SEBI TAKEOVER CODE

1. What is meant by Takeovers & Substantial acquisition of shares?

When an "acquirer" takes over the control of the "target company", it is termed as Takeover.
When an acquirer acquires "substantial quantity of shares or voting rights" of the Target
Company, it results into substantial acquisition of shares. The term "Substantial" which is
used in this context has been clarified subsequently.

2. What is a Target company?

A Target company is a listed company i.e. whose shares are listed on any stock exchange
and whose shares or voting rights are acquired/ being acquired or whose control is taken
over/being taken over by an acquirer.

3. Who is an Acquirer?

An Acquirer means (includes persons acting in concert (PAC) with him) any
individual/company/any other legal entity which intends to acquire or acquires substantial
quantity of shares or voting rights of target company or acquires or agrees to acquire control
over the target company.

4. What is meant by the term "Persons Acting in Concert (PACs)"

PACs are individual(s) /company(ies)/ any other legal entity(ies) who are acting together for
a common objective or for a purpose of substantial acquisition of shares or voting rights or
gaining control over the target company pursuant to an agreement or understanding whether
formal or informal. Acting in concert would imply co-operation, co-ordination for acquisition of
voting rights or control. This co-operation/ co-ordinated approach may either be direct or
indirect.
The concept of PAC assumes significance in the context of substantial acquisition of shares
since it is possible for an acquirer to acquire shares or voting rights in a company "in
concert" with any other person in such a manner that the acquisition made by them may
remain individually below the threshold limit but may collectively exceed the threshold limit.
Unless the contrary is established certain entities are deemed to be persons acting in
concert like companies with its holding company or subsidiary company, mutual funds with
its sponsor / trustee/ Asset management company, etc.

5. How substantial quantity of shares or voting rights is defined?

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 has defined
substantial quantity of shares or voting rights distinctly for two different purposes:

I. Threshold of disclosure to be made by acquirer(s):

1) 5% and more shares or voting rights: A person who, alongwith PAC, if any, (collectively
referred to as " Acquirer" hereinafter) acquires shares or voting rights (which when taken
together with his existing holding) would entitle him to more than 5% or 10% or 14% shares
or voting rights of target company, is required to disclose at every stage the aggregate of his
shareholding to the target company and the Stock Exchanges within 2 days of acquisition or
receipt of intimation of allotment of shares.
2) Any person who holds more than 15% but less than 55% shares or voting rights of target
company, and who purchases or sells shares aggregating to 2% or more shall within 2 days
disclose such purchase/ sale along with the aggregate of his shareholding to the target
company and the Stock Exchanges.
3) Any person who holds more than 15% shares or voting rights of target company and a
promoter and person having control over the target company, shall within 21 days from the
financial year ending March 31 as well as the record date fixed for the purpose of dividend
declaration, disclose every year his aggregate shareholding to the target company.
4) The Target company, in turn, is required to inform all the stock exchanges where the
shares of target company are listed, every year within 30 days from the financial year ending
March 31 as well as the record date fixed for the purpose of dividend declaration.

(II) Trigger point for making an open offer by an acquirer

1) 15% shares or voting rights:

An acquirer who intends to acquire shares which alongwith his existing shareholding would
entitle him to exercise 15% or more voting rights, can acquire such additional shares only
after making a public announcement (PA) to acquire atleast additional 20% of the voting
capital of target company from the shareholders through an open offer.

2) Creeping acquisition limit:

An acquirer who holds 15% or more but less than 55% of shares or voting rights of a target
company, can acquire such additional shares as would entitle him to exercise more than 5%
of the voting rights in any financial year ending March 31 only after making a public
announcement to acquire atleast additional 20% shares of target company from the
shareholders through an open offer.

3) Consolidation of holding:

An acquirer who holds 55% or more but less than 75% shares or voting rights of a target
company, can acquire further shares or voting rights only after making a public
announcement to acquire atleast additional 20% shares of target company from the
shareholders through an open offer.

6. How is "control" defined?

Control includes the right to appoint directly or indirectly or by virtue of agreements or in any
other manner majority of directors on the Board of the target company or to control
management or policy decisions affecting the target company. However, in case there are
two or more persons in control over the target company the cesser of any one of such
persons from such control shall not be deemed to be a change in control of management nor
shall any change in the nature and quantum of control amongst them constitute change in
control of management provided this transfer is done in terms of Reg. 3(1)(e). Also if
consequent upon change in control of the target company in accordance with regulation 3,
the control acquired is equal to or less than the control exercised by person (s) prior to such
acquisition of control, such control shall not be deemed to be a change in control.

7. What is a Public Announcement (PA)?

A public announcement is an announcement made in the newspapers by the acquirer

primarily disclosing his intention to acquire shares of the target company from existing
shareholders by means of an open offer.

8. What are the disclosures required to be made under Public Announcement?

The disclosures in the announcement include the offer price, number of shares to be
acquired from the public, identity of acquirer, purpose of acquisition, future plans of acquirer,
if any, regarding the target company, change in control over the target company, if any, the
procedure to be followed by acquirer in accepting the shares tendered by the shareholders
and the period within which all the formalities pertaining to the offer would be completed.

9. What is the objective of Public Announcement?

The Public Announcement is made to ensure that the shareholders of the target company
are aware of an exit opportunity available to them.

10. Can Acquirer make an offer for less than 20% of shares?

No, the acquirer cannot make an offer for less than 20% of shares. The acquirer has to
make an offer for a minimum of 20% (less only in specified cases).

11. Who is required to make a Public Announcement and when is the Public
Announcement required to be made?

The Acquirer is required to appoint a Merchant Banker (MB) registered with SEBI before
making a PA . PA is required to be made through the said MB. The acquirer is required to
make the P.A within four working days of the entering into an agreement to acquire shares
or deciding to acquire shares/ voting rights of target company or after any such change or
changes as would result in change in control over the target company.

In case of indirect acquisition or change in control, the PA shall be made by the acquirer
within three months of consummation of such acquisition or change in control or
restructuring of the parent or the company holding shares of or control over the target
company in India. The offer price in such cases shall be determined with reference to the
date of the public announcement for the parent company and the date of the public
announcement for acquisition of shares of the target company, whichever is higher, in
accordance with the parameters mentioned in the Takeover Regulations.

12. Whether appointment of Merchant Banker for the offer process is mandatory?
Yes

12. What documents are to be filed with SEBI after making a P.A. and when are these
documents to be filed ?

A hard and soft copy of the PA are required to be submitted to SEBI simultaneously with the
publication of the same in the newspapers.

A draft letter of offer is required to be filed with SEBI within 14 days from the date of Public
Announcement alongwith a filing fee of Rs.50,000/- per letter of offer (payable by Banker’s
Cheque / Demand Draft) A due diligence certificate as well as registration details as per
SEBI circular no. RMB (G-1) series dated June 26, 1997 are also required to be filed
alongwith the draft letter of offer.

13. Does SEBI "approve" the draft letter of offer?

Filing of draft Letter of Offer with SEBI should not in any way be deemed or construed that
the same has been cleared, vetted or approved by SEBI. The Letter of Offer is submitted to
SEBI for a limited purpose of overseeing whether the disclosures contained therein are
generally adequate and are in conformity with the Takeover Regulations. This requirement is
to facilitate the shareholders to take an informed decision with regard to the Offer. SEBI
does not take any responsibility either for the truthfulness or correctness of for any
statement, for financial soundness of Acquirer, or of Persons Acting in Concert, or of Target
Company, whose shares are proposed to be acquired or for the correctness of the
statements made or opinions expressed in the Letter of Offer. It should be understood that
while Acquirer is primarily responsible for the correctness, adequacy and disclosure of all
relevant information in this Letter of Offer, the Manager to the Offer( a Merchant Banker ) is
expected to exercise due diligence to ensure that the Acquirer duly discharges its
responsibility adequately.

14. What is a letter of offer?

A letter of offer is a document addressed to the shareholders of the target company

containing disclosures of the acquirer/ PACs, target company, their financials, justification of
the offer price, the offer price, number of shares to be acquired from the public, purpose of
acquisition, future plans of acquirer, if any, regarding the target company, change in control
over the target company , if any, the procedure to be followed by acquirer in accepting the
shares tendered by the shareholders and the period within which all the formalities
pertaining to the offer would be completed.
15. What happens once SEBI gives comments on the draft letter of offer?

The MB will incorporate in the letter of offer the comments made by SEBI and then send
within 45 days from the date of PA the letter of offer alongwith the blank acceptance form , to
all the shareholders whose names appear in the register of the company on the Specified
Date. The offer remains open for 20 days. The shareholders are required to send their Share
certificate(s) / related documents to registrar or Merchant banker as specified in PA and
letter of offer. The acquirer is required to pay consideration to all those shareholders whose
shares are accepted under the offer, within 15 days from the closure of offer.

In their own interest, the shareholders are advised to send such documents under registered
post. Further, the shareholders may also note that under no circumstances such documents
should be sent to the acquirer.

16. How is the price determined in an open offer?

SEBI does not approve the offer price. The acquirer/ Merchant Banker is required to ensure
that all the relevant parameters are taken in to consideration while determining the offer
price and that justification for the same is disclosed in the letter of offer

The relevant parameters are :

(a) negotiated price under the agreement which triggered the open offer.
(b) price paid by the acquirer or persons acting in concert with him for acquisition, if any,
including by way of allotment in a public or rights or preferential issue during the twenty six
week period prior to the date of public announcement, whichever is higher;
(c) the average of the weekly high and low of the closing prices of the shares of the target
company as quoted on the stock exchange where the shares of the company are most
frequently traded during the twenty six weeks or the average of the daily high and low prices
of the shares as quoted on the stock exchange where the shares of the company are most
frequently traded during the two weeks preceding the date of public announcement,
whichever is higher.

