issue of convertible securities,
the equity capital or which holds 10% or more of the equity
either the relevant date referred in (a) or a date 30 (thirty)
capital of the promoter, etc.
days prior to the date on which the holders of convertible
securities become entitled to apply for equity shares. 30. Regulation 167 of the ICDR Regulation.
27. Regulation 164(1) of ICDR Regulation. 31. Regulation 168 of the ICDR Regulation.

10 © Nishith Desai Associates 2020

 Mergers and Acquisitions

iii. Exemption to court approved i. Mandatory offer

merger Under the Takeover Code, an acquirer is
mandatorily required to make an offer to
The Preferential Issue Regulations shall not
acquire shares from the other shareholders in
apply in case a preferential allotment of shares
order to provide an exit opportunity to them
is made pursuant to a scheme of arrangement
prior to consummating the acquisition, if the
approved by the NCLT under the Merger
acquisition fulfils the conditions as set out in
Provisions discussed above.32
Regulations 3, 4 and 5 of the Takeover Code.
Under the Takeover Code, the obligation to
B. Securities and Exchange make a mandatory open offer by the acquirer36
Board of India (Substantial is triggered in the following events:
Acquisition of Shares and a. Initial trigger
Takeovers) Regulations, 2011 If the acquisition of shares or voting rights in
(the “Takeover Code”) a target company entitles the acquirer along
with the persons acting in concert (“PAC”) to
If an acquisition is contemplated by way of issue
exercise 25% or more of the voting rights in the
of new shares, or the acquisition of existing
target company.
shares or voting rights, of a listed company, to
or by an acquirer, the provisions of the Takeover b. Creeping Acquisition
Code are applicable. The Takeover Code
If the acquirer already holds 25% or more and
regulates both direct and indirect acquisitions of
less than 75% of the shares or voting rights in
shares33 or voting rights in, and control34 over
the target, then any acquisition of additional
a target company. 35 The key objectives of the
shares or voting rights that entitles the acquirer
Takeover Code are to provide the shareholders
along with PAC to exercise more than 5% of the
of a listed company with adequate information
voting rights in the target in any financial year.
about an impending change in control of the
company or substantial acquisition by an It is important to note that the 5% limit is
acquirer and provide them with an exit option calculated on a gross basis i.e. aggregating
(albeit a limited one) in case they do not wish to all purchases and without factoring in any
retain their shareholding in the company. reduction in shareholding or voting rights
during that year or dilutions of holding on
account of fresh issuances by the target
company. If an acquirer acquires shares along
32. Regulation 158 of the ICDR Regulation.
with other subscribers in a new issuance by the
33. The term ‘shares’ means shares in the equity share capital
company, then the acquisition by the acquirer
of a target company carrying voting rights and includes any will be the difference between its shareholding
security which would entitles the holder thereof to exercise
voting rights. The term also includes all depository receipts
pre and post such new issuance.
carrying an entitlement to exercise voting rights in the
target company. Therefore acquisition of depository receipts It should be noted that an acquirer (along
entitling the acquirer to exercise voting rights in the target with PAC) is not permitted to make a creeping
company may trigger the open offer obligation
acquisition beyond the statutory limit of non-
34. The term ‘control’ includes the right to appoint the
majority of the directors or to control the management or
public shareholding in a listed company i.e. 75%.37
policy decisions exercisable by a person or persons acting
individually or in concert, directly or indirectly, including
by the virtue of their shareholding or management rights 36. See Annexure 2 for the meaning of persons acting in concert.
or shareholders agreements or voting agreements or in any
37. Maximum permissible non-public shareholding is derived
other manner.
based on the minimum public shareholding requirement
35. A ‘Target Company’ has been defined as a company and under the Securities Contracts (Regulations) Rules 1957
includes a body corporate or corporation established (“SCRR”). Rule 19A of SCRR requires all listed companies
by a Central Legislation, State Legislation or Provincial (other than public sector companies) to maintain public
Legislation for the time being in force, whose shares are listed share- holding of at least 25% of share capital of the company.
on a stock exchange. Thus, by deduction, the maximum number of shares which

11
c. Acquisition of ‘Control’ plans to introduce new guidelines to define
‘bright lines’ to provide more clarity as regards
If the acquirer acquires control over the target
‘change in control’ in cases of mergers and
Regardless of the level of shareholding, acquisitions by issuing a discussion paper.40
acquisition of ‘control’ of a target company is However, SEBI finally decided not to go ahead
not permitted, without complying with the with the bright line test for determination of
mandatory offer obligation under the Takeover acquisition of ‘control’ and concluded that it
Code. What constitutes ‘control’ is most often needs to be determined on case-to-case basis.41
a subjective test and is determined on a case-to-
case basis. For the purpose of the Takeover Code,
‘control’ has been defined to include:
i. Indirect Acquisition of Shares or
Voting Rights
 Right to appoint majority of the directors;
For an indirect acquisition obligation to be
 Right to control the management or policy
decisions exercisable by a person or PAC, triggered under the Takeover Code, the acquirer
directly or indirectly, including by virtue must, pursuant to such indirect acquisition be
of their shareholding or management able to direct the exercise of such percentage of
rights or shareholders agreements or voting voting rights or control over the target company,
agreements or in any other manner. as would otherwise attract the mandatory open
offer obligations under the Takeover Code. This
Over time, the definition of ‘control’ has been provision was included to prevent situations
subject to different assessments and has turned where transactions could be structured in a
out to be, quite evidently, a grey area under manner that would side-step the obligations
the Takeover Code. The Supreme Court order under Takeover Code. Further, if:
in case of SEBI vs. Subhkam Ventures Private
Limited38 - which accepted an out-of-court  the proportionate net asset value of the target
settlement between the parties - left open company as a percentage of the consolidated
the legal question as to whether negative net asset value of the entity or business being
acquired; or
control would amount to ‘control’ under the
Takeover Code. In fact, the Supreme Court  the proportionate sales turnover of the target
had ruled that SAT ruling in this case (against company as a percentage of the consolidated
which SEBI had appealed before the Supreme sales turnover of the entity or business being
Court) which ruled that ‘negative control’ acquired; or
would not amount to ‘control’ for the purpose
 the proportionate market capitalisation of
of Takeover Code, should not be treated as
the target company as a percentage of the
precedent. With no clear jurisprudence on
enterprise value for the entity or business
the subject-matter, each veto right would
being acquired; is in excess of 80%, on the
typically be reviewed from the commercial
basis of the most recent audited annual
parameters underlying such right and its
financial statements, then an indirect
impact on the general management and policy
acquisition would be regarded as a direct
decisions of the target company. SEBI, in light
acquisition under the Takeover Code for the
of Jet-Etihad transaction,39 had indicated its
purposes of the timing of the offer, pricing of
the offer etc.
can be held by promoters i.e. Maximum permissible non-
public shareholding) in a listed companies (other than public
sector companies) is 75% of the share capital
40. n Paper on “Brightline Tests for Acquisition of ‘Control’ under
38. SAT Appeal No. 8 of 2009, Date of decision: January 15, 2010 SEBI Takeover Regulations” available at https://
39. [Link] [Link]/sebi_data/attachdocs/[Link]
research-and-articles/nda-hotline/nda-hotline-single- 41. [Link]
view/article/[Link]?no_ sebi-scarps-bright-line-control-test-proposal-117090801010_1.
cache=1&cHash=fa0e90046247a7f4ea1dad57cba60bad html

12
 Mergers and Acquisitions

Voluntary open offer iii. Pricing of Offer

An acquirer who holds between 25% and 75% Regulation 8 of the Takeover Code sets out the
of the shareholding/ voting rights in a company parameters to determine offer price to be paid to
is permitted to voluntarily make a public the public shareholders, which is the same for
announcement of an open offer for acquiring a mandatory open offer as well as a voluntary
additional shares of the company subject to open offer. There are certain additional
their aggregate shareholding after completion parameters prescribed for determining the
of the open offer not exceeding 75%.42 In case offer price when the open offer is made
of a voluntary offer, the offer must be for at least pursuant to an indirect acquisition. Please see
10% of the voting rights in the target company, Annexure 2 for the parameters as prescribed
but the acquisition should not result in a breach under Regulation 8 of the Takeover Code. It
of the maximum non-public shareholding limit is important to note that an acquirer cannot
of 75%. As per SEBI’s Takeover Code Frequently reduce the offer price but an upward revision
Asked Questions, any person holding less than of offer price is permitted, subject to certain
25% shareholding/voting rights can also make conditions.
a voluntary open offer for acquiring additional
shares. Any person who has been declared as
a willful defaulter or is a fugitive economic
iv. Competitive Bid/Revision of
offender cannot make an open offer or enter into offer/bid
any transaction that would attract obligations to
The Takeover Code also permits a person other
make a public announcement of open offer. 43
than the acquirer (the first bidder) to make a
competitive bid, by a public announcement, for
ii. Minimum Offer Size the shares of the target company. This bid must
be made within 15 (fifteen) working days from
a. Mandatory Offer44
the date of the detailed public announcement
Open offer for acquiring shares must be for at of the first bidder. The competitive bid must
least 26% of the shares of the target company. be for at least the number of shares held or
It is also possible for the acquirer to provide agreed to be acquired by the first bidder (along
that the offer to acquire shares is subject to a with PAC), plus the number of shares that the
minimum level of acceptance.45 first bidder has bid for. Each bidder (whether
a competitive bid is made or not) is permitted
b. Voluntary Open Offer46
to revise his bid, provided such revised terms
In case of a voluntary open offer by an acquirer are more favourable to the shareholders of
holding 25% or more of the shares/voting rights, the target company. 47 The revision can be
the offer must be for at least 10% of the voting made up to 3 (three) working days prior to the
rights in the target company. While there is no commencement of the tendering period.
maximum limit, the shareholding of the acquirer
post acquisition should not exceed 75%. In
v. Take private mechanism
case of a voluntary offer made by a shareholder
holding less than 25% of shares or voting rights The SEBI (Delisting of Equity Shares)
of the target company, the minimum offer size is Regulations, 2009 (“SEBI Delisting
26% of the total shares of the company. Regulations”) prescribe the method and
conditions for delisting of a company. The
SEBI Delisting Regulations allow an acquirer
42. Regulation 6(1) of Takeover Code. in addition to the promoter of the company to
43. Regulation 6A and 6B of Takeover Code. initiate delisting of such company. Pursuant to
44. Regulation 7 (1) of Takeover Code.
45. Regulation 19 of Takeover Code.
46. Regulation 7 (2) of Takeover Code. 47. Regulation 20 of Takeover Code.

13
Regulation 5A of the Takeover Code, an acquirer D. SEBI (Prohibition of Insider
may delist the company pursuant to an open Trading) Regulations, 2015
offer in accordance with the SEBI Delisting
(“PIT Regulations”)
Regulations provided that the acquirer declares
upfront his intention to delist. Prior to the The PIT Regulations prohibit the following in
inclusion of Regulation 5A, an open offer under case of a listed company (or a company that is
the Takeover Regulations could not be clubbed proposed to be listed):
with a delisting offer, making it burdensome for
i. an insider from communicating
acquirers to delist the company in the future.
unpublished price sensitive information
The Takeover Code provided for a 1 year cooling (“UPSI”);
off period between the completion of an open
ii. any person from procuring UPSI from an
offer under the Takeover Code and a delisting
insider; and,
offer in situations where on account of the
open offer the shareholding of the promoters iii. an insider from trading in securities49 when
exceeded the maximum permissible non-public in possession of UPSI.
shareholding of 75%.48 This restriction is not
Therefore, the PIT prohibit the dissemination as
affected by Clause 5A in that the acquirer will
well as the receipt of UPSI.
continue to be bound by this restriction if the
acquirer’s intent to delist the company is not
declared upfront at the time of making the i. Who is an insider?
detailed public statement.
Insider: Under the PIT Regulations, an ‘insider’ is
a person who is (i) a connected person; or (ii) in
C. Listing Regulations possession of or having access to UPSI. 50
On September 2, 2015, the SEBI (Listing Connected Person: A connected person is
Obligations and Disclosure Requirements) one who is directly or indirectly associated
Regulations, 2015 (“Listing Regulations”) were with the company (i) by reason of frequent
notified and constitute the applicable law in communication with its officers; or (ii) by being
this domain. The Listing Regulations provide a in a contractual, fiduciary or employment
comprehensive framework governing various relationship; or (iii) by holding any position
types of listed securities. including a professional or business relationship
with the company whether temporary or
Regulation 30 of Listing Regulations deals with
permanent that allows such person, directly
disclosure of material events by the listed entity
or indirectly, access to UPSI or is reasonably
whose equity and convertibles securities are listed.
expected to allow such access.51
Such entity is required to make disclosure of
events specified under Schedule III of the Listing Therefore, any person who has any connection
Regulations. The Listing Regulations divide the with the company that is expected to put
events that need to be disclosed broadly in two him in possession of UPSI is considered to
categories. The events that have to be necessarily be a connected person. Persons who do not
disclosed without applying any test of materiality seemingly occupy any position in a company
are indicated in Para A of Schedule III of the but are in regular touch with the company
Listing Regulation. Para B of Schedule III indicates will also be covered. Certain categories of
the events that should be disclosed by the listed persons are all deemed to be connected, such as
entity, if considered material.

