1. INTRODUCTION

Mergers and Acquisitions aim towards Business Restructuring and increasing competitiveness and shareholder value via increased efficiency. In the marketplace it is the survival of the fittest.

World Wide Scenario

USA has seen 20 years long wave of mergers, leveraged buyouts and takeovers that changed USA, Inc. Biggest merger of the world, $190 billion America Online-media giant Time Warner (stock financed deal) became second biggest in one month's time. Previous biggest merger was MCI-world. Europe and Japan also have seen many mergers.

The value of mergers in the global technology sector alone surged a 52 percent to $ 1.2 trillion in 1999 as companies scrambled to adapt their businesses to meet the growing demands of the internet economy. The total number of merger and acquisition transactions in the IT, media and communications sector rose nearly 26% to 6008 globally, according to a report by New-York based investment bank Broadview International.

Indian Scenario

We have witnessed a storm of mergers and acquisitions in recent years.The Finance Act,1999 clarified many issues relating to Business Reorganisations thereby facilitating and making business restructuring tax neutral. As per Finance Minister this has been done to accelerate internal liberalisation and to release productive energies and creativity of Indian businesses. The year 1999-00 has notched-up deals over Rs. 21000 cr. Which is over 1% of India's GDP. This level of activity was never seen in Indian corporate sector.

Infotech, banking, media, pharma, cement, power are sectors which are more active in mergers and acquisitions.

ACC Gujarat- Ambuja Cement, Lafarge TISCO, Satyam Infoway-Indiaworld, Rajpal E capital-Zee tele-Subir Bhatia-HLL- lakme, HLL Tomco, Sandoz-Ciba,HLL-Lipton,IndiaCements-Rassi, Sun-TDPL,Sun-MJ, Wockhardt demerger,only distribution network- parents' acquisitions- PAL – Peugot, Piramal Sarabhai, Piramal- Crossland,HDFC-Times Bank and many more. Among hostile takeover bids we saw Sterlite’s bid for Indal, Bajoria for Bombay Dyeing and Ballarpur Industries, Dalmia for Gesco and many more.

Tata tea acquisition is the biggest overseas acquisition by an Indian company. The acquisition will make the Tata Tea-Tetley Tea combine one of the largest tea producers and marketers in the world. Tata Tea will deploy the $75 ml. GDR money raised at $ 9.87 per GDR( equivqlent to Rs.430 per share) in its 281 ml. Pound leveraged buyout. Tatas and Birlas have merged their cellular companies to make a Billion $ giant-AT & T has also joined them.

Merger of CA firms-Price Warerhouse –Coopers Lybrand, RSM & CO-merger of Professional Institutes-

Reasons for hectic activity -What's driving the deal mania?

• Liberalisation is the one main reason. With liberalisation, came death of licensing and capacity controls. Bureaucratic hurdles coming in the way of industrial development are being removed. Protected markets and near monopoly situations have disappeared. Inefficient units are finding difficult to survive.
• Opening up of Indian economy by reduction/removal of quantitative and qualitative restrictions. India is a signatory to WTO agreements. Increasing competition have forced entrepreneurs to reexamine and restructure their businesses
• Fight between scale and specialisation.
• Access to foreign capital markets. FERA liberalisation-FEMA-liberised foreign investments-large Indian market opening up-insurance-telecom-banking-finance-services-infrastructure-consensus among major politicalparties -failure of soviet union and realisation of socialism failure-
• Maximisation of Shareholder values-

• Competitive advantages.Support to sick companies-synergy of operations-consolidation of market share-reduction of time and money in entering the market/foreign market-reducing uncertainty of market share-buying out competition-
• Realisation of stock market valuations.
• Inorganic growth through acquisitions.
• Exit route for promoters.
• Listing advantage.

Who are the intermediary professionals involved in M & A activity?

Dealmakers,Merchantbankers, lawyers.CAs,CSs,valuers,Bankers ,etc. are intermediaries involved in M & A activity.

Scope for practice for Chartered Accountants

• Advising on legal and practical aspects.

-Taxation Aspects-Direct and Indirect taxes

-Company Law

-SEBI Regulations

-Stamp duty

-SCRA

-FEMA Aspects

-Other laws

-Negotiations

-Takeover Defences.

• Due Diligence
• Valuation of

-Shares

-Business

-Goodwill

-Brands and other Intangible assets.

• Certification
• Documentation
• Leveraged buyouts and funding for takeovers.

M & a website-www.themaexchange.com-buyers and sellers can reach each other via this website.

CASE STUDY

Duck Limited[D] has 3 business divisions. Textiles, Pharma and Machinery manufacturing. The textiles business is incurring losses. The pharma business is flourishing. D wants to exit from Machinery manufacturing division being its non-core business. D is also considering a proposal from a software technologist[S] to join hands in S’s software development business. Crocodile Limited[C] has shown interest in acquiring Machinery business of D .D also has some brands and know-how for each of its line of activity. Stock Market price of Equity shares of D is Rs.10/- and paid-up Equity Capital of Rs.5 Crores divided into 50 lacs Equity shares of Rs.10/ each while that of C is Rs 50/- per share and paid-up Equity Capital of Rs. 5 Crores divided into 50 lacs Equity shares of Rs.10/ each.

Parties in these transactions need your advice from financial, legal, tax and management angle on questions shch as

-

1. What is the best course for D to carry out above restrucuring plan?
2. What is the best course for C to acquire Machinery business of Duck?
3. Whether Duck should amalgamate with C?
4. Whether D should demerge its Machinery business and Textile business?
5. What will be the share exchange ratio between the two companies?
6. Whether D should transfer the business to a subsidiary and then invite a partner in the subsidiaty company?
7. Whether D should make a slump sale of its Machiney business?
8. Whether sale of assets would be better vis- a-vis a slump sale?
9. What will be impact on Investment allowance and benefit of Section 80-IA?
10. Whether D should amalgamate other companies in the group which are doing the same or different business?
11. Whether D should revalue its assets?
12. What precautions C and S should take before going in for the deal?
13. What will be the position of carried forward losses and unabsorbed depreciation?
14. What are the documents to be prepared for every course of action to be taken?
15. What will be the cost of each of the alternative course to be followed?
16. What will be the time involved in each of the course of action taken?
17. What will be the tax aspects of each of the course of action taken?
18. Whether D can acquire S's business by issue of shares? Or by cash? Or by both?
19. How the business of S should be valued and due diligence to be exercised?
20. What are the formalities and what is the procedure for each course of action?
21. What will be impact on shareholder value of each decision taken?

1.MERGERS AND DEMERGERS

Difference between a merger and an amalgamation.

Difference between a merger and a demerger.

Difference between a demerger and a slumpsale.

Difference between a slumpsale and asset sale.

Difference between a merger and a reverse merger.

Difference between a merger and an acquisition.

A] COMPANY LAW ASPECTS of Mergers, amalgamations and demergers

Companies Act, 1956,Chapter V

ARBITRATION, COMPROMISES,ARRANGEMENTS AND RECONSTRUCTIONS

Sections 390 to 396 of the Companies Act, 1956 govern Rearrangements including Mergers, Amalgamations and Demergers.

