Looking Beyond the Words

1. Looking Beyond the Words Analyzing Impact Of The Companies Act, 2013 on Mergers & Acquisitions February, 2013

2. Cross-Border M&A 1

3. Merger Of Indian Company With Foreign Company F Co. F Co. Foreign and Indian shareholders ForeignShareholders Merger of I Co. with F Co. Overseas Overseas India India Business of Indian Co to continue as branch of foreign Co Indian Shareholders Business of Indian Co I Co.

4. Merger Of Indian Company With Foreign Company (Cont…) • Implications of foreign mergers • Taxability of assets transferred by Indian company to Foreign Co – Exemption under Section 47 (vi) of the Income Tax Act, available only if the merged company is Indian company – Availing of exemption difficult • Taxability of shares transferred by Indian shareholder in lieu of GDR / cash of Foreign Co- Exemption under Section 47 (vii) of the Income Tax Act, available only if the merged company is Indian company – Availing of exemption difficult • Post merger, the Indian business would be considered as branch / permanent establishment of the Foreign Company • Tax rate applicable to profits of foreign Company would be 43.26% as against 33.99% for domestic companies • Income of the branch to be determined in accordance with the principles of Article 7 of the relevant DTAA i.e. profits attributable to the Branch • Relatively easy to repatriate profits from the branch to the parent Tax Considerations • Substantive compliance requirements for Indian companies under Companies Act, would not be applicable • Post merger the Branch, would be considered as a foreign company and provisions of Section 592 to 602 of Companies Act would be applicable • Compliance with RBI regulations, as applicable to Branch applicable Regulatory considerations

5. Cross-border M&A – Issues For Consideration Background Overseas acquisitions by Indian companies generally through Special Purpose Vehicles(“SPV’s”) incorporated outside India Section 185 of New Act prohibits any loan/guarantee to subsidiaries ( whose board could be de-facto said to be controlled or accustomed to act on behalf of holding company) Circular dated 13 February 2014, allows provision of guarantees/ securities by holding to subsidiaries, only till section 186 (relating to loans and investment by company) of the New Act is notified The case study below presumes the position after notification of section 186 Situation under Old Act Position under New Act I Co. I Co. 100% shares of Subsidiary (20 MUSD) 100% shares of Subsidiary (100 MUSD) Guarantee India India Overseas Overseas Subsidiary Subsidiary Purchase of shares of target for 100 MUSD Funding (100 MUSD) Purchase of shares of target for 100 MUSD Equity fund – 20 Loan funds - 80 Target Equity fund – 100 Overseas Bank Target • Entire acquisition to be funded by I Co through self funds. • Leveraged buyouts likely to be affected

6. Domestic Acquisition By Foreign Company Acquisition structure under old Act Background and Implications In various cases, inbound M&A deals have been structured through ‘Subsidiarization’ The subsidiary structure also enabled ease of entry of foreign investor in a new entity, with desired business Structure feasible under the Old Act as section 372A / 295 of the old Act, allowed loans between holding-subsidiary Section 185 of the New Act, prohibits loan / book debts to a subsidiary by a holding Company (no exemptions). Also Section 186, as proposed, does not contain exemption for loans provided to a 100% subsidiary This means entire consideration of Slump sale, should be discharged in cash on Day 1 – Thereby making structuring of such M&A deal structures difficult Foreign Investor Overseas India Divesting Co. X Step II Investment at an agreed valuation in New Co. Step III Investment proceeds to be used by New Co. to discharge its liability to Co.X for slump sale consideration Division B Division A Step I Slump sale of Division B to 100% subsidiary of Co. X for a definite consideration Consideration to reflect as payable in books of New Co. New Co.

7. M&A provisions for Small Companies/ Holding-subsidiary 2

8. What's In The Bucket For Small Companies/Holding-Subsidiary ? • The New Act, recognizing the need for flexibility, has provided fast track route for merger of small companies / holding or subsidiary companies • Merger between small companies; or • Merger between holding company and its 100% subsidiary; or • Merger between other class or classes of companies as may be prescribed Fast track mergers Small Company (under the New Act) • Company other than a public company • Paid up capital does not exceed 50 lakh rupees or the amount prescribed (not more than INR 5 crore) • Turnover as per last profit and loss – Less than INR 2 crore or the amount prescribed (not more than INR 20 crore) • Cannot be a holding / subsidiary company