49. For the purpose of these Regulations the term ‘securities’ does
not include units of mutual funds.
50. Regulation 2(g) of the PIT Regulation.
48. Regulation 7 (5) of the Takeover Code. 51. Regulation 2(d) pf the PIT Regulation.

14
 Mergers and Acquisitions

‘immediate relatives’52, a holding, associate or The transaction was carried out pursuant to a
subsidiary company, etc. statutory or a regulatory obligation to carry out
a bona fide trade.
ii. What is Unpublished Price The transaction was undertaken pursuant to
Sensitive Information? 53 exercise of stock options in respect of which
the exercise price was pre-determined in
UPSI means any information relating to a compliance of applicable regulations.
company or its securities, directly or indirectly,
that is not generally available, and which upon Specifically for non-individual insiders
becoming available is likely to materially
 Individuals who executed the trade were
affect the price of the securities. It includes:
different from individuals in possession of UPSI
financial results; dividends; change in capital
and were not in possession of such UPSI; or
structure; mergers, demergers, acquisitions,
de-listing, disposals and expansion of business  Chinese wall arrangements were in place and
and such other transactions; and changes in there was no leakage of information and the
key managerial personnel. The term ‘generally PIT Regulations were not violated; or
available’54 means information that is accessible  Trades were made pursuant a trading plan.
to the public on a non-discriminatory basis
Therefore, as long as the board is of the informed
opinion that the transaction is in the best
iii. Defenses/Exceptions interest of the company, due diligence may
The communication of UPSI by an insider and be lawfully conducted. In case a particular
the procurement of UPSI by a person from an transaction does not entail making an open offer
insider is permitted if such communication, to the public shareholders, the board of directors
procurement is in furtherance of legitimate would be required to cause public disclosures
purposes, performance of duties or discharge of the UPSI prior to the proposed transaction
of legal obligations.55 The following are valid to rule out any information asymmetry in the
defenses available to a person who trades in market. Additionally, a duty has been cast on
securities when in possession of UPSI:56 the board of the company to cause the parties
to execute confidentiality and non-disclosure
General agreements for the purpose of this provision.
Therefore, introduction of Regulation 3(3) under
An off-market transaction or a block deal the PIT Regulations has amply clarified that the
between persons who communication or procurement of UPSI for
 were in possession of the same UPSI (without the purpose of due diligence shall be permitted,
being in breach of Regulation 3 and the UPSI subject to the conditions set out in the PIT
was not obtained under Regulation 3(3)); and Regulations.

 both counterparties made a conscious and

informed trade decision. iv. Trading plans57
A key change in the framework of PIT
Regulations is the introduction of trading plans.
52. Regulation 2(f) of the PIT Regulations, a spouse of a person, Typically, ‘insiders’ who are liable to possess
parent, sibling, and child of such person or of the spouse,
any of whom is dependent financially on such person, or UPSI round the year are permitted to formulate
consults such person in taking decisions relating to trading trading plans with appropriate safeguards. Every
in securities.
trading plan must cover a period of at least a
53. Regulation 2 (n) of the PIT Regulations.
year, must be reviewed and approved by the
54. Regulation 2(e) of the PIT Regulation.
55. Regulation 3(1) of the PIT Regulation.
56. Regulation 4(1) of the PIT Regulation. 57. Regulation 5 of the PIT Regulation.

15
compliance officer of the company and then disclose to the company his holding of securities
publicly disclosed. Trading cannot begin for a of the company as on date of appointment/date
period of 6 months after the plan is publicly of notification of the PIT Regulations i.e. May 15,
disclosed. Trading plans are a defense and do not 2015. More importantly, every promoter, member
provide absolute immunity from investigation of promoter group, designated persons or director
under the PIT Regulations. would be required to make continual disclosures
(within 2 trading days of such transaction) in
case the traded value of securities over a calendar
v. Due-Diligence Carve-Out quarter exceeds the monetary threshold of INR
The PIT Regulations contain a specific carve- 10 lakhs or such other value as may be specified.
out for communication and procurement of The company is also required to notify the
information (conduct of due-diligence) in stock exchanges in case such transactions by
connection with transactions involving mergers the promoter, employee or director exceeds this
and acquisitions. 58 Therefore, based on whether monetary threshold or in case of any incremental
or not a transaction entails making an open changes after such disclosure within 2 days of
offer under Takeover Code, information may be receipt of such information. These records will be
communicated, provided, allowed access to or required to be maintained by the company for at
procured on the following conditions: least 5 years.59

Open Offer Obligation under Takeover Code

vii. Code of Conduct and Fair
Where the board of directors of the company Disclosures
is of the informed opinion that the proposed
transaction is in the best interest of the listed The board of every company is required to
company. formulate and publish a code of practices and
procedures to be followed for fair disclosure
No Open Offer Obligation under Takeover of UPSI in accordance with the principles
Code set out in Schedule A to the PIT Regulations.
Schedule A of the PIT Regulations sets out
Where the board of directors of the listed
certain minimum standards such as equality of
company is of the informed opinion that the
access to information, publication of policies
proposed transaction is in the best interest of the
such as those on dividend, inorganic growth
listed company. Information that constitutes
pursuits, calls and meetings with analysts,
UPSI is to be made generally available at least 2
publication of transcripts of such calls and
trading days prior to the proposed transaction
meetings etc. 60 Additionally, the board of
being effected in such form as the board of
directors of every listed company and the board
directors may determine to be adequate and fair
of directors or head(s) of the organisation of
to cover all relevant and material facts.
every intermediary shall ensure that the chief
executive officer or managing director of every
vi. Disclosures listed company and market intermediary shall
formulate a code of conduct to regulate, monitor
A significant aspect of the insider trading norms
and report trading by designated persons and
is disclosure requirements for different categories
immediate relatives of designated persons.61
of persons involved in the affairs of the company.
It is important to bear in mind that going forward,
every promoter, member of promoter group,
designated persons, key managerial personnel
and director of a company would be required to
59. Regulation 7 (1) of the PIT Regulation.
60. Regulation 8 of the PIT Regulation.
58. Regulation 3(3) of the PIT Regulation. 61. Regulation 9 of the PIT Regulation.

16
 Mergers and Acquisitions

viii. Compliance officer The trading window shall be closed when the
compliance officer determines that a designated
The PIT Regulations have enhanced the role
person or class of designated persons can
of a compliance officer’s role with respect
reasonably be expected to have possession
to monitoring and regulating trading by
of unpublished price sensitive information.
employees and connected persons, in particular
Trading restriction period shall be made
monitoring and approving trading plans. The
applicable from the end of every quarter till 48
PIT Regulations prescribe specific qualification
hours after the declaration of financial results.
criteria for a compliance officer who shall report
to the board of directors of the company or the
head of the organization, as the case may be. xi. Chinese Walls
To prevent the misuse of confidential
ix. Pre-clearance of trades information the organization/firm shall adopt
a ‘Chinese Wall’ policy which separates those
A condition may be imposed on the insiders
areas of the organization/firm which routinely
that they can deal in the securities of the
have access to confidential information, from
company only after obtaining a prior approval
those areas which deal with sale/marketing/
in accordance with the procedure and policy
investment advice or other departments
prescribed by the company in that regard. In
providing support services.
addition, it may also be prescribed that a pre-
approved trade will have to be undertaken In order to monitor Chinese Wall procedures
within the stipulated time period, failing which and trading in client securities based on UPSI,
the approval would lapse. the organization/firm shall restrict trading
in certain securities and designate such list
as restricted/grey list. Securities of a listed
x. Notional trading windows company shall be put on the restricted/grey
Usually, the trading windows are closed to list if the organization/firm is handling any
eliminate any risk of insider trading and assignment for the listed company and is privy
monitor compliant trading within a company. to UPSI.

17
 Provided upon request only

4. Competition Law
The Competition Act, 2002 (“Competition agreements, etc., are examples where they can
Act”) which replaced the Monopolies and be considered to have an AAEC.
Restrictive Trade Practices Act, 1969 primarily
covers (i) anti-competitive agreements (Section
3), (ii) abuse of dominance (Section 4), and (iii)
II. Abuse of Dominant
combinations (Section 5, 6, 20, 29, 30 and 31). Position
The Competition Commission of India
An entity is considered to be in a dominant
(Procedure in regard to the Transaction of
position if it is able to operate independently of
Business relating to Combinations) Regulations,
competitive forces in India, or is able to affect
2011 (“Combination Regulations”) govern
its competitors or consumers or the relevant
the manner in which the CCI will regulate
market in India in its favor. The Competition
combinations which have caused or are likely
Act prohibits an entity from abusing its
to cause an appreciable adverse effect on
dominant position. Abuse of dominance would
competition (“AAEC”) in India.
include imposing unfair or discriminatory
conditions or prices in purchase/sale of goods
I. Anti-Competitive Agreements or services and predatory pricing, limiting or
restricting production/provision of goods/
The Competition Act essentially contemplates services, technical or scientific development,
2 kinds of anti-competitive agreements – indulging in practices resulting in denial of
Horizontal Agreements i.e. agreements between market access, etc.
entities engaged in similar trade of goods or
provisions of services, and Vertical Agreements
i.e. agreements between entities in different
III. Regulation of Combinations
stages/levels of the chain of production, in
In terms of Section 5 of the Competition Act, a
respect of production, supply, distribution,
‘combination’ involves:
storage, sale or price of goods or services. Anti-
competitive agreements that cause or are likely 1. the acquisition of control, shares, voting
to cause an AAEC within India are void under rights or assets of an enterprise by a person;
the provisions of the Competition Act.
2. acquisition of control of an enterprise
A horizontal agreement that (i) determines where the acquirer already has direct or
purchase/sale prices, or (ii) limits or controls indirect control of another enterprise
production supply, markets, technical engaged in identical business; or
development, investment or provision of
3. a merger or amalgamation between
services, or (iii) shares the market or source
or amongst enterprises; that cross the
of production or provision of services, by
financial thresholds set out in Section 5.
allocation of geographical areas/type of goods
or services or number of customers in the The financial thresholds for a combination are
market, or (iv) results in bid rigging / collusive determined with reference to (i) the combined
bidding, is presumed to have an AAEC. On the asset value and the turnover of the acquirer and
other hand, vertical agreements, such as tie-in the target in the event of an acquisition, and the
arrangements, 62 exclusive supply or distribution combined asset value and the turnover of the

62. A tie-in arrangement would include any agreement where

the purchaser of goods, (as a condition of such purchase) is browser Internet Explorer along with the Windows operat-
made to purchase some other goods. A classic example of ing system, limiting Netscape’s web browser, Navigator, from
this on a global scale may be Microsoft’s bundling of its web having a significant presence in the market.

