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Mergers & Acquisitions 2017

Contributing editorAlan M Klein

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www.gettingthedealthrough.com 5

PREFACE

Getting the Deal Through is delighted to publish the eighteenth edition of Mergers & Acquisitions, which is available in print, as an e-book and online at www.gettingthedealthrough.com.

Getting the Deal Through provides international expert analysis in key areas of law, practice and regulation for corporate counsel, cross-border legal practitioners, and company directors and officers.

Throughout this edition, and following the unique Getting the Deal

Through format, the same key questions are answered by leading practitioners in each of the jurisdictions featured. Our coverage this year includes new chapters on Myanmar and the Netherlands, and new pieces on cross-border M&A and franchising in M&A.

Getting the Deal Through titles are published annually in print. Please ensure you are referring to the latest edition or to the online version at www.gettingthedealthrough.com.

Every effort has been made to cover all matters of concern to readers. However, specific legal advice should always be sought from experienced local advisers.

Getting the Deal Through gratefully acknowledges the efforts of all the contributors to this volume, who were chosen for their recognised expertise. We also extend special thanks to the contributing editor, Alan M Klein of Simpson Thacher & Bartlett LLP, for his continued assistance with this volume.

LondonMay 2017

PrefaceMergers & Acquisitions 2017

Eighteenth edition


INDIA Khaitan & Co

128 Getting the Deal Through – Mergers & Acquisitions 2017

IndiaRabindra Jhunjhunwala and Bharat AnandKhaitan & Co

1 Types of transaction

How may businesses combine?

Asset acquisitionsIt is common for companies to acquire or sell entire businesses or undertakings. Alternatively, an acquirer may wish to cherry-pick cer-tain key assets (for example, IP and employees) and leave certain assets (for example, trade debts) behind. Both forms of business com-binations (ie, asset transfers or business transfers) are popular in India. Asset acquisitions may be preferred where the acquirer is wary of past liability issues and prefers to acquire segregated assets rather than acquire the target company as a whole.

Share acquisitionsOften, it is simpler for an acquirer to take over 100 per cent of the share capital of the target company than to seek to acquire key assets or the whole of the target’s business undertakings. India’s foreign exchange control regime has been considerably liberalised to allow 100 per cent foreign ownership in most sectors of the economy, barring a small neg-ative list where foreign investment is prohibited (for example, betting and gambling, lottery business, atomic energy, etc). In certain sectors, the government has prescribed foreign shareholding caps (for exam-ple, banking, insurance sectors, etc) and in some sectors foreign invest-ment is subject to conditions (for example, construction, telecom, single-brand retail trading, etc). Further, share deals may be preferred over asset acquisitions in sectors where key operating licences or assets cannot be transferred easily or in a timely manner (for example, tel-ecom and asset management companies).

In case of transactions between a resident seller and a non-resident buyer, deferred consideration and escrows for an 18-month period after the date of the agreement and indemnities with a value of no more than 25 per cent of the full purchase price are permissible without Reserve Bank of India’s (RBI) approval.

Joint venturesJoint ventures are another popular form of investment for many for-eign investors wishing to enter India. Given the recent judicial trends in India, pre-emption rights and share transfer restrictions are enforce-able in the case of a private limited company in India. Such pre-emptive rights must, however, be incorporated in the articles of association of the company for such rights to be enforceable against the company. Prior to the Companies Act 2013 (the Act) coming into force, pre-emp-tive rights and share transfer restrictions in the case of public limited companies were highly debated and there were doubts regarding the enforceability of such terms by courts in India. The Act, however, rec-ognises that provisions regulating the inter se transfer of shares among shareholders as being enforceable. Furthermore, in a complete rever-sal of its earlier position (since 1969), in October 2013, the Securities Exchange Board of India (SEBI) issued a notification recognising the validity of pre-emption, tag and drag-along rights. SEBI also recog-nised put and call options, subject to the conditions that the shares in question have been held for a minimum period of one year, the strike price and consideration complies with applicable pricing norms (for share transfers) in India; and) the contract is settled by actual delivery of the underlying securities. Since these rules prescribed by SEBI apply

only prospectively, the enforceability of options over the shares of a public limited company entered into prior to October 2013 remains a grey area under Indian law.

In July 2014, the RBI rationalised the pricing guidelines for issue and transfer of equity shares, compulsorily convertible preference shares or compulsorily convertible debentures as regards non-residents (including such instruments with in-built options). As per the prevail-ing exchange control norms, the pricing for the eligible instruments is as follows: in case of listed companies, the pricing as per the SEBI guidelines; and in case of unlisted companies, any internationally rec-ognised pricing methodology. Regardless of whether the instruments are straight equity or convertible, the spirit of the rules (prescribed by the RBI) is that a non-resident investor cannot be provided any assured or fixed rate of return on its investment.

Mergers and demergersIn India it is possible to either combine two distinct entities into a sin-gle entity by way of a merger or to split two distinct undertakings into separate entities by way of a demerger, in either cases through a court-sanctioned scheme.

2 Statutes and regulations

What are the main laws and regulations governing business combinations?

The following principal laws play an important role in establishing the structure and form of business combinations:

Companies Act 2013Under the Act, the sale of an ‘undertaking’ by a public company needs shareholder consent (section 180(1)(a) of the Act) by way of a special resolution (75 per cent majority) unless, with reference to the previous financial year, the investment of the company in such ‘undertaking’ is 20 per cent (or less) of its net worth as per the audited balance sheet of the previous financial year or such ‘undertaking’ generates less than 20 per cent of the total income of the company. Since June 2015, private companies have been exempt from this requirement.

Authorisations under the ActWhere an Indian entity is the acquirer it should be noted that under section 179(3)(e) read with sections 179(3)(j) and 186(5) of the Act, the power to invest funds, or acquire a substantial or controlling interest in another company, must be exercised at a meeting of the board through unanimous approval of the directors present at such meeting. No company shall directly or indirectly acquire any securities where the amount of investments exceeds 60 per cent of paid-up share capital and free reserves, or 100 per cent of free reserves and securities premium, whichever is more, unless: the board resolution sanctioning the pro-posed acquisition is unanimously approved by all directors present at the board meeting; and a special resolution (75 per cent majority) of the shareholders in general meeting is obtained. Indian companies seek-ing to make acquisitions require prior approval of any public financial institutions to whom loans are outstanding where either: the amount of investments exceeds 60 per cent of paid-up share capital and free reserves, or 100 per cent of free reserves and securities premium; or


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there exists any payment default towards amounts due to such public financial institution by the acquirer. Indian companies in default in repaying deposits are prohibited from making any acquisitions.

Schemes of amalgamationUnder the newly notified provisions in relation to Compromises, Arrangements and Amalgamations under Indian law (sections 230 to 232 of the Companies Act 2013), it is possible to merge two entities such that all the assets, liabilities and undertakings of the transferor entity are transferred to and vested in the transferee undertaking with the transferor company being dissolved. A scheme of amalgamation must be approved at a duly convened meeting by a majority in num-ber and three-quarters in value of the creditors (or class of creditors) and members (or class of members), present and voting and thereaf-ter sanctioned by the court. Amalgamation would be tax neutral in the hands of an amalgamating company if the conditions prescribed under section 2(1B) of the Income Tax Act 1961 (the Tax Act) are satisfied. Tax losses of an amalgamating company can be carried forward and set off against the profits of the amalgamated company, subject to fulfilment of certain conditions.