Section 390

Interpretation of Sections 391 and 393. Company means any company liable to be wound up-arrangement includes a reorganisation of the share capital of the company by the consolidation of shares of different classes or by division into…….or by both methods-

Section 391

Power to compromise or make arrangements with creditors and members

-between a company and creditors/any class or member/any class

-the court may on application, order a meeting of……in such manner as the court directs

[2] if majority in number representing 3/4^th in value of creditors/members……present and voting either in person or by proxy[where allowed]agree and if sanctioned by court, shall be binding on all members/creditors…….and company/liquidator/contributories-

provided no order unless court is satisfied about disclosure of all material facts, financial position etc.-

[3] no effect to court order till the time a certified copy of order is filed with the Registrar of Companies.

[4] A copy of order of the Court to be annexed to every copy of Memorandum of Association.

[5] default is punishable

[6]stay of suit or proceedings

Section 392

Power of High Court to enforce compromises and arrangements

[1] court has the power to superwise and give directions,

[2]If court is satisfied that scheme is not workable, it can order winding up of the company.

Section 393

Information as to compromises or arrangements with creditors and members

[1][a]Explanatory Statement with every notice Setting forth terms of compromise and directors' interest-

[2]trustees' interest to be disclosed.

[3] statement setting terms and contract to be furnished to members.

[4]default will invite fine.

Section 394

Provisions for facilitating reconstruction and amalgamation of companies.

[1] when an application is made u/s 391 for compromise or arrangement and it is shown to the court that[a] compromise or arrangement is proposed for the purpose of a scheme of reconstruction of any company or companies or the amalgamation of any two or more companies and[2] under scheme whole or any part of undertaking, propety or libilities of any company concerned in the scheme [ transferor co] is to be transferred to another co.[transferee co.], court may by order…provide for……….transfer……allotment……….continuation of legal proceedings….dissolution…….provision for dissenting shareholders……incidental matters…

provided company Law Board or ROC and official liquidator report is obtained[2]where order made properties and liabilities to vest to transferee[3] certified copy to be filed with ROC.

Section 394ANotice to be given to Central Government for applications under section 391 and 394.

Section 395

Power and duty to acquire shares of shareholders dissenting from scheme or contract approved by majority

Section 396

Power of Central Government to provide for amalgamation of companies in national interest.

Section 396A

Preservation of books and papers of amalgamated company

B INCOME-TAX ASPECTS

1]Amalgamation

In normal parlance, Amalgamation takes place when two or more companies combine and form a new corporate entity after the previous corporate entities are dissolved.

A merger signifies the absorption of one company by another which retains its name and corporate entity with the added capital, franchises and powers of a merged corporation.

Section 2(1B) of Income-tax Act defines Amalgamation as follows.

"amalgamation", in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form another company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that

• "company" is defined under section 2(17) of IT Act as meaning any Indian Company, any body corporate incorporated by or under the laws of a country outside India or any institution, association or body assessed or assessable as a company under IT Act or which is declared by the Board as a Company.
• Section 2(26) of IT Act defines an Indian Company
• Effective date of amalgamation will be the date specified in the scheme as ‘the transfer date" and as approved by the Court.Marshall sons & Co. (India ) Limited v. ITO,(1997) 223 ITR 809,823(SC). Therefore notices issued under section 139(2) to file returns for the subsequent years were not warranted in law.

1. all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation;
2. all the liabilities of the amalgamating company or companies immediately before the amalgamation becomes the liabilities of the amalgamated company by virtue of the amalgamation;
3. shareholders holding not less than Ä three-fourths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders by virtue of the amalgamation,

• three-fourths in value and not in number.
• "shares" will include preference shares also.

• This section was amended by Finance Act,1999 to relax the requirement of shareholders holding nine-tenths in value to become shareholders of the amalgamated company by"shareholders holding three-fourths in value."
• Provisions of sub-clause (a) or (c) of section 2(22) are not attracted in a case where a company merges with another company in a scheme of amalgamation. Departmental Circular No. 5P(LXXVI-63)of 1967 dtd. 9^th October,1967. Subclause (a) includes any distribution of accumulated profits , if it entails release to its shareholders of all or any part of the assets of the company. (c) applies only on liquidation.

2]DEMERGER-

There were no specific provisions for demerger under Income-tax Act, 1961 upto Assessment Year 1999-00

Finance Act, 1999 made demergers tax neutral. The Act also distinguished sale of assets from demergers as a going concern.

Accumulated losses and unabsorbed depreciation, in a demerger, are allowed to be carried forward by a resulting company if these are directly relatable to the undertaking proposed to be transferred. In other cases, such losses and depreciation shall be apportioned between the demerged company and the resulting company in proportion to the assets coming to the share of each as a result of demerger.

Section 2(19AA) of Income-tax Act, 1961 defines 'demerger' as "Demerger", in relation to companies, means the transfer, pursuant to a scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 (1 of 1956), by a demerged company of its one or more undertakings to any resulting company in such a manner that –

• the definition is not an inclusive definition but is an exhaustive definition-
• one or more undertakings can be transferred-more than one undertaking can be transferred to more than one company provided other conditions of section2(19AA) are satisfied.

1. all the property of the undertaking, being transferred by the demerged company, immediately before the demerger, becomes the property of the resulting company by virtue of the demerger;

• property should include intangible assets also.
• undertaking may first transfer some property to another person and then demerge- McDowell.
• See Explanation 1 for definition of "Undertaking".

1. all the liabilities relatable to the undertaking, being transferred by the demerged company, immediately before the demerger, become the liabilities of the resulting company by virtue of the demerger;

2. ^* the property and the liabilities of the undertaking or undertakings being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger;

• does it mean historical book values? Or does it mean that a revaluation is possible before a demerger? values appearing in books of account will mean IT written down value of the assets or company law book values? Does a revaluation really matter or is required in case of a demerger?-see Explanation 3 below.

1. ^* the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis;

• shares will include preference shares also?
• no consideration other than shares can be issued e.g. debentures can not be issued.

1. the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger,or by a nominee for, the resulting company or, its subsidiary) become shareholders of the resulting company or companies by virtue of the demerger;

• shares will include preference shares also?
• They may not hold 3/4ths in value in resulting company.

otherwise than as a result of the acquisition of the property or assets of the demerged company or any undertaking thereof by the resulting company;

1. * the transfer of the undertaking is on a going concern basis;

2. ^* the demerger is in accordance with the conditions, if any, notified under sub-section (5) of section 72A by the Central Government in this behalf.

Explanation 1- For the purposes of this clause, "undertaking" shall include any part of an undertaking , or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting a business activity.

Explanation 2 –For the purposes of this clause, the liabilities referred to in sub clause (ii), shall include –

1. the liabilities which arise out of the activities or operations of the undertaking;

2. the specific loans or borrowings (including debentures) raised, incurred and utilised solely for the activities or operations of the undertaking; and

• in cases, other than those referred in clause (a) or clause (b), so much of the amounts of general or multipurpose borrowings, if any, of the demerged company as stand in the same proportion which the value of the assets transferred in the demerger bears to the total value of assets of such demerged company immediately before the demerger.
• Assets will include current assets also?