18
 Mergers and Acquisitions

combined resultant company, in the event of an  Test 2 / Global Asset Test and Global Turnover
amalgamation or merger, and (ii) the combined Test - (i) Total assets in India or outside higher
asset value and the turnover of the “group” to than USD 4 billion of which assets in India
which the target/resultant company will belong are higher than INR 1000 crore; or (ii) total
pursuant to the proposed acquisition/merger. turnover in India or outside is higher than
USD 12 billion of which turnover in India
Under Section 32 of the Competition Act, the
should be higher than INR 3000 crores.
CCI has been conferred with extra-territorial
jurisdiction, meaning that any acquisition
where assets/turnover are in India, and exceed B. Small Company Exemption
specified limits, would be subject to the scrutiny The Central Government has exempted certain
of the CCI, even if the acquirer and target are
enterprises from the provisions of Section 5 of
located outside India.
the Act. Such enterprises are those that are party
to any form of combination described under
A. Financial thresholds Section 5 of the Act – acquisitions and mergers
/ amalgamations alike – and, where the value of
The Competition Act prescribes financial
assets of the target entity or the merged entity
thresholds linked with assets/turnover for the
is not more than INR 3.5 billion in India or
purposes of determining whether a particular
turnover is not more than INR 10 billion. Further,
transaction qualifies as a ‘combination’. A
the exemption also extends to specific situations
transaction that satisfies any of the following
where a portion of an enterprise or division
tests shall be treated as a ‘Combination’:
or business is being acquired, taken control of,
An acquisition where the parties to the merged or amalgamated with another enterprise.
acquisition, i.e. the acquirer and the target, In such cases, the value of assets and turnover
jointly have: of the said portion will be the relevant assets
and turnover to be taken into account for the
 Test 1 / India Asset Test and India Turnover purposes of this exemption. This results in the
Test - in India (i) assets higher than INR 2000
entire enterprise value being disregarded in cases
crore; or (ii) turnover higher than INR 6000
where it is the commercial intent for the acquirer
crore; or
to acquire only a portion of an enterprise.
 Test 2 / Global Asset Test and Global Turnover However, this exemption is only valid until
Test - Total assets in India or outside higher March 04, 2021, unless further extended.
than USD 1 billion of which assets in India
should be higher than INR 1000 crores; or (ii)
total turnover in India or outside is higher
C. Pre-Filing Consultation
than USD 3 billion of which turnover in India Any enterprise which proposes to enter into a
should be higher than INR 3000 crore; or combination may submit a request in writing to
the CCI, for an informal and verbal consultation
The acquirer group63 has: with the officials of the CCI about filing such
proposed ‘combination’. However, advice
 Test 1 / India Asset Test and India Turnover
Test - in India (i) assets higher than INR 8000 provided by the CCI during such pre-filing
crores; or (ii) turnover higher than INR 24000 consultation is not binding on the CCI.
crores; or
D. Mandatory Reporting before
63. A ‘group’ for the above purposes would mean two or more Consummation of the
enterprises which, directly or indirectly, are in position to –
i Exercise of not less than 50% or more of the voting rights in the Combination
other enterprise; or
ii Appoint more than fifty per cent of the members of the board Section 6 makes void any combination which
of directors in the other enterprise, or iii Control the manage-
ment or affairs of the other enterprise causes or is likely to cause an AAEC within

19
India. Accordingly, section 6 of the Competition meet the criteria described below need not wait
Act requires every acquirer to notify the CCI of a for the approval of the CCI to consummate
combination. The CCI must form a prima facie a notifiable transaction (‘Green Channel’).
opinion on whether a combination has caused Once the acknowledgment of the form filed
or is likely to cause an AAEC within the relevant under this Green Channel route has been
market in India, within 30 days of filing. The received by the parties, the transaction will be
combination can be consummated only after deemed approved and parties will be able to
the expiry of 210 days from the date on which consummate the transaction immediately.
notice is given to the CCI, or after the CCI has
To avail of the benefit of the Green Channel
passed an order approving the combination.
route, the qualifying criteria is that the parties to
the combination, their group entities and each
E. Multiple tranches of their, direct or indirect investee entities (even
an investment of a single share in a company
In order to ensure that all the combinations
shall make such company an investee entity)
arising from small individual transactions
should not: (i) produce/provide similar or
which otherwise in isolation may not qualify
identical or substitutable product or service or;
the financial thresholds mentioned above but
(ii) engage in any activity relating to production,
along with inter-connected or inter-dependent
supply, distribution, storage, sale and service or
transactions may qualify the financial
trade in product or service which are at different
thresholds, are notified to CCI, the Combinations
stage or level of production chain or; (iii) engage
Regulations provide that in a situation where the
in any activity relating to production, supply
ultimate intended effect of a business transaction
distribution, storage, sale and service or trade in
is achieved by way of a series of steps or smaller
product or service which are complementary
individual transactions which are inter-
to each other. This analysis will also have to
connected or inter-dependent on each other, one
be undertaken while considering all plausible
or more of which may amount to a combination,
alternative market definitions.
a single notice, covering all these transactions,
may be filed by the parties to the combination. 64 The acquirer would also be required to make
Further, the Combinations Regulations were a positive declaration confirming that the
amended in 2014, wherein a provision was combination falls under the Green Channel
inserted which mandates companies to notify (meaning there are no overlaps at any level as
CCI if the substance of the transaction and any discussed above). If it is found that either such
structure of the transaction(s), comprises a declaration or any other statement made by
combination, and that has the effect of avoiding the acquirer in the form is incorrect then the
notice in respect of the whole or a part of the form and deemed approval of the CCI shall both
combination shall be disregarded. be considered void ab initio. The parties will
however have an opportunity to be heard before
the CCI renders the approval void ab initio.
F. Green Channel
In furtherance of the Government of India’s
G. Exceptions to Filing
ease of doing business initiatives, the CCI
introduced certain important amendments to Schedule I to the Combination Regulations
its Combination Regulations on August 13, 2019 specifies certain categories of transactions
(“2019 Amendment Regulations”) with came which are ordinarily not likely to have an AAEC
into effect from August 15, 2019. and therefore would not normally require to be
notified to the CCI which inter alia include:
The 2019 Amendment Regulations provide
for a green channel route whereby parties that  Acquisitions of shares or voting rights as
an investment or in the ordinary course
of business as long as the total shares or
64. Regulation 9(4)

20 © Nishith Desai Associates 2020

 Mergers and Acquisitions

voting rights held by the acquirer directly or  Merger or amalgamation: (i) of holding and
indirectly is less than 25% of the total shares subsidiary company and/ or (ii) of companies
or voting rights of the company, and as long which are majority held by the same group.
as control is not acquired. However, the merger or amalgamation
must not lead to the transfer of joint
 Acquisition of not more than 5% shares or control to sole control. A share subscription,
voting rights in any financial year (on a gross
financing facility or any acquisition by
basis) by an acquirer or its group, if (a) the
a public financial institution, foreign
acquirer or its group already hold 25% or more
institutional investor, bank or venture
of the shares or voting rights of the acquired
capital fund (“VCF”) pursuant to any loan or
enterprise but do not hold 50% or more shares
investment agreement, would not qualify as
of voting rights of the acquired enterprise either
a combination that will be regulated by the
prior to or after such acquisition and (b) joint or
CCI, and such transactions are exempt from
sole control is not acquired.
the Combination related provisions under
 Acquisition by an acquirer who already holds the Competition Act. However, such public
50% or more shares or voting rights except financial institution, FII, bank or VCF is
in cases where the transaction results in a required to notify the CCI of the details of the
transfer from joint control to sole control. acquisition within 7 days of completion of
the acquisition.
 An acquisition of assets unrelated to the
business of the acquirer, or acquired solely  Impact on transactions involving listed
as an investment or in the ordinary course companies: In combination involving listed
of business, other than an acquisition of a companies, a primary transaction may
substantial business operation. trigger notification with CCI and subsequent
open offer obligation under the Takeover
 Acquisitions of stock-in-trade, raw materials,
stores and spares, trade receivables and other Code. In cases where clearance from the CCI
similar current assets (in the ordinary course is not received within the statutory time
of business). period required to complete the open offer
as prescribed under the Takeover Code, then
 Acquisitions of shares or voting rights as per the Takeover Code, SEBI may direct
pursuant to a bonus or rights issues, or the acquirer to pay interest to shareholders
buyback of shares, not leading to acquisition for the delay beyond the maximum period
of control. within which the tendering shareholders are
 Acquisition of shares or voting rights or assets required to be paid.
within the same group, except where the
acquired enterprise is jointly controlled by
enterprises that are not part of the same group.

21
4. Exchange Control
2018. RBI also notified the Foreign Exchange
I. Foreign Direct Investment Management (Mode of Payment and Reporting
of Non-Debt Instruments) Regulations, 2019
India’s story with respect to exchange control
that provides for reporting requirements in
is one of a gradual, deliberate and carefully
relation to any investment made under the Non-
monitored advance towards full capital account
Debt Instruments Rules.
convertibility. Though significant controls
have been removed and foreign companies can The Non-Debt Instrument Rules were also
freely acquire Indian companies across most modified as on December 5, 2019 (“Amendment
sectors, these are subject to strict pricing and to Non-Debt Instruments Rules”) to incorporate
reporting requirements imposed by the Central the provisions of the Press Note 4 of 2019
Government and the RBI. (detailed below) announced by the Department
for Promotion of Industry and Internal Trade
Investments in, and acquisitions (complete and
(“DPIIT”). Other than the changes set forth herein,
partial) of, Indian companies by non-resident
certain sector specific changes (such as in contract
entities and individuals, are governed by the
manufacturing, digital media, e-commerce, single
terms of the Foreign Exchange Management
brand retail trading conditions) that were not
(Non-Debt Instruments) Rules, 2019 (“Non-Debt
included in the Non-Debt Instrument Rules, have
Instruments Rules”), issued in supersession of
now been reflected by the Amendment to the
Foreign Exchange Management (Transfer or Issue
Non-Debt Instruments Rules.
of Security by a Person Resident outside India)
Regulations, 2000 (the “FI Regulations”) and the The Non-Debt Instruments Rules segregate
press notes issued by the Department of Industrial foreign investments into various types: person
Policy and Promotion, Government of India. resident outside India, foreign portfolio
investor (FPI), non-resident Indian (NRI) or
The Ministry of Finance, on October 15, 2019
an Overseas Citizen of India (OCI), other non-
notified Sections 139, 143 and 144 of the Finance
resident investors and foreign venture capital
Act, 2015 which had proposed amendments
investments (FVCI).
to certain sections of the Foreign Exchange
Management Act, 1999 (“FEMA”), being Section
6 (Capital Account Transactions), Section A. Key changes in definition in the
46 (Power of Central Government to make Non-Debt Instruments Rules
rules) and Section 47 (Power of RBI to make
regulations) respectively. These amendments  “Non-Debt Instruments” has been defined
resulted in a shift of power from the RBI to as: (i) all investments in equity instruments
the Central Government and a bifurcation of in incorporated entities: public, private, listed
instruments into debt instruments and non- and unlisted; (ii) capital participation in LLP;
debt instruments. The Central Government (in (iii) all instruments of investment recognised
consultation with the RBI) was entrusted with in the FDI Policy notified from time to time;
powers to frame rules on non-debt instruments (iv) investments in units of AIFs, REITS and
while the RBI (in consultation with the Central InvITs; (v) investment in units of mutual
Government) is entrusted with the power to funds of Exchange-Trade Fund which invest
draft regulations for debt instruments. more than 50% in equity; (vi) junior-most
layer (i.e. equity tranche) of securitization
As a result, the Central Government notified the
structure; (vii) acquisition, sale or dealing
Non-Debt Instruments Rules superseding the directly in immovable property; (viii)
erstwhile FI Regulations, and Foreign Exchange
contribution to trusts; and (ix) depository
Management (Acquisition and Transfer of
receipts issued against equity instruments.
Immovable Property in India) Regulations,

22
 Mergers and Acquisitions

It must be noted that FI Regulations did not in an unlisted Indian company; or in 10% or
allow for foreign direct investment in trusts more of the post-issue paid-up equity capital on
except VCF and investment vehicles. The a fully diluted basis of a listed Indian company.
Non-Debt Instruments Rules specifically In case however, an existing investment
include contribution to trusts in the by a person resident outside India in equity
definition of non-debt instruments. instruments of a listed company falls to a level
below 10%, of the post-issue paid-up capital
 “Debt Instruments” has been defined to
on a fully diluted basis, the investment shall
mean all instruments other than non-debt
continue to be treated as FDI.
instruments as defined above.
Schedule I of the Non-Debt Instruments Rules
 “Equity Instruments” replaces the defined
term ‘capital instruments’ in FI Regulations. contains the Foreign Direct Investment Scheme
Equity Instruments means equity shares, (“FDI Scheme”) and sets out the conditions for
convertible debentures, preference shares and FDI in India. Sectors in which FDI is prohibited
share warrants issued. include lottery business, gambling and betting
including casinos, chit funds, Nidhi company,
 “Hybrid Securities” has been introduced in the trading in transferable development rights and
Non-Debt Instruments Rules to mean hybrid real estate business or construction of farm
instruments such as optionally or partially houses, manufacturing of cigars or tobacco,
convertible preference shares or debentures sectors not open to private sectors such as
and such other instruments as specified by the atomic energy, railway operations, foreign
Central Government from time to time, issued technology collaborations such as franchise,
to a person resident outside India by an Indian trademark, brand name, management contract
company or a trust. However, the term ‘Hybrid is also prohibited for lottery business and
Security’ has not been used anywhere in the gambling and betting activities. Entry routes
Non-Debt Instruments Rules. and sectoral caps are prescribed for sectors
 The definition of ‘Foreign Investment’, specifically permitted under the FDI Scheme.
includes an explanation that in the event any In sectors or activities not listed under the FDI
declaration is made by a person as per the Scheme or prohibited, foreign investment is
provisions of the CA, 2013, stating that the permitted up to 100% through the automatic
beneficial interest in the securities is being route, subject to applicable laws and specified
held by a person resident outside India, then conditionalities.
even though the investment is made by a Automatic Route and Government approval
resident Indian citizen, the same shall be Route: Automatic route means the entry route
counted as foreign investment. where investment by a person resident outside
 The definition of ‘Sectoral Cap’ has been India does not require the prior approval of the
amended under the Amendment to the RBI or the Central Government. Government
Non-Debt Instruments Rules to omit “debt” route, on the other hand, requires prior
meaning the composite sectoral cap under government approval and foreign investment
the Non-Debt Instruments Rules will now received under this route is subject to conditions
include only (i) foreign investment on a stipulated by the government in its approval.
repatriable basis by persons resident outside
Earlier, the determination of automatic route
India in equity of a company or capital of an
or approval route was made based on the
LLP; and (ii) indirect foreign investment.
sector in which the investee company operates.
However, pursuant to Press Note 5 published
B. Foreign Direct Investment (FDI) on April 17, 2020, 65 the Government of India

FDI means investment through equity

instruments by a person resident outside India 65. Press Note 3 (2020 Series) Available at [Link]
sites/default/files/pn3_2020.pdf.

