Mergers and Acquisitions (M&As) in India
Laws relating to M&As in India
Lawyers dealing with M&As in India now need to diversify themselves; first, they need to acquaint themselves with various basic terminologies involved under various legislations pertaining to M&As in India
S.No | Legislation dealing with M&A | Terminology | Provision | Interpretation | Approving authority under Indian laws |
1. | Companies Act, 1956 (Companies Act) | Arrangement | Section 390 | Courts in | High Courts |
2. | SEBI (Substantial Acquisition of Shares and Takeovers), 1997 (Takeover Code) | Acquisitions and Takeovers [Terms acquisitions and Takeovers are not defined under the Takeover code, but none the less are commonly used word as a market practice] | Regulation 2(b)- defines acquirer; 2(o) defines target company. | Under Takeover code, acquisitions and takeover refers to acquisition of shares and/ or voting rights or control of the targets company (i.e., the listed company which is being acquired). | SEBI |
3. | Competition Act, 2002 (the Act) | Combination | Section 5 | The acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprises. [This also takes into account various thresholds provided under the Competition Act, for a transaction to be termed as Combination] | CCI |
‘Combination’ under Competition Act
Combination is defined under section 5 of the Competition Act, 2002 as the acquisition of one or more enterprises by one or more persons or merger or amalgamation of enterprises shall be a combination of such enterprises and persons or enterprises. Here the word ‘or’ is disjunctive and should not be read as ‘and’. The Act here, it appears envisages only three situations- (i) acquisitions, (ii) mergers and (iii) amalgamations and is silent on other schemes of reorganizations and restructuring. The legislatures in their wisdom have defined the word ‘acquisition’ (section 2(a)) in the Act but have forgotten to define ‘mergers’ and ‘amalgamations’. For our guidance, they have left section 2(z), which refers us to Companies Act, but Companies Act has also not defined ‘mergers’ and ‘amalgamations’.
So, to interpret the scope of word, ‘mergers’ and ‘amalgamations’:
(a) we need to refer the definition of ‘arrangement’ under the Companies Act; or
(b) we dive more deep into the wordings of mergers and amalgamations under the Act-
(i) under section 5(c), merger is referred as the enterprise remaining after merger, the literal interpretation would mean-
Situation 1: Company A + Company B = Company A; or
Situation 2: Company A + Company B = Company B.
If that is the case- then, in my opinion in Situation 1, Company A is the acquiring entity and Company B is the acquired entity and in Situation 2, Company A is the acquired entity and Company B is the acquiring entity.
(ii) further, under section 5(c), the reference to ‘amalgamation’ is worded as the enterprise created as a result to amalgamation. There is only one situation under ‘amalgamation’ literally, which is Company A + Company B = Company C. There is a ‘creation’ of an enterprise as a result of combination under amalgamation.
In my opinion, the CCI and courts for the purposes of competition law cases, should consider the scope of word ‘mergers’ and ‘amalgamations’ as mentioned under the Competition Act, 2002 and not the Companies Act.
Further, ‘Combination’ under the Act, is only for big ticket transaction i.e. only those combinations, which crosses certain minimum threshold (see table below) are considered as combination under the Act and liable to be reviewed by the CCI.
Status | Geographical Coverage | Threshold | |
No Group | Assets: | Rs.1500 crores | |
Turnover: | Rs.4500 crores | ||
Assets: | US$ 750 million (including at least in India Rs. 750 crores) | ||
Turnover: | US$ 2250 million (including at least in | ||
Group | Assets: | Rs.6000 crores | |
Turnover: | Rs.18000 crores | ||
Assets: | US$ 3 billion (including at least in India Rs 750 crores). | ||
Turnover: | US$ 9 billion (including at least in India Rs.2250 crores). |
MCA Notification S.O. 482 (E), dated 4 March, 2011 and Corrigendum dated 27 May, 2011 (MCA Circular)
Under section 54(a) of the Act, Ministry of Corporate Affairs, in its wisdom notified (under MCA Notification S.O. 482 (E), dated 4 March, 2011, which was amended by Corrigendum dated 27 May, 2011) : “the central government, in public interest, hereby, exempts an enterprise, whose control, shares, voting rights or assets are being acquired has [either] assets of the value of not more than Rs. 250 crores [in India] and turnover of not more than Rs. 750 crores [in India] from the provisions of section 5 of the said Act for a period of five years”
I am not sure what public interest does this MCA Circular serve, but nevertheless, this MCA Circular has created a lot of ripples in the competition lawyer fraternity- because of its bad legislative drafting.
Under the MCA Circular:
(i) the exemption is available for the period of five from 4 March, 2011 (i.e., upto 3 March, 2016);
(ii) the exemption (exemption in terms of notification under section 6(2) of the Act) is available to parties to the combination, where the assets of the target company (the acquired company) is less than Rs. 250 crores or the turnover of the target company (the acquired company) is less than Rs. 750 crores.
If either of the above mentioned condition is fulfilled, then, the parties to the combination need not file notice to the CCI.
(iii) the exemption is given only in terms of- when control, shares, voting rights or assets are being acquired. That implies, the ‘amalgamation’ transactions are not covered under the MCA Circular, since there is no acquisition of control, shares, voting rights or assets under amalgamation, but a takeover, acquisition and merger transactions are covered and are exempted under MCA Circular, if the condition mentioned in (ii) above is satisfied.
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