Please note that unlike the erstwhile companies Act 1956, the new provisions have made certain changes in the procedure involved in the approval of schemes. The National Company Law Tribunal (NCLT) is now vested with the power to sanction schemes of Compromises, Arrangements and Amalgamations, instead of the High Court, and accordingly, all the schemes presently pending before the High Courts, would stand transferred to the respective NCLT bench. Apart from cer-tain procedural changes, the new provisions also provide for fast-track and simplified procedure for mergers and amalgamations of certain class of companies such as holding and wholly owned subsidiary, and small companies, without approval of NCLT.

DemergerWhere the business of an entity comprises two distinct ‘undertak-ings’, it is possible to split up the entity into two entities. Generally, shareholders of the original entity would be issued shares of the new entity. Where a demerger is completed through a court process and ful-fils certain conditions prescribed under the Tax Act, it will not result in capital gains for the seller (section 2(19AA) of the Tax Act) or sales tax liability. In addition, tax losses of a demerged company relat-able to the demerged ‘undertaking’ can be carried forward and offset against the profits of the resulting company, subject to fulfilment of certain conditions.

TakeoversSEBI regulates the Indian securities market. In September 2011, SEBI replaced the erstwhile SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the Takeover Code).Under the new Takeover Code, where an acquirer acquires, either directly or indirectly, 25 per cent or more of the shares or voting rights of a listed company, the acquirer is required to make an offer to the public to acquire at least 26 per cent of the voting capital of the company at the minimum offer price. The open-offer obligation is also triggered in the case of change in control of the target company. In addition, if an indirect acquisition exceeds the prescribed threshold of 80 per cent of the net asset value or sales turnover or market capitalisation of the entity of the business being acquired as per the recent audited annual financial statements, such indirect acquisition shall be regarded as a direct acquisition of the target company and will trigger a mandatory open offer obligation in India. Therefore, great care has to be taken while structuring transactions where the offshore target has an Indian listed subsidiary.

Listing agreement and SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (Listing Regulations)SEBI issued the Listing Regulations on 2 September 2015, which became effective on 1 December 2015. With the coming of the new Listing Regulations, mere contractual obligations (including in respect of disclosures to stock exchanges) under the erstwhile listing agree-ment have now been embodied in the Listing Regulations and such obligations have statutory basis. The Listing Regulations has also

replaced the erstwhile long-form of the listing agreement with a more concise version of the listing agreement, and listed companies need to execute fresh agreement in the new format with the stock exchanges by June 2016. The Listing Regulations inter alia specifies continual disclo-sure obligations for listed companies.

Also, sale of a ‘material subsidiary’ by a listed company which reduces the listed company’s shareholding in such subsidiary to less than 50 per cent or listed company ceases to exercise control on such subsidiary requires approval of shareholders of the listed company by way of a special resolution pursuant to the Listing Regulations. Similarly, sale or disposal of assets amounting to 20 per cent of the assets of the material subsidiary on an aggregate basis during a finan-cial year also needs shareholders’ approval by way of special resolu-tion, except where such divestment is part of a court scheme. The Listing Regulations define a ‘material subsidiary’ as a subsidiary of a listed company, whose income or net worth exceeds 20 per cent of the consolidated income or net worth respectively, of the listed compa-nies or its subsidiaries in the immediately preceding accounting year. Further, in case of public listed companies, SEBI has prescribed addi-tional compliances for schemes of arrangements for mergers, amal-gamations and other restructurings involving listed companies under the Listing Regulations and SEBI circular dated 30 November 2015 (SEBI Circular), being effective from 1 December 2015. Among other compliances, schemes of arrangement involving listed companies and promoter or promoter group, inter alia, needs approval of major-ity of minority shareholders, and such approval of shareholders being obtained by way of e-voting and postal ballot.

Competition Act 2002The relevant provisions of the Competition Act, 2002 (Competition Act) and the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (as amended) came into effect on 1 June 2011. Accordingly, acquisitions of shares or voting rights or assets or control or mergers or amalgama-tions that breach the specified asset or turnover threshold (combina-tion) must be notified to the Competition Commission of India (CCI) and cannot be effective without the prior clearance of the CCI. This is generally the acquirer’s responsibility. However, in cases of mergers or amalgamations, the responsibility lies on all the concerned parties to the merger or amalgamation. The thresholds vary, depending upon the nature of the transaction and parties involved, as below:

Scenario 1: Combination of standalone acquirer and target (Indian presence only)

Combined assets >20 billion rupees or Combined turnover >60 billion rupees

Scenario 2: Combination of standalone acquirer and target (worldwide with Indian presence)

Combined assets >US$1 billion including Indian presence of 10 billion rupees

orCombined turnover >US$3 billion including Indian presence of 30 billion rupees

Scenario 3: Combination of group, acquirer and target (Indian presence only)


Scenario 4: Combination of group acquirer and target (worldwide with Indian presence)


orCombined turnover >US$12 billion including Indian presence of 30 billion rupees

Scenario 5: Acquisition of a target (company A) where the acquirer has existing control over another enterprise in the same or similar business (company B) (Indian presence only)



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Scenario 6: Acquisition of a target (company A) where the acquirer has existing control over another enterprise in the same or similar business (company B) (worldwide with Indian presence)


orCombined turnover >US$ 3 billion including Indian presence of 3 billion rupees

The Regulations also provide for certain categories of transactions which need not normally be notified to the CCI. There is also an exemp-tion for transactions involving small targets, namely, targets with assets of less than 3.5 billion rupees in India or turnover of less than 10 billion rupees in India. This exemption is applicable only in case of acquisi-tions and is available until March 2021.

The Competition Act prescribes a fine up to 1 per cent of the com-bined assets or turnover of the combination, whichever is higher, for a failure to notify a transaction to the CCI or for delayed notification to the CCI. In addition to provisions for non-filing of material infor-mation, the Competition Act also includes provisions for proceedings against persons and individuals responsible for the conduct of the busi-ness and affairs of companies.

Certain amendments were introduced to the Regulations recog-nising certain categories of transactions that are not likely to cause an appreciable adverse effect to competition, including the following:• an acquisition of less than 10 per cent equity share capital or vot-

ing rights of the target enterprise would be considered to be made ‘solely as an investment’ provided that (i) the acquirer did not acquire any special rights and would have the ability to exercise only such rights that are exercisable by the ordinary shareholders of the target enterprise to the extent of their respective shareholding; and (ii) the acquirer is not a member of the board of directors of the target enterprise and does not have the right or intention to nomi-nate a director on the board of directors of the target enterprise and does not intend to participate in the affairs or management of the target enterprise. Provided that such an acquisition made ‘solely as an investment’ does not entitle the acquirer to hold more than 25 per cent or more of the total shares or voting rights in the target enterprise, and is made without any acquisition of control, such an acquisition would not require prior approval of the CCI; and

• in a situation where an acquirer or its group already holds more than 25 per cent and less than 50 per cent of shares or voting rights in the target enterprise, then the acquirer or its group can acquire addi-tional shares or voting rights without seeking the prior approval of the CCI, provided that the transaction does not result in acquisition of sole or joint control of such target enterprise by the acquirer or its group.

3 Governing law

What law typically governs the transaction agreements?

Typically, Indian law is preferred as the governing law of transaction agreements where the target is based in India or the assets are based in India. In some cases (for example, project documents or foreign currency-denominated loans), it is possible to negotiate some other governing law. Foreign judgments passed in other jurisdictions are enforceable in India as a decree if such a country is one of the recipro-cating territories as notified by the central government under the provi-sions of the Civil Procedure Code, 1908.