23
has prescribed mandatory government approval (Substantial Acquisition of Shares and Takeover)
route for all investments made by any entity Regulations, 2011 and continues to hold such
of a country that shares land border with control and the amount of consideration may
India, i.e. Bangladesh, China, Pakistan, Nepal, be paid as per the mode prescribed by RBI or out
Myanmar, Bhutan and Afghanistan. Further, of the dividend payable by the Indian investee
this requirement shall also be applicable in case company; provided further that such dividend
where any beneficial owner of an investment is credited to a specially designated non-interest
into India is situated in or is a citizen of any such bearing rupee account for acquisition of shares on
countries. Accordingly, all investments from the recognized stock exchange.
neighbouring countries, regardless of the sector
Issuance against pre-incorporation expenses:
in which the investee company operates, would
A wholly owned subsidiary set up in India
require prior government approval.
by a non-resident entity, operating in a sector
The onus of compliance with sectoral or where 100% foreign investment is allowed
statutory caps on foreign investment and under the automatic route and there are no
attendant conditions, if any, is on the company FDI linked performance conditions, may issue
receiving foreign investment. A foreign investor equity instruments to the said non-resident
can acquire equity shares, compulsorily entity against pre-incorporation or pre-operative
convertible preference shares, share warrants expenses incurred by the non-resident entity up
or convertible debentures 66 in an Indian to a limit of 5% of its authorized capital or USD
company up to the investment (or sectoral) 500,000 whichever is less.
caps for each sector provided in the FDI Scheme.
Issuances by Indian company for other
Subsequent to the abolition of the Foreign
consideration: An Indian company may issue,
Investment Promotion Board (“FIPB”), which
equity instruments to a person resident outside
provided prior approval as required for certain
India, if the Indian investee company is engaged
sectors, the Government of India, vide an Office
in an automatic sector, against –
Memorandum dated June 5, 2017, has entrusted
the work of granting government approval a. swap of equity instruments; or
for foreign investments to the concerned
b. import of capital goods or machinery
administrative ministries/departments of the
or equipment (excluding second-hand
Government and for certain specific situations,
machinery); or
to the DIPP, now renamed as DPIIT.
c. pre-operative or pre-incorporation expenses
Issuance by Indian company: An Indian
(including payments of rent etc.)
company may issue equity instruments to
a person resident outside India subject to In case of swap of equity instruments, valuation
entry routes, sectoral caps and attendant involved in the swap arrangement is required to
conditionalities prescribed in the FDI Scheme. be made by a merchant banker registered with
SEBI or an investment banker outside India
Issuance by listed Indian company: A person
registered with the appropriate authority in the
resident outside India may purchase equity
host country.
instruments of a listed Indian company on a
stock exchange in India, provided that the person An Indian company may issue equity shares
making the investment has already acquired against any funds payable by it to a person
control of such company in accordance with SEBI resident outside India, the remittance of which
is permitted under the FEMA, the Non-Debt
Instrument Rules and corresponding rules.
66. A foreign investor may also subscribe to preference shares.
However, in order to fall under the automatic route, the
preference shares / debentures must be compulsorily
convertible into equity, failing which the investment will be
treated as a debt and the External Commercial Borrowings
(ECB) policy will be applicable.

24
 Mergers and Acquisitions

C. Foreign Portfolio Investors D. Non-resident Indian (“NRI”) or

Foreign portfolio investors registered with Overseas Citizen of India (“OCI”)
the SEBI as per the SEBI (Foreign Portfolio on repatriation basis
Investment) Regulations, 2014 are permitted
An NRI or OCI may purchase or sell equity
to invest in equity instruments of an Indian
instruments of a listed company on repatriation
company listed or to be listed on a recognized
basis, on a recognized stock exchange in India
stock exchange in India subject to the conditions
through a branch designated by an Authorised
set forth under Schedule II of the Non- Debt
Dealer for the purpose; and the total holding by
Instruments Rules:
any individual NRI or OCI shall not exceed 5% of
a. Total holding by each FPI or an investor the total paid-up equity capital on a fully diluted
group, is less than 10% of the total paid-up basis or shall not exceed 5% of the paid-up value
equity capital on a fully diluted basis or of each series of debentures or preference shares
less than 10% of the paid-up value of each or share warrants issued by Indian company;
series of debentures or preference shares or and the total holdings of all NRIs and OCIs put
share warrants issued by Indian company together shall not exceed 10% of the total paid-up
(individual limits), and the total holdings of equity capital on a fully diluted basis or shall not
all FPIs put together, is not exceeding 24% of exceed 10% of the paid-up value of each series of
paid-up equity capital on a fully diluted basis debentures or preference shares or share warrants;
or paid-up value of each series of debentures or provided that this 10% limit may be raised to
preference shares or share warrants (aggregate 24% if a special resolution to that effect is passed
limit); provided this aggregate limit may be by the general body of the Indian company.
increased by the Indian company up to the
An NRI or OCI may without limit purchase or
sectoral cap/statutory ceiling, with approval
sell units of domestic mutual funds which invest
of its board of directors and general body
more than 50% in equity.
through a resolution and a special resolution,
respectively. Once the aggregate limit has been
increased to a higher threshold, the Indian E. NRI or OCI on non-repatriation
company cannot reduce the same to a lower basis
threshold; provided further that the aggregate
limit with respect to an Indian company in a An NRI or OCI, including a company, a trust and
sector where FDI is prohibited shall be 24%. a partnership firm incorporated outside India
and owned and controlled by NRIs or OCIs, may
b. An FPI may purchase equity instruments of
purchase or contribute towards the following, on
an Indian company through public offer or
a non-repatriation basis, and such investment is
private placement, subject to individual and
deemed to be domestic investment made at par
aggregate limited specified.
with the investment by residents:
c. An FPI may purchase units of domestic
a. Equity instrument issued by a company
mutual funds or Category III Alternative
without any limit either on the stock
Investment Fund or offshore fund for which
exchange or outside it; and/or
no objection is issued in accordance with
SEBI (Mutual Fund) Regulations, 1996, which b. Units issued by an investment vehicle without
in turn invest more than 50% in equity any limit, either on the stock exchange or
instruments on repatriation basis subject to outside it; and/or
the terms and conditions specified by the SEBI
c. Capital of a limited liability partnership
and the RBI.
without any limit; and/or
d. An FPI may purchase units of REITs and
d. Convertible notes issued by a startup entity.
InVITs on repatriation basis subject to terms
specified by SEBI.

25
An NRI or OCI, including a company, a trust and vi. Dairy industry
a partnership firm incorporated outside India
vii. Poultry industry;
and owned and controlled by NRIs or OCIs are
not permitted to make any investment in equity viii. Production of bio-fuels;
instruments or units of a Nidhi company or a
ix. Hotel-cum-convention centers with seating
company engaged in agricultural or plantation
capacity of more than 3000;
activities or real estate business or construction
of farm houses or dealing in transfer of x. Infrastructure sector.
development rights.
b. Units of a VCF or a category I Alternative
Investment Fund (“Cat-I AIF”) or units or a
F. Investment by other non- scheme or of a fund set up by a VCF or Cat-I AIF.
resident investors c. Equity or equity linked instrument or debt
instrument issued by an Indian ‘start-up’
Long term investors like sovereign wealth funds
irrespective of the sector in which the start-up
(“SWFs”), multilateral agencies, endowment
is engaged. The definition of ‘start-up’ is as
funds, insurance funds, pension funds and
per the DPIIT’s notification;67 provided that
foreign central banks may purchase securities
if the investment is in equity instruments,
subject to terms specified by the RBI and the SEBI.
then sectoral caps, entry routes and attendant
conditions apply.
G. Investment in a Limited Liability
An FVCI may purchase securities or instruments
Partnership (“LLP”) either from issuer of securities/instruments
or from any person holding these securities
A person resident outside India or an entity
or instruments. FVCI may invest in securities
incorporated outside India, not being an FPI or
on a recognized stock exchange subject to the
an FVCI, may contribute to the capital of an LLP
provisions of Securities and Exchange Board of
operating in sectors or activities where foreign
India (FVCI) Regulations, 2000.
investment up to 100% is permitted under
automatic route and there are no FDI linked The FVCI may acquire, by purchase or otherwise,
performance conditions. from or transfer by sale or otherwise, to any
person resident in or outside India, any security
or instrument it is allowed to invest in, at a price
H. Foreign venture capital
that is mutually acceptable to the buyer and the
investors (“FVCI”) seller/issuer. The FVCI may also receive proceeds
of liquidation of VCF or of Cat-I AIF or of schemes
An FVCI registered with the SEBI can invest in:
or funds set up by the VCFs or Cat-I AIFs.
a. Securities issued by an Indian company in the
following sectors, and whose securities are not
67. While the definition of ‘startup’ under the rules still refer to no-
listed on a recognized stock exchange at the tification dated February 16, 2016 issued by DPIIT, Notification
time of issue of securities: G.S.R. 127(E), February 19, 2019 provides the latest definition of
startup as below (which needs to be aligned under the rules);
An entity shall be considered as a Startup: i. Up to a period of
i. Biotechnology; ten years from the date of incorporation/ registration, if it is
incorporated as a private limited company (as defined in the
ii. IT related to hardware and software Companies Act, 2013) or registered as a partnership firm (regis-
development; tered under section 59 of the Partnership Act, 1932) or a limited
liability partnership (under the Limited Liability Partnership
Act, 2008) in India. ii. Turnover of the entity for any of the finan-
iii. Nanotechnology; cial years since incorporation/ registration has not exceeded one
hundred crore rupees. iii. Entity is working towards innovation,
iv. Seed research and development; development or improvement of products or processes or ser-
vices, or if it is a scalable business model with a high potential
v. Research and development of new chemical of employment generation or wealth creation. Provided that an
entity formed by splitting up or reconstruction of an existing
entities in pharmaceutical sector; business shall not be considered a ‘Startup’.

26
 Mergers and Acquisitions

I. Investment by a person resident repatriation basis subject to certain conditions of

outside India in an investment the Non-Debt Instruments Rules.
vehicle
K. Acquisition of rights shares/
A person resident outside India (other than a
citizen of Pakistan or Bangladesh) or an entity bonus shares
incorporated outside India (other than an entity
A person resident outside India may subscribe to
incorporated in Pakistan or Bangladesh) may
shares issued on a rights basis / bonus issuance
invest in units of investment vehicle.68 Investment
by an Indian company provided that the offer of
vehicle may issue its units to a person resident
shares is in compliance with the provisions of
outside India against swap of equity instruments of
CA 2013, and does not result in breach of sectoral
a special purpose vehicle proposed to be acquired
caps applicable to the company, and the price at
by such investment vehicle.
which the shares are offered to the person resident
Investment made by an investment vehicle into outside India is not less than the price offered to
an Indian entity is considered as indirect foreign the resident shareholders. These conditions are
investment for the investee Indian entity if the also applicable in case a person resident outside
Sponsor or Manager or Investment Manager India makes investment in equity instruments
(a) is not owned and not controlled by resident (other than share warrants) issued by an Indian
Indian citizens; or (b) is owned or controlled by company as a rights issue that are renounced to a
persons resident outside India. person to whom it was offered.