Explanation 3 – For determining the value of the property referred in sub clause (iii), any change in the value of assets consequent to their revaluation shall be ignored. [applicability of this explanation is restricted only for subclause(iii)]

Explanation 4 – For the purposes of this clause, the splitting up or the reconstruction of any authority or body constituted or established under a Central, State or Provincial Act, or a local authority or a public sector company, into separate authorities or bodies or local authorities or companies, as the case may be, shall be deemed to be a demerger if such split up or reconstruction fulfills the conditions specified in sub clauses (i) to (vii) of this clause, to the extent applicable;such conditions as may be notified in the Official Gazette, by the Central government. This is amended by Finance Act, 2000.w.e.f. 1-4-2000.

• Apple Aptech-Westcoast-soma paper-Workhardt-Ciba speciality chemicals division-catterpiler HM?- Listing benefit-
• Will it be advisable sometimes not to comply with the definition of Demeger?

Section (19AAA) :

"demerged company" means the company whose undertaking is transferred, pursuant to a demerger, to a resulting company;’.

The recognition of demergers is one of the measures taken by the Finance Act, 1999 to provide that companies are allowed greater freedom to re-organise their business structuring , without suffering additional tax burdens in the process, and so that benefits such as depreciation and set off and carry forward of loss in respect of the transferred undertaking continue to be available to the resulting company.

Section 2(41A):

"resulting company" means one or more companies (including a wholly owned subsidiary thereof ) to which the undertaking of the demerged company is transferred in a demerger and, the resulting company in consideration of such transfer of undertaking, issues shares to the shareholders of the demerged company and includes any authority or body or local authority or public sector company or a company established, constituted or formed as a result of demerger:"

• Only shares can be issued-equity or preference-debentures or cash can not be issued
• Whether any liability on account of deemed dividend can arise in case of a demerger?

• Section 2(22)- but dividend does not include…….

2(22)(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company(whether or not there is a reduction of capital in the demerged company.)inserted by the Finance Act,1999,w.e.f. 1-4-2000

• Section 32(1)(ii)-Depreciaton- know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the first day of April, 1998, now eligible for depreciation wef 1-4-1999.

• With effect from 1-4-2001, Finance Act, 2000 omitted the first proviso to Section 32(2), which reads as under.

Provided that the business or profession for which the allowance was originally computed continued to be carried on by him in the previous year relevant for that assessment year. So even if the said business is discontinued, depreciation can be carried forward. This can help slump sales. Section 32(2) refers to set-off and carry forward of unabsorbed depreciation.

• Fifth proviso to clause (ii) of sub-section (1) of section 32 has been substituted w.e.f. 1-4-2000 by Finance Act,1999 to bring demerger on par with amalgamation with respect to sharing of depreciation between the demerged company and the resulting company like the transferor company and the transferee company- The aggregate deduction allowable to the predecessor and the successor in the case of succession referred to in clause (xiii) and clause (xiv) of section 47 or section 170 or to the amalgamating company and the amalgamated company in the case of amalgamation, or to the demerged company and the resulting company in the case of demerger, as the case may be, shall not exceed in any previous year the deduction calculated at the prescribed rates as if the succession or the amalgamation or the demerger had not taken place and such deduction shall be apportioned…………………First the aggregate depreciation need to be calculated at the prescribed rates as if the amalgamation or demerger did not take place and then the same to be apportioned in the ratio of number of days for which the assets were used by them- [[?? Obviously the same will not hold good for slumpsale. Slumpsale is not tax neutral]]

• Similar amendments have been carried out by Finance Act, 1999 to bring demerger on par with amalgamation, w.e.f. 1-4-2000 in following sections:-

• Section 35A relating to deduction for expenditure on acquisition of patent rights or copyrights,-transfer of the rights to amalgamated or demerged company will not change the position. Section 35A(7) has been inserted to provide for demergers.

• Section 35AB deduction in respect of expenditure on knowhow-1/6 th amount of any lumpsum consideration is available as a deduction [ amalgamated company or the resulting company entitled to claim deduction under this section in respect of such undertaking to the same extent and in respect of the residual period as it would have been allowable to the amalgamating company or the demerged company had such amalgamation or demerger not taken place],

• Section 35ABB(2),(3) and(4) relating to treatment of sale proceeds of a license to operate telecommunication services-capital expenditure incurred for acquiring any right to operate telecommunication services-deduction is available for an appropriate fraction for the period for which license is in force.sub-section (6) takes care of amalgamation while subsection(7) has been inserted for demergers. Transfer under scheme of amalgamation or demerger will not be treated a sale and the provisions will apply to amalgamated and demerged company as if license is not transferred.

• Section 35D[5A] w.e.f. 1-4-2000 amortisation of preliminary expenses [in case of a demerger the resulting company will be able to claim amortisation of preliminery expenses as if the demerger has not taken place. for applying the provisions to the demerged company as if demerger had not taken place], sub clause (5) refers to amalgamation

• Section 35E(7A) deduction for expenditure on prospecting, etc. for certain minerals,

• Section 35DD has been newly inserted from 1-4-2000 by Finance Act,1999.

Amortisation of expenditure in case of amalgamation or demerger Provides for deduction of an amount equal to one-fifth of expenditure incurred wholly and exclusively for the purpose of amalgamation or demerger of an undertaking, for each of the 5 successive previous years beginning with the previous year in which the amalgamation or demerger takes place-No deduction shall be allowed under any other section.

• Section 41 profits chargeable to tax ;- A new clause (iv) which provides that the "successor in business" includes the resulting company in the case of demerger has been inserted in Explanation 2 to section 41(1) w.e. f. 1-4-2000 to a successor in business for amounts received for which loss or expenditure was incurred and in respect of which the deduction or allowance has been made.

.

• SLUMP SALE-W.e.f.1-4-2000
• Section 2(42C) has been inserted to define a slump sale.-"slump sale'-means the transfer of one or more undertakings as a result of the sale for a lumpsum consideration without values being assigned to the individual assets and liabilities in such sales.

Explanation 1.-For the purposes of this clause, "undertaking" shall have the meaning assigned to it in Explanation 1 to clause (19AA).

Explanation 2.-For the removal of doubts, it is hereby declared that the determination of the value of an asset or liability for the sole purpose of payment of stampduty, registration fees or other similar taxes or fees shall not be regarded as assignment of values to individual assets or liabilities.

Artex engg. Case-227 ITR

• Section 43(1) defines "actual cost"- "actual cost" means the actual cost of the assets to the assessee, as reduced by cost met by any other person.

• Explanation 7 to section 43(1) specifies that where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company and the amalgamated company is an Indian company, the actual cost of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purpose of its own business

• Finance Act, 1999 has inserted new Explanation 7A for determination of actual cost in case of a Demerger.

Explanation 7A.- Where, in a demerger, any capital asset is transferred by the demerged company to the resulting company and the resulting company is an Indian company, the actual cost of the transferred capital asset to the resulting company shall be taken to be the same as it would have been if the demerged company had continued to hold the capital asset for the purpose of its own business.

provided that such actual cost shall not exceed the written down value of such assets in the hands of demerged company.