4 Filings and fees

Which government or stock exchange filings are necessary in connection with a business combination? Are there stamp taxes or other government fees in connection with completing a business combination?

Exchange control regulationIndia has a strict and highly prescriptive exchange control regime that applies to acquisitions with a cross-border element. For example, in the case of a transfer of shares of an Indian company by an Indian resident to a non-resident, shares must not be transferred at a price less than the price determined in accordance with the pricing norms of the RBI, India’s central bank. Broadly, this means that the price per share must not be less than the price worked out as per any internationally accepted

pricing methodology for valuation of shares on an arm’s-length basis, duly certified by a chartered accountant or a SEBI-registered merchant banker in case of unlisted companies, or SEBI guidelines in case of listed public companies. In the case of a share transfer, a report must be filed with an authorised dealer bank in the prescribed form (Form FC-TRS) within 60 days of the receipt of remittance towards sale of shares. An acknowledged copy of Form FC-TRS from the resident party’s authorised dealer bank is required to enable registration of the transfer of shares in favour of the acquirer in the books of the company. Recently, the RBI has prescribed mandatory electronic filing of Form FC-TRS and discontinued physical filing as was prescribed earlier. In addition to this, at the time of exit (namely, transfer of shares of an Indian company from non-resident to resident), the pricing norms are required to be complied with. The RBI has liberalised its policy in con-nection with the transfer of shares from a non-resident to a resident to some extent by clarifying that no prior RBI approval is required in the event the pricing norms are not satisfied in circumstances where the original and the resultant investment complies with the foreign direct investment policy and the pricing of the transaction otherwise adheres to pricing norms prescribed by SEBI (for example, the pricing norms prescribed for delisting, IPO, block deals, takeover, etc), and a char-tered accountant certifying compliance with relevant SEBI’s pricing guidelines has been obtained.

Stock exchange reportingSEBI issued the SEBI (Prohibition of Insider Trading) Regulations 2015 (SEBI Insider Trading Regulations) on 15 January 2015, which came into effect on 15 May 2015 and repealed the erstwhile SEBI (Prohibition of Insider Trading) Regulations 1992. The new SEBI Insider Trading Regulations have, inter alia, broadened the definitions of unpublished price sensitive information (UPSI), insider and connected persons, and provides a stricter code for protection of shareholders’ interests. The new SEBI Insider Trading Regulations prohibit communication of UPSI by an insider, procurement of UPSI by other persons, and trading in securities by an insider in possession of UPSI. In the case of companies whose shares are publicly listed in India, under the SEBI Insider Trading Regulations, information regarding amalgamation, mergers or takeo-vers is deemed to be UPSI. However, carve-outs have been provided for communication or procurement of UPSI for legitimate purposes or discharge of legal obligations. Further, unlike the earlier regulations, in the interest of M&A deals, SEBI has introduced specific carve-out for communicating or procuring UPSI during diligences in cases: (i) if an open offer is triggered, then such communication of UPSI is per-missible where the board is of the informed opinion that the proposed transaction is In the best interest of company; or (ii) if no open offer is triggered, then such communication of UPSI is permissible where the board is of the informed opinion that the proposed transaction is in the best Interest of company and such UPSI is disseminated to be made generally available at least two trading days prior to the proposed transaction being effected in such form as the board of directors may determine so as to rule out any information asymmetry in the market.

Further, the new Listing Regulations are more comprehensive in terms of disclosures, and require disclosure of any events or informa-tion which in the opinion of board of directors of the listed company is material. Information or events have been classified as: (i) deemed material (such as acquisitions, merger, amalgamations, demergers, other restructurings, etc), for which disclosure needs to be made to the stock exchanges within 24 hours from the occurrence of the event of information; and (ii) disclosure of events for which the board can for-mulate materiality policy (such as expected default in timely payment of interests, preference dividend or redemption or repayment of debt securities, any change in general character of business of the company, disruption of operation owing to natural calamity, etc).

Stamp dutyStamp duty is payable on the instrument for the transfer of physical shares at the rate of 0.25 per cent of the value (or consideration) of the shares transferred. Such stamp duty is exempt if shares to be transferred are held in dematerialised or electronic form. In addition to this, stamp duty is required to be paid on investment agreements, share purchase agreements, asset transfer or business transfer agreement, etc, as per the applicable stamp duty rates under specific local state stamp laws.


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CompetitionAs mentioned under question 2, if the specified thresholds are trig-gered, a filing will have to be made with the CCI in Form I or Form II. Form I is a simple form and the parties may, at their option make a Form I or Form II filing. The parties may make a Form II filing in two instances: (i) the parties to the combination are engaged in produc-tion, supply, distribution, storage, sale or trade of similar or identical or substitutable goods or provision of similar or identical or substitutable services and the combined market share of the parties to the combi-nation after such combination is more than 15 per cent in the relevant market; or (ii) the parties to the combination are engaged at different stages or levels of the production chain in different markets, in respect of production, supply, distribution, storage, sale or trade in goods or provision of services, and their individual or combined market share is more than 25 per cent in the relevant market. In the case of Form I and Form II filing, the CCI must be notified within 30 calendar days of the execution of the agreements relating to acquisitions of shares or voting rights or assets, or board of directors’ approval for proposed merger or amalgamation. The filing fees to be deposited with the CCI in case of Form I filing is 1.5 million rupees, and for Form II is 5 million rupees.

In the case of acquisitions by public financial institutions, foreign Institutional investors, banks or venture capital funds pursuant to any covenant of a loan or investment agreement, the CCI must be noti-fied in Form III within seven days of the acquisition. Form III is a post facto notification.

5 Information to be disclosed

What information needs to be made public in a business combination? Does this depend on what type of structure is used?

In contrast to public listed companies where the extent of disclosure is relatively high due to dealings taking place on the stock exchange and related reporting obligations (refer to response to question 4), in the case of private company acquisitions, there is no mandatory require-ment to make any public disclosures. However, in our experience, details of private deals are often leaked.

6 Disclosure of substantial shareholdings

What are the disclosure requirements for owners of large shareholdings in a company? Are the requirements affected if the company is a party to a business combination?

Under the Takeover Code, an acquirer must disclose its shareholding if it acquires more than 5 per cent of the shares or voting rights of the listed target company. An acquirer who holds 5 per cent of the shares or voting rights of the listed target company is required to disclose every acquisition or disposal of 2 per cent or more of the shares or vot-ing rights of the listed target company to the company and the stock exchanges where its shares are listed. Such disclosures must be made at each stage of acquisition and are to be made to the company and to the stock exchanges on which the shares of the company are listed.

Under the SEBI Insider Trading Regulations, every promoter, employee and director of every company listed on a stock exchange in India is required to disclose to the company the number of such securi-ties acquired or disposed of within two trading days of such transac-tion if the value of the securities traded, whether in one transaction or a series of transactions over any calendar quarter, aggregates to a traded value in excess of 1 million rupees. Further, every company shall notify the particulars of such trading to the stock exchange on which the secu-rities are listed within two trading days of receipt of the disclosure or from becoming aware of such information.

7 Duties of directors and controlling shareholders

What duties do the directors or managers of a company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination? Do controlling shareholders have similar duties?