J. Issue of Convertible Notes by an L. Issue of Shares under merger/

Indian startup company amalgamation / demerger
A person resident outside India (other than A transferee company may issue shares to the
an individual who is a citizen or Pakistan or shareholders of a transferor company under a
Bangladesh or an entity which is registered or scheme of merger or amalgamation approved by
incorporated in Pakistan or Bangladesh) may an Indian court, provided that the sectoral caps
purchase convertible notes issued by an Indian mentioned above are not exceeded.
startup company for an amount of INR 25 lakhs
or more in a single tranche. Such issuance is
M. Issue of partly-paid up shares
required to comply with the entry route, sectoral
caps, pricing guidelines and other conditions and share warrants
for foreign investment. Similarly, transfers of
Currently, only equity shares, compulsorily
a convertible note between a person resident
convertible preference shares and compulsorily
outside India and a person resident in or outside
convertible debentures and share warrants
India is also permitted subject to compliance
are permitted under the FDI route as equity
with entry route, sectoral caps, pricing guidelines
instruments.
and other conditions as prescribed. An NRI or
an OCI may acquire convertible notes on non- Partly paid shares can be issued to person
resident outside India if (i) pricing of partly paid
shares is determined up front and at least 25%
68. Investment Vehicle means an entity registered and regulated of the total consideration amount (including
under the regulations framed by the SEBI or any other author-
ity designated for that purpose and shall include, namely: (i) share premium) is paid up front; and (ii) the
Real Estate Investment Trusts (REITs) governed by the Securi- remaining amount is invested within a period of
ties and Exchange Board of India (REITs) Regulations, 2014;(ii)
Infrastructure Investment Trusts (InvIts) governed by the 12 months of issuance. As regards the issuance
Securities and Exchange Board of India (InvIts) Regulations, of share warrants, the following conditions must
2014 (iii) Alternative Investment Funds (AIFs) governed by
the Securities and Exchange Board of India (AIFs) Regulations, be complied with: (i) pricing and conversion
2012; formula / price is required to be determined

27
up front and 25% of the total consideration a. the price worked out in accordance with
is required to be paid up front; and (ii) the the SEBI guidelines in case of a listed Indian
remaining amount is required to be brought in company or in case of a company going
within a period of 18 months. Further, the price through a delisting process as per the SEBI
at the time of conversion should not be less than (Delisting of Equity Shares) Regulations, 2009;
the fair value of the shares as calculated at the
b. the fair value of shares determined as per any
time of issuance of such warrants.
internationally accepted pricing methodology
It must also be noted that only companies for valuation of shares on arm’s length basis
in which investment can be made under the duly certified by a chartered accountant or a
automatic route can issue partly paid shares merchant banker registered with SEBI, in case
or share warrants. For companies under the or a practicing cost accountant, in case of an
approval route, prior approval concerned unlisted Indian company.
administrative ministries/departments of the
Government will be required to issue partly paid
P. Investment in Depository
shares or share warrants.
Receipts
N. ESOP and sweat equity shares Any security or unit in which a person resident
outside India is allowed to invest under the
Indian company may issue ‘employees’ stock
Non-Debt Instruments Rules are eligible
option’ and/or ‘sweat equity shares’ to its
instruments for issue of depository receipts69 in
employees or directors or employees or directors
terms of Depository Receipts Scheme, 2014 (“DR
of its holding company or joint venture or
Scheme”).
wholly owned overseas subsidiary or subsidiaries
who are resident outside India; provided that Companies incorporated outside India may issue
(i) the scheme has been drawn in terms of Indian Depository Receipts70 (IDRs) through a
the regulations under SEBI or the Companies domestic depository, to persons resident in India
(Share Capital and Debentures) Rules, 2014; (ii) and outside India subject to such issue being in
such employee stock options or sweat equity compliance with the Companies (Registration
shares are in compliance with the sectoral cap of Foreign Companies) Rules, 2014 and the SEBI
applicable to the said company; (iii) issue of (Issue of Capital and Disclosure Requirements)
employee stock option or sweat equity shares Regulations, 2018, be denominated in Indian
in a company that requires prior government rupee only and the proceeds of issue of IDRs
approval should procure such approval prior to be immediately repatriated outside India by
issuance. companies issuing such IDRs. Any issue of
IDRs by financial or banking companies having
presence in India, either through a branch or
O. Pricing under the automatic
subsidiary, requires prior approval of the sectoral
route regulator.
Acquisition of shares of an Indian company
by a person resident outside India under the
automatic route may only be made in accordance
with the pricing requirements provided in the 69. Depository receipt means a foreign currency denominated
instrument, whether listed on an international exchange
Non-Debt Instruments Rules. The price of shares or not, issued by a foreign depository in a permissible
issued to non-residents cannot be less than: jurisdiction on the back of eligible securities issued or
transferred to that foreign depository and deposited with a
domestic custodian and includes ‘global depository receipt’ as
defined in the Companies Act, 2013 (18 of 2013);
70. Indian Depository Receipts means any instrument in the
form of a depository receipt created by a domestic depository
in India and authorised by a company incorporated outside
India making an issue of such depository receipts;

28
 Mergers and Acquisitions

II. Indirect Foreign Investment; in India, may transfer such equity instruments
Downstream investment or units so held by him in compliance with the
conditions specified:
Foreign investment may be direct or indirect. a. Transfer by non-resident (not NRI / OCI /
Generally speaking (and subject to certain erstwhile overseas body corporate) to non-
exceptions) if: resident: a person resident outside India, not
an NRI or an OCI or an erstwhile overseas
a. an Indian investing company is (i) not
corporate body, may transfer by way of sale
“owned”71 and “controlled” 72 by resident
or gift the equity instruments of an Indian
Indian citizens; or (ii) is owned or controlled
company or units held by him to any person
by persons resident outside India; or
outside India; this may also include transfer
b. an investment vehicle whose sponsor or of equity instruments of an Indian company
manager or investment manager (i) is not pursuant to liquidation, merger, de-merger,
owned and not controlled by resident Indian amalgamation of entities or companies
citizens; or (ii) is owned or controlled by incorporated or registered outside India.
person resident outside India; then the entire
Where the equity instruments are held by
investment by the investing company into the
person resident outside India on a non-
subject downstream Indian investee company
repatriable basis, the transfer by way of sale
would be considered as indirect foreign
where the transferee intends to hold the
investment.
equity instruments on a repatriable basis, is
Indian entity that has received indirect foreign required to comply with the entry routes,
investment is required to comply with entry sectoral caps or investment limits, pricing
route, sectoral caps, pricing guidelines and other guidelines, documentation and reporting
conditions as applicable for foreign investment. requirements for such transfers, as prescribed
from time to time.
III. Transfer of equity b. Transfer by sale or gift or sale on stock
instruments of an Indian exchange: Person resident outside India,
holding equity instruments of an Indian
company by or to a person company or units may transfer the same to
resident outside India person resident in India by way or sale or gift
or may sell the same on a recognized stock
exchange in India in the manner specified by
The Non-Debt Instruments Rules have detailed
SEBI; provided that such transfer is required
the provisions in relation to transfer of equity
to comply with entry routes, sectoral caps
instruments of an Indian company by or to a
or investment limits, pricing guidelines,
person resident outside India. A person resident
documentation and reporting requirements for
outside India, holding equity instruments of an
such transfers, as prescribed from time to time.
Indian company, or units or a person resident
c. Transfer by sale: A person resident in India
holding equity instruments of an Indian
71. A company is considered to be owned by resident Indian company or units, may transfer the same to a
citizens, if the Indian company where ownership is vested in person resident outside India by way of sale,
resident Indian citizens and / or Indian companies, which are
ultimately owned and controlled by resident Indian citizens. subject to sectoral caps, investment limits,
72. A company is considered to be controlled by resident Indian pricing guidelines or other conditions as
citizens, if the Indian company where control is vested in applicable for investment by person resident
resident Indian citizens and / or Indian companies, which are
ultimately owned and controlled by resident Indian citizens; outside India.
“control” means the right to appoint majority of directors or
to control the management or policy decisions including
by virtue of their shareholding or management rights or
shareholders agreement or voting agreement

29
d. Gift by Resident to Non-resident on non- by the seller for a period not exceeding 18
repatriation basis: A person resident in months from the date of payment of the full
India holding equity instruments or units consideration, if the total consideration has
of an Indian company on a non-repatriation been paid by the buyer to the seller. Provided
basis may transfer the same to a person that the total consideration finally paid is
resident outside India by way of gift with the required to comply with the applicable pricing
prior approval of the RBI and subject to the guidelines.
following conditions:
g. Transfer by pledge: Transfer of equity
i. the donee is eligible to hold such security instruments or an Indian company or
under the Non-Debt Instruments Rules; units of an investment vehicle by way of
pledge is subject to: (i) any person being
ii. gift does not exceed 5% of the paid-up
promoter of a company that has raised ECB
capital of the Indian company or each
in compliance with the Foreign Exchange
series of debentures or each mutual fund
Management (Borrowing and Lending in
scheme;
Foreign Exchange) Regulations, 2000, may
iii. the applicable sectoral cap in Indian pledge the shares of the borrowing company
company is not breached; or of its associate resident companies subject
to certain conditions; (ii) any person resident
iv. the donor and donee are ‘relatives’ as
outside India holding equity instruments in
defined under Section 2(77) of Companies
an Indian company or units of an investment
Act, 2013;
vehicle may pledge the equity instruments
v. value of the security to be transferred or units in favour of a bank in India/non-
by donor together with any security banking financial company to secure credit
transferred to any person residing outside facilities for bona fide purposes or in favour
India as gift during the financial year does of an overseas bank to secure credit facilities
not exceed the rupee equivalent of USD 50 extended to such person who is the promoter
thousand. of the Indian company or overseas group
company of such Indian company.
e. Transfer of equity instruments with
optionality clause: Person residing outside In case of invocation of pledge, transfer of
India holding equity instruments of an Indian equity instruments is required to comply with
company containing an optionality clause sectoral caps, pricing guidelines and other
and exercising the option or right, may exit conditions at the time of creation of pledge.
without any assured return, subject to pricing
h. Transfer by FPI: An FPI may transfer by way
guidelines and a minimum lock-in period of 1
of sale or gift, the equity instruments of an
year or as prescribed, whichever is higher.
Indian company or units held by him to any
f. Deferred consideration: Transfer of equity person resident outside India; this would
instruments between a person resident in also include transfer of equity instruments of
India and a person outside India structured an Indian company pursuant to liquidation,
as a deferred payment is permitted in the merger, de-merger, amalgamation of entities
following manner: an amount not exceeding or companies incorporated or registered
25% of the total consideration may be paid outside India.
by the buyer (i) on a deferred basis, within
i. Pricing guidelines: Price of equity
a period not exceeding 18 months from the
instruments of an Indian company, when
date of the transfer agreement; or ( ii) may
such instruments are being i) transferred from
be settled through an escrow arrangement
a resident in India to a person resident outside
between the buyer and seller for a period not
India, cannot be less than:
exceeding 18 months from the date of the
transfer agreement; or (iii) may be indemnified

30
 Mergers and Acquisitions

i. The price worked out in out in accordance [Link] Direct

with the SEBI guidelines in case of a listed Investment
Indian company;
ii. The price at which a preferential allotment An Indian company that intends to acquire or
of shares can be made under the SEBI invest in a foreign company outside India must
guidelines, in case of a listed company or in comply with the Foreign Exchange Management
case or in case of a company going through (Transfer or Issue of any Foreign Security)
a delisting process as per the Securities and Regulations, 2004 (“ODI Regulations”).
Exchange Board of India (Delisting of Equity
The ODI Regulations are an extension of
Shares) Regulations, 2009;
the process of liberalization initiated by the
iii. Valuation of equity instruments done as Government of India in the 1990s. The ODI
per any internationally accepted pricing Regulations contain detailed provisions
methodology for valuation on an arm’s governing investments made by an Indian
length basis duly certified by a Chartered company in a foreign company by grant of
Accountant or a Merchant Banker registered ‘general permission’ to make a ‘direct investment
with SEBI or a practicing Cost Accountant, in outside India’ in bona fide business activities,
case of an unlisted Indian company. subject to compliance with the regulations. The
term ‘direct investment outside India’ has been
On the other hand, the price of equity
defined as ‘investment by way of contribution to
instruments of an Indian company, when such
the capital or subscription to the Memorandum
instruments are being transferred by a person
of Association of a foreign entity or by way of
resident outside India to a person resident in
purchase of existing shares of a foreign entity
India, cannot exceed:
either by market purchase or private placement,
i. Price worked out in out in accordance with or through stock exchange, but does not include
the SEBI guidelines in case of a listed Indian portfolio investment’.
company;
The Indian party may choose to fund the
ii. The price at which a preferential allotment aforesaid investment out of balances held in
of shares can be made under the SEBI Exchange Earner’s Foreign Currency (EEFC)
guidelines, in case of a listed company or in account, by drawing funds from an authorized
case or in case of a company going through dealer subject to certain limits, or using the
a delisting process as per the Securities and proceeds of an ADR/GDR issue, swap of shares,
Exchange Board of India (Delisting of Equity capitalization of exports, or using the proceeds
Shares) Regulations, 2009; of external commercial borrowings (ECBs) or
Foreign Currency Convertible Bonds (FCCBs).
iii. Valuation of equity instruments done as
per any internationally accepted pricing General permission has been granted to persons
methodology for valuation on an arm’s resident in India to purchase/acquire securities
length basis duly certified by a Chartered out of the Resident Foreign Currency (RFC)
Accountant or a Merchant Banker registered account, as bonus shares on existing holding
with SEBI or a practicing Cost Accountant, in of foreign currency shares or out of the foreign
case of an unlisted Indian company. currency resources outside India (when not
permanently resident in India).
The guiding principle being that the person
resident outside India is not guaranteed any
assured exit price at the time of making such
investment or agreement and is required to exit
at the price prevailing at the time of exit.