In case the shares of Target Company are not frequently traded then instead of point (c)
above, parameters based on the fundamentals of the company such as return on net worth
of the company, book value per share, EPS etc. are required to be considered and
disclosed.
In case of non-compete agreement for payment to any person other than the target
company, if the payment is more than 25% of the offer price arrived in terms of the
Regulations, the same has to be factored into the offer price.

17. What are the criteria for determining whether the shares of the Target Company are
frequently or infrequently traded?

The shares of the target company will be deemed to be infrequently traded if the annualised
trading turnover in that share during the preceeding 6 calendar months prior to the month in
which the PA is made is less than 5% (by number of shares) of the listed shares. If the said
turnover is 5% or more, it will be deemed to be frequently traded.

18. Are only those shareholders whose names appear in the register of target company
on a specified date, eligible to tender their shares in the open offer?

No. Any shareholder who holds the shares on or before the date of closure of the offer is
eligible to participate in the offer.

19. What is a competitive bid?

Competitive bid is an offer made by a person, other than the acquirer who has made the first
public announcement.
20. What happens if there is a competitive offer and a person had availed the first offer at
a lower price? Can the person switch his acceptance to a better offer?

Yes, switching of acceptances between different offers is possible. The shareholder has the
option to withdraw acceptance tendered by him upto three working days prior to the date of
closure of the offer

To enable the shareholders to be in a better position to decide as to which of the subsisting

offers is better and also not to cause last minute decisions / confusions, the offer price and
size are effectively frozen for the last 7 working days prior to the closing date of the offers.
Shareholders may wait till the commencement of that period to be aware of upward revisions
in the offer price and size of the offers, if any.

21. Can an acquirer withdraw the offer once made?

No, the offer once made can not be withdrawn except in the following circumstances:
· Statutory approval(s) required have been refused;
· The sole acquirer being a natural person has died;
· Such circumstances as in the opinion of the Board merits withdrawal.

22. How can a person avail the offer if he/she has not received the letter of offer?

The Public Announcement contains procedure for such cases i.e. where the shareholders do
not receive the letter of offer or do not receive the letter of offer in time. The shareholders are
usually advised to send their consent to Registrar to offer, if any or to MB on plain paper
stating the name, address, number of shares held, Distinctive Folio No, number of shares
offered and bank details alongwith the documents mentioned in the Public Announcement,
before closure of the offer. The public announcement and the letter of offer along with the
form of acceptance is available on the SEBI website at www.sebi.gov.in.

23. Is there any compensation to a shareholder for delayed receipt of payment under the
offer?
Acquirers are required to complete the payment of consideration to shareholders who have
accepted the offer within 15 days from the date of closure of the offer. In case the delay in
payment is on account of non receipt of statutory approvals and if the same is not due to
wilful default or neglect on part of the acquirer, the acquirers would be liable to pay interest
to the shareholders for the delayed period in accordance with Regulations.

If the delay in payment of consideration is not due to the above reasons, it would be treated
as a violation of the Regulations and therefore, also liable for other action in terms of the
Regulations.

24. Is the acquirer required to accept all the shares under the open offer?

No, if the shares received by the acquirer are more than the shares agreed to be acquired by
him, the acceptance would be on proportionate basis.

25. What are the safeguards incorporated in the takeover process so as to ensure that
shareholders get their payments under the offer/ receive back their share
certificates?

Before making the Public Announcement, the acquirer has to open an escrow account in the
form of cash deposited with a scheduled commercial bank or bank guarantee in favour of the
Merchant Banker or deposit of acceptable securities with appropriate margin with the
Merchant Banker. The Merchant Banker is also required to confirm that firm financial
arrangements are in place for fulfilling the offer obligations. In case, the acquirer fails to
make the payment, MB has a right to forfeit the escrow account and distribute the proceeds
in the following way.
a) 1/3 of amount to target company
b) 1/3 to regional SEs, for credit to investor protection fund etc.
c) 1/3 to be distributed on pro rata basis among the shareholders who have accepted the
offer.
The Merchant Banker is required to ensure that the rejected documents which are kept in
the custody of the Registrar / Merchant Banker are sent back to the shareholder through
Registered Post.

Besides forfeiture of escrow account, SEBI can initiate separate action against the acquirer
which may include prosecution / barring the acquirer from entering the capital market for a
specified period etc.

26. Whether all types of acquisitions of shares or voting rights over and above the limits
specified in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,
1997, necessarily require acquirer to make a public announcement followed up by an
open offer?

No. Certain type of acquisitions as stipulated under regulation 3 of Chapter I of the

Regulations, are specifically exempted from the open offer process subject to the acquirer
complying with the requirements/conditions, as may be applicable, for such acquisitions.
Such exemptions include acquisitions arising out of firm allotment in public issues, rights
issues, inter-se transfer amongst group companies, relatives, promoters, acquirer and PACs,
Indian promoters and foreign collaborators and transfer of shares from state level Financial
Institutions to co-promoters of company pursuant to the agreement etc.

27. Which are those acquisitions/ transactions where reporting to SEBI is mandatory?
Reporting is mandatory under Regulation 3(4) in respect of acquisitions arising out of firm
allotment in public issues, rights issues, inter-se transfer amongst group companies,
relatives, promoters, acquirer and PACs, Indian promoters and foreign collaborators and
transfer of shares from state level Financial Institutions to co-promoters of company
pursuant to the agreement.

28. What is the time frame to submit such report and procedure fee thereof?

The report is required to be submitted to SEBI within 21 days from the date of acquisition /
allotment alongwith a fee of Rs.10,000/- per report.

29. Is there any prescribed form of application for various reports/ documents mentioned
above?

YES, SEBI has specified the format, which is available on the SEBI webite at
www.sebi.gov.in

30. What information is required to be furnished to Stock Exchanges in compliance of the

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 and when
is it required to be furnished?

For transactions, which entail reporting requirements, details of the proposed acquisition
need to be filed with SEs where shares of target company are listed, atleast four working
days before the date of actual acquisition/ allotment.

A person who, alongwith PAC, if any, (collectively referred to as " Acquirer" hereinafter)
acquires shares or voting rights (which when taken together with his existing holding) would
entitle him to more than 5% or 10% or 14% shares or voting rights of target company, is
required to disclose at every stage the aggregate of his shareholding to the target company
and the Stock Exchanges within 2 days of acquisition or receipt of intimation of allotment of
shares.

 Any person who holds more than 15% but less than 55% shares or voting rights of target
company, and who purchases or sells shares aggregating to 2% or more shall within 2 days
disclose such purchase/ sale along with the aggregate of his shareholding to the target
company and the Stock Exchanges.

Further, annual disclosures have to be given regarding holding of promoters, persons in

control and persons holding more than 15% shares or voting rights of the Target company.
Further , a copy of the Public Announcement to acquire shares from public is to be given to
the Stock Exchanges simultaneously with the publication in the newspapers.. Subsequently,
upward revisions in offer, withdrawal of offer has also to be intimated to the Stock
Exchanges simultaneously.
31. What happens if the acquirer / target company /Merchant Banker violates the
provisions of the Regulations ?

The Regulations have laid down the general obligations of acquirer, target company and the
Merchant Banker. For failure to carry out these obligations as well as for failure / non
compliance of other provisions of the Regulations, the Regulations have laid down the
penalties for non compliance.

These penalties include

a) forfeiture of the escrow account,

b) directing the person concerned to sell the shares acquired in violation of the regulations,
c) directing the person concerned not to further deal in securities,
d) levy monetary penalties,
e) initiate prosecution proceedings.
f) directing appointment of a merchant banker for the purpose of causing disinvestment of
shares acquired in breach of regulations 10, 11 or 12
g) directing transfer of any proceeds or securities to the Investors Protection Fund of a
recognised stock exchange;
h) directing the target company or depository to cancel the shares where an acquisition of
shares pursuant to an allotment is in breach of regulations 10,11 or 12;
i) directing the target company or the depository not to give effect to transfer or further freeze
the transfer of any such shares and not to permit the acquirer or any nominee or any proxy
of the acquirer to exercise any voting or other rights attached to such shares acquired in
violation of regulations 10, 11 or 12;
j) debarring any person concerned from accessing the capital market or dealing in securities
for such period as may be determined by the Board;
k) directing the person concerned to make public offer to the shareholders of the target
company to acquire such number of shares at such offer price as determined by the Board;
l) directing disinvestment of such shares as are in excess of the percentage of the
shareholding or voting rights specified for disclosure requirement under the regulations 6,7
or 8;
m) directing the person concerned not to dispose of assets of the target company contrary to
the undertaking given in the letter of offer;
n) directing the person concerned, who has failed to make a public offer or delayed the
making of a public offer in terms of these Regulations, to the shareholders, whose shares
have been accepted in the public offer made after the delay, the consideration amount along
with interest at the rate not less than the applicable rate of interest payable by banks on fixed
deposits.
Further, the Board of Directors of the target company would also be liable for action in terms
of the Regulations and the SEBI Act for failure to carry out their obligations specified in the
Regulations.
Action can also be initiated for suspension, cancellation of certificate of registration against
an intermediary such as the Merchant Banker to the offer.

32. Are mergers and amalgamations of companies also covered under the SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997?