• Section 43(6) defines written down value-

• For Computation of written down value of assets(for the seller) in the case of a Slumpsale, following new sub-item (C) has been inserted in clause (6)(c)(i) of Section 43 w.e.f. 1-4-2000 by Finance Act,1999.

1. by the amount of depreciation actually allowed to him under this Act or under corresponding provisions of Income-tax Act,1922, in respect of any previous year relevant to the assessment year commencing before 1-4-1988; and

2. by the amount of depreciation that would have been allowable to the assessee for any assessment year commencing on or after 1-4-1988 as if the asset was the only asset in the relevant block of assets,

Say Rs. 500 is written down value of block of assets-less( Rs. 200 actual cost of the asset-less Rs.50 depreciation allowed i.e.Rs.150)=Rs.350 balance.

Explanation 2.- where in any previous year, any block of assets is transferred, (a)…………….(b) by the amalgamating company to the amalgamated company in a scheme of amalgamation and the amalgamated company is an Indian company. ,

then notwithstanding anything contained in clause(10), the actual cost of the block of assets in the case of the amalgamated company shall be written down value of block of assets in the case of amalgamating company for the immediately preceding previous year as reduced by depreciation actually allowed for the said preceding previous year.

• How the written down value of block of assets will be worked out in case of a demerger both for the demerged company and the resulting company?

-Explanation 2A and 2B have been inserted in clause (6)(c) of sectin 43 with efffect from 1-4-2000 by the Finance Act, 1999 for this purpose.

Explanation 2A specifies that where in any previous year, any asset forming part of a block of assets is transferred by a demerged company to the resulting company, then, notwithstanding anything contained in clause (1), the written down value of the block of assets of the demerged company for the immediately preceding previous year shall be reduced by bookvalue of the assets written down value of the assets transferred to resulting company pursuant to the demerger.

Explanation 2B:- where in any previous year, any asset forming part of a block of assets is transferred by a demerged company to the resulting company, then, notwithstanding anything contained in clause(1), the written down value of block of assets in the case of the resulting comany shall be the value of the assets appearing in the books of account written down value of the transferred assets as appearing in the books of account of the demerged co immediately before demerger:

Provided that if the value of the assets as appearing in the books of account of the demerged company immediately before demerger exceeds the written down value of such assets in the hands of the demerged company, the amount representing such excess shall be reduced from the writen down down value of the assets. This proviso is proposed to be omitted by the Finance Bill, 2000 with retrospective effect from 1-4-2000. The proposed amendment seeks to provide that the written down value of the assets, being transferred, shall be the uniform basis of adjustment in the hands of the demerged company as well as the resulting company.

• Section 45 Capital Gain Any profit or gain arising from transfer of a capital asset shall be chargeable under the head…….and be deemed to be the income of the year in which transfer took place.

• Section 47- Transactions not regarded as a transfer

• Section 47 (vi)- any transfer, in the scheme of amalgamation of capital assets by the amalgamating company to an amalgamated company if an amalgamated company is an Indian company.

• Section 47(via)- any transfer, in the scheme of amalgamation of a capital asset being a share or shares held in an Indian company, by the amalgamating foreign company to the amalgamated foreign company, if—

(a) at least twenty-five percent of the shareholders of the amalgamating foreign company continue to remain shareholder of the amalgamated foreign company, and

(b) such transfer does not attract tax on capital gain in the country in which the amalgamating company is incorporated

with effect from 1-4-2000

Section 47(vib) any transfer, in a demerger of a capital asset by the demerged company to the resulting company if the resulting company is an Indian company

• Section 47(vic)- any transfer, in a demerger ,of a capital asset being a share or shares held in an Indian company, by the demerged foreign company to the resulting foreign company, if—

1. at least seventy-five percent of the shareholders the shareholders holding not less than three-fourths in value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign company, and

2. such transfer does not attract tax on capital gain in the country in which the demerged foreign company is incorporated

provided sections 391 to 394 shall not apply to demergers referred here. The condition of 75% of shareholders was different from similar condition provided in sub-clause(v) of clause (19AA) of section 2 relating to the definition of demerger, which is stipulated at " three-fourts in value of shares", hence the proposed amendment.

Section 47(vid) any transfer or issue of shares by the resulting comany, in a scheme of demerger to the share holders of demerged company , if transfer or issue is made in consideration of demerger of undertaking.

Section 47 (vii)- any transfer by shareholders, in the scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company if—

(a) the transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company, and

(b) the amalgamated company is an Indian company.

• Section 47(xiii) where a firm is succeeded by a company in the business carried on by it

• Section 47 (xiv) where a sole proprietory concern is succeeded by a company in the business carried on by it

• Section 47A- Withdrawal of exemption in certain cases

Where at any time before the expiry of eight years from the date of a capital asset referred to in clause (iv)[[holding to subsidiary]] or, as the case may be, clause (v) of section 47—

such capital asset is converted by the transferee company into, or is treated by it as, stock-in-trade of its business: or

the parent company or its nominees or, as the case may be the holding company ceases or cease to hold the whole of the share capital of the subsidiary company, the amount of profits or gain arising from transfer of such capital asset not charged under section 45 by virtue of the provision contained in the said clauses, (iv) or, as the case may be, clause (v) of section 47 shall, notwithstanding anything contained in the said clause be deemed to be income chargeable under the head "capital gains" of the previous year in which such transfer took place.

• Section 48- Mode of Computation of capital gain

• Section 49(2) Cost of acquisition of shares in an amalgamated company is deemd to be cost of acquisition of shares of amalgamating company.

With effect from 1-4-2000

• Section 49(2C) The cost of acquisition of shares in resulting company shall be the amount which bears to the cost of acquisition of shares held by the assessee in demerged company the same proportion as the net book value of assets transferred in demerger bears to the networth of demerged company immediately before demerger

• Section 49(2D) The cost of acquisition of the original shares held by the shareholder in the demerged company shall be deemed to have been reduced by the amount as so arrived at under section 49 (2C).

Explanation.- for the purposes of this section"net worth" shall mean the aggregate of the paid up share capital and general Reserves as appearing in the books of account of the demerged company immediately before the demerger..

• Section 50- Special provision for computation of capital gain in case of depreciable assets

• Section 50B:- Special provision for computation of capital gains in case of slump sale with effect from 1-4-2000-

(1) Any profits or gains arising from the slump sale effected in the previous year shall be chargeable to income-tax as capital gains arising from the transfer of long-term capital assets and shall be deemed to be the income of the previous year in which transfer took place:

Provided that any profits or gains arising from the transfer under the slump sale of any capital asset being one or more undertakings owned and held by assessee for not more than 36 months immediately preceding the date of its transfer shall be deemed to be the capital gains arising from the transfer of short-term capital assets.

