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Cross border Mergers Provisions under the Companies Act, 2013: Analysis and Implications
Ajay Kumar Sharma opines on the recently enacted Companies Act, 2013, passed after much Parliamentary debate and analysis, presents newer challenges in field of cross-border mergers and amalgamations, and is not -
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| panacea to all existing problems. This paper discusses merits and demerits of certain salient pertinent provisions. It offers original insights, which have possibly not been explored as yet, and more comprehensively discusses certain previously identified issues. Thus, it provides a background material to discuss these imperatives further. |
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Introduction:
The initial euphoria regarding the recent Indian Companies Act, 2013 will mellow down with passage of time. The pragmatic implications both, long term and short term of any newly enacted legislation is actually felt and understood by the stakeholders and the regulators on basis of the problems which emerge post enactment with which they have to be grapple. However, this does not undermine the significance of analysing its provisions at this juncture to offer timely insights as to their strengths and weaknesses. It might also provide an opportunity to the legislators to again contemplate on some of the provisions of the Companies Act so as to suggest some suitable amendments. This paper may also provide some food for thought to the Ministry of Corporate Affairs (MCA) while formulating rules, under the Act, on the imperative issue of cross border mergers and acquisitions.
The merger provisions are contained in Chapter XV, containing Sections 230 to 240, which deals with ‘Compromises, Arrangements and Amalgamations.’ Section 234 specifically deals with the cross-border mergers concerning merger or amalgamation of an Indian company with foreign company. The analysis of merits and demerits will be done with a view to examine the possible implications of the relevant provisions on cross-border mergers.
An insight into certain general provisions of Chapter XV:
2.1 More comprehensive Reporting:
Sub-section (2) of Section 230 at the onset makes the reporting to the tribunal for purpose of calling a members or creditors meeting more comprehensive than prescribed by Rule 67 of the Companies Court Rules, 1959, by filing an affidavit in Form No. 34, as required on an application made under Section 391(1) of the Companies Act, 1956. Most notable changes are the disclosure regarding the Corporate Debt Restructuring (CDR) Scheme to the tribunal; and filing of a share and property valuation report before the tribunal.
2.2 Notice to the Regulators and examining the role of CCI:
Sub-section (5) of Section 230 provides for sending sub-section (3) notice and other prescribed documents to the sectoral regulators and other authorities who are likely to be affected by the compromise or arrangement, to enable these regulators and authorities to make any representations on the proposals within the prescribed 30 days period. Competition Commission of India (CCI), which is arguably the Indian super-regulator, is expressly to be provided with the said notice and documents, if necessary. The circumstances amounting to the ‘necessity’ of the notice to CCI are nowhere delineated in the Act. Perhaps, the asset and turnover thresholds prescribed under Section 5 of the Competition Act, 2002 will be looked into to determine such a necessity, in absence of an express provision in the Companies Act in this regard.
As far as providing notice to the CCI is concerned, we should not forget that the Competition Act, 2002 provisions, along-with the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (‘Merger Control Regulations’) already prescribes for obtaining mandatory approval of certain combinations, where prescribed thresholds are met. Even the Company (High) Courts are taking note of these Competition Law provisions in their orders approving schemes of mergers. This entails substantial costs including, high filing fee with attendant delay. This dual requirement of allowing CCI to make representations before the tribunal, and under the Competition Act to seek mandatory sanction is unnecessary, and cumbersome for the companies concerned. Further an anomalous situation may be created, if the CCI does not object or make any representation before the tribunal and later on declines to grant sanction, as required under Section 31(1) of the Competition Act. Instead, representations by CCI should be omitted in the sub-section (5) of Section 230, as it will have authority to block the merger when the ‘combination’ proposal comes for its approval.
2.3 Restricting the scope of objections to mergers by shareholders and creditors:
There been instances in past of unscrupulous shareholders who bought just a few shares solely with a view to object to the mergers and attempt to block and delay the process. Proviso to sub-section (4) to Section 230 appears to rule out such frivolous and vested objections to the compromises or arrangements by prescribing, that ‘the objection to the compromise or arrangement shall be made only by persons holding not less than ten per cent of the shareholding or having outstanding debt amounting to not less than five per cent of the total outstanding debt.’ Such a positive change can have negative implications for protecting the rights of the genuine minority shareholders and small creditors. Instead, a summary procedure could be prescribed for such objections, a time frame could be laid down for dealing with such objections, and tribunal should be permitted to impose heavy penalty on such unscrupulous objectors.