No, only takeovers and substantial acquisition of shares of a listed company fall within
purview of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
Mergers and Amalgamations are outside the purview of SEBI as they are a subject matter of
the Companies Act, 1956.

 35. What is the procedure for making an application to the Takeover Panel for seeking
exemption ?
The acquirer shall make an application in the standard format specified by SEBI giving all
the relevant details of the proposed acquisition along with a fee of Rs 25,000/- .The standard
format is available on the SEBI website www.sebi.gov.in.

36. How does SEBI process such application?

SEBI forwards the application to the Takeover Panel within 4-5 days of its receipt. The
Takeover Panel would make a recommendation on the application to SEBI within 15 days of
receipt of the application from SEBI. SEBI, after affording reasonable opportunity to the
concerned parties, wherever necessary, would pass a reasoned order on the application
within 30 days thereof and publish the same.
37. Are there any specific provisions for disinvestment of government shareholding in listed
Public Sector Undertakings (PSUs)?

To facilitate acquisition of shares or voting rights or control by strategic partner from the
Central Government in a listed PSU and to harmonise the process of disinvestment and
investor protection.
The said amendments include the following:

Transfer of shares and control to the strategic partner/ acquirer even before completing the
open offer formalities in terms of the Regulations;

The date of entering into the share purchase agreement would be the reference date for
making the public announcement.

The date on which the Central Government opens the financial bids would be the reference
date for classifying the shares of the company as frequently or infrequently traded and for
determination of the offer price. Non-applicability of requirement of second offer for
subsequent stage of acquisition subject to certain conditions Prohibition from making a
competitive bid. It may be noted that these amendments were made only for the purpose of
PSU disinvestment and are not available to other acquisitions.

38. Where can an investor get more information related to the SEBI Takeover Regulations?

The Bhagwati Committee report, the SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997 and subsequent amendments, public announcements and
letter of offer are available at SEBI’s website http://www.sebi.gov.in.

For any other information regarding Substantial Acquisition of Shares and Takeovers, you
may address your query to SEBI, Division of Corporate Restructuring at SEBI Bhavan, Plot
No.C4-A, 'G Block, Bandra Kurla Complex, Bandra (E), Mumbai 400 051.

COMPANIES ACT, 2013

Key provisions of the Companies Act, 2013, which could have a bearing on mergers
and acquisitions

The Companies Act, 2013 is opening up new and simple avenues for mergers, acquisitions
and restructuring operations in India. It is expected that the new legislation will reduce
shareholders’ litigation and propagate their rights. The Act seeks an alignment with other
laws such as Income Tax and exchange control provisions to facilitate its efficient
implementation.

• The new Act proposes that the National Company Law Tribunal (NCLT) will assume the
jurisdiction of High Courts in context of restructuring schemes. A commendable step in the
direction of simplifying courts’ approved merger /amalgamation/compromise processes
include relaxation of mandates in the case of mergers of small enterprises, holding
companies and their wholly owned subsidiaries, etc., where the approval of NCLT will not be
required. The minimum thresholds of 10% and 5% for shareholders and creditors objections,
respectively, are expected to eliminate the frivolous objections of small shareholders who
oppose deals under the guise of shareholder activism. Meetings of creditors may be
dispensed with if 90% of creditors (in value) give their consent to this.

• While SEBI has introduced provisions to regulate the accounting treatment for listed
companies, the new Act also brings the accounting treatment of unlisted ones under the
radar of the regulatory authorities. The NCLT cannot sanction a scheme unless a certificate
from the auditor is submitted, stating that the accounting treatment is correct. This
requirement for an auditor’s certificate is also extended to the capital-reduction process.

• The law also provides that notice of every scheme should be sent to various interested
regulatory authorities such as the RBI, the CCI and the Income Tax department, requesting
their representation. This would have an impact on timelines and could increase attention
paid and scrutiny by the authorities.

• The new provisions also require that a copy of the valuation report is annexed to the notice
sent to shareholders and creditors for meetings. Thereby,, the Companies Act, 2013 aims to
protect shareholders’ rights and enable increased scrutiny of schemes by the concerned
regulators. It also aims to increase transparency and reduce the scope for unconventional
practices, particularly where valuation and accounting considerations are involved.

• The merger of a listed company into an unlisted one will allow the latter to remain unlisted,
as long as the shareholders of the merging listed company are offered an exit
opportunity.Payment of the value of shares and other benefits needs to be in accordance
with pre-determined price formulae or according to their prescribed valuation.

• Global integration and cross-border mergers are now permitted — the older law only
welcomed foreign companies into India. However, a foreign company must be based in a
notified jurisdiction. This makes it possible for an Indian company to restructure its
shareholdings and migrate its ownership to an international holding structure, and thereby
increase its access to foreign markets. However, the extent to which this provision will be
beneficial will depend on which jurisdictions are notified for cross-border mergers under the
Act.

• Currently, companies are not prohibited from holding treasury stock. Companies are
utilizing such treasury stock to control their voting rights and manage their cash flows due to
this relaxation. On account of a merger or compromise under the new legislation, no
company can hold shares in the names of trusts, either on its own behalf or of its
subsidiaries. This is in sync with the motive of the new legislation to enable increased
transparency and accountability in the corporate.

• Investors will now be better empowered to enforce agreed on rights on specific matters by
the inclusion of entrenchment provisions in Articles of Association. Furthermore, the law also
provides for legality of inter-se shareholder arrangements relating to transfer of shares. This
is welcome for private equity investors. They will be able to use clauses such as “tag along”
and “drag along,” mentioned in the shareholder agreement. SEBI and RBI have
implemented some welcome amendments, enabling such rights, to be in sync with the
provisions of the Companies’ Ac t, 2013.

• The corporate world currently finds “minority squeeze out” a challenging task to practically
implement due to the stringent or ambiguous norms that apply to voluntary squeeze out
under the Companies Act, 1956. Retaining the provisions of voluntary squeeze out, the new
law provides for mandatory minority squeeze out as well, although with appropriate
shareholders’ resolutions. Shareholders holding more than 90% of the equity shares of
companies are to notify their intention of buying the remaining equity shares of minority
shareholders. The Act also provides for timeline- and valuation-related requirements for
purchase of shares from minority shareholders.

• Private companies in India could issue shares with differential voting rights without any
restrictions under erstwhile corporate laws. However, the Companies Act, 2013 prescribes
certain conditions such as the past track record and size of the issue of private companies to
issue shares with differential voting rights.

• The sale or transfer of the whole of an undertaking or substantially most of it by a company

now requires a Special Resolution, as opposed to an ordinary one under erstwhile laws. The
requirement for a special resolution on sale or transfer of an undertaking now extends to
private companies.

• A cooling off period of one year between two buy-backs has been prescribed, even in the
case of shareholder-approved buybacks, limiting the number of buy -backs for a company.
Even a buy-back under a scheme of arrangement will need to be compliant with conditions
prescribed under core provisions.

• Multi-layered companies have become a matter of concern for regulators and investors.
The new Act restricts investments through more than two layers of investment companies,
with certain exceptions such as in the case of outbound acquisitions in which the targets
have subsidiaries beyond two layers or where there are more than two investment
companies to meet statutory requirements.

• In line with its theme of fairness in thought and conduct, the new Act requires any
preferential allotment of capital being made by a company to be fairly valued by a registered
valuer. In the Act’s effort to give an increased impetus to corporate governance, restrictions
relating to inter-corporate loans/investments/guarantees are now also imposed on private
companies and holding subsidiary relationships. Additionally, related party transactions now
need to be undertaken at arms’ length by companies.

• The Companies Act, 2013 introduces the concept of class action suits in India. While there
is a threshold on the minimum number of shareholders or depositors required to initiate such
class action suits, this initiative will enable stakeholders to seek compensation, not only from
a company but also its directors, auditors and expert advisors for any unlawful or wrong
conduct.

• The Companies Act, 2013 brings about another radical change in the definition of
“subsidiary.” In erstwhile corporate law, a holding-subsidiary relationship was established
between two companies on the basis of an enterprise’s equity holding in its subsidiary.
According to the new laws, a holding company and its subsidiary’s relationship is dependent
on the former exercising control over half of the total share capital, which includes shares
other than equity shares.

The 2013 Act seeks to simplify the overall process of acquisitions, mergers and
restructuring, facilitate domestic and cross-border mergers and acquisitions, and thereby,
make Indian firms relatively more attractive to investors.

The 2013 Act provides for the constitution of the National Company Law Tribunal
(NCLT) as the single authority for all schemes relating to restructuring.

Key Provisions

Cross-border mergers

Various factors influence the spurt in recent cross-border mergers and acquisitions, including
the ever-increasing need of companies to tap new markets and set up global operations in
these, achieve cost reduction and synergies and secure natural resources. Cross-border
M&A is also supported by technological advancements, low cost financing arrangements
and robust market conditions, which have made deal-makers confident and think more
creatively about their global growth strategies.
The flow of transactions could be inbound (non-residents investing in India) or outbound
(Indian businesses making investments abroad). Current laws only permit inbound mergers
(foreign companies merging with Indian ones) and not the other way round. The 2013 Act
proposes to allow both — inbound and outbound cross-border mergers between Indian
companies and foreign ones. It provides for the merger of an Indian company into a foreign
one, whether its place of business is in India or in certified jurisdictions (to be notified by the
Central Government from time to time), subject to the NCLT’s and RBI’s approval. The
consideration of a merger, which will also be subject to the approval of the RBI, could either
be in cash or depository receipts, or partly in cash and partly in depository receipts.