Directors’ dutiesDirectors’ duties have now been codified under Indian law (section 166 of the Act). The principal duties of directors under Indian law are similar (but not identical) to those under English law. So, under Indian

law, a director’s relationship with the company is fiduciary in nature. A director must act in good faith in order to promote the objects of the company for the benefit of its members as a whole. A director must act with due and reasonable care, skill and diligence. A director must avoid any actual or potential conflict between his or her own and the com-pany’s interests. A director must not achieve or attempt to achieve any undue gain or advantage to himor herself or his or her relatives or part-ners or associates. However, under the Act, directors’ duties have been muddled by requiring directors to act not only in the best interest of the company but also its employees, the shareholders, the community and for the protection of the environment. There is no guidance for direc-tors regarding which duties override in case of any actual or potential conflict between duties to different stakeholders.

If a company proposes to enter into any arrangement or contract in which the director is directly or indirectly concerned or interested, the director is under a statutory obligation to declare such interest at a meeting of the board (section 184 of the Act). Normally the declara-tion of an interest must be made at the first such meeting at which the matter is considered and thereafter at the first meeting of the board in every financial year or whenever there is any change in the declarations already made. Under the Act, interested directors cannot constitute or form part of a quorum or vote on matters in which they are inter-ested, except in case of private companies where interested directors may participate in a board meeting after disclosure of his or her inter-est before the board as permitted by a recent notification in June 2015. Please note that the Tax Act contains provisions relating to recovery of the non-recoverable income tax liability of a private limited company from its directors in certain cases.

Statutory restrictions on directorsBoard approval is required for any contract between a company and any ‘related party’ (which expression includes directors, or certain persons connected with the directors, key managerial personnel or his relative, holding, subsidiary or associate companies, etc) in relation to the sale, purchase or supply of goods or services or for leasing, buying or selling of property of any kind or for underwriting subscription to any securities or derivatives thereof of the company (section 188 of the Act). Moreover, certain transactions with a ‘related party’ also require the prior approval of the company’s shareholders by way of an ordinary resolution (50 per cent majority) (the requirement of a special resolu-tion has been relaxed after Companies (Amendment) Act 2015 effec-tive from 29 May 2015). However, transactions with a related party by the company in the ordinary course of the business and at arm’s-length basis will not require the board or shareholders’ approval. Further, relaxation from this requirement of shareholders’ approval is also avail-able for transactions between a holding company and its wholly owned subsidiary whose accounts are consolidated with the holding company and placed before the shareholders for approval at a general meeting.

Shareholders’ dutiesUnder Indian law, controlling shareholders are not subject to similar duties as directors. However, as in English law, controlling sharehold-ers are obliged not to deal with the minority in an unfairly prejudicial or oppressive manner (section 241 of the Companies Act 1956). Courts have wide-ranging powers in the case a claim of unfair prejudice is suc-cessfully made.

8 Approval and appraisal rights

What approval rights do shareholders have over business combinations? Do shareholders have appraisal or similar rights in business combinations?

Shareholder approval (75 per cent majority) is necessary where a pub-lic company proposes to dispose of a substantial part or the whole of an ‘undertaking’. In the case of a merger or demerger, shareholder approval is necessary provided that a majority in number and three-quarters in value of the shareholders and creditors approve such transaction. Listed companies need shareholders’ approval by special resolution in case of disposal of a material subsidiary or sale or disposal of assets of a material subsidiary as mentioned in question 2. Further, approval of majority of minority shareholders is required in certain cases involving schemes of arrangement between a listed company and promoter or promoter group entities.


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It should be noted that listed Indian companies tend to be closely held by an individual or a family. Therefore, deal protection can be achieved by ensuring that the controlling shareholders are committed to the proposed transaction.

9 Hostile transactions

What are the special considerations for unsolicited transactions?

Historically, unsolicited transactions in the case of publicly listed enti-ties have been scarce in India due to the concentration of controlling interests in a few individuals or families. Most public deals involve a degree of due diligence by the acquirer and fairly robust representa-tions and warranties package backed by the seller. Accordingly, ‘pub-lic takeovers’ closely resemble private M&A transactions, with the exception of the acquirer having to complete an ‘open offer’ process in accordance with the Takeover Code and make mandatory disclosure under the Takeover Code.

The new Takeover Code provides for hostile takeovers of listed Indian companies and has laid down conditions upon satisfaction of which an acquirer can make a ‘voluntary offer’ to acquire shares of an Indian listed company. These conditions, inter alia, include:• a voluntary offer can be made only by a person who holds at least

25 per cent shares or voting rights in a company, but not more than 75 per cent (taking account of the maximum permissible non- public shareholding);

• a voluntary offer can be made only by a person who has not acquired any shares in the target company in the preceding 52 weeks prior to the offer;

• during the offer period, the acquirer cannot acquire shares other than through the voluntary offer; and

• once the voluntary offer is completed, the acquirer shall not acquire further shares in the target company for six months after comple-tion of the offer. However, this excludes acquisitions by making a competing offer.

10 Break-up fees – frustration of additional bidders

Which types of break-up and reverse break-up fees are allowed? What are the limitations on a company’s ability to protect deals from third-party bidders?

Although much more common in relation to private deals (especially where financial investors are involved or in the case of termination due to non-satisfaction of a condition), deal protection devices such as break fees (payable by the target or promoters to the bidder) and reverse break fees (payable by the bidder to the target or promoters) are extremely rare in connection with public deals India. It is not clear whether SEBI would approve an offer letter involving such payments, especially if these arrangements cast a potential payment obligation on the target company.

Under the Act, it is unlawful for any public company to give finan-cial assistance in connection with the acquisition of shares (section 67 of the Act). Further, the consequences of a breach are stringent and liability of the company is subject to a fine of a maximum of 2.5 million rupees, and every officer of the company who is in default is liable to imprisonment for a term which may extend to three years and with fine of a maximum of 2.5 million rupees. We believe making ‘financial assis-tance’ an offence with potential criminal liability under the Act (with no ‘whitewash’ procedure) will give rise to several challenges in the future.

11 Government influence

Other than through relevant competition regulations, or in specific industries in which business combinations are regulated, may government agencies influence or restrict the completion of business combinations, including for reasons of national security?

Yes. If there is a perceived risk to national security, the government can influence or restrict the completion of a business combination. For instance, under the exchange control policy, foreign investments requiring government approval in defence, railway infrastructure, broadcasting or telecom sectors are scrutinised from a security stand-point. Although there is no formal record, it is reported that the central

government had rejected certain investment proposals owing to politi-cal or national security reasons in sectors such as telecom.

12 Conditional offers

What conditions to a tender offer, exchange offer or other form of business combination are allowed? In a cash acquisition, may the financing be conditional?

In the case of a private deal, the parties are free to negotiate the condi-tions to completion. However, we have rarely seen financing conditions even in the case of private deals.

In the case of public transactions that have also triggered a (regu-lated) mandatory tender offer, the parties have much less flexibility, as the tender offer would necessarily require fund confirmation on the part of the acquiring entity. Further, in case of tender offers SEBI does not allow acquirers to rely on any commercial preconditions other than Indian statutory approvals and other conditions that are not in control of acquirer to withdraw the tender offer.

13 Financing

If a buyer needs to obtain financing for a transaction, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing?

Pure leverage cross-border deals are not common in India. Where a transaction is debt-financed outside India, normally an offshore secu-rity package is put in place by the acquirer as taking security over Indian assets needs prior approval from the RBI. In such a scenario, funds are normally drawn down and available at the time of signing the acqui-sition documents and making the public announcement in order to satisfy the merchant banker that necessary financing is available. Even in the case of purely domestic deals, financing conditions are rarely sought for, or accepted.