(2) In relation to capital assets being an undertaking or division transferrd by way of such sale, the "net worth" of the undertaking or division shall be deemed to be cost of acquisition and cost of improvement for the purposes of sections 48 and 49 and no regard shall be given to the provisions contained in the second proviso to section 48.[indexed cost of acquisition and improvement]

(3)Every assessee, in the case of a slump sale, shall furnish in the prescribed form along with the return of income a report of an accountant as defined in the Explanation below section 288(2) indicating the computation of the net worth of the undertaking or division, as the case may be, has been correctly arrived at in accordance with the provisions of this section. Form No. 3CEA has been prescribed for Report of an Accountant by IT(Twenty-first Amdt.) rules, 199 9w.e.f. 25-6-99

Explanation:- For the purposes of this section, "networth" means the networth as defined clause (ga)of subsection (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act,1985

In section 50B of the Income-tax Act, for the Explanation, the following Explanations shall be substituted, namely:-

Explanation 1.-for the purposes of this section, " net worth" shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division appearing in its books of account:

Provided that any change in the value of assets on account of revaluation of assets shall be ignored for the purpose of computing the net worth.

Explanation 2 for computing the " net worth", the aggregate value of total assets shall be.-

Slump sale can be effected by non-corporate assessees also.

Slump sale can result in long-term capital loss also.

Section 72A- Provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in certain cases of amalgamation or demerger,etc.

Section 72A has been substituted by a new section 72A by the Finance Act, 1999 with effect from 1-4-2000(i.e. for Assessment year2000-01 and subsequent years)

. The new Section is more liberal and additionally covers cases of demergers as well. The old section required Central Govt. to satisfy itself on the recommendation of the specified authority that the following conditions are fulfilled (a) company was not financially viable by reason of its losses, liabilities and other relevant factors (b) the amalgamation was in public interest and(c) that other conditions as may be specified by Central government to ensure that the benefit under this section is restricted to facilitate rehabilitation or revival of the business of the amalgamating company, have been fulfilled. Thereafter Central Govt. may make a declaration to the above effect and then accumulated losses and unabsorbed depreciation of the amalgamatiing company shall be deemed to be the loss or, as the case may be allowance for depreciation of the amalgamated company for the previous Year in which amalgamation was effected and other provisions of this Act relating to carry forward of loss and allowance of depreciation shall apply accordingly.

Besides there were other conditions like carrying on the business without any modification or reorganisation and certificate from specified authority that adequate steps have been taken for revival.

New section 72A

(1)Where there has been………notwithstanding anything contained in any other provision of this Act accumulated loss and unabsorbed depreciation of the amalgamatiing company shall be deemed to be the loss or, as the case may be allowance for depreciation of the amalgamated company for the previous Year in which amalgamation was effected and other provisions of this Act relating to carry forward of loss and allowance of depreciation shall apply accordingly.

(2)not allowed unless the amalgamated company-

1. holds continuously for a minimum period of 5 years from the date of amalgamation at least 3/4^th in value of assets of the amalgamating co. acquired in a scheme of amalgamation.

2. Continues the business of the amalgamating company for a minimum period of 5 years from the date of amalgamation

3. Fulfills other conditions prescribed to ensure revival of the business of amalgamating Company or to ensure amalgamationn is for genuine business purpose.

(3)where conditions in (2) not complied setoff of loss or allowance of depn made in any previous year to amalgameted company shall be deemed to be income chargeable for the year in which not complied.

(4) Notwithstanding…………the Act, in the case of a demerger, the accumulated loss and the allownce for unabsorbed depreciation of the demerged co. shall-

(a) where such loss/unabsorbed depreciation is directly relatable to the undertaking. transferred to resulting company, be allowed to be carried forward and setoff in the hands of the resulting company

(b)where such loss or unabsorbed Depreciation is not directly relatable to undertaking transferred to resulting company, be apportioned between Demerged and resulting company in the same proportion in which the assets of the undertakings have been retained by demerged company and transferred to resulting company and be allowed to be carried forwad and setoff in the hands of the demerged or the resulting company as the case may be.[[assets will include current assets also here no conditions for holding assets or continuing business----also losses will not be for the previous year in which demeger was effected so appears….only balance period left will be allowed losses.???]]

(5)Central Government may specify conditions for genuine business purpose.

(6) Where there has been…………….. firm or a proprietory concern is succeeded by a company and fulfilling conditions of 47(xiii) or (xiv)…then notwithstanding anything contained in any other provision of this Act accumulated loss and unabsorbed depreciation of the predecessor firm or proprietory concern shall be deemed to be the loss or, as the case may be allowance for depreciation of the amalgamated company for the purposes of previous Year in which business Reorganisation was effected and other provision of this Act relating to carry forward of loss and allowance of depreciation shall apply accordingly .

Provided if conditions of section 47(xiii) or (xiv) not fulfilled, the setoff of loss or allowance of depreciation made in any previous Year in the hands of successor company shall be deemed to be the income of the company in the year in which conditions not complied.

(7) defines accumulated loss and unabsorbed depreciation.

• Chapter XX-C

Chapter XX-C is attracted when there is a transfer of immovable property for an apparent consideration exceeding the specified amount. Thus one would have to evaluate (I) whether the property, whose value may be assumed to exceed the specified amount, is an immovable property, (ii) whether the vesting under the court order is a transfer and (iii) whether the shares and/or other consideration received by the shareholders of the amalgamating company or demerged company is the apparent consideration.

b) Wealth tax

No special implication for amalgamated Companies

c) Gift Tax

No special implication for amalgamated Companies

d) Stamp Duty

Essentials for levy of stamp duty: -

1. There has to be an "instrument"

2. Such instruction should be one which has been specified in Schedule I;

3. Such instrument should have been "executed";

4. Such instrument should have either-

(a) Not having been previously executed by any person is executed in the "state".

OR

(b) Having been executed outside the states relates to any property situated in the state or to any matter or thing done or to be done in the state AND is received in the state.

Some of the typical instruments, which would be executed in some types of amalgamation, are as follows on which stamp duty is leviable.

1. Scheme of amalgamation as sanctioned by the court.

2. Transfer deed in respect of the undertaking or the properties.

3. Merger by an order of Court under section 394 of the Companies Act,1956.

By virtue of section 2(g) of Bombay Stamp Act, the order of the Court ordering the vesting of transfer of assets and liabilities of the transferor Company to the transferee Company is deemed to be a conveyance and hence stamp duty is attracted.

Transfer of the property of a partnership firm to a limited company on its conversion was held to be treated as a conveyance and, hence, chargeable to stamp duty, irrespective of the fact the partners of the firm were the shareholders of the company.

DECISION OF BOMBAY HIGH COURT IN LITAKA PHARMACEUTICALS

This landmark decision has serious implications for mergers covered not just by the Bombay Stamp Act, 1958, but also mergers covered by Acts of other States

The following are the major conclusions of the Honourable Court: -

1) An amalgamation under an order of Court under Section 394 of the Companies Act, 1956 is an instrument under the Bombay Stamp Act.

2) States are well within their jurisdiction when they levy stamp duty on instrument of amalgamation.

3) Stamp duty would be levied not on the gross assets transferred but on the "undertaking". When the transfer is on a going concern basis. i.e. on the assets less liabilities. The value for this purpose would thus be the value of assets less liabilities. The value for this purpose would thus be the value of shares allotted. This decision has been accepted in the Act and now stamp duty is leviable on the value of shares allotted plus other consideration paid.

Stamp duty on other documents

Usually in a merger, several other documents, agreements, indemnity bonds, etc. are executed, depending the facts of each case and requirements of the parties. Stamp duty would also be leviable as per the nature of the instrument and its contents

ACCOUNTING ASPECTS

Accounting Standard 14.

