Practical examples of Merger and Aquisition from India

MERGERS &
ACQUISITIONS
REGULATORY CONSIDERATIONS

Future and Reliance deal
 Future Group entered into an agreement with
Reliance Retail, to sell its retail, wholesale, logistics
and warehousing to the latter
 Future Retail will sell its supermarket chain Big
Bazaar, premium food supply unit Foodhall and
fashion and clothes supermart Brand Factory’s retail
as well as wholesale units to Reliance Retail
 Future Group was under immense pressure from its
lenders, led by the State Bank of India, to manage its
debt, and the deal in seen as a bid by the group to cut
down on the same
https://indianexpress.com/article/explained/explained-why-future-group-has-taken-amazon-to-court-what-the-court-said-7113612/

Future and Reliance deal
 Before sale to Reliance, Biyani had been wooing
several business groups to sell shares in several
companies of Future Group in an attempt to cut
down on the debt, but had not seen much success
 Following the nationwide lockdown in March, to
contain the spread of Covid-19 the retail business
of Future Group had come under more stress
 Sales in many of its premium food sales arm
Foodhall and Brand Factory had come to a near
halt in the lockdown, which lasted more than two
months

Why is Amazon objecting to the Future-
Reliance deal?
 Biyani’s Future Retail had signed another deal
with global e-commerce giant Amazon
 As part of the deal, Amazon had acquired 49 per
cent stake in Future Coupons, the promoter firm
of Future Retail in a deal worth nearly Rs 2,000
crore
 The deal had also given Amazon a ‘call’ option,
which enabled it to exercise the option of
acquiring all or part of Future Coupon’s promoter,
Future Retail’s shareholding in the company,
within 3-10 years of the agreement

Why is Amazon objecting to the Future-
Reliance deal?
 After Future’s agreement with Reliance, Amazon
said the deal was a violation of a non-compete
clause and a right-of-first-refusal pact it had signed
with the Future Group
 The deal also required Future Group to inform
Amazon before entering into any sale agreement
with third parties
 On its part, the Future Group has said that it had
not sold any stake in the company, and was merely
selling its assets and had therefore not violated any

What Amazon did?
 Amazon also sent a letter to the Securities and
Exchange Board of India (SEBI), the Bombay Stock
Exchange and the National Stock Exchange (NSE)
asking them not to approve the Future-Reliance deal as
there was an interim stay order on the same
 Asking the agencies to take note of the stay order,
Amazon is learnt to have said that if the deal went
ahead, it would show companies across the world that
orders by reputed tribunals such as the Singapore
International Arbitration Centre (SIAC) were not
respected in India

Why did FRL move the Delhi High
Court?
 The company had moved a plea in the Delhi
High Court seeking appropriate relief against
Amazon.com’s NV Investment Holdings to
stop the latter from interfering in its deal with
Reliance Industries Limited’s (RIL) Reliance
Retail Ventures Limited

Tax issue: Vodafone and Hutch deal
 Vodafone-Hutch deal involved Vodafone Plc.,
a UK-based telecommunication company and
Hucthison Essar or Hutch India
 The deal closed in 2007, and was followed by
the Indian Revenue department
 Pursued Vodafone to make tax payment

 This was a cross-border share transfer deal
between the two groups
 This deal was not subject to tax liability as per
Indian tax laws
 Transfer of shares by a non-resident company
to another non-resident entity is not subject to
any tax in India

 The Indian Revenue Department was sure that
the case involved transfer of beneficial interest
of shares of an Indian entity
 So, tax was payable
 Vodafone paid partial tax of USD 0.5 billion in
early 2011
 Vodafone fought the case and won

Mergers and Acquisitions
 Elevate the functional performance of the
entity
 M & A have potential to create monopolistic
power
 Process is carried out meticulously
 Interests of all the stakeholders protected

M & A
 It is inevitable to understand the legal aspects that
regulate the process
 How to legally complete a M & A procedure
 How to regulate hostile takeover
 How to regulate monopoly power created by
acquisitions
 How to avail tax advantages

Some of the large M & A
activities
 Walmart’s USD 16 billion acquisition of Flipkart (2018)
 the USD 13 billion acquisition of Essar Oil by a
Rosneft-led Russian consortium (2017)
 Adani Transmission’s USD 3 billion acquisition of
Reliance Infrastructure’s integrated Mumbai power
distribution business (2018)
 Reliance and Future group deal (2020)
 HDFC ltd. And HDFC Bank (2022)

M & A regulatory framework
 Company law compliance
 Licenses and permits involved in business
operations
 Intellectual property rights
 Financing regulation requirement such as
foreign equity, foreign currency loans, external
commercial borrowings, bonds etc.