14 Minority squeeze-out

May minority stockholders be squeezed out? If so, what steps must be taken and what is the time frame for the process?

The Companies Act 2013 provides that the majority shareholders who are the owner of 90 per cent or more of the equity shares of a company shall have the right of offer by notice to the remaining shareholders of the company to compulsorily acquire the shares. The Companies Act 2013 also gives such a right to the minority, to require the offeror to buy them out on the terms of the offer. The offer to be made by the minority shareholders to the majority shareholders for buying the equity shares shall be at a price determined on the basis of valuation undertaken by a registered valuer.

In the case of an unlisted company and a private company, the offer price shall be determined after taking into account the follow-ing factors:• the highest price paid by the acquirer, person or group of persons

for acquisition during the last 12 months; or • the fair price of shares of the company to be determined by the

registered valuer after considering valuation parameters includ-ing return on net worth, book value of shares, earning per share, price earning multiple vis-à-vis the industry average, and such other parameters as are customary for valuation of shares of such companies.

Further, the Companies Act 2013 requires the company to act as the transfer agent (for receiving and disbursing the price or taking delivery and delivering the shares) between the parties and imposes an obliga-tion on the majority shareholders to deposit the squeeze-out consid-eration amount in a separate bank account. The separate bank account is required to be operated by the company for at least one year; how-ever, the company is required to disburse the consideration amount to the minority shareholders within a period of 60 days from the date of deposit of the consideration amount by the majority stockholders.

In addition to it, the transferee company, may make an offer to the shareholders of another company, in the form of a scheme or a contract to acquire shares of the transferor company. In the event of the hold-ers of nine-tenths of the value of the shares of the transferor company


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accepting the offer of the transferee company within four months from making the offer, the transferee company shall have the right to give a notice to the dissenting shareholders (holders of one-tenth of value of shares) to acquire their shares at any time within two months after the expiry of the said four months.

Another possible method of squeeze-out is by way of capital reduc-tion under section 66 of the Companies Act 2013. Though section 66 of the Companies Act 2013 does not provide strictly for squeeze-out, the interpretations offered by the Indian courts under section 100 (corre-sponding provision under the Companies Act 1956) have added a dif-ferent colour.

Squeeze-out through reduction of capital was discussed by the division bench of the Bombay High Court in Sandvik Asia Limited v Bharat Kumari Padamsi ([2009] 92 SCL 272 (Bom)). The High Court held that it will not withhold its sanction to a resolution resulting in a squeeze-out of minority shareholders through reduction of capital if it is established that reduced shareholders are being paid fair value of their shares, the overwhelming majority of the shareholders voted in favour of the resolution and reduction is in complete compliance with the Companies Act and articles of the company. Therefore we can inferfrom this decision that majority shareholders (more than three-quarters of the company) can remove minority shareholders by extin-guishing the share capital held by the minority shareholders alone if the broad conditions as stated above are satisfied. The Bombay High Court in another case, Elpro International Limited ([2009] 149 Comp Cas 646 (Bom)) held that a scheme of reduction can be made appli-cable to a select group of shareholders so long as conditions under the Companies Act have been followed.

An appeal preferred before the Supreme Court of India against Bombay High Court’s Sandvik Asia decision was not admitted by the apex court, meaning effectively that the apex court did not think it fit to interfere with the original decision of the Bombay High Court.

Another possible method of squeeze-out for listed companies is delisting the shares from the stock exchange pursuant to SEBI (Delisting of Equity Shares) Regulations 2009 (Delisting Regulations). For this, among other compliances, delisting must be approved by a special resolution of the target company (Delisting Resolution) in a general meeting by a two-thirds majority of shareholders present and voting. It is important to note that the special resolution is to be acted upon only if the votes cast by public shareholders in favour of the pro-posal amount to at least two times the number of votes cast by public shareholders against it. The pricing of shares for the delisting process is determined by the reverse book-building process with a minimum floor price arrived as per the Takeover Code. For the delisting offer to be successful: • the post-offer shareholding of the promoter together with persons

acting in concert along with shares accepted through eligible bids at the price arrived as per the Delisting Regulations, reaches 90 per cent of the total shares of that class (excluding shares held by cus-todians and against which depository receipts are issued); and

• at least 25 per cent of public shareholders existing on the date of the Delisting Resolution tender in the reverse book building process (however, such a requirement can be relaxed, in the event acquirer and merchant banker to the offer is able to demonstrate that they have contacted all the public shareholders either through regis-tered post or speed post or courier or hand delivery with proof of delivery or other prescribed means).

In the event the delisting offer is successful, any remaining public shareholder holding equity shares of the delisted company may ten-der his or her shares to the promoter up to a period of at least one year from the date of delisting and, in such a case, the promoter is required to accept the shares tendered at the same final price at which the earlier acceptance of shares was made.

15 Cross-border transactions

How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions?

Generally, prior to consummating a share acquisition in India, offshore buyers typically incorporate a holding company in a jurisdiction with a friendly tax treaty with India (for example, Mauritius, Singapore, the Netherlands, etc) in order to secure favourable tax treatment at the time

of exit. Needless to say, the holding company should have ‘commercial substance’, else it could be regarded as a device for tax avoidance by tax authorities. Also, Indian transfer pricing regulations would apply to international transactions entered into between related enterprises.

Apart from tax considerations, India’s exchange control regime applies to cross-border deals. Earlier, foreign investors could not acquire listed shares directly on-market unless they were registered as foreign institutional investors with SEBI. However, the RBI has removed this restriction and has clarified that foreign investors includ-ing non-resident Indians are eligible to acquire shares on the rec-ognised stock exchanges through a registered broker under an FDI scheme subject to compliance with certain conditions. The Ministry of Finance had announced a new category of investors, qualified foreign investors (QFIs), to directly invest in the Indian equity markets in order to widen the class of investors and attract more foreign funds. Recently, SEBI notified the SEBI (Foreign Portfolio Investors) Regulations, 2014 (FPI Regulations), and with this SEBI has harmonised foreign insti-tutional investors (FIIs), sub-accounts and QFI regimes into a single investor class – foreign portfolio investors (FPI) and provided a single window clearance through designated depository participants. The FPI route is a unified market access route for all portfolio investments in India aimed at rationalising and simplifying the process for foreign portfolio investments with a unified access route.

16 Waiting or notification periods

Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations?

Where an acquisition relates to a sector where foreign investment is restricted and therefore needs prior regulatory approval from the cen-tral government, the waiting period for such approvals can range from six to eight weeks. The central government has delegated authority to the Foreign Investment Promotion Board (FIPB) under the aegis of the Ministry of Finance to grant such approvals on its behalf. In practice, delays are not uncommon and the definitive timing to obtain FIPB approval is hard to predict.

The central government has proposed to close the FIPB, the gov-ernment agency responsible for regulating foreign investment and which granted approvals to foreign investment in regulated sectors. Currently, a Group of Officers has been constituted to prepare a road-map to phase out FIPB. RBI is expected to formulate standard oper-ating procedure for approval of FDI proposals. Going forward, the approval requirements for foreign investment in regulated sectors may be determined by the respective governmental agencies responsible for regulating those sectors.

17 Sector-specific rules

Are companies in specific industries subject to additional regulations and statutes?