31
A. Direct Investment in a Joint or other services. A special case is carved out
Venture/ Wholly Owned for a software exporter who wishes to start a
software company overseas – the Indian exporter
Subsidiary
is permitted to receive shares up to 25% of the
An Indian company is permitted to invest value of exports in the overseas company without
in a joint venture (“JV”) or a wholly owned entering into joint venture agreements, with the
subsidiary (“WOS”) up to 400% 73 of the net prior approval of RBI.
worth of the Indian company as on the date of
the last audited balance sheet without seeking
C. Transfer of shares
the prior approval of the RBI, subject to the
following conditions being fulfilled: An Indian company may sell the securities of an
overseas JV/WOS to another Indian Party which
 The Indian company is not on the RBI’s
has been in operation for a year provided that the
caution list or under investigation by the
following conditions, inter alia, are fulfilled:
Enforcement Directorate.
 The sale does not result in any write off of the
 The Indian company routes all the
investment made;
transactions relating to the investment in the
JV or the WOS through only one branch of an  The sale should be through the stock exchange
authorized dealer to be designated by it. on which the securities of the overseas JV/
WOS are listed. Where the shares of the JV/
Overseas direct investment cannot be made in
WOS company are not listed, the sale price
the real estate business or trading in Transferable
of the shares should not be less than the fair
Development Rights or banking business.
value of the shares as determined by a certified
Further, investment in the financial services
Chartered Accountant or Certified Public
sector is subject to special requirements. Any
Accountant;
financial commitment in overseas JV/WOS
exceeding USD 1 billion (or its equivalent) in  The exiting Indian seller does not have any
a financial year will require the prior approval dues from the JV/WOS.
of the RBI even when the total financial
 The Indian party is not under any
commitment is within the eligible limit under investigation by SBI / DoE / SEBI / IRDA or
the automatic route (i.e. 400% net worth as per other regulatory authority in India.
the last audited balance sheet).
The securities of the JV/WOS may also be
pledged by the Indian company as security, to
B. Investment by way of avail of fund/non-fund based credit facilities for
capitalization of exports, or fees itself or for the JV/ WOS.
royalties etc., due to the Indian
company D. Guarantee by Indian party
The ODI Regulations permit a company to invest Loan and guarantee can be extended to an
in an entity outside India by way of capitalization overseas entity only if there is already existing
of amounts due to it from the investee company, equity participation by way of direct investment.
for sale of plant, machinery, equipment and other However, in case the overseas entity is a first
goods/ software, or any fees, royalty, commissions level step down operating subsidiary of the
or other entitlements due to it for transfer of Indian party, corporate guarantee may be issued
technical know- how, consultancy, managerial by the Indian party on behalf of such step-down
operating subsidiary provided such guarantee is
reckoned for the purpose of computing the total
73. This ceiling is not applicable where the investment is funded financial commitment of the Indian party.
out of balances held by the Indian party in its Exchange
Earners’ Foreign Currency (EEFC) account. In case the overseas entity is a second or

32
 Mergers and Acquisitions

subsequent level step down operating subsidiary stake in the Indian company; provided the
of the Indian party, corporate guarantee may be shares under the ESOP Scheme are offered by
issued by the Indian party on behalf of such step the issuing company on a globally uniform
down operating subsidiary with prior approval basis and an annual return is submitted by the
of the RBI provided such Indian party holds Indian company to the RBI giving details of
indirect stake of not less 51% in the step down remittances, beneficiaries, etc.
operating subsidiary and guarantee is reckoned
 if they represent qualification shares for
for the purpose of computing the financial
becoming a director of a company outside
commitment of the Indian party.
India to the extent prescribed as per the law
of the host country where the company is
E. Investment by Individuals located, provided it does not exceed the limit
prescribed for the resident individuals under
Under the ODI Regulations, there are limits on the LRS at the time of force of the acquisition;
individuals owning shares in foreign companies.
 as part/full consideration of the professional
An individual may inter-alia invest in equity in services rendered to the foreign entity or lieu
terms of the limits and conditions specified under of director’s remuneration; and
the Liberalized Remittance Scheme (“LRS”)
(up to a maximum amount of USD 2.5 million  if they are rights shares that are being issued
per annum). The LRS was introduced in 2004 by virtue of holding shares;
to simplify and liberalize the foreign exchange  of a JV / WOS abroad of the Indian promoter
facilities available to resident individuals. company by employees / directors of Indian
Remittance under the LRS is permitted for any promoter company engaged in field of
permitted current or capital account transactions software where consideration does not exceed
or a combination of both. The funds remitted the ceiling as prescribed by RBI; the shares
under the LRS can be used for various purposes acquired do not exceed 5% of the paid-up
such as purchasing objects, making gifts and capital of the JV / WOS outside India and
donations, acquisition of employee stock options post- allotment, the percentage of shares held
and units of mutual funds, venture funds, by Indian promoter company, together with
unrated debt securities, promissory notes, etc. shares allotted to its employees, is not less
Further, general permission has been granted to than the percentage of shares held by Indian
individuals under the ODI Regulations to acquire promoter company prior to allotment.
foreign securities:
 of an Indian company in the knowledge
 as a gift from any person resident outside India; based sector may allow its resident employees
(including working directors) to purchase
 under Cashless Employees Stock Option
Scheme issued by a company outside India, foreign securities under the ADR / GDR linked
provided it does not involve any remittance stock option schemes.
from India; Any person intending to make any investments
 by way of inheritance from a person whether other than those specifically covered under the
resident in or outside India; ODI Regulations must obtain the prior approval
of the RBI.
 under ESOP Schemes, if he is an employee, or,
a director of an Indian office or branch of a Further, a resident individual (single or in
foreign company, or, of a subsidiary in India association with another resident individual) can
of a foreign company, or, an Indian company make overseas direct investment in the equity
in which foreign equity holding, either shares and compulsorily convertible preference
direct or through a holding company/Special shares of a JV/WOS outside India subject to
Purpose Vehicle (“SPV”), irrespective of the certain conditions. Some of these conditions are
percentage of the direct or indirect equity listed below:

33
 The JV or WOS abroad should be engaged  Resident individuals will have to get the
in a bona fide business and should not be valuation certificate from a certified valuer
engaged in the real estate, banking business or registered with the appropriate valuation
financial services activities. authority in host country.

 The JV/WOS should be an operating entity  At the time of investments, the permissible
only and not a step-down subsidiary. Further, ceiling shall be overall ceiling prescribed from
resident individuals cannot invest in a step- the resident individual under the LRS.
down subsidiary.

34
 Mergers and Acquisitions

5. Taxes and Duties

i. sale, exchange or relinquishment of the asset;
I. Income Tax Act, 1961 or
The ITA contemplates and recognizes the ii. extinguishment of any rights therein; or
following types of mergers and acquisitions:
iii. compulsory acquisition thereof under any
 Amalgamation (i.e. a merger which satisfies law; or
the conditions mentioned below)74
iv. in a case where the asset is converted by the
 Demerger or spin-off; owner thereof into, or is treated by him as,
stock-in-trade of a business carried on by him,
 Slump sale/asset sale; and
such conversion or treatment; or
 Transfer of shares.
v. maturity or redemption of a zero-coupon
The ITA defines an ‘amalgamation’ as the
bond; or
merger of one or more companies with another
company, or the merger of two or more vi. any transaction involving the allowing of the
companies to form one company. The ITA also possession of any immovable property to be
requires that the following conditions must be taken or retained in part performance of a
met by virtue of the merger, for such merger to contract of the nature referred to in section
qualify as an ‘amalgamation’ under the ITA: 53A of the Transfer of Property Act, 1882; or

 all the property of the amalgamating vii. any transaction (whether by way of
company(ies) becomes the property of the becoming a member of, or acquiring shares
amalgamated company; in, a co-operative society, company or
other association of persons or by way of
 all the liabilities of the amalgamating
any agreement or any arrangement or in
company(ies) become the liabilities of the
any other manner whatsoever), which has
amalgamated company; and
the effect of transferring, or enabling the
 shareholders holding not less than 75% of enjoyment of, any immovable property.
the value of the shares of the amalgamating
Further, under Section 9(1)(i) of the ITA, capital
company become shareholders of the
gains arising to a non-resident is considered
amalgamated company. There is a specific
taxable in India if they are earned directly or
carve out from the satisfaction of this
condition in case of amalgamation of a indirectly through the transfer of a capital asset
subsidiary into its parent, as it is impossible situated in India.
for the condition to be satisfied in such cases. Income chargeable to tax as capital gains is
computed by deducting the following from
A. Tax on Capital Gains the value of the consideration received – (a)
expenditure incurred wholly and exclusively
Section 45 of the ITA levies tax on capital gains with respect to such transfer, and (b) cost of
arising on the transfer of a capital asset. Section acquisition of the capital asset and any cost of
2(47) of the ITA defines the term ‘transfer’ in improvement of the capital asset. Section 49(1)
relation to a capital asset75 to include: (e) of the ITA provides that the cost of acquisition
of assets transferred by way of a scheme of
74. Section 2(1B) of the ITA amalgamation that are covered by the exemptions
75. Section 2 (14) defines ‘capital asset’ as property of any kind held
by an assessee whether or not connected with his business
or profession, but excludes (a) stock in trade, consumable profession, (b) personal effects, i.e. movable property held for
stores or raw materials held for the purposes of his business or personal use, and (c) certain agricultural land.

35
under Section 47 mentioned above would be  for a foreign amalgamating company (transferor)
deemed to be the cost of acquisition of the assets in connection with transfer of shares in an Indian
by the amalgamating company. Similarly, Section company
49(2) provides that the cost of acquisition for
Section 47(via): When a foreign holding
a shareholder, of shares of the amalgamated
company transfers its shareholding in an Indian
company, is deemed to be the cost of acquisition of
company to another foreign company as a result
the shares of the amalgamating company.
of a scheme of amalgamation, such a transfer
If a merger or any other kind of restructuring of the capital asset i.e. shares in the Indian
results in a transfer of a capital asset (as defined company, would be exempt from tax on capital
above) for a resident or a capital asset that is gains in India for the foreign amalgamating
situated in India for a non-resident, it would lead company, if it satisfies the following
to a taxable event.76 conditionsAt least 25% of the shareholders of
the amalgamating foreign company continue to
a. Capital Gains Tax Implications for Mergers
be the shareholders of the amalgamatedforeign
Section 47 of the ITA sets out certain transfers company, and
that are exempt from the provisions of Section
 such transfer does not attract capital gains
45 (the charging provision for tax on capital tax in the country where the amalgamating
gains) and such transfers are exempt from tax company is incorporated.
on capital gains. The relevant exemptions are
provided below: It may be noted that while the definition of
‘amalgamation’ under Section 2(1B) requires
 for an amalgamating company (transferor) that 75% (in terms of value of shares) of the
Section 47(vi): The transfer of a capital asset in a shareholders of the amalgamating company
scheme of amalgamation by the amalgamating should become the shareholders in the
company to the amalgamated company is amalgamated company, this section specifies
exempt from tax on capital gains, provided 25% of the number of shareholders as the
the amalgamated company is an Indian corresponding figure. The above provisions
company. 77 Please note that for this exemption also indicate that an Indian company may not
to be applicable to a merger, it is essential amalgamate into a foreign company without
that the merger falls within the definition attracting capital gains tax liability in India.
of ‘amalgamation’ provided above. Special
 shareholders of the amalgamating company
exemptions have also been included in case of
amalgamations involving banking companies.78 Section 47(vii): Transfer by the shareholders
of an amalgamating company, in a scheme of
amalgamation, of shares of the amalgamating
company (the capital asset) as consideration
for the allotment of shares of the amalgamated
76. Capital gains characterization under the ITA also depends
on accounting treatment of the transferred asset as ‘capital company, is exempt from tax on capital gains,
asset’, frequency of sale, period of holding etc. In case the asset provided that the amalgamated company is an
is held as a trading asset and is transferred as part of business,
income arising may also be categorized as ‘business income’ Indian company.79 The exemption from tax on
under the ITA.
77. This section only requires that the amalgamated (or the
surviving) company must be an Indian company. The
amalgamating company may be an Indian company or a
79. In this scenario, the shareholders get shares of the
foreign company. In this connection it is useful to note that
amalgamated company in exchange for their shareholding in
the meaning of the term ‘company’ under the Companies Act
the amalgamating company, and the amalgamating company
differs considerably from the meaning under the ITA. Under
is dissolved. It should be noted that the term transfer is used
the Companies Act, ‘company’ would generally refer to an
here in the context of the definition of this term under the
Indian company (unless specifically provided otherwise).
ITA, which includes the extinguishment of any right in a
Under the ITA, the term ‘company’ has a much broader
capital asset. So if the rights of the shareholders in the shares
meaning and inter alia includes an Indian company and a
of the amalgamating company are extinguished, it would
foreign body corporate (i.e. including a foreign company)
amount to a transfer (which is exempt from capital gains tax
78. Sections 47(viaa), 47(vica), 47(vicb) of the ITA if the conditions specified are complied with).

