A suggestion has also been made about delisting listed shares through a scheme of merger by merging a listed company with an unlisted company with an adequate safety net or a clear exit option for public shareholders of the listed company. This has been a very contentious issue. While it is important to have a robust capital market, it is equally clear that “reluctant” listed companies are not necessarily healthy for the strong capital market. Some balance needs to be achieved and this suggestion is welcome if appropriately implemented.
The committee recognized the need for permitting an Indian company to be merged with a foreign company. It noted that these would require not only an amendment to the Companies Act, but also changes in the Income-tax (I-T) Act, Foreign Exchange Management Act, and so on. It recommended that the government should adopt international best practices by looking at different jurisdictions. As such, although termed a merger, this is more like a swap with Indian shareholders able to hold foreign securities instead of the Indian securities—in a sense, the holding structure is flipped by permitting a foreign company to acquire shares of an Indian company by using its own shares.
Independent valuation
Valuation of shares is an important aspect of any merger. The committee took note of the Shroff committee report on “Valuation of corporate assets and shares” and made certain recommendations which are important in the context of the evolving scenario. One such recommendation is that the task of appointing the valuer should be entrusted to the audit committee. The audit committee should verify the independence of the valuer for the purpose of independent valuation; such verification would include the valuer having an advisory mandate and its past association with the company.
In the context of the significant rise in stock prices and the controversies that can arise in a swap ratio, the aspect of independence of valuers is an important dimension, and hopefully should create an inbuilt check on valuations which might otherwise not have been fair.
Stamp duty
The Irani committee took cognizance of the differential stamp duty regime prevalent in different states. Certain states such as Maharashtra, Gujarat and Rajasthan regard an order of the high court sanctioning the merger as a stampable instrument under the relevant Stamp Act, while several states have not so far taken such a clear stand. Such a differential regime inhibits M&A activities, especially when the merger is between companies having their registered offices in two different states. Stamp duty constitutes a significant part of the cost of a merger and hence the committee opined that all the states should have a simple and uniform regime.
Approval of scheme
The current law requires that the scheme for merger be approved by a majority in number representing also three-fourths in value of shareholders/creditors present and voting. The committee recommended that the requirement of majority in number may be done away with, since the value criteria has already been factored in.
The committee also recommended that while the interest of minority shareholders should be protected, it is only the shareholders/creditors having a significant prescribed stake who should be permitted to object. While, on the face of it, this may appear to be against the philosophy of protection of minority interest, on balance, it is a welcome provision as it will prevent frivolous objections.
Summing up