 Tax laws and compliance
 Import and export licenses and permits, breach if
any
 Shareholding pattern and valid issuance of
securities
 Special provisions in articles of association, giving
room inn M & A

 Contracts entered with directors, promoters, key
managerial personnel etc.
 The validity, enforceability, and authorization
involved in the contracts entered with different
parties
 Evaluation of employment contracts (general) and
special employment contracts of key personnel,
union, etc.
 Insurance coverage taken and terms involved

 Loan contract terms and compliance with
obligations, pledge, collateral, and hypothesis
of assets and guarantees
 Litigation involved and defense taken

M & A: Indian regulatory system
Mergers &
Acquisitions
Companies Act
1956/2013
Income Tax Act
1961
Absorption Foreign
entity
SEBI
Takeover
Competition
Act 2002
FEMA
guidelines
(RBI)
FDI guidelines
(FIPB & DIPP)
Domestic
Amalgamatio
n
Consolidati
on
Insolvency and
bankruptcy code
2016

 Merger/ Amalgamation
 In India, M&A is either amalgamation or
takeover
 The word merger is not defined under Indian
Companies Act 1956 or Income Tax 1961
 The CA 2013 attempts to explain the word as

 “A merger is a combination of two or more
entities into one: the desired effect being not
just the accumulation of assets and liabilities
of the distinct entities, but organization of such
entity into one business”
 However, it is the word amalgamation that
describes merger in India
 It is defined by ITA 1961

 Merger implies that two firms merging to form
a new entity or one in which an acquirer
completely absorbs the target company
 The former is known as consolidation while the
latter is termed as absorption
 In India, the term merger is analogous to
amalgamation

 Amalgamation is regulated by CA as it
involves restructuring of participating
companies
 It is a scheme of rearrangement of share
capital with the promoters
 Amalgamation or scheme of rearrangement of
companies involves regulatory framework
provided by the CA 1956/2013, ITA 1961 and
Competition Act 2002

The Companies Act provisions
 Observing MOA of transferee company
 Convening board meeting and preparation of
valuation report and scheme document
 Application to High court
 Notice to be given to stock exchange

The Companies Act provisions
 Court approves time, date, venue of the board
meeting for merger
 General meeting convened for passing of scheme
document
 Results reported
 Court approval sought
 Certified copy filed with registrar of companies

The scheme of amalgamation is expected to
consist of
 The particulars about the transferor (target) and
the transferee (acquirer)
 Main terms and conditions for transfer of assets
and liabilities from transferor to the transferee
 The proposed date for the scheme
 Share capital of transferor and the transferee in
terms of authorized capital, issued capital,
subscribed capital, and paid up capital

The scheme of amalgamation is expected to
consist of
 The proposed payment in terms of cash
component and exchange ratio for target
shareholders. In context of exchange ratio, the
target shares are extinguished and new shares
are issued
 The proposed conditions pertaining to dividend
distribution, ranking of equity, etc.
 The proposed conditions pertaining to provident
fund, gratuity, super annuity funds of the
employee of the transferor company, etc.

Key changes made under Companies Act
2013
 Notice of meeting
 Treasury shares
 Approval of scheme through postal ballot
 Valuation of target
 Compliance with accounting standards

Key changes made under Companies Act
2013
 Objective to merger scheme
 Merger with foreign company
 Merger of listed company into unlisted
company
 Fast track merger

The Income Tax Act provisions
 Normally, ITA levies tax on capital gain, which
is realized on transfer of capital assets
 Capital assets are fixed assets, generally
property of any kind
 ITA levies capital gain tax on capital gains
arising on transfer of capital assets

 Normal business transactions other than
amalgamation involving transfer of assets,
immovable property of any kind is subject to
capital gain tax
 Capital assets may be short-term and long-
term
 Held for 36 months or more are long term and
held for less than 36 months are short term
capital assets

