The wait for the new avatar of the Companies Act has got longer, with the Bill not being introduced in the winter session of Parliament.
The Bill is likely to be based on the recommendations of the J.J. Irani committee report which was issued as far back as May 2005. The committee has, among other things,recommended changes tothe existing provisions dealing with mergers and acquisitions (M&As) of companies inIndia.
In view of the significant M&A activity, there is a serious need to facilitate it. The extent of the activity can be gauged from the fact that there were 339 M&A deals with a total value of about Rs1.76 trillion during the first six months of 2007 against 480 deals of about Rs80,000 crore in all of 2006.
One of the important dimensions on M&A is the intent to have the merger applications heard by the National Company Law Tribunal (NCLT), as distinct from the high court, which is the position today. The NCLT issue has been hanging fire and is currently before the Supreme Court. One hopes that thisissue will be resolved soon and NCLT will function in a transparent and efficient manner to further facilitate M&As on the fast track. The NCLT issue does not emerge out of the Irani committee report, but needs to be borne in mind as an important dimension.
This article seeks to take a close look at the merger provisions recommended by the committee.
The committee took note of the fact that the process of M&A is time-consuming and court-driven. In relation to mergers, the Union government plays a role through the official liquidator (OL) and the regional director (RD) of the ministry of corporate affairs. The committee suggested that OL and RD be asked to furnish information that may have a bearing on the proposed merger, that the information be furnished within a stipulated time and if nothing is furnished within the time, it may be presumed that they have no comments to offer. Such a “presumed no objection” clause will clearly require RD and OL to respond within a reasonable time.
According to the committee, mergers between private companies should be distinguished from mergers between public limited companies. The concept of mergers through agreements between two parties (that is, contractual mergers) may be given statutory recognition. Mergers where no public interest is involved should be effectuated by following a simple procedure without the intervention of the court, that is, by the approval of shareholders. The methodology on how this would work is unclear, but this is an important suggestion and can work well, subject to certain safeguards.
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.
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.
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.
Apart from the Companies Act, there are several aspects in relation to other types of restructuring. These include a large number of tax issues. For example, in case of a demerger, the current definition of “demerger” under the I-T Act requires the transfer of assets at book value, which is restrictive and needs to be done away with. Similarly, in the case of acquisitions, sellers who tender shares in an open offer should also be entitled to capital gains exemption. There is another regulatory requirement of taking the approval of stock exchanges, which sometimes causes delays and needs to be addressed. One of the objectives of the committee was to put in place a transparent, simple and globally acceptable system so as to make India a globally competitive investment destination. Clearly, what has been recommended and what the government is trying to achieve is laudable. What is important is for the government to address all aspects of the activity and take concrete and meaningful steps to put M&As on the fast track.
Ketan Dalal is executive director of PricewaterhouseCoopers. Your comments and feedback are welcome at email@example.com