Mergers & Acquisitions (M&A), Amalgamations & Demergers
Context
The Reserve Bank of India (RBI) on October 24th, laid down draft guidelines for bank financing of corporate acquisitions.
Under the proposed rules, banks can finance up to 70 per cent of the acquisition value, with the balance 30 per cent to be funded by the acquiring company through its own equity.
Corporate restructuring through mergers and demergers is considered a "Panacea for corporate turbulence" and a key strategy for corporate growth.
Mergers & Amalgamations (M&A)
The terms 'merger' and 'amalgamation' are used synonymously and are likened to "Marriages".
In an amalgamation, the undertaking (property, assets, and liability) of one or more companies (amalgamating company) is absorbed by an existing or new company (amalgamated company).
The amalgamating company integrates with the amalgamated company and is dissolved without winding up.
Merger:
Income-Tax Act, 1961 Definition (Sec 2(1B)):
A merger where:
All assets and liabilities of the amalgamating company become assets and liabilities of the amalgamated company
Shareholders holding not less than 3/4th in value of the shares in the amalgamating company become shareholders of the amalgamated company
Demerger
A demerger refers to the transfer of one or more undertakings of a company to another company, resulting in the creation of two or more distinct companies.
All the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger.
Income-Tax Act, 1961 Definition (Sec 2(19AA)):
It is a transfer of one or more undertakings from a "demerged company" to a "resulting company" such that:
All property and liabilities of the undertaking are transferred
The transfer is at book value
The resulting company issues shares to the shareholders of the demerged company on a proportionate basis
The transfer is on a "going concern basis".
Key Regulatory Bodies & Frameworks
Companies Act (1956/2013):
The primary legislation facilitating compromise, arrangement, or reconstruction.
Income Tax Act, 1961: Provides tax implications for mergers and demergers, including exemptions for shareholders and the transfer of assets.
Competition Commission of India (CCI): Monitors and regulates mergers and acquisitions that may impact market competition under the Competition Act, 2002.
The High Court / NCLT:
It has jurisdiction over the scheme.
Petitions are filed with the High Court of the state where the registered office is located.
SEBI:
The Takeover Code and SEBI circulars regulate schemes involving listed companies.
Competition Commission of India (CCI):
The Competition Act, 2002, regulates 'combinations' (mergers) that meet specified asset or turnover thresholds.
Reserve Bank of India (RBI):
Approval is required for mergers involving foreign companies.