Companies Bill 2011: M&A goodies abound, but curbs a killjoy

The Companies Bill, 2011 (“the Bill”) was presented before the Lok Sabha on December 14, 2011, withdrawing the Companies Bill, 2009. The Bill, proposes significant changes to the existing corporate law provisions dealing with mergers and acquisitions (‘M&A’) and corporate restructuring with some modifications to the Companies Bill, 2009 (“the 2009 Bill”).

The Bill retains the welcome changes pertaining to simplification of the process relating to merger of small companies and that of a wholly-owned subsidiary with a holding company with some modifications.

The most talked-about proposition of merger of an Indian company into a foreign one has been introduced with certain surprises embedded. The Bill mandates approval of the Reserve Bank of India for cross-border mergers. The restrictions on structuring of capital through issuance of shares with differential voting and dividend rights under the 2009 Bill have been done away with, which has been well appreciated.

Merger of small companies
Provisions regarding merger or amalgamation of two or more small companies or between a holding and its wholly-owned subsidiary company were introduced by the Companies Bill, 2008, and reiterated by the 2009 Bill. The provisions that enabled fast-track implementation of merger of small companies with minimum compliances have been modified slightly. As per the Bill, a notice has to be issued to registrar of companies (“ROC”) and official liquidator (“OL”) first and objections / suggestions have to be placed before the members in the general meeting. Once the scheme is approved by members and creditors, a notice would have to be given to the central government, the ROC & OL. If the central government has any objections, it may file an application with the tribunal and seek its approval.

The limits for considering a company as a “small company” have been lowered to a share capital of Rs50 lakh or a turnover of Rs2 crore which, under the 2009 Bill, were Rs5 crore and Rs20 crore, respectively.

Cross-border mergers
As per the Companies Act, 1956, cross-border mergers are permitted only if the transferee is an Indian company, and not vice-versa. However, the 2009 Bill opened the door to cross-border mergers by allowing them both ways. The consideration to shareholders of the amalgamating company may be discharged by payment of cash, or issuance of Indian Depository Receipts, or a combination of both. Notably, the Bill has introduced the rigour of obtaining RBI approval in every case of a cross-border merger.
The Bill has allowed such mergers with any foreign company and has done away with the provisions of the 2009 Bill that gave its green light to only those foreign companies which have business locations in India.

Merger / demerger of a listed company with an unlisted one
Under current provisions, the merger of a listed transferor into an unlisted transferee entails listing. The Bill continues to offer an option to the transferee to continue as an unlisted company by paying in cash to shareholders of the listed transferor who decide to opt out of the unlisted transferee, which is missing in the existing Act. However, the proposal of opting out of the listed transferor has been done away with in the case of a demerger.

Treasury stocks on merger
The Bill stipulates that any inter-company investments would have to be cancelled in a scheme and holding shares in the name of the transferee or under a trust would not be allowed.
Reduction of capital
The Bill provides that the Tribunal shall give notice of application for reduction of capital in addition to creditors to the central government and Sebi (in the case of listed companies). The recipients have 3 months from the date of receipt of the notice to make their representations. Furthermore, proposed accounting treatments need to be in compliance with accounting standards and a certificate to that effect needs to be filed with the Tribunal.

Conversion of pref shares into equity
The Bill concurs with the 2009 Bill that if any arrangement or compromise entails conversion of preference shares into equity shares, then such preference shareholders shall be given an option to either obtain arrears of dividend in cash or accept equity shares equal to the value of the dividend payable.

Shares with differential voting rights
The provisions of the existing Act provide for issuance of shares with differential voting rights. The Bill has re-introduced the concept which was done away with by the 2009 Bill.

Minority squeeze out
The Bill continues to offer the window of minority squeeze out by acquirers or persons acting in concert holding 90% of more issued equity capital on the basis of valuation by a registered valuer or price determined in accordance with prescribed rules as the option of a minority shareholder.

Some other issues
The Bill continues certain other welcome reforms proposed by the 2009 Bill in terms of circulation of a valuation report to members and restricting the eligibility to object to a Scheme of amalgamation/ arrangement to 10% & 5% in value in the case of members and creditors, respectively. Furthermore, the Bill continues to propose notices to various regulatory authorities in cases of schemes of arrangement and restricts their time limit to 1 month to respond. The option to conduct voting through postal ballot has been retained. Certain setbacks proposed under the 2009 Bill have been retained in terms of not allowing multiple buybacks in the same year — even in cases where approval has been obtained in a general meeting of shareholders — and buyback through a court scheme — without the rigour of buyback provisions.

The Bill also retains the proposals under the 2009 Bill in terms of prohibition of issuance of shares on discounts other than sweat equity, requirement of a registered valuer in the case of various valuations under the legislation and the possibility to extend the redemption period of preference shares by issuing fresh shares with the consent of shareholders and the Tribunal.

Conclusion
On the whole, the Bill contains some progressive measures. However, it has subjected mergers & acquisitions to certain cumbersome regulatory approvals which may be a roadblock for timely completion of deals.

Jinesh Shah is a director and Shankar Ganesh is a manager with KPMG.  Views are personal.