Enabling of cross-border mergers is expected to help Indian companies in more ways than
one, including in the following:

• Restructuring their shareholdings, wherein they can migrate ownership to an international

holding structure
• Facilitating listing of entities, which may have Indian assets in overseas jurisdictions
• Providing exit routes to current investors in overseas jurisdictions

Fast-track merger

As in some overseas jurisdictions, the 2013 Act has introduced the new concept of fast-
track mergers and demergers. These provide the option of a simplified and fast-track
merge/demerger process, which can be used for the following and is an option for
companies:
• Merger of two or more specified small companies
• Merger between holding company and its wholly owned subsidiary
• Such other classes of companies as may be prescribed
In this case, the merger will have to be approved by Central Government and there will be
no requirement to approach NCLT.

Approval process

Under this process, the schemes approved by the boards of directors of companies will need
to be sent to the Registrar of Companies (RoC) and the Official Liquidator (OL) for their
suggestions or objections within 30 days. The scheme will then be considered in the
meetings of shareholders or creditors, along with their suggestions or objections, and will
have to be approved by the following classes of persons:

• Shareholders holding 90% of the total number of shares at a general meeting

• Majority creditors (representing nine-tenth in value) in a meeting convened with 21 days’

notice
After the approval mentioned above, the scheme will have to be filed with the OL, RoC and
the Central Government. In the event of there being “no objection,” this will be deemed as
approved. However, in the event of objections from the RoC or OL, the scheme may be
referred by the Central Government to the NCLT for it to consider the scheme under the
normal process of a merger. In this case, the NCLT can either mandate that the scheme is to
be considered a normal merger or it may confirm the scheme by passing an order to this
effect. In addition to the above, both the companies (transferor and transferee) will need to
file a declaration of solvency with the RoC.
Among the various features of fast-track mergers of companies, one is the exemption from
the need to obtain auditors’ certificates of compliance with applicable accounting standards.
 Demergers defined

The draft rules released by the MCA clarify that the term “demerger” is to be included within
the compromise or arrangement defined in the 2013 Act. As opposed to the 1956 Act, the
Rules provide a clear definition of the term.

Furthermore, the Rules provide for the accounting treatment for the demerger till a specific
accounting standard has been prescribed for it, which is in accordance with the conditions
stipulated in section 2(19AA) of the IT Act. The rules prescribe that the difference in the
value of assets and liabilities in the books of a demerged company will be credited to its
capital reserve or debited to its goodwill. Moreover, the difference in the net assets taken
over and shares issued as consideration will be credited to the capital reserve (excess) or
debited to goodwill (deficit) in the books of the resulting company. As compared to the IT
Act, which ignores revaluation of assets for the purpose of determining book value, the rules
of the 2013 Act enable a company to ignore any revaluation or write- off of assets, only of
the preceding two financial years. A certificate from a Chartered Accountant will also be
required to be submitted to the NCLT to the effect that the accounting treatment is in
compliance with the conditions so prescribed.

Treasury shares

Indian promoters of companies, including listed ones, have in the past used the route of
issuing treasury stocks to consolidate their holdings in companies to raise funds and as an
avenue to control voting rights. Promoters have followed the practice of transferring the
shares of their subsidiary companies to trusts and issuing shares of holding companies
pursuant to the mergers of wholly owned or partially owned subsidiaries with holding
companies, instead of canceling such shares. Past precedents include Escorts, Mahindra &
Mahindra and Jaiprakash Associates.
However, the 2013 Act restricts a transferee company from holding shares in its own name
or in the name of a trust. Any inter-company investments between companies involved in
mergers need to be mandatorily canceled in this event.The provisions given above should
result in greater transparency and reduce the scope of unconventional or ambiguous
practices, particularly where valuation and accounting considerations are involved. This
change is also in line with the 1956 Act, which prohibits a company from owning its own
shares.

Mergers of listed companies with unlisted ones

The 1956 Act does not contain any specific provision governing the merger of a listed
company with an unlisted one. It is generally assumed that shares issued pursuant to the
merger of a listed company with an unlisted one (or vice versa) need to be listed on the
stock exchanges where the transferor company was listed. There have been cases, where
the resulting company has continued to be unlisted after the demerger. Recent precedents
include the schemes of demerger of Wipro Ltd.
The 2013 Act sets out formal guidelines and provides an option to a transferee company to
remain unlisted till it is listed or applies for listing, provided the shareholders of the merged
listed company are given an exit opportunity. It also provides that provision should be made
by the NCLT for an exit route for the shareholders of a transferor company who decide to opt
out of the transferee company by making payment amounting to the value of the shares and
other benefits, in accordance with a pre-determined price formula or after a valuation report
is produced (which should not be less than the value prescribed by SEBI’s regulations).

Minority buyout
The 2013 Act has introduced an exit mechanism for minority shareholders with the intent of
reducing litigation with minority shareholders. The Act grants access to the acquirer or
person acting in concert or a person or a group of persons becoming registered
shareholders of 90% or more of the issued equity share capital of the target company (listed
or unlisted) by virtue of amalgamation, share exchange, conversion, securities or for any
other reason. Such an acquirer, person or a group of persons will notify minority
shareholders about their intention of buying the remaining equity shares. In addition, minority
shareholders may also offer their shares suo- motto to majority shareholders.

As provided in the draft rules, the price mechanism for the minority buy-back in the case of a
listed company will be the price according to SEBI’s regulations, but this needs to be carried
out by a registered valuer. Whereas, for an unlisted company, various factors are taken into
consideration, i.e., the highest price paid for an acquisition during the last 12 months and the
fair price of shares to be determined after taking into account valuation parameters as
prescribed. In addition, an registered valuer will provide a valuation report to the board of
directors of a company, justifying the methodology of arriving at such a price. On the other
hand, the shares of minority shareholders need to be acquired by majority shareholders and
not by the company and will entail outflow of funds in the hands of the majority shareholders.

• Furthermore, with a view to reduce the timelines involved in a restructuring exercise, the
2013 Act has introduced a minimum threshold for raising objections to the scheme of
arrangement, i.e., only persons holding a 10% shareholding or with a minimum outstanding
debt of 5% can object to the scheme. It provides a safeguard against frivolous litigations by
shareholders with negligible stakes (which happens in many schemes), thereby avoiding
unnecessary delays.

•The 2013 Act also empowers the NCLT to dispense with meetings of creditors if at least
90% of the creditors in value agree and confirm this by affidavit, thereby reducing the
discrepancy in practice followed by different High Courts while granting their approval on the
basis of consent letters obtained.

•The 2013 Act also requires the valuation report for the share swap ratio to be sent along
with the notice for the meeting to all stakeholders, as is currently applicable to listed
companies, thereby opening doors for larger scrutiny on the share swap ratio by
shareholders, even in the case of unlisted companies.

The implementation of the 2013 Act will also require updates in other laws to link these with
the new provisions. Laws including Stamp Duty (the conveyance rate provided for orders
under section 391–394 of the 1956 Act), Exchange Control regulations (for holding of real
estate, sectoral limits, etc.) and tax laws (definition of mergers, demergers and other
conditions for tax neutrality) will need amendments prior to notification of sections relating to
merger provisions, to provide the effect of benefits envisaged by the 2013 Act.

The 2013 Act is a step toward bringing greater transparency and accountability in the age-
old procedures of M&A, thereby visibly making the Indian Corporate Law friendlier and a
right step in the direction of “ease of M&A business”

SEBI REGULATIONS
Securities and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009
If the acquisition of an Indian listed company involves the issue of new equity shares or
securities convertible into equity shares (“Specified Securities”) by the target to the acquirer,
the provisions of Chapter VII (“Preferential Allotment Regulations”) contained in ICDR
Regulations will apply (in addition to company law requirements). Highlighted below some of
the important provisions of the Preferential Allotment Regulations.

Pricing of the Issue

The Preferential Allotment Regulations set a floor price for an issuance. The floor price of
shares is linked to the average of the weekly high and low closing price of the stock of the
company over a 26 week period or a 2 week period preceding the relevant date.

Lock-in

Securities issued to the acquirer (who is not a promoter of the target) are locked-in for a
period of 1 year from the date of trading approval. The date of trading approval is the latest
date when trading approval is granted by all stock exchanges on which the securities of the
company are listed. Further, if the acquirer holds any equity shares of the target prior to such
preferential allotment, then such prior holding will be locked in for a period of 6 months from
the date of the trading approval. If securities are allotted on a preferential basis to promoters/
promoter group34, they are locked in for 3 years from the date of trading approval subject to
a limit of 20% of the total capital of the company. The locked-in securities may be transferred
amongst promoter/ promoter group or any person in control of the company, subject to the
transferee being subject to the remaining period of the lock in.

Exemption to court approver merger

The Preferential Allotment Regulations do not apply in the case of a preferential allotment of
shares pursuant to merger / amalgamation approved by the Court under the Merger
Provisions discussed.

Takeover Code

If an acquisition is contemplated by way of issue of new shares, or the acquisition of existing

shares or voting rights, of a listed company, to or by an acquirer, the provisions of the
Takeover Code are applicable. The Takeover Code regulates both direct and indirect
acquisitions of shares or voting rights in, and control over a target company. The key
objectives of the Takeover Code are to provide the shareholders of a listed company with
adequate information about an impending change in control of the company or substantial
acquisition by an acquirer, and provide them with an exit option (albeit a limited one) in case
they do not wish to retain their shareholding in the company.