9. Fast Track Merger Scheme – Small Companies/ Holding-Subsidiaries 2 Convening GM 1 Notice of the Scheme Conduct general meetings of both the Transferee/Transferor Companies – Approval by shareholders having 90% of the total share capital Notice of the Scheme to Registrar, OL of both the Transferee/Transferor Companies 4 Creditors approval 3 Declaration of solvency Transferee/Transferor Companies to gain approval of their respective creditors representing 90% of the total value of creditors. (21 days notice for obtaining approval in writing) Transferee/Transferor Companies to file declaration of solvency with their respective Registrars If no objection, CG to register the Scheme 5 Filing of Scheme with the CG Transferee Company to file copy of scheme with the Central Government, Registrar and OL CG to decide to approve scheme or file objections with Tribunal (time limit to CG for raising objections is within 60 days of receipt of the Scheme), else deemed ‘no objection’ Objection by Registrar, OL, to be filed with CG within 30 days else deemed ‘no objection’ Tribunal, upon receipt of objections from the CG, shall pass order approving the scheme, otherwise normal procedure laid down under section 230 to be complied with Issues (i) Whether Demerger covered under the provisions of section 233 (ii) Can small companies/ holding-subsidiaries apply for normal course under a scheme of arrangement ?

10. Fast Track Merger Scheme – Small Companies/ Holding-Subsidiaries Specifically provided that provision of Section 233 shall apply mutatis mutandis to other types of Schemes referred in Section 230 or 232 (i.e. demerger, spin offs etc) Thus, Demerger of small companies can be undertaken using the Fast track process Whether the Fast track merger scheme applicable for Demerger of small/holding-subsidiaries ? Specific provision under section 233 allows a small company/holding-subsidiary to apply for normal route for merger / demerger Can small companies/ holding-subsidiaries apply for normal route under a scheme of arrangement ? Issue for consideration : Whether merger of a small company with a foreign company permissible under the fast track merger process?

11. Other Important Aspects 3

12. Merger Of Listed Company With Unlisted Company Shareholders of Co. A & Co. B Shareholders of Co. A Shareholders of Co. B Shareholder of the transferor company have an option to exit at a fair price if the merged entity remains unlisted, by payment of cash consideration Overseas Overseas India India Co. B (Unlisted) Merged C o. (A+B) (Unlisted) Co. A (Listed) Co. A to merge with Co. B

13. Other Important Aspects Implications of buy-back, issue of differential voting rights etc Under old Act, 365 day time gap was required between board approved buybacks (i.e. buy-backs upto 10%) Under new Act, buyback possible after 3 years from which specified defaults (repayment of deposits / interest etc,) ceased to subsist Minimum 1 year gap required between two buybacks (whether shareholder approved or board approved), even if buyback is within 25% limit. Buy-Back Permits issue of shares with differential voting and dividend rights subject to restrictions / rules – Section 43 No exemption / relaxation to private limited companies, which was available earlier Onerous conditions laid in Rules for issue of DVR shares, which inter-alia includes authorization in AOA and special resolution, track record of at least 10% dividend payout during past 3 financial years, no default in repayment of Investor or creditors dues and that the company has not been convicted of offence under RBI Act, SEBI Act, SCRA or other Special Acts Differential Voting Rights (“DVR”) • Under new Act, investment not permitted through more than two layers of ‘Investment Companies’ – Section 186. This Restriction shall not apply to: • Company acquiring another company incorporated overseas having more than two layers, as per laws of that country • Subsidiary having investment subsidiaries for meeting any statutory requirements Layered structures Prohibition on companies from holding shares through trusts, either on its behalf or on behalf of any subsidiaries/ associate companies on corporate restructuring / compromise / arrangement - Section 232 Treasury Stock

14. Other Important Aspects (cont..) Implications on Scheme Accounting, Objections, Notice etc Earlier Act provided for flexibility in the manner of recording the transaction of merger / demergers – thereby facilitating financial restructuring (set off of losses etc) Specific provision in new law stipulates that the accounting must conform and comply with the accounting standards. (presently compliance with accounting standards is only mandatory for listed companies) The new provision in the Companies Act, 2013 would even require an unlisted company to comply with the accounting standard norms The auditor’s certificate stating that the scheme has been drawn in compliance with Accounting standards is now mandatory for all companies. Scheme Accounting • Under old Act, objections to scheme could be raised by any shareholder / creditor, without any threshold limit • Under New Act, objections can be raised only by persons holding not less than 10% of the shareholding or having outstanding debt amounting to not less than 5% of the total outstanding debt. • This has been done to prevent shareholders with very nominal shares to delay the procedures. Objections to Scheme Under old Act, the notice of scheme would be served to the Central Government, the Registrar of Companies and the Official Liquidator as per the directions of the High Court. Under New Act, the notice of the scheme of the arrangement must be notified to all the regulatory authorities concerned like SEBI, Income Tax Department, RBI, Competition Commission of India (CCI), stock exchanges(as applicable) in addition to the provision of the Companies Act, 2013, NCLT, shareholders, creditors, etc. Impact : Increased scrutiny of schemes by regulatory authorities. Notice of Scheme

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