2.4 More elaborate provisions and procedure:
It can be noticed, that the 2013 Act has much elaborate provisions and procedure to deal with several issues related to forming a more objective view of the scheme and deal with the stakeholders interests when compared to the provisions under the Companies Act, 1956. One such provisions is Section 236, which prescribes for ‘purchase of minority shareholding’. This provision should be distinguished from the preceding section dealing with the acquisition of shares of dissenting shareholders. Though, inadvertently in Section 236 the Explanation which follows sub-section (8) erroneously refers to Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 [SEBI (SAST) Regulations, 1997] when SEBI (SAST) Regulations, 2011 are already in force. This drafting error could have been detected and removed in the Parliament itself.
2.5 Simplified procedure in certain cases:
One salient provisions of the 2013 Act is Section 233, which prescribes for bypassing the tribunal in case of merger or amalgamation of two or more small companies or between a holding company and its wholly-owned subsidiary, apart from other prescribed companies. Section 233 involves the Registrar (RoC) and Official Liquidators (OLs) in such mergers and amalgamations. This simplification of the process should expedite such mergers apart from reducing the transaction costs.
Provision (Section 234) specific to cross-border mergers:
3.1 Section 234: Progressive or Regressive
The Companies Act, 1956 due to Section 394(4)(b) restricts cross-border mergers to the Indian transferee companies. This legislative policy was a unusually restrictive and parochial, and ostensibly existed to protect Indian companies. This neo-colonisation mindset viewing business with foreign entities with suspicion should have been long sacrificed in this era of economic liberalisation, where the Indian government is slowly and cautiously moving towards an open door policy for inbound foreign investment, with progressive relaxation on capital account transactions (in a rather flip-flop manner); and the benefits of comparative advantage are quite well established for trade and commerce. Indian Government is arguably moving towards a freer capital account convertibility. In such an environment the restriction on cross-border mergers imposed by the Section 394(4)(b) should not be countenanced. It should also be appreciated, that such restrictive protectionist condition is not there in many advanced jurisdictions like, the U.K. and the U.S., otherwise previous cross-border mergers with U.K. Companies e.g., in the 1976 E.I.D. Parry Ltd. Case and the U.S. companies e.g., the year 2003 amalgamation of Verasity Technologies Inc. with Moschip Semiconductor Technology Ltd. would not have been possible. No adverse effects have been demonstrated on the U.S. and U.K. companies due to permissive regime in their jurisdictions.
Thus, the introduction of Section 234 in the 2013 Act is a welcome step. However, a regressive restriction of allowing such cross-border mergers only with the foreign companies incorporated in the Central Government notified jurisdictions nullifies the progressiveness which was apparent in Section 234. It is just anybody’s guess that which jurisdictions will be notified in due course, and on what basis. Will this policy be formed on basis of reciprocity or, on some other criterion, like restricting mergers from tax and treaty havens? Notably, the Companies Act, 1956 provisions do not restrict cross border mergers on basis of the nationality of the transferor foreign company. Thus, there is a need to further examine two issues pertaining to this restriction. Will this restriction in the 2013 Act actually make it even more regressive than the 1956 Act? This question can only be addressed after the relevant notification is issued, which will enable examination of its scope and contents; and its impact on cross-border M&As is seen with passage of time. The second concern relates to the (in) appropriateness of addressing issues concerning other areas like, international taxation and its avoidance through the instrument of companies legislation. This complicates these existing problems further, without effectively addressing them, and has unnecessary adverse implications on the company’s law regime.
3.2 Role of the Reserve Bank in the approval: Onerous condition.
Sub-section (2) of Section 234 requires a prior Reserve Bank approval in the cross-border mergers. This is unusual and should be left to the wisdom of the authorities managing Foreign Exchange Management Act, 1999 and its Regulations, prescribing the exchange control laws in India. It should be noticed, that even under the current framework, Regulation 7 of the FEM (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000 (‘FEMA 20’) mere reporting to the Reserve Bank by the transferee or the new company within the 30 days period in the manner prescribed is the general norm to be followed. Only respite is, that sub-section (2) is ‘subject to any other law for time being in force’. Thus, Regulation 7 of FEMA 20 should override the prior approval requirements. A corresponding overriding provision will have to be introduced in the FEM (Transfer or Issue of any Foreign Security) Regulations, 2004 (‘FEMA 120’) for the benefit of cross border mergers involving a foreign transferee company.