Mandatory offer

Under the Takeover Code, an acquirer is mandatorily required to make an offer to acquire
shares from the other shareholders in order to provide an exit opportunity to them prior to
consummating the acquisition, if the acquisition fulfils the conditions as set out in
Regulations 3, 4 and 5 of the Takeover Code. Under the Takeover Code, the obligation to
make a mandatory open offer by the acquirer is triggered in the following events:

Initial Trigger
If the acquisition of shares or voting rights in a target company entitles the acquirer along
with the persons acting in concert (“ PAC ”) to exercise 25% or more of the voting rights in
the target company.

Creeping Acquisition

If the acquirer already holds 25% or more and less than 75% of the shares or voting rights in
the target, then any acquisition of additional shares or voting rights that entitles the acquirer
along with PAC to exercise more than five per cent (5%) of the voting rights the target in any
financial year.It is important to note that the five per cent (5%) limit is calculated on a gross
basis i.e. aggregating all purchases and without factoring in any 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 with other subscribers in a new
issuance by the company, then the acquisition by the acquirer will be the difference between
its shareholding pre and post such new issuance. It should be noted that an acquirer (along
with PAC) is not permitted to make a creeping acquisition beyond the statutory limit of non-
public shareholding in a listed company i.e. seventy five per cent (75%).

Acquisition of ‘Control’

Regardless of the level of shareholding, acquisition of ‘control’ of a target company is not

permitted, without complying with the mandatory offer obligation under the Takeover Code.
What constitutes ‘control’ is most often a subjective test and is determined on a case-to-case
basis. For the purpose of Takeover Code, ‘control’ has been defined to include:

￭Right to appoint majority of the directors;

￭ Right to control the management or policy decisions exercisable by a person or PAC,

directly or indirectly, including by virtue of their shareholding or management rights or
shareholders agreements or voting agreements or in any other manner.

Over time, the definition of ‘control’ has been subject to different assessments and has
turned to be, quite evidently, a grey area under the Takeover Code. The Supreme Court
order in case of SEBI vs. Subhkam Ventures Private Limited, which accepted an out-of-court
settlement between the parties, had left open the legal question as to whether negative
control would amount to ‘control’ under the Takeover Code. In fact, the Supreme Court had
ruled that SAT ruling in this case (against which SEBI had appealed before the Supreme
Court) which ruled that ‘negative control’ would not amount to ‘control’ for the purpose of
Takeover Code, should not be treated as precedent. With no clear jurisprudence on the
subject-matter, each veto right would typically be reviewed from the commercial parameters
underlying such right and its impact on the general management and policy decisions of the
target company. Given the recent Jet- Etihad deal, SEBI, recently indicated, its plans to
introduce new guidelines to define ‘bright lines’ to provide more clarity as regards ‘change in
control’ in cases of mergers and acquisitions.

Indirect Acquisition of Shares or Voting Rights

For an indirect acquisition obligation to be triggered under the Takeover Code, the acquirer
must, pursuant to such indirect acquisition be able to direct the exercise of such percentage
of voting rights or control over the target company, as would otherwise attract the mandatory
open offer obligations under the Takeover Code. This provision was included to prevent
situations where transactions could be structured in a manner that would side-step the
obligations under Takeover Code.
Further, if:
￭ the proportionate net asset value of the target company as a percentage of the
consolidated net asset value of the entity or business being acquired; or

￭the proportionate sales turnover of the target company as a percentage of the consolidated
sales turnover of the entity or business being acquired; or

￭ the proportionate market capitalisation of the target company as a percentage of the

enterprise value for the entity or business being acquired; is in excess of eighty per cent, on
the basis of the most recent audited annual financial statements, then an indirect acquisition
would be regarded as a direct acquisition under the Takeover Code for the purposes of the
timing of the offer, pricing of the offer etc.

Voluntary Open Offer

An acquirer who holds between 25% and 75% of the shareholding/ voting rights in a
company is permitted to voluntarily make a public announcement of an open offer for
acquiring additional shares of the company subject to their aggregate shareholding after
completion of the open offer not exceeding 75%. In the case of a voluntary offer, the offer
must be for at least 10% of the shares of the target company, but the acquisition should not
result in a breach of the maximum non-public shareholding limit of 75%. As per SEBI’s
Takeover Code Frequently Asked Questions, any person holding less than 25%
shareholding/voting rights can also make a voluntary open offer for acquiring additional
shares.

Minimum Offer Size

a. Mandatory Offer

The open offer for acquiring shares must be for at least 26% of the shares of the target
company. It is also possible for the acquirer to provide that the offer to acquire shares is
subject to a minimum level of acceptance.

b. Voluntary Open Offer

In case of a voluntary open offer by an acquirer holding 25% or more of the shares/voting
rights, the offer must be for at least 10% of the total shares of the target company. While
there is no maximum limit, the shareholding of the acquirer post acquisition should not
exceed 75%. In case of a voluntary offer made by a shareholder holding less than 25% of
shares or voting rights of the target company, the minimum offer size is 26% of the total
shares of the company.

Pricing of the offer

Regulation 8 of the Takeover Code sets out the parameters to determine offer price to be
paid to the public shareholders, which is the same for a mandatory open offer as well as a
voluntary open offer. There are certain additional parameters prescribed for determining the
offer price when the open offer is made pursuant to an indirect acquisition. Please see
[Annexure 2] for the parameters as prescribed under Regulation 8 of the Takeover Code. It
is important to note that an acquirer to reduce the offer price but an upward revision of offer
price is permitted, subject to certain conditions.

Competitive Bid/ Revision of offer/bid

The Takeover Code also permits a person other than the acquirer (the first bidder) to make a
competitive bid, by a public announcement, for the shares of the target company. This bid
must be made within 15 working days from the date of the detailed public announcement of
the first bidder. The competitive bid must be for at least the number of shares held or agreed
to be acquired by the first bidder (along with PAC), plus the number of shares that the first
bidder has bid for. Each bidder (whether a competitive bid is made or not) is permitted to
revise his bid, provided such revised terms are more favourable to the shareholders of the
target company. The revision can be made up to three working days prior to the
commencement of the tendering period.

Take Private Mechanism

The SEBI regulations on delisting prescribe the method and conditions for delisting a
company, which earlier could only be undertaken by the promoter of the company. SEBI
notified the SEBI (Delisting of Equity Shares) (Amendment) Regulations, 2015 (“Amended
Delisting Regulations”). The Amended Delisting Regulations now allow an acquirer to initiate
delisting of the target. Further, SEBI has also amended the Takeover Code wherein it
inserted Regulation 5A to incorporate the changes introduced in the Amended Delisting
Regulation. Pursuant to Regulation 5A, now an acquirer may delist the company pursuant to
an open offer in accordance with the Delisting Regulations provided that the acquirer
declares upfront his intention to delist. Prior to the inclusion of Regulation 5A, an open offer
under the Takeover Regulations could not be clubbed with a delisting offer, making it
burdensome for acquirers to delist the company in the future. The Takeover Code provided
for a one year cooling off period between the completion of an open offer under the
Takeover Regulations and a delisting offer in situations where on account of the open offer
the shareholding of the promoters exceeded the maximum permissible non-public
shareholding of 75% as provided under the Securities Contract Regulation Rules. This
restriction is not affected by Clause 5A in that the acquirer will 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 detailed public statement.

LISTING AGREEMENT

Listing Agreement

The Securities Contract (Regulations Act), 1956 requires every person whose securities are
listed on a stock exchange to comply with the conditions of the listing agreement with that
stock exchange. Clause 40A of the listing agreement51 entered into by a company with the
stock exchange on which its shares are listed, requires the company to maintain a public
shareholding52 of at least 25% on a continuous basis. If the public shareholding falls below
the minimum level pursuant to:

￭ the issuance or transfer of shares (i) in compliance with directions of any regulatory or
statutory authority, or (ii) in compliance with the Takeover Code, or

￭ reorganization of capital by a scheme of arrangement, the stock exchange may provide

additional time of 1 year (extendable upto to 2 years) to the company to comply with the
minimum requirements.

In order to comply with the minimum public shareholding requirements, the company must
either issue shares to the public, or offer shares of the promoters to the public. If a company
fails to comply with the minimum requirements, its shares may be delisted by the stock
exchange, and penal action may also be taken against the company. SEBI in its board
meeting of November 19th 2014 approved the SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2014 (“Listing Regulations”). The Listing Regulations provide for
a comprehensive framework governing various types of listed securities and when notified
will replace the Listing Agreements.

COMPETITION LAW, 2005

The Competition Act, 2002 replaced the Monopolies and Restrictive Trade Practices Act,
1969, and takes a new look at competition altogether. The Competition Act primarily covers
(i) anti- competitive agreements (Section 3), (ii) abuse of dominance (Section 4), and (iii)
combinations (Section 5, 6, 20, 29, 30 and 31). The Competition Commission of India
(Procedure in regard to the transaction of business relating to combinations) Regulations,
2011 (“Combination Regulations”) govern the manner in which the Competition Commission
of India (CCI) will regulate combinations which have caused or are likely to cause an
appreciable adverse effect on competition (“AAEC”) in India.

Anti - Competitive Agreements

The Competition Act essentially contemplates two kinds of anti-competitive agreements –

horizontal agreements i.e. agreements between entities engaged in similar trade of goods or
provisions of services, and vertical agreements i.e. agreements between entities in different
stages / levels of the chain of production, in respect of production, supply, distribution,
storage, sale or price of goods or services.