Accounting for Amalgamation (Mandatory)

• Amalgamation in nature of merger to be accounted for under pooling of interest method.-all the assets liabilities, shareholders holding 90% of face value of equity become equity holders,consideration discharged by shares, business intended to be carried, no adjustment intended to book values of asset/lib except for uniformity-

• Amalgamation in nature of purchase should be accounted for under purchase method.-one which does not satisfy one or more of above conditions- these are amalgamations in the nature of purchase
• Under pooling of interest method, all the assets and liabilities and reserves of the transferor Company are recorded at the existing carrying amounts. Identity of reserves is preserved and they appear in the same form-difference in share capital is adjusted in reserves.

• Under purchase method, all the assets and liabilities of the transferor Company are recorded at the existing carrying amounts or by allocating consideration to individual identifiable assets and liabilities on the basis of fair values at the date of amalgamation.identity of reserves is not preserved. The excess of shortfall of consideration over the value of net assets should be recognised as goodwill or capital reserve.
• Appropriate disclosure as specified should be made in the financial statement after amalgamation.
• Amalgamation should not be incorporated in financial statement but disclosure as specified should be made if it is effected after the Balance Sheet date but before the issue of financial statements of the either party.

FINANCIAL ASPECTS

1. EXCHANGE RATIO

   The exchange ratio for the Merger and Amalgamation is generally determined on the basis of relative share values of the companies under Amalgamation. For determining the exchange ratio one need to determine the value per share of each of the company under Amalgamation.

2. VALUATION

Share valuation

METHODOLOGY OF VALUATION

There are three methods commonly adopted in India for valuation of shares. These are the Net Assets Method, the Earning Capitalisation Method and the Market Price Method. Each method proceeds on different fundamental assumptions, which have greater or lesser relevance, and at times even no relevance, to a given situation. Thus the method to be adopted for a particular valuation must be judiciously chosen.

1. The Net Assets Method represents the value of share with reference to historical cost of the Assets owned by the company and the attached Liabilities on the valuation date, such value represents the support value of a share of a going concern. It is usual to ignore the market value of the operating assets under this method.

   While the historical cost is adopted in respect of the assets which are to continue as a part of the going concern, it is necessary to adjust the market value of Non Operating Assets such as non trade investment and any surplus assets which are capable of being disposed off without affecting the assets base for the operations.

2. The Earning Capitalisation Method involves determination of the maintainable earnings level of the company from its normal operations. These earnings, considered on a post tax basis, are then capitalised at a rate which, in the opinion of the valuer, combines an adequate expectation of a reward from enterprise and risk. The business value arrived at is then divided among shareholders. This method is based on the earning capacity of the business and is consistent with the "Going Concern" basis applicable to continuing business entities.

3. The Market Price Method evaluates the share on the basis of weighted average rate of the transactions entered on the stock exchange. This rate is considered as indicative of the value perception for the shares by inventors operating under free market conditions.

Business valuation-perpetuity method-

Brand valuation-

Employee valuation-Infosys-Aptech-Dr. Reddy's Laboratories-Rolta have done employe valuation based on Lev and Scwartz model-juggi's variation-

Valuation of Distribution network-

Valuation of Software

Valuation of Knowhow- Ranbaxy

Valuation of Other intangibles

Valuation of Dot com companies-number of hits/eyeballs-number of sticky eyeballs-number of repeat sticky eyeballs-

1. Due Diligence

1.Corporate organisation

2.Capital structure-history-shareholding pattern-top 50 shareholders-depository agreements-stock options agreements-nontransferable, non disposal unsertakings-

2.Stock Exchange filings, other disclosure documents and related items.

3.Government regulations filings.

4.sales of securities and financing

5.Intellectual property.

6.material agreements.

7. management and controlling persons.

8.labour personnel and human resources.

9.immovable properties.

10.Movable properties.

10.financial information.

PRACTICAL ASPECTS

(II) PROCEDURE FOR A DEMERGER/SPIN –OFF

1. Identify a division/unit to be demerged.

2. Decide the Appointed Date for demerger.

3. Prepare separate Balance sheets for the division to be demerged and rest of the company as on Appointed Date.

4. Get the Market Valuation Report of tangible and intangible assets being transferred, if necessary.

5. Get both the Accounts audited by the Statutory Auditors.

6. Work out the proposed reduction in the share capital/reserves of Transferor Company. Work out a ratio of shares of the Transferee Company to be issued for number of shares which are reduced by the Transferor Company

7. Apply for availability of name of the Transferee Company, which will acquire the unit to be spun-off, and obtain clearance of the name.

8. Prepare a scheme of Rearrangement.

9. Approval of the Scheme at the Board Meeting of the Transferor company.

10. Apply to High court where Regd. Office of the Transferor company is situated for shareholders' and creditors' meetings, etc.

11. Approval of the Scheme at the court convened General Body Meeting.

12. Approval of the Scheme at the Creditors' Meeting.

13. File chairman's Report on the outcome of the Meetings with the High court

14. File petition in the High-court(s).

15. Incorporate the Transferee Company.

16. Obtain Highcourt court order approving the scheme.

17. Carry out the transfer of assets and liabilities.

18. Intimate about the demerger to all the concerned parties and authorities.

19. Obtain/endorse licenses.

1. Sales Tax Aspects

   - Withdrawal of subsidy

   - Sales tax on transfer of undertaking, goods, fixed assets, intangible assets.

2. Excise duty Aspects

g) SSI/SIA Registration

h) MRTP Act

By concept, merger increases the size of undertakings. If two concerns which have merged are in the same industry industry, normally the market share of the new undertaking would be larger and it is possible that it may move closer to be a monopoly or a near monopoly.

In line with the new and liberal Industrial Policy announced in 1991, substantial amendments have been made in the MRTP Act, more particularly with respect to mergers, amalgamations and takeovers and important provisions governing such transactions have been omitted. While, as ruled by the Supreme Court the Act may not hamper mergers before and at the time of the process, post merger regulation is possible and while deciding on a merger as well as while as during the operation of the new undertaking, care would have to be taken to ensure that the provisions are not contravened.

Sick Industrial Companies (Special Provisions) Act, 1985

As per Regulation 3(1)(j), Regulation 10,11 and 12 of Takeover Code do not apply to (transfer of shares) pursuant to a scheme-(i) framed under Section 18 of the SICA,1985.

ACQUISITIONS

Difference between Mergers and Acquisitions-

Acquisitions versus takeovers-

Law relating to acquisition and takeover of listed companies

General Considerations for Acquisition/takeover

Before deciding on a takeover, the Acquirer has to consider some or all of following factors

1. The total cost of the takeover i.e. the consideration, Public offer, Issue of Shares.
2. The total value of the Business being taken over.
3. The time which a takeover will take.
4. The hurdles in the way of a takeover.
5. Percentage of ownershipControl with which the Acquirer will be comfortable.
6. The State of the Target Company – healthy, sick, needing urgent funds, etc.
7. The Reliability of financial and other data about the target company.
8. Shareholding Pattern, Promoters Stake and Institutional Views-.
9. The Synergy with acquirer's business, likely Returns and cost benefits of takeover.
10. Hostile or Friendly Takeover.
11. Laws relating to takeover.
12. Possibility of Competitive bids.
13. Existing holding in the Target Company.
14. Market Share.
15. Ready Project vis-a-vis a Greenfield Project.
16. Accelerating entry in a market.
17. Ready entry in a Regulated market.

f) Special Considerations on deciding a strategy for takeover :

1. The Market Price and P/E Ratio of both the Companies.
2. Whether the business is to be merged or kept separate.
3. Whether only certain assets are to be acquired.