3.4 Central Government forming rules in consultations with the Reserve Bank:
Proviso to sub-section (1) of Section 234 provides, ‘that the Central Government may make rules, in consultation with the Reserve Bank of India, in connection with mergers and amalgamations provided under this section.’ The coverage, consistency (both within and with other existing laws), and clarity of such rules will be important criteria. The Companies (Cross-Border Mergers) Regulations, 2007 (U.K.) may be instructional in this regard, as it exhibits considerable foresight in dealing with even (traditionally) offshoot issues like, protection of employees. The consultations with other stakeholders and experts are suggested before formulating such rules.
3.5 Depository Receipts as payment of consideration to the shareholders of the merging company:
One radical feature of sub-section (2) of Section 234 is allowing Depository Receipts (DRs) as payment of consideration to the shareholders of the merging company. Thus, there can be a case of issuance of Indian Depository Receipts (IDRs) by the foreign company as payment of consideration to the shareholders of the Indian merging company. IDRs have been an unpopular and problematic security, which seems to have fell into disfavour after the Standard Chartered Bank’s IDR issue. The RBI and SEBI as regulators have created unnecessary restrictions, and have been sceptical in crucial areas like redemption, which has only been slowly yet not fully relaxed, to the inconvenience of the foreign companies issuing such IDRs through depositories. We should not also forget the Central Government’s intervention in form of Companies (Issue of Indian Depository Receipts) Rules, 2004. This makes the whole IDR Regime unnecessarily complex and unattractive. If the IDRs are to be made an attractive security, like ADRs and GDRs, then simplification and unification of the IDR legal regime needs to be done with an open mind by the regulators concerned. Otherwise, such enabling provisions permitting issuance of IDRs carry little meaning.
Conclusion:
Thus, in anticipation this article seeks to examine some salient aspects of Companies Act, 2013 pertaining to the cross-border mergers either, generally or specifically. The merits of some provisions in the new Act are noticeable at the onset. For example, as discussed, Section 230(2) provides for a more comprehensive reporting relatively than the one under the 1956 Act regime. The simplification of procedure of mergers, in certain cases, under Section 233 is also laudatory. However, many of the enactments are criticisable. Notice requirement to the CCI under Section 230(5) should not be provided for due to the current competition law sufficiently addressing that issue. Involvement of too many regulators in the proceedings before the tribunal may unnecessarily complicate and delay the process of a cross border merger. In fact, it is surprising to find the inclusion of CCI in this provision considering the government's efforts on the other hand to simplify the regulatory process by initiating measures like the constitution of the financial sector legislative reforms commission (FSLRC) under the chairmanship of Justice Srikrishna.
Furthermore, the restriction contained in Section 234 restricting cross border mergers (both ways) of Indian companies with companies of only notified countries is not only regressive but speaks of the parochial and protectionist mindset of the government in these matters. This restriction in practice may turn out to be more regressive than the corresponding one under the 1956 Act having only one-way prohibition. Thus, this jurisdiction notification requirement should certainly be done away with when the government and parliament seek to liberalise the cross border mergers. If issues like tax avoidance are a problem in cross border deals, the solution should be sought under international tax laws regime not through the Companies Act. The mention in Section 234(2) about seeking RBI approval in cross border mergers, subject to any extant law, is also superfluous in view of the FEMA and the gamut of regulations under it which are meant to act as the foreign exchange control laws. The instance of a drafting mistake in the explanation to Section 236(8) while referring erroneously to the previous SEBI (SAST) Regulations could have been obviated either at the drafting stage or at the time of passage of the bill by the legislature.
Hopefully, the Government will take timely note of the critique advanced in this article to initiate suitable legislative and executive measures. The other stakeholders are also likely to have more clarity on the issues discussed here enabling them to more objectively assess the provisions pertaining to cross border mergers in the Companies Act, 2013.
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| AJAY KUMAR SHARMA is an Assistant Professor of Law and Executive Director, Research Centre on Transactional Law (RECENTLAW), at the National Law University, Jodhpur (India). The author invites comments and suggestions at: aksnluj@gmail.com. A previous version of this paper on the Companies Bill, 2012 provisions was presented in the 2nd National Conference on 'New Company Law' at the Symbiosis Law School, Noida (Mar. 2013). This research paper is written by the author as part of his ongoing PhD Research. |
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