 Condition 1: All the property of the amalgamating company or
companies immediately before the amalgamation becomes the
property of the amalgamated company by virtue of the
amalgamation
 Condition 2: All the liabilities of the amalgamating company or
companies immediately before the amalgamation becomes the
liabilities of the amalgamated company by virtue of the
amalgamation
 Condition 3: Shareholders holding not less than 75% in value of
the shares in the amalgamating company or companies (other than
shares already held therein immediately before the amalgamation
by, or by a nominee for, the amalgamated company or its
subsidiary) become shareholders of the amalgamated company by
virtue of the amalgamation

 Section 47 states that where capital gain arises
due to transfer of shares held in Indian company
by amalgamating foreign company to
amalgamated foreign company, the tax is
exempted if:
 25% of the shareholders of amalgamating foreign
company continue to remain shareholders of the
amalgamated foreign company
 Such a transfer is not subject to any tax on capital
gain in the country where the amalgamated
company is incorporated

 Section 72A of the ITA states that when sick
and poorly performing companies merge with
a healthy company
 The amalgamated company can avail the
benefit of carrying forward the loss and the
unabsorbed depreciation of the amalgamating
company.

Competition Act provisions
 To encourage healthy competition and
discouraging creation of monopoly
 The MRTP Act was abolished and Competition Act
2002 came in existence
 Become operational in May 2009
 CCI regulates the law and Competition Appelate
(CA) tribunal that operates the law are operational
since 2011

Competition Act provisions
 CA regulates anti-competitive agreements
 Abuse of domination position in the market
 Consolidation leading to monopoly creation
 Any agreement between companies regarding
activities related to procurement, production,
distribution of goods and services
 Acquisition or control of knowledge and
information

Acquisition/Takeover
 Regulated by SEBI Act 1992
 Through substantial acquisition of shares and
takeover regulation 1997
 When an entity or a person acquires the
control of the target company, it is termed as
takeover
 Control means substantial acquisition of
shares or voting rights of the target company

Acquisition/Takeover: control
 Substantial acquisition or voting right is
explained in two context
 Threshold limit of disclosure
 Threshold limit for open offer

 When an acquirer acquires shares or voting rights
that increase his shareholding to 5%, 10% or
24.99% in the target company
 Required to disclose at every stage the aggregate
of his shareholding to the concerned target firm
 To the stock exchange where shares of the target
company are listed within two days of acquisition

 When a person holds shares or voting rights of
about 25% or more but less than 55%
engages in the trading of the shares of about
2% or more
 Required to disclose his cumulative
shareholding every year to the target company
and concerned stock exchange

 Any person holding 25% or more shares or voting
rights of about of a target company
 Required to disclose his ownership to the target
company within 21 days from financial year
ending 31st March for the purpose of dividend
declaration
 The target company needs to submit every year,
to concerned stock exchanges

 Threshold limit for making an open offer
 When an acquirer acquires shares that
increase his ownership to 25% or more of
shares or voting rights in the target company
 Required to make a minimum public offer of
additional 26% of the remaining shareholders
of the target company

 When an acquirer holds more than 25% but
less than 55% of the shares or voting rights in
a target company, then for any additional
purchase of more than 5% shares or voting
rights
 One is entitled to make an open offer of

 When an acquirer holds more than 55% but
less than 75% of the shares or voting rights in
a target company, then for any additional
purchase shares
 One is entitled to make an open offer of

Cross border M&A
 In case a foreign entity is involved, then M&A
is also regulated by Foreign Exchange
Management Act 1999 (FEMA)
 FEMA is governed by RBI
 A foreign entity can invest in India through FDI
route or FPI route

Foreign Investment
Automatic
route
Government
route
NRIs, PIOs
Foreign venture
capital investment
SEBI Regd.
FIIs
Restricted
route
Foreign direct
investment
Foreign
portfolio
investment
https://www.moneycontrol.com/news/business/economy/explained-how-did-
india-get-record-fdi-in-fy21-despite-the-pandemic-6619301.html

Foreign investment in India
 FDI can be done by a foreign entity in the form
of wholly owned subsidiary formed in India
under CA 1956 or as a joint venture firm
 A foreign company can also setup a liaison
office, project office, or branch office in India
 Certain activities are permitted under FEMA
regulations 2000

Foreign Investment
Liaison office
Branch office
Project office
Indian
company
Wholly owned
subsidiary
Joint venture

 Option1: Operating as an Indian company
 Wholly owned subsidiary
 Joint venture with Indian partner