   .

4. Benefit of Carried Forward losses and depreciation.
5. Advantage of Listing.
6. Reverse Merger.
7. Spinoff after takeover
8. Continuance of existing management.
9. Foreign Acquisitions
10. Worldwide Mergers
11. Government Regulations

    SEBI Guidelines

    AT&T Telecom Co.

    Anti trust regulations-Microsoft – Apple

12. Capital Gains, Stamp duties and other Tax aspects

    Sale v/s Spinoff

13. General body approvals not coming
14. Quantum of uncertain Contingent liabilities & unknown risk in taking over whole Company.
15. Too many unrelated businesses of the Target Company.

LEGAL ASPECTS OF ACQUISITIONS

SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.

• Came into effect from 20-2-1997.
• Applies only to acquisition of shares in listed companies-see Regulation 2(1)(o) definition of " target Company" and Regulation 3(1)(k) exemption to acquisition.
• Covers acquisition of shares as well as takeover of management control.

• Key difference between 1994 and 1997 regulations

-Indirect acquisitions now covered.

-Takeover process made smoother.

-Acquisition of control without acquiring voting rights included

-New definitions introduced

-Protection of shareholders through escrow, etc.

CHAPTER I-PRELIMINARY

Regulation 2-Definitions

2(b)-Acquirer

2(c)-Control

2(e)-Person acting in concert-

2(f)-Offer Period

2(h)-Promoter

2(j)-Public shareholding

2(k)-Shares

2(o)-Target company

Regulation 3 Applicability of the Regulations[10,11 and 12]

First checkup whether the proposed acquisition will be hit by Regulation10,11,or 12-then checkup whether you are entitled for exemption-Exemption from Takeover code under Regulation 3.

+3[1[a]allotment in a public issue-full disclosures for firm allotments-

+3[1][b]Rights issue

*+3[1][c]Preferential allotments-acquisition via preferential allotment is possible-

3[1][d]allotment to underwriters pursuant to any underwriting agreement-

*+3[1][e]inter se transfer of shares among I]group companies, ii]relatives and iii][a]Indian promoters and collaborators iii][b] promoters

3[1][f]stock-brokers for clients, market maker during market making,Public Financial Institutions on their own account, Banks and FIs as pledges.

3[1][g]transmission on succession or inheritance.

*3[1][h]acquisition by government companies.

*+3[1][i]from state level FIs and their subsidiaries to co-promoter(s) pursuant to an agreement.

3[1][j]pursuant to a scheme under SICA or arrangement or reconstruction or merger or demerger under any law or regulation, Indian or foreign.

3[1][k]shares of unlisted companies.

3[1][l]such cases as may be exempted from applicability of chapter III by the Board.

*intimate to the exchange where shares are listed, of the proposed transactions at least 4 working days in advance in case of acquisition exceeding 5% of the voting share capital of the company.

+submit a report to SEBI within 21 days of acquisition if acquirer alongwith PAC and alongwith existing holding gets 15% or more of the voting rights

CHAPTER II-DISCLOSURES OF SHAREHOLDING AND CONTROL IN A LISTED COMPANY

Regulation 6 Transitional provision-intimation of existing shareholding on intimation of new code-

Regulation 7 Acquisition of more than 5% shares or voting rights in a company(taken together with shares or voting rights, if any, held by him) shall disclose the aggregate of his shareholding or voting rights to the company-

• Bajoria controversy
• Manner of disclosure not mentioned here.

Regulation 8 Continual disclosures-(1)yearly disclosures by every person who holds more than 15% , within 21 days from 31^st March(2) by promoters and persons having control within 21 days of 31^st March and record date(3) by Company

CHAPTER III-SUBSTANTIAL ACQUISITION OF SHARES OR VOTING RIGHTS IN AND ACQUISITION OF CONTROL OVER A LISTED COMPANY

Regulation 10 No acquirer shall acquire shares or voting rights which (alongwith held by him or by PAC with him) entitle him to exercise 15% or more of the shares or voting rights in a company-unless such acquirer makes a Public Announcement to acquire shares of such Company in accordance with the Regulations-limit increased to 15% from 10% wef 28-10-1998-trigger off point-Regulation 10,11 and 12 are embargo-acquire v/s agreeing to acquire-

• Whether increase in percentage shareholding due to buyback of shares by a Company can trigger off takeover code?

Regulation 11 Consolidation of holdings-(1)applies to acquisition of additional shares or voting rights by an acquirer with PAC-creeping acquisition- no acquirer who has acquired 15%(earlier 10%) or more but not more than 75%(earlier 51%) shall acquire either by himself or through or with PAC additional shares entitling himto exercise more than 5 % (earlier 2%) in any period of 12 months unless such acquirer makes a Public Announcement to acquire shares of such Company in accordance with the Regulations unless such acquirer makes a Public Announcement to acquire shares of such Company in accordance with the Regulations -running period of 12 months-Reliance and Tatas(2) additional shares beyond 75% can not be acquired without PA.

Explanation-for the purpose of Regulation 10 and 11 acquisition shall mean and include direct acquisition in a listed company as well as indirect acquisition of holding companies, whether listed or unlisted whether in India or abroad

Regulation 12 Acquisition of control over a company-applies even when no shares are acquired -Public announcement and acquisition of shares necessary-Gujarat Ambuja ACC controversy-control may change by a resolution of shareholders-

Explanation [i]cessation of control from joint owners to one or more persons shall not be deemed change in control-change in nature and quantum of control shall also not constitute change in control-

if transfer from joint to sole control is at less than market value special resolution to decide mode of disposal by a letter o offer or by block transfer to the existing shareholders in control-

[ii] if any person or persons are given joint control, such control shall not be deemed to be a change in control so long as the control given is equal to or less than the control exercised by person[s] presently having control over the company- not happily worded

Regulation 13 Appointment of a merchant banker-before making PA-category I-unrelated-

Regulation 14 Timing of the public announcement of offer-by MB not later than 4 working days

Regulation 15 Public announcement of offer-newspapers-two working day before issuance, copy to SEBI, SEs and target company-

Regulation 16-contents of Public announcement of offer-

Regulation 17-brochures-PA, etc. not to contain misleading information-prosecution-penalty section 15H Rs. 5 lacs-

Regulation 18-submission of draft letter of offer to Board within 14 days-

Regulation 19-specified date-like a record date-not later tan 30^th day from PA-

Regulation 20-Minimum offer price-highest of -negotiated price,highest price paid for any acquisition in last 26 weeks prior to PA by acquirer or PAC,price paid ina preferential offer during 12 months upto closure of offer,average of weekly high-low of closing prices at most frequently traded exchange, during 26 weeks preceding date of PA.