36
 Mergers and Acquisitions

capital gains would only be to the extent that  All the property of the undertaking, 82 being
the transfer is for the consideration for shares of transferred by the demerged company,
the amalgamated company. If any consideration immediately before the demerger becomes
other than shares of the amalgamated the property of the resulting company by
company, such as cash or bonds, was paid to the virtue of the demerger;
shareholders of the amalgamating company, it
 All the liabilities83 relatable to the
may be considered liable to tax on capital gains.80 undertaking, being transferred by the
If any of the conditions specified above are not demerged company, immediately before
satisfied (including the conditions specified in the demerger, become the liabilities of the
the definition of ‘amalgamation’), the transfer of resulting company by virtue of the demerger;
capital assets in a merger would be subject to tax
on capital gains.  The property & the liabilities of the
undertaking/undertakings being transferred
 for the shareholders/interest holders of a foreign by the demerged company are transferred
amalgamating company in relation to indirect at values appearing in its books of account
transfer tax immediately before the demerger. In other
Section 47(viab) of the ITA provides that any words, the resulting company should record
transfer by the shareholders, in a scheme of property and the liabilities of the undertaking
amalgamation, of shares/interests of a foreign at the value appearing in the books of accounts
amalgamating company (the capital asset) that (book value) of the demerged company. This
derive their value ‘substantially’ from Indian condition is impossible to be met by resulting
assets81 (indirect transfer), is exempt from tax companies that follow Indian accounting
on capital gains, if it satisfies the following standards, since they are required to record
conditions: the property and liabilities of the undertaking
at fair value. In order to facilitate tax neutral
i. at least 25% of the shareholders of the demerges involving companies following
amalgamating foreign company continue Indian accounting standards, Finance Act, 2019
to be the shareholders of the amalgamated (No.2) amended Section 2(19AA) of the ITA
foreign company, and to provide that the requirement of recording
ii. such transfer does not attract capital gains property and liabilities of the undertakings
tax in the country where the amalgamating received by the resulting company at book
company is incorporated. value shall not be applicable in a case where
the property and liabilities of the undertakings
b. Capital gains tax implications for demergers received by the resulting company are
The term ‘demerger’ in relation to companies recorded at fair value, due the application of
is defined in Section 2(19AA) of the ITA to Indian accounting standards;
mean the transfer, pursuant to a scheme of  The resulting company issues, in consideration
arrangement under the Merger Provisions of the demerger, its shares to the shareholders
by a demerged company of its one or more of the demerged company on a proportionate
undertakings, to any resulting company, in basis;
such a manner that:

82. The term ‘undertaking’ would include any part of an

undertaking, any unit or division of an undertaking or a
80. The Gujarat High Court, in CIT v. Gautam Sarabhai Trust, business activity as whole, but does not include individual
[1988] 173 ITR 216( Guj) had held that a shareholder receiving assets or liabilities which do not constitute a business activity.
any other property other than shares by virtue of a merger 83. The term ‘liabilities’ would include liabilities and specific
would not qualify for the exemption under Section 47(vii).
loans/borrowings incurred or raised for the specific business
81. Explanation 6 proposed to be added to Section 9(1)(i) of activity of the undertaking. In case of a multipurpose loan,
the ITA by the Finance Bill, 2015 clarifies that the term such value of the loan will be included, that bears the same
‘substantial’ would mean the foreign shares/interest would proportion as the value of the demerged assets to the total
need to derive at least 50% of their value from Indian assets. assets of the company.

37
 The shareholders holding not less than  Such transfer does not attract tax on capital
3/4ths in value of the shares in the demerged gains in the country, in which the demerged
company (other than shares already held foreign company is incorporated.
therein immediately before the demerger,
However, since both the demerged and the
or by a nominee for, the resulting company
resulting companies in the aforesaid example
or its subsidiary) become shareholders of
are based outside India, hence the provisions of
the resulting company(ies) by virtue of the
the CA 2013 (as the case may be) would not be
demerger, otherwise than as a result of the
applicable.
acquisition of the property or assets of the
demerged company or any undertaking As in the case of a merger, a specific exemption
thereof by the resulting company; provision covers demergers in an ‘indirect
transfer’ situation i.e. Section 47(vicc) of the ITA,
 The transfer of the undertaking is on a going
whereby any transfer of a foreign company’s
concern basis;
shares, that derive their value ‘substantially’
 The demerger is in accordance with the from Indian assets (indirect transfer), as part of
conditions, if any, notified under subsection a demerger would be exempt from capital gains
(5) of section 72A by the Central Government tax in the hands of the demerged company if the
in this behalf. following conditions are satisfied:
Section 2(19AAA) of the ITA defines the term  The shareholders holding at least 3/4ths in
“demerged company” to mean a company, whose value of the shares of the demerged foreign
undertaking is transferred, pursuant to a demerger, company continue to remain shareholders of
to a resulting company. Section 2(41A) defines the resulting foreign company; and
a “resulting company” to mean one or more
companies (including a wholly owned subsidiary  Such transfer does not attract tax on capital
gains in the country, in which the demerged
thereof) to which the undertaking of the demerged
foreign company is incorporated.
company is transferred in a demerger and, the
resulting company in consideration of such
transfer of undertaking, issues shares to the B. Capital gains tax implications
shareholders of the demerged company. on transfer of shares84
The ITA contains certain tax beneficial
Gains earned by a resident company from the
provisions in the case of a demerger. If the
transfer of capital assets situated anywhere in
demerger fulfills the conditions listed above, the
the world are taxable in India. In the case of
transfer of assets by the demerged company to
non-residents, only those gains arising out of
a resulting company, which must be an Indian
the transfer of a capital asset situated in India
company, is exempted from capital gains tax
should be taxable.85
under Section 47(vib) of the ITA.
The source rule pertaining to a ‘capital asset
Further, in case of a demerger of a foreign
situated in India’ was examined by the Supreme
company, whereby both the demerged and
Court of India in Vodafone International Holdings
resulting companies are foreign, but the assets
B.V. v. Union of India,86 which dealt with the
demerged include or consist of shares in an
transfer of shares of a non-resident company
Indian company, the transfer of these shares is
exempt from capital gains tax in the hands of the
demerged company under Section 47(vic) of the 84. All tax rates mentioned in this chapter are exclusive of
ITA, if the following conditions are satisfied: applicable surcharge and cess.
85. Section 9 of the Income Tax Act, 1961. Further, India also
 The shareholders holding at least 3/4ths in introduced a rule to tax non- residents on the transfer of
foreign securities the value of which are substantially
value of the shares of the demerged foreign (directly or indirectly) derived from assets situated in India
company continue to remain shareholders of (Indirect Transfer Tax).
the resulting foreign company; and 86. (2012) 341 ITR 1(SC)

38
 Mergers and Acquisitions

between two non-residents. The Supreme Court a. date on which the accounting period of the
held that a share is legally situated at the place foreign company / entity ends preceding the
of incorporation/ registration of the company date of transfer of a share or an interest; or
or where the shares may be effectively dealt
b. date of transfer, if the book value of the assets
with. Therefore, while the shares of an Indian
of the foreign company/ entity on the date of
company would be considered as situated in
transfer exceed the book value of the assets as
India, the shares of a company incorporated
on the date referred in (a) above by 15%
outside India would ordinarily be viewed as
situated outside India. However, subsequent to The tax treatment of capital gains depends
the above mentioned Vodafone judgment, the mainly on whether the gains are short term or
Government of India introduced indirect transfer long term. Short term capital gains (“STCG”)
tax rules through introduction of Explanation arise upon the transfer of capital assets held
5 to Section 9(1)(i) of the ITA. This insertion by a taxpayer for a period of 36 months or less
clarified that the transfer of shares of a foreign before the date of transfer (12 months or less
company which derives its value substantially in the case of securities listed on a recognized
from assets located in India shall be subject to stock exchange in India, and 24 months in the
capital gains tax in India. case of unlisted shares of an Indian company).
Long term capital gains (“LTCG”) arise upon
As per Explanation 6 to section 9(1)(i) of the ITA,87
the transfer of a capital asset held for a period
a foreign company is considered to derive its value
of more than 36 months (12 months in the case
substantially from assets located in India if the
of listed securities and 24 months in the case of
value of such assets (“Indirect Transfer Test”):
unlisted shares of an Indian company).
i. exceeds INR 100 million; and
Listed: STCGs arising from the transfer of
ii. represents at least 50% of the value of all the listed equity shares upon payment of requisite
assets owned by the company or the entity, as securities transaction tax (STT) are taxable at the
the case may be. beneficial rate of 15%.88
Additionally, Explanation 6 also provides that STCG arising from transfer of listed shares sold
the value of the assets for the purposes of the off the floor of the stock exchange are taxed
Indirect Transfer Test shall be the fair market at (i) slab rates in case of individuals (resident
value (“FMV”) of the assets determined as and non-resident), (ii) 30% in case of resident
per any internationally accepted valuation companies;89 and (iii) 40% in case of non-
methodologies without reduction of liabilities. resident companies.
In addition to the above, Section 9(1)(i) LTCGs arising out sale of listed shares on the stock
Explanation 7, provides for an exemption exchange are subject to a beneficial tax rate of
from the indirect transfer provisions to small 10% where such gains exceed INR 100,000 (Indian
shareholders, who together with associated
enterprises hold a de minimis shareholding
(less than 5%). 88. Section 111A, Income Tax Act 1961.
89. 25% (plus applicable surcharge and cess) in case of domestic
Further, as per clause (d) of Explanation 6, value companies having total turnover or gross receipts not
of the assets for the purposes of determining exceeding INR 4 billion in the financial year 2018-19. Further,
the tax rates for resident companies exercising the option
whether the Indirect Transfer Test is satisfied to be taxed under Section 115BAA or Section 115BAB of the
should be computed as on a specified date IT Act (introduced by the Taxation Laws (Amendment) Act,
2019) shall be 22% and 15% respectively (for both sections –
(“Specified Date”). Specified date has been plus surcharge at the rate of 10% and health and education
defined in the ITA to mean cess at the rate of 4%), subject to fulfilment of conditions
prescribed in the said sections, including computing
the total income without claiming specified deductions
and exemptions under the IT Act. The new options were
introduced by the Indian government in December 2019 to
87. Explanation 6 to section 9(1)(i) was introduced through slash corporate tax rates in an attempt to provide an impetus
Finance Act, 2015 to the Indian economy during times of staggering growth.

39
Rupees One Hundred Thousand) provided that Moreover, in case unlisted shares of a company
securities transaction tax (“STT”) is paid both at are transferred at less than the FMV then
the time of acquisition and sale of shares.90 The the FMV shall be deemed to be the full value
Central Board of Direct Taxes (“CBDT”) issued a consideration for the purposes of computing
notification specifying that the requirement to pay capital gains tax in the hands of the transferor.95
STT at the time of acquisition will not apply to (1) Further, in case of transfer of shares at less than
share acquisitions undertaken prior to October 1, FMV, even the transferee may be subject to tax
2004, (2) share acquisitions undertaken on or after on the difference between the FMV and the
October 1, 2004 which are not chargeable to STT consideration paid under the head ‘income from
subject to certain exceptions for the purposes of other sources’. 96 Lastly, in this regard, it shall be
obtaining the capital gains tax rate of 10% under noted that under section 56(2)(viib) of the ITA,
section 112A.91 if a private company issues shares to a resident
at a premium (above the face value), then the
LTCGs arising out of transfer of listed equity
difference between the consideration received
shares sold off the floor of the stock exchange are
for such shares and their FMV should be taxable
taxed at (i) 20% in case of residents; and (ii) 10%
in the hands of the issuing company. However,
in case of non-residents. 92
this provision is not applicable to consideration
Unlisted: STCGs arising from transfer of unlisted for issuance of shares received: (i) by a venture
shares are taxable at (i) slab rates in case of capital undertaking from a venture capital
individuals (both resident and non-residents); company or a VCF; or (ii) by a company from
(ii) 30% in case of resident companies;93 (iii) and a class or classes of persons as may be notified
40% in case of non-resident companies. LTCGs by the Government in this behalf. Importantly,
arising out of unlisted securities are taxable at ‘eligible start-ups’, (i.e. start-ups that qualify the
the rate of (i) 10% in case of non-residents; and prescribed the conditions and are recognized as
(ii) 20% in case of residents.94 ‘eligible start-ups’ by Government) are exempt
from section 56(2)(viib).
All transactions entered into on a recognized
stock exchange in India will be subject to STT,
which is levied on the transaction value. In the C. Capital Gains Tax Implications
case of sale of equity shares on a delivery basis, for a Slump Sale
STT is generally levied at the rate of 0.125% on
the value of the transaction on both the buyer A slump sale is a transaction by way of ‘sale’
and seller of the equity shares. as a result of which the transferor transfers
one or more of its undertakings on a going
Further, India has entered into tax treaties with
concern basis for a lump sum consideration,
several jurisdictions that allow for allocation
without assigning values to the individual
of taxation rights in a cross-border transactions.
assets and liabilities of the undertaking.97 For
In case where a non-resident is resident of a
the purpose of computing capital gains, the
jurisdiction with a beneficial tax treaty with
cost of acquisition would be the ‘net worth’ of
India (such as Mauritius or Singapore), subject to
the undertaking on the date of the transfer. 98
fulfilment of other requirements, they may claim
The ‘net worth’ of the undertaking shall be
benefits under the tax treaty to neutralize capital
determined by calculating the difference
gains tax exposure in India.
between the aggregate value of total assets and
aggregate value of total liabilities as per the
books of accounts of the seller.
90. Section 112A of the Income Tax Act, 1961
91. Notification No. SO 5054(E), dated October 1, 2018
95. Section 50CA of the Income Tax Act, 1961
92. This beneficial rate is applicable if the inflation indexation is
not claimed. 96. Section 56 (2)(X) of the Income Tax Act, 1961
93. Supra note 4 97. Section 2(42C) of the ITA
94. Section 112, Income Tax Act, 1961; Supra note 7 98. Section 50B of the ITA