 Option 2: Operating as Branch/Liaison/Project
office
 Brach office: the financial consideration required
for opening these offices in India has been
categorized for each
 BO setup is sanctioned only when the foreign
company has a consistent profitability record for
preceding 5 years
 The parent foreign company should have a net
worth of not less than USD 100,000 or it’s
equivalent

 Liaison office
 A liaison office setup is sanctioned only when the
foreign company has a consistent profitability
record for preceding 3 years
 The parent foreign company should have a net
worth of not less than USD 50,000 or it’s
equivalent
 Allowed to carry out liaison activities
 Can not carryout any business operations in India

 Project office
 A project office is set up to execute activities of parent
foreign company a specific project undertaken
 A foreign company should have secured a contract
from an Indian company to execute a project in India
 Funding capital should be remitted by foreign parent
company
 Project has sought a formal approval by a competent
authority

Foreign direct investment
 FDI is a tool for foreign ownership restriction in
India, especially in different sectoral
investments
 FDI is governed by RBI’s regulations
 FEMA guidelines
 FDI regulations

Ministry of
Commerce and
Industry
DIPP
FIPB
FEMA
RBI
Ministry of
Finance
FDI
regulation

 FDI allowed by Indian government by foreign
companies falls under 3 categories
 Automatic route of investment
 Restricted investment
 Prohibited investment
 FDI: India's foreign direct investment inflows grew
by 81 percent in November 2020 to $10 billion -
The Economic Times

Automatic route of investment
 It may be 100% investment or subject to
sectoral limits
 The foreign entity does not require any prior
approval either from Government or RBI
 Need to comply with the RBI’s pricing
guidelines

Automatic route of investment
 Pricing guidelines state about price of the shares
 If transferred by an Indian resident to foreign
resident should be at least equal to market price
of the share in case of a listed company
 In case of private company, the transfer price of
shares of price should not be less than the fair
value of the shares
 Will be determined by a chartered accountant
according to prescribed guidelines

Restricted investment
 These may be 100% ownership or subject to
sectoral cap on FDI as proposed by government
 Defence equipment, electronics, aerospace
equipment, print media, broadcasting and courier
service, tobacco substitutes, manufacture of
cigars, cigarettes of tobacco and tobacco
substitutes
 Require formal prior approval of the FIPB
 LIST OF RESERVED ITEMS

Prohibited investment
 The Indian government prohibits non-Indian,
that is, foreign entity to invest in certain sectors
 Atomic energy and Railway transport (other
than Mass rapid transport system)
 Lottery business
 Agriculture with some exclusion

Prohibited investment
 Housing and real estate development except
township development or as specified in FEMA
 Trading in transferable development rights (TDRs)
 Retails trading (except single brand product retail
trading)
 Business of chit fund, nidhi company
 Manufacturing of cigars, cigarettes of tobacco or
tobacco substitutes

Instruments of FDI
 Foreign investment in Indian companies can be in form of FIIs or
NRI
 Depository receipts and foreign currency convertible bonds and
debentures
 Taxes levied on foreign entity investments are as follows
 Capital gain tax
 Dividend tax
 Stamp duty
 VAT

Foreign portfolio investment
 FPI is done through FIIs
 Regulated by SEBI (FII) regulations and FEMA
guidelines and required to register
 SEBI FPI regulation, 2014 has replaced SEBI
FIIs regulations 1995 and QFI (Qualified
foreign investors) framework
 All existing FIIs and QFIs are to be merged
into FPI

 FIIs include
 Asset management companies (AMCs)
 Pension funds
 Mutual funds
 Investment trusts
 University funds
 Endowment funds
 Charitable trusts and societies

 The new FPI regulations categorize FPI under 3 categories
 Government and government related investors like central
banks, government agencies, and sovereign wealth funds
 Appropriately regulated broad-based funds like MFs,
investment trusts, insurance/reinsurance companies;
appropriately regulated persons such as banks, AMCs,
investment manager/advisors, portfolio managers, university
funds and pension funds
 All others not eligible in category I and II, like endowments,
charitable societies, charitable trusts, individual and family,
offices, hedge funds etc.

Foreign venture capital investment
 All foreign venture capital investors (FVCIs) need to
register
 FVCIs can invest through equity, equity linked and
debt instruments
 Through IPO or private placement
 FVCI registered outside India can now register as FPI
in India to invest in startup ventures
 Also allowed to invest in Indian venture capital fund or
Indian unlisted company

Practical examples of Merger and Aquisition from India

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Practical examples of Merger and Aquisition from India