Regulation 21-Minimum number of shares to be acquired-

Regulation 22, 23 and 24 General obligations of acquirer, Board of Target company and Merchant banker.

• Can the Board refuse to transfer shares if Regulation 10 or 11 not complied?

• Can a Compny announce buyback of shares when an acquirer has made an Open Offer?

Regulation 25-Competitive bid-a tool for takeover defence-also a process of price discovery-sterlite, Indal takeover bids-

Regulation 26-Upward revision of offer

Regulation 27-withdrawal of offer

Regulation 28 Provision for escrow

(I) Procedure for friendly Takeover of a Listed Company

1. PRE OFFER PERIOD

1. Identification of a Target Company-

2. Initiate negotiations.

3. Acquirers to complete their Due diligence of the Target Company.

4. Board meeting of Acquirer for decision regarding acquisition, authority for negotiation to a Director, authority to represent and sign Memorandum Of Understanding, appointment of Lead Managers, Registrars, Advisors, Printers and all other agencies along with other Acquirers, EGM for permission under section 372A, authority to make public announcement with other Acquirers, to sign Letter Of Offer and other papers, to make revised bid etc.

5. Write to all SE’s where the Target company is listed for data on weekly high-low and average price for 26 weeks prior to date of Public Announcement. Also call for volume data for 12 months from each of the stock exchange(s) where the target company is listed . Decide the offer price as per Takeover code.

6. EGM of Acquirers for section 372A approval. Keep Draft Letter of offer open here, if ready.

7. NRI sellers to apply to RBI for transfer of shares.

8. NRI sellers to give POA for transfer of shares.

9. NRI buyers to apply to RBI for purchase of shares (if on repatriation basis) if required.

10. Acquirers to enter MOU with the Sellers. Decide the place of execution of MOU.-check effect of guidelines on negotiated deals-spot delivery transactions-

11. Send letter to SEBI for permission to transfer non-transferable shares, if any, through category 1 merchant banker.

12. Enter MOU with Lead Manager.

13. Appoint and obtain consent of Registrars to the Offer.

14. Appoint Advisers to Offer, if necessary.

15. Acquirers to make provision for escrow account to the extent of 25% to 50% as the case may be.

16. Obtain a CA certificate for availability of resources with Acquirers and display firm financial arrangement for acquisition to the LM.

17. Acquirers to deposit 1% of purchase consideration.

18. Prepare Draft Public Announcement as per the required contents.

19. Fix specified Date to be within 30 days of date of PA

20. LM to file Draft Public Announcement with SEBI two working days before the publication of Announcement and incorporate SEBI’s comments, if any.

21. Acquirers to write letters to SEs where Target company is listed informing acquisition under clause 40A/40B of Listing Agreement and Takeover Code.

22. LM to send to Target Company and SEs where Target is listed for agreement of acquisition of shares alongwith copy of draft Public announcement.

23. Target company to write to SEs where it is listed intimating receipt of information of acquisition.

24. Make public Announcement in one English national Daily having wide circulation, one Hindi national Daily having wide circulation, regional news paper where the target company’s shares are most actively traded and regional newspaper where the Registered office of the Target Company is situated, within 4 working days of the Acquirers agreeing to acquire. (Reg. 14[1] )

25. Board of Directors of Target company not to take certain actions during offer period, unless approval of general body of shareholders is obtained after the date of PA of offer. Target company obligations(Reg.23)

26. Send a copy of Public Announcement to SEBI, Target company and SEs where listed.

27. Receive SEBI’s approval to transfer non-transferable shares.

28. Receive RBI approval for NRI sellers /buyers.

29. Board meeting of Target Company to consider Public Announcement.

30. Get valid transfer forms duly signed, filled and stamped. If necessary let the transfer agent of Target Company peruse the same and approve for signature, etc. Make payment for the shares and receive delivery of duly endorsed share certificates.

31. Lead Manager to complete his due diligence.

32. Obtain CA certificates, letters of representation from Acquirers and other evidences and documents for Due Diligence of LM.

33. LM to prepare Draft Letter of Offer within 14 days of public Announcement and to file the same with SEBI, Target company and SEs where Target company is listed.

34. Incorporate SEs comments in final draft of Letter of Offer.

35. Receive SEBI’s comments within 21 days of PA and incorporate them in final draft of LO and take appropriate action.

36. Reply to SEBI in Seriatim of observations and changes duly highlighted Give cooling period to SEBI to react.

37. Signatory to LO to obtain power of Attorney from directors to sign LO.

38. Print LO, Acceptance forms, envelopes, covering letter and names and addresses of Acquirers on transfer forms.

39. Send (6) copies of LO to SEs where Target Company is listed when printed. Also send copies to SEBI.

40. Send a copy of printed LO to Board of Target Company and obtain acknowledgements.

41. Complete dispatches of LO within 45 days of PA and obtain proof of dispatch .

42. Offer opens within 30 days of dispatch.

    B) DURING THE OFFER PERIOD

43. Competitive bids, if any, within 21 days of the PA of the first offer(Reg.25(1).

C) POST OFFER

44. Acquirers to open special Account and transfer funds for payment to seller. (Reg.29)

45. LM to allow Transfer of Escrow money to special Account.

46. Registrar to Issue to receive forms, certificates and other documents.

47. Registrar to Issue to verify transfers. Target company to cooperate. (Reg.)

48.Decide on the proportionate basis of acceptance of offer, if offer is oversubscribed. (Reg. )

49.Make payment to those whose offers are accepted.

50.LM to file Report with SEBI.

TAKEOVER DEFENCES

• Poison pills.
• Competitive bids.
• Buyback of Shares.
• Preferential allotment.
• Merger of group companies.
• Delisting.

Section 108A to 108I of the Companies Act, 1956 govern purchase of shares and takeover.

Section 108A

Restriction on acquisition of certain shares-prior approval of Central Government when acquisition exceed 25% of equity capital-

Section 108B

Restriction on transfer of shares

Section 108C

Restriction on the transfer of shares of foreign companies

Section 108D

Power of Central Government to direct companies not to give effect to the transfer

Section 108E

Time within which refusal to be communicated

Section 108F

Nothing in Sections 108A to 108D to apply to Government companies, etc.

Section 108G

Applicability of the provisions of sections 108A to 108F-applies to exiting or would be dominant undertakings

Section 108H

Construction of certain expressions used in sections 108A to 108G

Section 108 I

Penalty for acquisition or transfer of share in contravention of sections 108A to 108D

Section 111

Section 111A

Section 293 -Restriction on powers of Board

Section 372A- Loans,and Investments

Section 371- Penalties for contravention of section 369,370 or 370-A

Section 372- Purchase by company of shares, etc., of other companies

Section 373 –Investments made before commencement of Act

Section 374- Penalty for contravention of section 372 to 373

Section 376- Condition prohibiting reconstruction or amalgamation of company except on continuance of managing agent, etc., to be void.

Securities Contracts( Regulation) Act, 1956.

Section 22A of SCRA was enacted for free transferability and registration of transfer of listed securities of companies, which was omitted in pursuance to enactment of Depositories Act,1956.