Anti-competitive agreements that cause or are likely to cause an AAEC within India are void
under the provisions of the Competition Act. A horizontal agreement that (i) determines
purchase / sale prices, or (ii) limits or controls production supply, markets, technical
development, investment or provision of services, or (iii) shares the market or source of
production or provision of services, by allocation of geographical areas/type of goods or
services or number of customers in the market, or (iv) results in bid rigging / collusive
bidding, is presumed to have an AAEC. On the other hand, vertical agreements, such as tie-
in arrangements, exclusive supply or distribution agreements, etc., are anti-competitive only
if they cause or are likely to cause an appreciable adverse effect on competition in India.

Abuse of Dominant Position

An entity is considered to be in a dominant position if it is able to operate independently of

competitive forces in India, or is able to affect its competitors or consumers or the relevant
market in India in its favor. The Competition Act prohibits an entity from abusing its dominant
position. Abuse of dominance would include imposing unfair or discriminatory conditions or
prices in purchase/sale of goods or services and predatory pricing, limiting or restricting
production / provision of goods/services, technical or scientific development, indulging in
practices resulting in denial of market access etc.

Regulation of Combinations

The Combination Regulations are the key regulations through which the CCI regulates
combinations such as mergers and acquisitions. Under Section 32 of the Competition Act,
the CCI has been conferred with extra-territorial jurisdiction. This means that any acquisition
where assets / turnover are in India (and exceed specified limits) would be subject to the
scrutiny of the CCI, even if the acquirer and target are located outside India.
A “Combination”, for the purposes of the Competition Act means:
￭ an acquisition of control, shares or voting rights or assets by a person;
￭ an acquisition of control of an enterprise where the acquirer already has direct or indirect
control of another engaged in similar or identical business; or
￭ a merger or amalgamation between or among enterprises; that exceed the ‘financial
thresholds’ prescribed under the Competition Act.

Financial thresholds

Competition Act prescribes financial thresholds linked with assets / turnover for the purposes
of determining whether a transaction is a ‘combination’, and CCI approval is required only for
combinations. A transaction that satisfies any of the following tests is a combination:
An acquisition where the parties to the acquisition, i.e. the acquirer and the target, jointly
have:
Test 1: India Asset Test and India Turnover Test - in India (i) assets higher than INR 1500
crore; or (ii) turnover higher than INR 4500 crore; or
Test 2: Global Asset Test and Global Turnover Test - Total assets in India or outside higher
than USD 750 million of which assets in India should be higher than INR 750 crore; or (ii)
total turnover in India or outside is higher than USD 2250 million of which turnover in India
should be higher than INR 2250 crore; OR The acquirer group would have – ￭Test 1: India
Asset Test and India Turnover Test - in India (i) assets higher than INR 6000 crore; or (ii)
turnover higher than INR 18000 crore; or ￭ Test 2: Global Asset Test and Global Turnover
Test - (i) Total assets in India or outside higher than USD 3 billion of which assets in India
are higher than INR 750 crore; or (ii) total turnover in India or outside is higher than USD 9
billion of which turnover in India should be higher than INR 2250 crore.

Small Company Exemption

To facilitate M&A for small companies, an exemption has been granted to companies which
have assets of less than INR 250 crore or turnover of less than INR 750 crores respectively
(“SME Exemption”) in India. However, this exemption is only available until March 04, 2016.

Pre-Filing Consultation

Any enterprise which proposes to enter into a combination may request in writing to the CCI,
for an informal and verbal consultation with the officials of the CCI about filing such proposed
‘combination’ with CCI. Advice provided by the CCI during such pre-filing consultation is not
binding on the CCI.

Mandatory Reporting

Section 6 makes void any combination which causes or is likely to cause an AAEC within
India. Accordingly, Section 6 of the Act requires every acquirer to notify the CCI of a
combination within 30 days of the decision of the combination or the execution of any
agreement or other document for acquisition and seek its approval prior to effectuating the
same. The CCI must form a prima facie opinion on whether a combination has caused or is
likely to cause an AAEC within the relevant market in India, within 30 days of filing. The
combination will become effective only after the expiry of 210 days from the date on which
notice is given to the CCI, or after the CCI has passed an order approving the combination.

Multiple tranches

In order to ensure that all the combinations arising from small individual transactions which
otherwise in isolation may not qualify the financial thresholds but along with inter-connected
or inter-dependent transactions may qualify the financial thresholds are notified to CCI,
Combinations Regulations provide that in a situation where the ultimate intended effect of a
business transaction is achieved by way of a series of steps or smaller individual
transactions which are inter-connected or inter-dependent on each other, one or more of
which may amount to a combination, a single notice, covering all these transactions, may be
filed by the parties to the combination. Further, Combinations Regulations were amended in
2014, wherein a provision was inserted which mandates companies to notify CCI if the
substance of the transaction and any structure of the transaction(s), comprises a
combination, and that has the effect of avoiding notice in respect of the whole or a part of the
combination shall be disregarded.

Exceptions to Filing

Schedule I to the Combination Regulations specifies certain categories of transactions which

are ordinarily not likely to have an AAEC and therefore would not normally require to be
notified to the CCI which inter alia include:

￭ Acquisitions of shares or voting rights as an investment or in the ordinary course of

business as long as the total shares or voting rights held by the acquirer directly or indirectly
is less than 25% of the total shares or voting rights of the company, and as long as control is
not acquired. Acquisition of not more than 5% shares or voting rights in any financial year
(on a gross basis) by an acquirer or its group, if (a) the acquirer or its group already hold
25% or more of the shares or voting rights of the acquired enterprise but do not hold 50% or
more shares of voting rights of the acquired enterprise either prior to or after such acquisition
and (b) joint or sole control is not acquired.

￭Acquisition by an acquirer who already had 50% or more shares or voting rights except in
cases where the transaction results in a transfer from joint control to sole control.

￭ Acquisition of assets unrelated to the business of the acquirer, or acquired solely as an

investment or in the ordinary course of business, other than an acquisition of a substantial
business operation.

￭Acquisitions of stock-in-trade, raw materials, stores and spares, trade receivables and other
similar current assets (in the ordinary course of business).
￭Acquisitions of shares or voting rights pursuant to a bonus or rights issues, or buyback of
shares, not leading to acquisition of control.
￭ Acquisition of shares or voting rights or assets within the same group, except where the
acquired enterprise is jointly controlled by enterprises that are not part of the same group.
Merger or amalgamation: (i) of holding and subsidiary company and/ or (ii) of companies
which are majority held by the same group. However, the merger or amalgamation must not
lead to the transfer of joint control to sole control.
￭ A share subscription, financing facility or any acquisition by a public financial institution,
foreign institutional investor, bank or venture capital fund pursuant to any loan or investment
agreement, would not qualify as a combination that will be regulated by the CCI, and such
transactions are exempt from the Combination related provisions under the Competition Act.
However, the public financial institution, FII, bank or venture capital fund is required to notify
the CCI of the details of the acquisition within 7 day of completion of the acquisition.
￭ Impact on transactions involving listed companies. In combination involving listed
companies, a primary transaction may trigger notification with CCI and subsequent open
offer obligation under the Takeover Code. In cases where clearance from the CCI is not
received within the statutory time period required to complete the open offer as prescribed
under the Takeover Regulations, then as per the Takeover Code, SEBI may direct the
acquirer to pay interest to shareholders for the delay beyond the maximum period within
which the tendering shareholders are required to be paid.
EXCHANGE CONTROLS

Significant controls have been removed and foreign companies can freely acquire Indian
companies across most sectors, these are subject to strict pricing and reporting
requirements imposed by the Reserve Bank of India (“RBI”). Investments in, and acquisitions
(complete and partial) of, Indian companies by foreign entities, are governed by the terms of
the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident
outside India) Regulations, 2000 (the “FI Regulations”) and the provisions of the Industrial
Policy and Procedures issued by the Secretariat for Industrial Assistance (SIA) in the
Ministry of Commerce and Industry, Government of India.
The FI Regulations segregate foreign investments into various types: foreign direct
investments (FDI), foreign portfolio investments (FPI), investments by non-resident Indians
(NRI) on portfolio basis, or on non-repatriation basis, foreign venture capital investments.

Foreign Direct Investment (FDI)

Schedule 1 of the FI Regulations contains the Foreign Direct Investment Scheme (“FDI
Scheme”), and sets out the conditions for foreign direct investments in India. Annex A of the
FDI Scheme sets out the sectors in which FDI is prohibited. This list includes sectors such
as lottery, gambling etc. A foreign investor can acquire shares or convertible debentures in
an Indian company upto the investment (or sectoral) caps for each sector provided in
Annexure B to the FDI Scheme. Investment in certain sectors requires the prior approval of
the Foreign Investment Promotion Board (“FIPB”) of the Government of India, which is
granted on a case to case basis. Any foreign equity inflow that requires prior FIPB approval
and is above INR 1,200 crores (i.e. INR 12 Billion) requires a prior approval of the Cabinet
Committee on Economic Affairs.

Portfolio Investment Scheme

Foreign portfolio investors registered with the SEBI as per the SEBI (Foreign Portfolio
Investment) Regulations, 2014 and non-resident Indians (”NRI”), are permitted to invest in
shares / convertible debentures under the portfolio investment scheme. This scheme permits
investment in listed securities through the stock exchange.

Foreign venture capital investors (“FVCI”)

An FVCI registered with the SEBI can invest in Indian venture capital undertakings, venture
capital funds or in schemes floated by venture capital funds under the terms of Schedule 6 of
the FI Regulations. One of the important benefits of investing as an FVCI is that an FVCI is
not required to adhere to the pricing requirements that are otherwise required to be met by a
foreign investor under the automatic route when purchasing or subscribing to shares or
when selling such shares.