Yes. For example, foreign investment in the insurance sector is restricted to 49 per cent of the share capital of the Indian insurance company. In addition, the Indian insurance company is required to obtain a licence from the Insurance Regulatory and Development Authority and adhere to several reporting, solvency and accounting requirements. Accordingly, in addition to exchange control laws, it is important to evaluate the local industry- specific regulations prior to finalising any investment proposal in India.

18 Tax issues

What are the basic tax issues involved in business combinations?

Share salesUnder Indian tax laws, any gain arising out of transfer of Indian shares is liable to tax in India. Accordingly, it is important to determine whether the gains are long-term or short-term capital gains (depending upon whether the shares are held for: a duration exceeding 12 months or less in case of listed shares; or a duration exceeding 24 months or less in case of unlisted shares). The currently prevailing rates for resident and non-resident corporate sellers are as follows:


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Particulars Non-resident seller** Resident seller*

Long-term capital gains

Short-term capital gains



Where securities (equity shares and units of equity oriented mutual fund) are listed on a recognised stock exchange in India and the transaction of sale takes place on the stock exchange such that the transaction is subject to securities transaction tax (STT)

Nil

(refer to note 1)

15%

(refer to note 2)

Nil

(refer to note 1)

15%

(refer to note 2)

Listed bonds or listed debentures

10% (refer note 2) 40% 10% (refer

note 2) 30%

Where securities (other than bonds or debentures) are listed on a recognised stock exchange in India and the transaction of sale does not take place on the stock exchange and thus, not subject to STT

10%

(refer to note 2)

40%10%

(refer to note 2)

30%

Unlisted shares and securities 10% 40% 20% 30%

20% 40% 20% 30%

Equity shares sold in an offer for sale to public included in the initial public offer and where such securities are subsequently listed on a recognised stock exchange

Nil 15% Nil 15%

* To be further increased by applicable surcharge and education cess of 3 per cent. In case of a domestic company, surcharge is applicable at the rate of 7 per cent (where the total income exceeds 10 million rupees but does not exceed 100 million rupees) and 12 per cent (where the total income exceeds 100 million rupees).

** In case of a foreign company, a surcharge is applicable at the rate of 2 per cent (where the total income exceeds 10 million rupees but does not exceed 100 million rupees) and 5 per cent (where the total income exceeds 100 million rupees).

Note 1: The Finance Bill, 2017 proposes that this exemption shall be available only if the STT has also been paid at the time of acquisition of equity shares sought to be transferred (subject to exceptions as may be prescribed). Further, though such long-term capital gains are exempt from capital gains tax under normal provisions, the companies are required to pay minimum alternate tax at the rate of 18.5 per cent (to be further increased by applicable surcharge and education cess of 3 per cent) for resident corporations and non-resident corporations having a permanent establishment in India or place of business in India or are required to seek registration In India relating to companies.

Note 2: In the case of listed securities there is an option to avail of a tax of 10 per cent after certain adjustments or 20 per cent without such adjustments. These adjustments are not applicable in case of the underlying security being bonds and debentures or non-residents. Since the adjustments are not applicable in case of non-residents, there has been litigation around availability of the lower rate of 10 per cent to non-residents, however, as per the judicial precedents available as on date, the benefit of 10 per cent rate should be available.

Note 3: The above table is applicable in case of Foreign Direct Investments only.

The concessional tax regime for FPIs is as under:


(period of holding exceeds 12 months)


(period of holding is 12 months or less)

Where securities are listed on recognised stock exchange and transaction of sales takes place on the stock exchange by FPIs

Nil 15%

Other securities 10% 30%

Above-mentioned rates to be further increased by applicable surcharge and cess. Surcharge applicable to FPIs is same as applicable to foreign companies as mentioned above.

FPIs are also accorded concessional rate of withholding on interest payments at the rate of 5 per cent (plus applicable surcharge and cess) on certain debt instruments such as (listed NCDs, long-term infrastructure bonds) provided the rate of interest on such NCDs does not exceed 500 bps over SBI base rate and are issued before 1 July 2017. In case the conditions mentioned under the Tax Act are not met, withholding on interest payments would be at the rate of 20 per cent (plus applicable surcharge and cess).

Indirect transfer of Indian assetsAs per the IT Act, any share or interest in a foreign company is deemed to be situated in India if its value is derived, directly or indirectly, sub-stantially from Indian assets. Accordingly, transfer of such offshore share or interest will be taxable in India. ‘Substantial value’ means if at least 50 per cent of its value is derived from India and value of Indian assets exceeds 100 million rupees. The manner of determination of value of the Indian assets as regards global assets of the foreign com-pany is to be determined in the prescribed manner. The provisions of the applicable tax treaty between country of residence of non-resident and India would also be relevant to determine such taxability in India.

Some transactions have been kept outside the purview of these provisions by way of safe harbour provisions. This should be borne in mind while undertaking an offshore or global deal. The Finance Bill 2017 proposes that the scope of the indirect transfer tax provision shall not cover within its ambit, direct or indirect investments held by non-resident (NR) taxpayers in FPIs that are registered as Category-I or Category-II with the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations 2014.

Deferred consideration Earn-outs or deferred consideration are taxed upfront in the year of transfer of shares itself irrespective of its contingent nature. Hence, it is imperative to structure the deferred consideration in the most tax-efficient manner.

Other considerationsAdditionally, it will be good if the buyer insists that the seller furnishes a tax clearance certificate before transfer of certain specified assets (eg, shares, immoveable property) as under the Indian tax laws the tax authorities in certain circumstances can treat the transaction as void to the extent of outstanding tax demand. Likewise, in case of acquisition of business, the Indian tax laws provide that the buyer as a successor can be held liable for the past tax dues of the seller, in certain circum-stances. Suitable contractual protection is usually agreed upon to cover against such risks. In the case of acquisition of shares it would also be important for buyer and seller to have permanent account number (which is a tax registration number in India), which needs to be quoted in relevant transaction documents subject to certain exceptions.

Buy-back of sharesCurrently, a 20 per cent tax (plus applicable surcharge and cess) is imposed on the company on its distributed income on account of the buy-back of unlisted shares by a company from its shareholder. The distributed income is the difference between buy-back price and the amount received by the company for the issue of the shares. Such income is not further taxed in the hands of the shareholder.


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Asset salesOrdinarily, asset sales (other than shares and depreciable assets) also involve the sellers being liable for capital gains. In the case of assets held for more than 36 months, the capital gains tax rate for a non-resi-dent corporate seller is 20 per cent (to be further increased by applica-ble surcharge and education cess of 3 per cent) and in the case of assets held for up to 36 months, the capital gains tax rate is 40 per cent (to be further increased by applicable surcharge and education cess of 3 per cent). In addition, value added tax (VAT) will be levied on sale of move-able assets (including intangibles assets) as per rates prescribed under respective state laws. If any consideration is paid for a non-compete obligation, service tax will be payable on such consideration; and for income tax purposes, the non-compete fee could either be character-ised as ‘business income’ or capital gains.