40
 Mergers and Acquisitions

Further, for the purpose of such calculation, the D. Capital gains tax implications
aggregate value of total assets shall be, for an asset sale (itemized sale)
 in the case of depreciable assets, the written
In an asset sale, the acquirer only purchases
down value of the block of assets determined
the assets of the seller. This does not amount to
in accordance with the ITA;
the transfer of the business as a going concern
 in the case of capital assets in respect of and specific values are attributed to each of the
which the whole of the expenditure has been assets. The capital gains tax payable by the seller
allowed or is allowable as a deduction under will depend on the period that the seller has
section 35AD, nil; and held each of the assets that are transferred. This
 in the case of other assets, the book value of method of acquisition is usually used where the
such assets. acquirer does not want to acquire the liabilities
of the seller and more so if the acquirer believes
If the undertaking, which is being sold under that the seller has not disclosed certain liabilities
slump sale was held by the transferor Indian or there is a distinct possibility that unforeseen
company for more than 36 months, the capital liabilities could arise in the future.
gains realized on such sale would be taxed
as LTCG, i.e. at the rate of 20% (exclusive of If the asset, which is being sold was held by the
surcharge and education cess). If, however, the transferor Indian company for more than 36
undertaking was held for 36 months or less by months, the capital gains realized on such sale
the transferor Indian company, the capital gains would be taxed as LTCG, i.e. at the rate of 20%
realized would be taxed as STCG, i.e. at the rate of (exclusive of surcharge and education cess).
30% (exclusive of surcharge and education cess). If, however, the asset was held for 36 months
or less by the transferor Indian company, the
A slump sale is useful in situations when it capital gains realized would be taxed as STCG,
would not be feasible to go through the process i.e. at the rate of 30% (exclusive of surcharge and
of amalgamation or demerger under the education cess).
Merger Provisions. Further, it is also a useful
restructuring tool in case of transactions such Further, if shares of an Indian unlisted company
as externalizations as an undertaking may are transferred to a resident or to a non-resident
be transferred by an Indian company at ‘net at less than its ‘fair market value’ 101, the
worth’ to another Indian company in a tax transferee would be subject to tax under the head
neutral manner. Time taken for a slump sale is ‘income from other sources’ under the ITA and
substantially less than the time taken for merger. the difference between the consideration and
the fair market value would be added to its gross
It would also be useful to note that the definition total income and taxed at applicable rates in the
of ‘slump sale’ under the ITA uses the term ‘sale’99 hands of transferee. 102
specifically, and excludes any other type of
transfer as defined under the ITA. Therefore, Applicable surcharge on companies would be
the transfer of an undertaking in consideration 5% if income is between INR 1-10 crores and
for issue of securities of the transferee or any 10% if income exceeds INR 10 crores. Further, an
other property other than cash should be tax education cess of 3% would be applicable after
neutral in India.100 surcharge.
Please note that any cross-border transaction
between related parties that is liable to tax under
the ITA would also be subject to ‘transfer pricing’

99. The term ‘sale’ is defined as a transfer of property in 101. Computable under the Income Tax Rules, 1962.
consideration for cash under the Sale of Goods Act, 1930.
102. However, this liability may be neutralized for a non-resident
100. Upheld by the Bombay High Court in CIT v. Bharat Bijlee if it is resident in a jurisdiction with which India has entered
Limited, [2014] 364 ITR 581 (Bombay). into a beneficial tax treaty.

41
requirements under Indian law, mandating the b. The amalgamating company:
transaction to be undertaken at an ‘arm’s length
i. has been engaged in the business, in which
price’ and other documentation requirements.
the loss occurred or depreciation remained
unabsorbed, for 3 or more years; and
E. Tax on Business Income - Carry
ii. has held continuously, on the date of
Forward of Losses amalgamation, at least 3/4ths of the book
value of the fixed assets held by it 2 years
Section 72A of the ITA provides that in case
prior to the date of amalgamation.
of amalgamation of a company owning an
industrial undertaking 103 with another Section 72A(4) of the ITA provides a similar
company, the accumulated loss and the benefit for demergers. However, in the case
unabsorbed depreciation of the amalgamating of a demerger, the company does not need
company is deemed to be the loss / allowance for to satisfy any conditions similar to those
depreciation, of the amalgamated company. The applicable to mergers. In the case of a demerger,
amalgamated company would then be entitled the accumulated loss and the allowance for
to carry forward such loss and depreciation and unabsorbed depreciation of the demerged
set off such amounts against its future profits. company shall:
However, the following conditions must be a. where such loss or unabsorbed depreciation
satisfied for availing the above entitlement: is directly relatable to the undertakings
transferred to the resulting company, be
a. The amalgamated company:
allowed to be carried forward and set off in the
i. Holds 3/4ths of the book value of the hands of the resulting company;
fixed assets which it acquired from the
b. where such loss or unabsorbed depreciation
amalgamating company continuously
is not directly relatable to the undertakings
for a period of 5 years from the date of
transferred to the resulting company, be
amalgamation;
apportioned between the demerged company
ii. Continues to carry on the business and the resulting company in the same
of the amalgamating company for a proportion
minimum period of 5 years from the date
c. in which the assets of the undertakings have
of amalgamation. This would imply that if
been retained by the demerged company and
the amalgamating company were engaged
transferred to the resulting company, and be
in more than one business prior to
allowed to be carried forward and set off in
amalgamation, the amalgamated company
the hands of the demerged company or the
would be required to carry on all of those
resulting company, as the case may be.
businesses; and
In a case where these conditions are not met, the
iii. Fulfills such other conditions as may be
ITA provides for a disallowance for carry-forward
prescribed to ensure the revival of the
and set-off of losses where there is a substantial
business of the amalgamating company
change in ownership. Section 79 of the ITA
or to ensure that the amalgamation is for
provides that in order for a company to claim
genuine business purpose.
carry-forward and set-off of losses for a particular
assessment year, 51% of the voting power of
the company must be beneficially held during
that assessment year by the same shareholders
103. Industrial undertaking means an undertaking engaged who held such voting right during the year in
in manufacture or processing of good, manufacture of
computer software, generation/dis- tribution of electricity/
which loss was incurred. However, this provision
power, telecommunications services etc. This does not cover shall not be applicable in a case where there is a
undertakings in the software service sector and certain other
service sectors.
change in shareholding of an Indian company,

42
 Mergers and Acquisitions

that is a subsidiary of a foreign company, as In an asset purchase depending on the type of

a result of amalgamation or demerger of a asset being sold, the rate of GST will vary. Since
foreign company, subject to the condition a ‘business’ per se does not qualify as ‘goods’ or
that 51% shareholders of the amalgamating or ‘services’ under the GST Act, no GST is levied on
demerged foreign company continue to be the slump sale transactions. Further, since ‘shares’ are
shareholders of the amalgamated or the resulting covered under the definition of ‘securities’ and
foreign company.104 Further, domestic transfer ‘securities’ are specifically excluded from the ambit
pricing rules have also been introduced under of ‘goods’ under the GST law, there would be no
the ITA by which expenses may be disallowed in GST incidence upon transfer of shares, including
case of transactions between related parties. in case of amalgamations and demergers.

F. Transfers declared void under III. Stamp Duty

Section 281
Stamp duty is a duty payable on certain specified
Where there are assessment proceedings or instruments/documents. Broadly speaking,
tax litigations under the ITA pending on any when there is a conveyance or transfer of any
person, including a company, any charge created movable or immovable property, the instrument
on or transfer envisaged of any assets of such or document effecting the transfer is liable to
person shall be considered void as per section payment of stamp duty.
281 of the ITA –
i. if it is not made for adequate consideration A. Stamp duty on court order for
and there is a notice of the pendency of such mergers/demergers
proceeding or with a notice of such tax or
other sum payable by such person; or Since the order of the Court merging two or
more companies, or approving a demerger,
ii. if it is not made with the previous permission
has the effect of transferring property to the
of the assessing officer.
surviving /resulting company, the order of the
A certificate under section 281 is key in a merger NCLT may be required to be stamped. The stamp
or acquisition situation in a case where the laws of most states require the stamping of such
transferor has pending assessment proceedings orders. The amount of the stamp duty payable
or tax litigation under the ITA at any level. would depend on the state specific stamp law.

II. Goods and Services Tax B. Stamp duty on share transfer

The stamp duty payable on a share transfer form
From July 1, 2017, the Goods and Services Tax
executed in connection with a transfer of shares
(“GST”) regime has come into force, which
is 0.25% of the value of, or the consideration
replaced the erstwhile indirect tax regime. Under
paid for, the shares. Currently, if the shares are in
the GST regime, Central GST and State GST is
dematerialised form, the abovementioned stamp
levied on all intra-state supplies of goods and/
duty is not applicable. However, with effect from
or services, and Integrated GST is levied on
July 1, 2020, share transfers of unlisted securities
imports and all supplies of goods and/or services
both in physical and dematerialized form
undertaken in the course of inter-state trade or
will be subject to stamp duty at 0.015% of the
commerce. The slab rates for the levy of GST on
purchase consideration. Stamp duty in the case
the supply of goods/services are fixed at 5%, 12%,
of listed securities varies from 0.015% to 0.003%
18% or 28%.
depending on whether they are traded on a cash
on delivery basis or cash on non-delivery basis.
104. Special exemptions are also provided in case of death of a
shareholder, gift of shares to relatives.

43
C. Stamp duty on shareholder share purchase or slump sale. This is primarily
agreements/joint venture because in a share purchase or slump sale, there
would usually be no incidence of GST, which may
agreements
be levied on different aspects of an asset purchase.
Stamp duty will be payable as per the state Further, the rate of stamp duty is also usually
specific stamp law. higher in an asset purchase and slump sale, and
it is dependent on the nature of the assets being
transferred. While for tax purposes, no values are
D. Stamp duty on share purchase
assigned to the individual assets of the undertaking
agreements being transferred (in a slump sale), it is necessary
to assign values to assets for the purpose of
Stamp duty may be payable on an agreement
determining the stamp duty payable.
that records the purchase of shares/debentures
of a company. This stamp duty is payable in The stamp duty on a transfer of shares is
addition to the stamp duty on the share transfers currently 0.25% (0.015% from July 1, 2020) of
mentioned above. the consideration payable for the shares, which
rate is usually far less than the stamp duty rates
applicable for transfer of movable/immovable
E. Transaction costs for asset
assets which may vary from 3% to 5% from state
purchase vs. slump sale vs. to state.
share purchase
Transaction related costs are generally higher in
the case of an asset purchase as compared to a

44
 Mergers and Acquisitions

6. Conclusion
As Dale Carnegie105 said “Flaming enthusiasm, The recommendations of the JJ Irani Report are
backed by horse sense and persistence, is of particular significance in this regard. The
the quality that most frequently makes for Report has recommended that legal recognition
success”. A quote that holds good for M&A in to ‘contractual merger’ (i.e., mergers without the
India, and a credo to which Indian companies intervention of the court) can go a long way in
seem to subscribe given their successes to date eliminating the obstructions to mergers in India.
in completing acquisitions. There is little to The report also recommended that the right to
stop Indian companies that desire to be global object to a scheme of merger/acquisition should
names for playing the merger and acquisition only be available to persons holding a substantial
game globally. With a plethora of financing stake in the company.
options, this aspiration has become a reality for
As George Bernard Shaw 106 is reputed to have
many corporate houses, who can now boast of
said “we are made wise not by the recollection of
having the best in the industry under their wings.
our past, but by the responsibility for our future”,
Indian companies have often surpassed their
and the future of India is bright indeed.
foreign counterparts in corporate restructuring
both within and beyond the national frontiers.
Mergers and acquisitions are powerful indicators
Team M&A
of a robust and growing economy. The legal
framework for such corporate restructuring must
be easy and facilitative and not restrictive and
mired in bureaucratic and regulatory hurdles. The
biggest obstacle in the way of completing a merger
or an amalgamation remains the often long drawn
out court procedure required for the sanction of a
scheme of arrangement.

106. July 26, 1856 – November 2, 1950, Nobel Prize for Literature
105. November 24, 1888 – November 1, 1955.