Indirect Foreign Investment

Foreign investment may be direct or indirect. Generally speaking (and subject to certain
exceptions) if an Indian investing company is “owned” or “controlled” by “non-resident
entities”, then the entire investment by the investing company into the subject downstream
Indian investee company would be considered as indirect foreign investment.

Investment in a holding company

Foreign investment, whether direct or indirect, into a non-operational company, including a
holding company, requires prior approval of the FIPB.

Acquisition of rights shares/ bonus shares

A non-resident may subscribe to shares issued on a rights basis by an Indian company

provided that the offer of shares does not result in increase in the percentage of foreign
equity permitted for such company, and the price at which the shares are offered to the non-
resident is not less than the price offered to the resident shareholders. A non- resident may
also acquire bonus shares under the FI Regulations. The rights/bonus shares will however
be subject to the same conditions as those applicable to the original shares.

Issue of Shares under merger/ amalgamation / demerger

A transferee company may issue shares to the shareholders of a transferor company under
a scheme of merger or amalgamation approved by an Indian court, provided that the
sectoral caps mentioned above are not exceeded.

Issue of shares against import of capital goods and pre-operative/pre- incorporation

expenses

Indian companies can issue and allot equity shares/ preference shares to a person resident
outside India under the automatic route against import of capital goods/ machineries /
equipment (including second-hand machineries) and pre-operative/pre- incorporation
expenses (including payments of rent, etc.) subject to compliance with the conditions
prescribed. Further, equity shares/ convertible preference shares/ convertible debentures
can be issued by a company against any other funds payable by it provided that: (i) such
shares/ debentures should be issued in accordance with the foreign exchange laws, and (ii)
the shares issued shall be subject to the applicable tax laws and the conversion to equity
should be net of applicable taxes.

Issue of partly-paid up shares and share warrants

Partly paid shares can be issued to non-residents if (i) pricing of partly paid shares is
determined upfront and at least 25% of the total consideration amount is paid up front; and
(ii) the remaining amount is invested within a period of 12 months of issuance. As regards
the issuance of share warrants, the following conditions must be complied with: (i) pricing
and conversion formula / price is required to be determined up front and 25% of the total
consideration is required to be paid up front; and (ii) the remaining amount is required to be
brought in within a period of 18 months. Further, the price at the time of conversion should
not be less than the fair value of the shares as calculated at the time of issuance of such
warrants. It must also be noted that only companies in which investment can be made under
the automatic route can issue partly paid shares or warrants. For companies under the
approval route, prior FIPB approval will be required to issue partly paid shares or warrants.

Pricing under the automatic route

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 FDI Regulations. The price of shares issued to non- residents cannot be less than the
fair value of shares as determined as per any internationally accepted pricing methodology
for valuation of shares on arm’s length basis, or if the Indian company is listed, the price
cannot be less than the price calculated in accordance with the SEBI guidelines.

Foreign Technology Collaborations

Payments for foreign technology collaboration by Indian companies are allowed under the
automatic route subject to compliance without any limits.

ADR/GDR

An Indian company may also issue American Depositary Receipts / Global Depositary
Receipts to foreign investors in accordance with the new Depository Receipts Scheme, 2014
(“DR Scheme”).

Overseas Direct Investment

An Indian company that wishes to acquire or invest in a foreign company outside India must
comply with the Foreign Exchange Management (Transfer or Issue of any Foreign Security)
Regulations, 2004 (the “ODI Regulations”). The ODI Regulations are an extension of the
process of liberalization initiated by the Government of India in the 1990s. The regulations
contain detailed provisions governing investments made by an Indian company in a foreign
company by grant of ‘general permission’ to make a ‘direct investment outside India’ in bona
fide business activities, subject to compliance with the regulations. The term ‘direct
investment outside India’ has been defined as ‘ investment by way of contribution to the
capital or subscription to the Memorandum of Association of a foreign entity or by way of
purchase of existing shares of a foreign entity either by market purchase or private
placement, or through stock exchange, but does not include portfolio investment ’. The
Indian party may choose to fund the aforesaid investment out of balances held in Exchange
Earner’s Foreign Currency account, by drawing funds from an authorized dealer subject to
certain limits, or using the proceeds of an ADR/GDR issue.

Direct Investment in a Joint Venture/ Wholly Owned Subsidiary

An Indian company is permitted to invest in a joint venture (“JV”) or a wholly owned

subsidiary (“WOS”) upto 400 % of the net worth of the Indian company as on the date of the
last audited balance sheet without seeking the prior approval of the RBI, subject to the
following conditions being fulfilled: ￭ The Indian company is not on the RBI’s caution list or
under investigation by the Enforcement Directorate. ￭ The Indian company routes all the
transactions relating to the investment in the JV or the WOS through only one branch of an
authorized dealer to be designated by it. Overseas direct investment cannot be made in the
real estate business or banking business. Further, investment in the financial services sector
is subject to special requirements.

Investment by way of capitalization of exports, or fees royalties etc., due to the Indian
company

The ODI Regulations permit a company to invest in an entity outside India by way of
capitalization of amounts due to it from the investee company, for sale of plant, machinery,
equipment and other goods/ software, or any fees, royalty, commissions or other
entitlements due to it for transfer of technical know- how, consultancy, managerial or other
services. A special case is carved out for a software exporter who wishes to start a software
company overseas – the Indian exporter is permitted to receive shares up to 25% of the
value of exports in the overseas company by filing an application with the authorized dealer.

Transfer of shares
An Indian company may sell the securities of an overseas JV/WOS which has been in
operation for a year provided that the following conditions, inter alia, are fulfilled: ￭ The sale
does not result in any write off of the investment made; ￭ The sale should be through the
stock exchange on which the securities of the overseas JV/WOS are listed. Where the
shares of the JV/WOS company are not listed, the sale price of the shares should not be
less than the fair value of the shares as determined by a certified Chartered Accountant or
Certified Public Accountant; ￭ The exiting Indian seller does not have any dues from the
JV/WOS. The securities of the JV/WOS may also be pledged by the Indian company as
security, to avail of fund/ non-fund based credit facilities for itself or for the JV/ WOS.

Investment by Individuals

Under the ODI Regulations, there are limits on individuals owning shares in foreign
companies. An individual may inter-alia invest in equity and in rated bonds / fixed income
securities of overseas companies as permitted in terms of the limits and conditions specified
under the Liberalized Remittance Scheme (up to a maximum amount of USD 125,000 per
annum). The Liberalized Remittance Scheme was introduced in 2004 to simplify and
liberalize the foreign exchange facilities available to resident individuals. Remittance under
the Scheme is permitted for any permitted current or capital account transactions or a
combination of both. The funds remitted can be used for various purposes such as
purchasing objects, making gifts and donations, acquisition of employee stock options and
units of Mutual Funds, Venture Funds, unrated debt securities, promissory notes, etc., under
this Scheme.

Further, general permission has been granted to individuals under the ODI Regulations to
acquire foreign securities: ￭ as a gift from any person resident outside India; ￭ under
Cashless Employees Stock Option Scheme issued by a company outside India, provided it
does not involve any remittance from India; ￭ by way of inheritance from a person whether
resident in or outside India; ￭ under ESOP Schemes, if he is an employee, or, a director of
an Indian office or branch of a foreign company, or, of a subsidiary in India of a foreign
company, or, an Indian company in which foreign equity holding, either direct or through a
holding company/Special Purpose Vehicle (SPV), is not less than 51 per cent; ￭ if they
represent qualification shares for becoming a director of a company outside India not
exceeding 1 % of the paid up capital of the overseas company , provided the consideration
for the acquisition does not exceed USD 20,000 in a calendar year; ￭ as part/full
consideration of the professional services rendered to the foreign entity or lieu of director’s
remuneration; and if they are rights shares. Any person intending to make any investments
other than those specifically covered under the ODI Regulations must obtain the prior
approval of the RBI. Further, a resident individual (single or in association with another
resident individual) can make overseas direct investment in the equity shares and
compulsorily convertible preference shares of a JV/WOS outside India subject to certain
conditions. Some of these conditions are listed below: ￭ The JV or WOS abroad should be
engaged in a bona fide business and should not be engaged in the real estate, banking
business or financial services activities. ￭ The JV/WOS should be an operating entity only
and not a step down subsidiary. Further, resident individuals can’t acquire a step down
subsidiary. ￭ Resident individuals will have to get the valuation certificate from a certified
valuer registered with the appropriate valuation authority in host country. ￭ At the time of
investments, the permissible ceiling shall be overall ceiling prescribed from the resident
individual under the Liberalized Remittance Scheme.

CAPITAL STRUCTURING AND OTHER M&A ASPECTS

Companies Act 2013: Capital structuring and other M&A related aspects
The complexity of the transactions being entered was not foreseen by the Old Cos Act. Key
amendments that have been brought in by the New Cos Act in relation to capital structuring
and related aspects including buyback of shares, issue of bonus shares, capital reduction
and others. There are two basic forms of capital — equity and debt capital. The methods to
achieve the appropriate capital structure often result in management resorting to strategies
such as private placements, buyback, capital reduction and issuance of bonus shares, which
have their own set of implications or considerations. Each financial instrument has its own
benefits and drawbacks, and a substantial portion of management time is invested in
designing appropriate capital structures in terms of the risk or reward payoff for
stakeholders.