Slump saleAnother option is to sell the business as a whole. Though this would also involve capital gains implications for the seller, the mode of com-puting such capital gains would differ. There are special provisions dealing with the taxability of capital gains arising on a ‘slump sale’. Accordingly, the sale consideration for transfer of an undertaking is reduced by the net worth of the undertaking to arrive at the taxable capital gains. If the undertaking was held for more than 36 months before the transfer, then capital gains are taxed as long-term capital gains at the rate of 20 per cent (to be further increased by applicable surcharge and education cess of 3 per cent), otherwise the gains are taxed as short-term capital gains at the rate of 30 per cent (to be further increased by applicable surcharge and education cess of 3 per cent). Most of the states have specifically exempted transfer of business or a division as whole from VAT if transferred as going concern. Generally a judicial view has been taken that sale of business as whole is not subject to VAT since business as whole is not goods, even where the VAT law of a state do not specifically exempt, such transaction. Services by way of transfer of a going concern, as a whole or as independent division of a business is exempted from service tax.

General Anti-Avoidance Rules General Anti-Avoidance Rules (GAAR) were effective from 1 April 2017 and may be invoked where the main purpose of an arrangement is to obtain a tax benefit. GAAR provisions empower the tax authorities to investigate any such arrangement as an ‘impermissible avoidance arrangement’ and consequently disregard entities in a structure, real-locate income and expenditure between parties to the arrangement, alter the tax residence of such entities and the legal situs of assets involved, treat debt as equity and vice versa, and the like. By doing so, the tax authorities may even deny tax benefits conferred under a tax treaty.

It is provided that GAAR shall not apply, inter alia, to (i) arrange-ments where the aggregate tax benefit in a relevant year, to all the par-ties involved, does not exceed 30 million rupees; and (ii) any income or gains on transfer, accruing, arising or deemed to accrue or arise to any person from investments made prior to 1 April 2017.

Tax residency certificateNon-resident taxpayers are mandatorily required to furnish a tax resi-dency certificate along with the prescribed information such as status of the taxpayer, country of incorporation, tax identification number, etc, for claiming the benefit of an applicable tax treaty.

Withholding taxWhere the payee is a non-resident or a foreign company, there is a legal obligation on the payer (whether resident or non-resident) to deduct tax at source when making any remittance to the former, if such pay-ment constitutes income which is chargeable to tax under the Tax Act read with the applicable tax treaty. Payment of withholding tax becomes a point of negotiation in cross-border M&A deals involving share sales and taxpayers resort to solutions like tax indemnity, escrow mechanism, etc. Payments of a certain nature made to a resident also attract deduction of tax at source, whether the payer is a resident or a non-resident.

Entry pricingThere are specific pricing provisions that may be relevant for the target or the investor on the primary issuances as well as secondary purchases. If shares are issued at a huge premium to resident investors then in cer-tain circumstances the target can be taxed on the excess premiums. Despite that, no such similar provisions apply if shares are issued to a non-resident investor, the recent trend has been that the Indian tax authorities are examining excess premium charged by Indian compa-nies on allotment of shares to non-residents and are attempting to tax the Indian companies on such excess premiums. Also, there are pricing provisions from an investor’s perspective and in certain cases if they acquire shares at a discount then they can be taxed too. The Finance Bill 2017 seeks to widen the scope of these provisions impacting a buyer as well as a seller. Hence, this definitely calls for a robust valua-tion report supporting the share allotment and premium value.

DemergerTo ensure that a demerger of an undertaking is tax-neutral, the follow-ing conditions need to be satisfied:• transfer is pursuant to a scheme of arrangement under sections

230 to 232 of the Companies Act 2013;• transfer of all assets and liabilities of the undertaking;• transfer of assets and liabilities at book value;• consideration for transfer settled solely by issue of shares in the

resulting company (except where resulting company is itself a shareholder of the demerged company);

• shareholders holding at least three-quarters in value of the demerged company to become shareholders in the resulting com-pany; and

• transfer on a going-concern basis.

19 Labour and employee benefitsWhat is the basic regulatory framework governing labour and employee benefits in a business combination?

The Industrial Disputes Act, 1947 (the ID Act) defines an undertaking as a unit of an industrial establishment carrying out any business, trade or manufacture. The ID Act provides for compensation to ‘workmen’ in the event of transfer of ownership or management of undertakings from one employer to another by agreement or by operation of law. The term ‘workmen’ applies to those employed in an industry to carry out manual, unskilled, technical, operational, clerical or supervisory work for hire or reward. It also includes persons employed in a supervi-sory capacity who earn less than a specified amount (currently 10,000 rupees per month). Other employees are governed by the terms of their employment contract. Further, in the case of a business combi-nation involving the transfer of employees, it is mandatory to ensure that employees consent (in writing) for their transfer resulting from transfer of undertaking and are hired by the transferee on terms no less favourable than their original terms of employment.

In the event of a transfer of an undertaking, all workmen who have been in continuous service for a period of at least one year are entitled to one month’s notice and compensation equivalent to 15 days’ average pay for every completed year of continuous service or any part thereof in excess of six months, as if such workmen have been retrenched. However, compensation need not be paid when:• the service of the workman is not interrupted by such transfer; • the terms and conditions of service applicable to the workman

after a transfer are not in any way less favourable than his or her terms and conditions prior to the transfer; and

• the new employer, under the terms of such transfer or otherwise, is liable to pay compensation, in the event of his or her retrenchment, on the basis that his or her service has been continuous and has not been interrupted by the transfer.

The above exceptions are cumulative and all the conditions must be met if the current employer is to be released from his or her liability to compensate the workmen on the transfer of the undertaking. The new employer will be responsible for paying compensation to a workman in such circumstances.


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20 Restructuring, bankruptcy or receivership

What are the special considerations for business combinations involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring?

By way of background, under Indian law, a company or a corporate debtor is regarded to be ‘insolvent’ where it has committed a default of a minimum of INR 1 lakh rupees and an application for insolvency res-olution of such a corporate debtor (CIRP) under the provisions of the Insolvency and Bankruptcy Code 2016 (Code) by a financial creditor, operational creditor or the corporate debtor itself has been accepted by the National Company Law Tribunal (NCLT).

Insolvency Resolution under the Code (CIRP): Once an application has been admitted, a statutory moratorium or a cure period of 180 days (extendable to a further period of 90 days by the NCLT under special circumstances) that is concurrent with the duration of the CIRP under the Code is initiated. The moratorium is a period of insulation granted to the corporate debtor by an order of the NCLT against the institution or continuation of suits, execution of judgments or orders, enforce-ment of security interest over the assets of the corporate debtor, etc. Significantly, with the initiation of the CIRP under the Code, the board of directors of the corporate debtor stands suspended and its powers are exercised by a resolution professional (or an administrator) under the scrutiny of a committee of creditors (COC). The COC consists of financial creditors of the corporate debtors with voting powers com-mensurate to the extent of financial debt owed to them. The COC is empowered by the Code to have the final say on specified matters per-taining to the operations and management of affairs of the corporate debtor (including in relation to a sale of assets of the corporate debtor, any change in the capital structure of the corporate debtor, etc), which decision is required to be made by a 75 per cent vote of the COC in a meeting held in such regard. A scheme for revival of the corporate debtor or a ‘resolution plan’ is required to be formulated and affirmed by the COC prior to getting it approved by the NCLT. In the event of a failure of the CIRP, the corporate debtor may be liquidated if: (i) the COC cannot agree on a workable resolution plan within the period of the CIRP, or (ii) if the COC decides to liquidate the corporate debtor during the period of the CIRP; or (iii) If the NCLT rejects the resolution plan; or (iv) where the corporate debtor contravenes the provisions of a resolution plan that has been approved by the NCLT.

Buying assets under the Code: The Code has not adopted the ‘UK pre-pack’ or the ‘US section 363’ asset sale models (ie, fast-track sales where the administrator or court finds that the company cannot be revived as a going concern not without selling some assets). However, under the Code, once the NCLT admits an application for CIRP, no assets sales are permitted without approval. On the formation of the COC, no asset sales are permitted without consent of 75 per cent of the COC. The Code does provide a ‘small sale exemption’ for sale of small value unencumbered assets in the ordinary course of business, but that will not help with large strategic sales. Furthermore, no transfer of shares of the corporate debtor is permitted except with the consent of 75 per cent of the committee by value. Therefore, for the moment, a potential buyer has two options: (i) execute the sale with the consent of the COC or (ii) execute the sale under a resolution plan approved by the COC and blessed by the NCLT as being in compliance with the Code. While (i) will likely be quicker, (ii) is likely to provide more certainty to the transaction with less likelihood of challenge and easier transfer of customers and business licences.

Important considerations: the Code arms the resolution profes-sional with a full suite of anti-avoidance powers for identified transac-tions undertaken in the twilight period (ie, an identified period under the Code prior to the liquidation of the corporate debtor). Potential buyers should be mindful of provisions contained in the Code against: (i) preferential transactions (ie, where a transfer of property (or an interest thereof ) puts a creditor in a beneficial position than it would have been had the assets of the corporate debtor been distributed at liq-uidation); (ii) undervalued transactions (ie, where a transfer of assets of the corporate debtor is undertaken for a consideration, the value of which is significantly less than the value of the consideration provided by the corporate debtor); and (iii) transactions defrauding creditors (ie, an undervalued transaction deliberately entered into by the corporate debtor for keeping its assets beyond the reach of any person entitled to make a claim against the corporate debtor).

21 Anti-corruption and sanctions

What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations?

There is no single comprehensive legal framework in India to deal with anti-corruption and economic sanctions considerations in relation to business combinations such as the Foreign Corrupt Practices Act 1977

Update and trends

There is currently a significant amount of stress in India’s banking system and much of this relates to corporate debt. We expect to see substantial de-leveraging taking place, including through sales of non-core assets and debt issuances. Financial investment into India has generally been biased towards equity, partly because India’s exchange controls are restrictive in relation to debt and partly because of difficulties in enforcing security interests. Reports indicate, however, that net debt inflows into India have increased steadily. Some of this can be attributed to structures that have evolved to facilitate foreign investment in certain debt products and the introduction of ‘masala’ bonds (rupee-denominated bonds issued overseas by Indian issuers). From October 2016, registered FPIs can also invest in unlisted debt that is issued by Indian issuers (only listed debt was permitted earlier). SEBI still needs to amend its securities rules to fully effect this change. A new set of creditors (ie, security trustees in respect of listed debt securities and specified non-banking financial companies) can now access the enforcement procedure under SARFAESI Act 2002, a special law that allows specified secured creditors to enforce their security interests without taking recourse to a formal court or administrative procedure. Previously, only banks, asset reconstruction companies, and notified financial institutions were eligible as secured creditors under the SARFAESI Act 2002.

Foreign investment through Indian holding companies have been tricky, as further investment by these Indian companies are deemed to be foreign investment in certain cases. In this regard, the Supreme Court’s judgment in IDBI v Hubtown is helpful as it indicates that such Indian companies can now choose from a range of instruments including OCDs for downstream investments. In this case, the foreign investor had purchased equity and convertible securities in an

Indian company, which had in turn purchased debt from its operating subsidiaries, and one of the principal allegations was that the foreign investor was gaining indirect exposure to Indian debt (while investing through the more open equity route).

Furthermore, the recent past has witnessed an increase in buyout deals by private equity investors, pursuant to an increasing pressure on companies to repay debt and an increasing trend among foreign institutional investors to take operational control of firms.

In the past few years, India has witnessed an increase in M&A transactions, both in terms of value and volume. The total quantum of announced deal value for 2016 is estimated at US$52.6 billion, sharply higher than US$31.3 billion in 2015. The M&A activity in 2017 is expected to be on a surge owing to continued interest of financial and strategic investors in the Indian economy. Several sectors, includ-ing e-commerce, technology, life sciences, telecom and financial services are expected to attract significant attention. The Indian government has recently initiated several steps towards reforms to boost both domestic and offshore investor sentiment. For instance, the government has opened the railways, defence and insurance sec-tors for foreign investors. The ‘Make in India’ and ‘Demonetization’ initiative of the government is another such example. The government has taken steps to reduce regulatory timelines significantly, and each of the states in India are taking steps towards increasing ease of doing business in India. Most of the regulatory processes for obtaining or renewing licences and registrations have now been made online and the government is working towards single-window clearance to ease doing business in India. With all these measures, we strongly feel that M&A activity in India will continue to increase significantly in the future.


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(in the United States) or Bribery Act, 2010 (in the United Kingdom). In India, the anti-corruption and economic sanctions regime in relation to business combinations is largely covered by the Act, Indian Penal Code, 1860 (IPC), Prevention of Corruption Act 1988 (POCA), Prevention of Money Laundering Act 2002 (PMLA) and foreign exchange laws and regulations. A corrupt practice or bribe by any public servant, company or its officers may amount to a criminal offence (breach of trust, cheat-ing, fraud, etc) under the IPC and is punishable with imprisonment or a fine, or both.

The PMLA forms the core of the legal framework put in place by India to combat money laundering. The PMLA and rules notified there-under impose obligations on banking companies, financial institutions and intermediaries to verify the identity of clients, maintain records and furnish information to the relevant authorities. The PMLA defines money laundering offences and provides for the freezing, seizure and

confiscation of the proceeds of crime. Where a company has com-mitted a money laundering offence under the PMLA, every person in charge of and responsible to the company for the conduct of its busi-ness at the time of commission of the offence is deemed to be guilty unless he or she proves that the contravention took place without his or her knowledge or that he or she exercised all due diligence to prevent such contravention. This effectively reverses the burden of proof as far as the individual is concerned.

India is also a signatory to the United Nations Convention against Corruption, and has ratified the same. Further, to give effect to its obli-gations under the United Nations Convention Against Corruption, the government of India has given its assent to amend the POCA through the Prevention of Corruption (Amendment) Bill 2013, which is pending before upper house of the Indian parliament, the Rajya Sabha.

Rabindra Jhunjhunwala [email protected] Bharat Anand [email protected]

Bangalore Kolkata Mumbai New DelhiSimal, 2nd Floor Emerald House One Indiabulls Centre Ashoka Estate, 12th Floor7/1 Ulsoor Road 1B Old Post Office Street 13th Floor, Tower 1 24 Barakhamba RoadBangalore 560 042 Kolkata 700 001 841 Senapati Bapat Marg New Delhi 110 001India India Mumbai 400 013 India

Tel: +91 80 4339 7000 Tel: +91 33 2248 7000 Tel: +91 22 6636 5000 Tel: +91 11 4151 5454Fax: +91 80 2559 7452 Fax: +91 33 2248 7656 Fax: +91 22 6636 5050 Fax: +91 11 4151 [email protected] [email protected] [email protected] [email protected]

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Text Box

Reproduced with permission from Law Business Research Ltd. This article was first published in Getting the Deal Through: Mergers & Acquisitions 2017, (published in May 2017; contributing editor: Alan M Klein, Simpson Thacher & Bartlett LLP). For further information please visit www.gettingthedealthrough.com.

2017

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mergers & acquisitions - khaitan photocopying without a cla licence. first published 1999 ......

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