Buy-back of shares

Buy-back refers to purchase of its own shares by a company from its existing shareholders.
This is generally undertaken by a company when it has a significant amount of cash, there
are no viable projects on the table and it is interested in disbursing cash to its shareholders
in the form of dividends. The way out for management is buying back its own shares. Buy-
back may also be undertaken for other reasons such as maintaining the market price of
shares, an increase in promoters’ stakes, etc.
Buy-back may be of the following types:
• Buy-back of up to 10% of total paid-up capital plus free reserves approved by the board of
directors
• Buy-back of up to 25% of the total paid-up capital plus free reserves approved through a
special resolution at the general meeting of the company
• Buy-back through a court-approved Scheme of Arrangement
Under the Old Cos Act, a buy-back approved by a board of directors was only possible after
a period of 365 days had lapsed from the date of the preceding buy-back offer. As regards a
buy-back approved by shareholders, it was possible to adopt a view that multiple buy-backs
were permissible in the same financial year as long as the total buy-back in that specific year
did not exceed 25% of the paid up equity capital of the company. However, the New Cos Act
has curtailed this freedom offered to companies by mandating maintenance of a gap of at
least one year between two buy-backs under any of the routes. Furthermore, buy-back of
shares undertaken as part of a court approved Scheme of Arrangement will also need to
adhere to conditions prescribed under buy-back provisions. The Old Cos Act prohibited a
company from undertaking buy-back if it had defaulted in repaying deposits, redeeming
preference shares or debentures, paying dividends, etc., till the time default persisted.
However, under the New Cos Act, a company that has defaulted (as above) is prohibited
from buying back its shares for a further period of three years after the default is remedied.

Capital reduction

“Capital reduction,” a commonly used tool for increasing shareholder value and realigning
capital structure, has also been subject to certain stringent provisions under the New Cos
Act. The New Cos Act, emphasising on the importance of repayment of deposits accepted
by a company from the public, prohibits an organization with arrears in its payment of
deposits or interest on such deposits (accepted either before or after commencement of the
New Cos Act) from undertaking capital reduction. The procedure for undertaking capital
reduction has been made more onerous by mandating the National Company Law Tribunal
(NCLT) (which receives applications from companies undertaking capital reduction) to
forward these to the Central Government (CG), the Registrar, SEBI (in the case of listed
companies) and creditors, and take into consideration representations made by them. The
CG and others are required to make their representations to the NCLT within a period of
three months from the date of receipt of notice, failing which their assent will be presumed.
Furthermore, submission of a certificate from a company’s auditor, confirming that the
accounting treatment for such reduction is in conformity with the specified Accounting
Standards, has been made a pre-requisite for seeking the NCLT’s approval of the capital
reduction scheme. Additionally, it has been made mandatory for a company to publish the
order of the NCLT sanctioning capital reduction in the manner directed.

Issue of shares with differential voting rights (DVR)

An alternative to variation of shareholders’ rights is issue of DVR shares, which are like
ordinary equity shares, but are different in that they provide the shareholders fewer voting
rights than those of ordinary shareholders. A company can issue DVR shares (not exceeding
25% of its share capital), only if it has been profitable for three years preceding the year in
which it has decided to issue DVR shares, and it has not defaulted in filing its annual
accounts and returns for the period. Furthermore, the articles of a company should authorize
issue of DVR shares or the company should have obtained its shareholders’ approval in a
general meeting by passing a special resolution (by postal ballot in the case of listed
companies) for issue of such shares.
Under the Old Cos Act, restrictive conditions relating to issue of DVR shares were not
applicable to private companies unless these were subsidiaries of public companies. A
private company was free to issue shares with DVR, in accordance with the regulations
specified in its articles of association. However, the New Cos Act has widened the purview of
the provisions to all companies, thereby securing within its scope issue of DVR shares, even
by private companies.

Issue of bonus shares

The New Cos Act has introduced a section (with a view to bringing about uniformity), which
permits a company to issue fully paid-up bonus shares. In the case of listed entities, SEBI’s
Issue of Capital and Disclosure Requirement regulation, 2009 requires that a bonus issue is
made from free reserves built from genuine profits or share premium collected only in cash
and prohibits capitalization of revaluation reserves. The New Cos Act, walking the line set by
the guidelines mentioned above, has incorporated a new section, which provides for issue of
fully paid-up bonus shares out of its free reserves, or its security premium account or capital
redemption reserve account, subject to compliance with certain conditions such as
authorization by the articles, approval provided in a general meeting, etc. Furthermore,
companies have been prohibited from issuing bonus shares by capitalizing on their
revaluation reserves or in lieu of dividends.

Private placement

Under the New Cos Act, “private placement” has been defined to mean any offer of
securities or an invitation to subscribe to the securities of a select group of persons by a
company through issue of a private placement offer letter, which satisfies prescribed
conditions. These provisions are applicable for private and public companies. Any offer that
is not in compliance with this clause will be deemed a public offer and applicable provisions
applicable will apply to it. The New Cos Act provides that an offer of private placement of
securities can be made to a maximum of 50 persons or a higher prescribed number in a
financial year (the Draft rules prescribed a limit of 200 persons in a financial year). However,
qualified institutional buyers, as defined under SEBI’s Issue of Capital and Disclosure
Requirement and employees under the Employees’ Stock Option Scheme, have been
excluded while computing the maximum limit. As in the case of public offers, a company can
only collect subscriptions through cheques, demand drafts or banking channels and should
keep these in a separate bank account.

In addition that an offer should only be made to persons whose names have been recorded
by a company prior to inviting subscriptions. Furthermore, a company making an offer or
issuing an invitation through private placement will need to allot its securities within 60 days
from the date of receipt of the application money, failing which this will need to be repaid to
the subscribers. Furthermore, tightening the noose on companies for raising funds in a
fraudulent manner, the New Cos Act states that no fresh offer or invitation can be issued
unless their allotments with respect to previous offers or invitations have been completed,
withdrawn or abandoned by them. Moreover, companies raising funds through private
placement will not be allowed to release any public advertisements or utilize any media,
marketing or distribution channels or agents, to inform the public about such offers.

Loans to directors/subsidiaries

Taking note of misuse of rules relating to loans advanced to directors and persons in whom
directors are interested, the New Cos Act mandates stringent regulations relating to advance
of such loans and levies a heavy penalty in the case of non-compliance. The New Cos Act
has withdrawn the exemptions available to private companies under the Old Cos Act in this
regard, thereby making it nearly impossible for directors to divert funds for their personal use
by such means. This provision is among the few sections that has been notified by the
Ministry.
Under the Old Cos Act, such loans or guarantees could be provided with the approval of the
Central Government. The New Cos Act has taken away this shield from companies.
However, exceptions have been made in the following situations:

1. Loans to managing or whole-time directors as part of service conditions committed to him

or her or in pursuance of schemes approved by companies’ shareholders through special
resolutions
2. Loans or guarantees provided in the ordinary course of business by a company and the
rate of interest on such loans not being less than the bank rate declared by the RBI .The
New Cos Act includes restrictions on advancing of loans or guarantees to directors and “to
any other person in whom a director is interested.” The expression “any other person in
whom a director is interested” includes any body corporate, whose board of directors,
managing director or manager acts in accordance with the directions or instructions of the
board or of any director of the lending company. A literal reading suggests that this
expression may cover subsidiary companies.

Companies’ loans and investments

Like the existing Old Cos Act, the New Cos Act also prohibits a company from giving loans
or guarantees to, providing security in connection with a loan to any other body corporate or
acquiring the securities of any other body corporate exceeding the higher of the following:
a) 60% of its paid-up share capital, free reserves and securities premium
b) 100% of its free reserves and securities premium
Under the Old Cos Act, the restriction above was only applicable in connection with provision
of loans/guarantees/securities on behalf of another body corporate. The New Cos Act
extends this restriction to any person or entity. Furthermore, prior approval through a special
resolution passed at a general meeting is mandated where the specified limits given above
are likely to be breached. The loans/guarantee/security provided by private companies or
holding company to/on behalf of its wholly owned subsidiary have also been brought under
prescribed investment limits under the provisions of the New Cos Act. Additionally, the New
Cos Act requires a lending company to charge interest on a loan advanced, the minimum
rate whereof has been linked to the prevailing yield on government securities.A company will
now be required to make full disclosure of such loans/guarantees/securities and the purpose
of their utilization by the recipient in its financial statements.

Revival and rehabilitation of sick companies

One of the key changes brought about by the New Cos Act is simplification of the procedure
for rehabilitation and winding up of sick companies. The coverage of the Sick Industrial
Companies Act, 1985 (SICA) is limited to industrial companies, while the New Cos Act
covers the revival and rehabilitation of all companies, irrespective of their sectors. The
criterion for erosion of 50% of a company’s net worth for declaring it sick and approaching
the Board for Industrial and Financial Reconstruction has been dispensed with in the New
Cos Act – the revised criterion is “inability to pay 50% of the outstanding secured debt” within
30 days of service of notice by secured lenders. Any secured creditor fulfilling the criteria
given above or a company may suo moto file an application with the NCLT for being
declared a sick organization on the same grounds. Revival and rehabilitation of Sick
Industrial companies was earlier governed under the Sick Industrial Companies Act, 1985
and is now covered under Chapter XIX of New Cos Act.Correlation of its sickness with a
company’s inability to pay debts rather than erosion of its net worth, which in most cases is
subject to accounting vagaries, would find favor with stakeholders.On being assessed as a
sick company, the creditor or company may file an application with the NCLT to determine
measures to be adopted for its revival or rehabilitation. The scheme of revival and
rehabilitation will need to be approved by secured creditors (holding a 75% value) and
unsecured creditors (holding a 25% value). If this is not approved, the NCLT can order the
company to be wound up.