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M&A structures and regulation in India
November, 19th 2019

Mergers and demergers used to be court-driven processes but, upon the constitution and notification (in December 2016) of the National Company Law Tribunal (NCLT), they are now NCLT-driven processes.

Assets and business transfers
Both acquisitions of certain key assets of a business undertaking (ie, asset transfers) and entire business undertakings as a going concern (ie, business transfers) are common in India. Business transfers are referred to as a ‘slump sale’ under the Income Tax Act, 1961 (ITA), and involve the transfer of all assets and liabilities of a business undertaking on a going concern basis. Further, business transfers also benefit from a favourable tax treatment in comparison to asset transfers:

in a business transfer, a lump-sum value is assigned to the entire undertaking as a whole instead of values being assigned to individual assets; and
liabilities, as is the case with an asset transfer.
Share acquisitions
In India, share acquisitions still remain the most prevalent and preferred mode of acquisition, because they are relatively simpler and time efficient in comparison to the other three modes discussed in this chapter. Further, a share acquisition can be in the form of a secondary purchase, that is, a purchase by an acquirer of securities of the target held by existing shareholders, and a primary investment, that is, a subscription by the acquirer to a fresh issuance of securities by the target, or a combination. A purchase of, or subscription to, securities are both relatively straightforward. A purchase or subscription can involve acquisition of equity shares or instruments convertible into equity shares and may vary depending on the nature of the investment and the commercial intent. As a general rule, foreign direct investment (FDI) in Indian companies is permitted only through a purchase of, or subscription to, equity shares and instruments convertible into equity shares.

Joint ventures
A joint venture is another popular structure where two parties (especially where one party is a non-resident or a foreign party) can come together to benefit from each other’s synergies and expertise. For example, the resident or domestic party can contribute its distribution network to the joint venture entity, and the non-resident or foreign party can licence its intellectual property (IP) to the joint venture entity, such that both joint venture parties can benefit from the exploitation of such IP in India.

As a first step, the acquirer should have reached an initial commercial agreement with the target and its promoters. This process could involve bilateral negotiations between the parties or an auction or bid process where multiple potential acquirers are vying for the target. A typical transaction process will begin with the execution of a term sheet outlining the intention of the parties and the broad contours of the transaction. This is usually followed by the acquirer conducting the necessary legal, financial, tax and other due diligence processes with respect to the company and, if the acquirer is a foreign entity, also an anti-corruption and money laundering due diligence. Once the acquirer has reasonably satisfied itself based on the results of the due diligence processes, negotiations on transaction documents commence. Based on the outcome of the due diligence and the structure of the transaction, these would typically include an asset or business transfer agreement for an asset or a business transfer respectively, a share purchase or subscription agreement for share acquisitions, a joint venture agreement for joint ventures, a shareholders’ agreement and any other agreement that the parties may agree to.

Acquisition of distressed assets
Following the enactment of the Insolvency and Bankruptcy Code in 2016 and the issuance by the Reserve Bank of India (RBI), the central bank, of circulars involving restructuring of debts owed to banks, the mergers and acquisitions market in India has seen a sharp increase in transactions involving distressed assets.

Depending on the understanding between the parties and the regulatory and consent requirements, the transaction can either be structured as a simultaneous sign and close transaction, or a two-tiered transaction where the agreements are executed on an earlier date and the transaction is consummated on a later date following fulfilment or waiver of the agreed conditions precedent to closing.

The timeline for the process would depend on the time taken for due diligence, the duration of negotiations and the time taken to fulfil any conditions precedent, including the receipt of all applicable statutory approvals. Share acquisitions are generally the most time efficient, followed by asset and business transfers and finally mergers and demergers, which are longer processes as they are court (ie, NCLT) processes and may take anywhere between six months and two years to receive approval.

Legal regulation
Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?

The Companies Act, 2013 (Companies Act), the Indian Contract Act, 1872 (Contract Act) and the Specific Relief Act, 1963 (Specific Relief Act) form the principal legislation governing private acquisitions and disposals in India. While the Companies Act provides for the manner in which securities of companies can be issued and transferred, and mergers and demergers can be consummated, and the restrictions thereon, the Contract Act and the Specific Relief Act primarily provide guidance on the nature of rights that the parties can agree to contractually, and the remedies that can be availed by the parties for a breach of the contract. Matters of taxation in connection with acquisitions and disposals are governed by the provisions of the ITA, and the Competition Act, 2002 (Competition Act) regulates transactions against being an anticompetitive arrangement or adversely affecting competition in any manner.

Further, in connection with private acquisitions and disposals involving a non-resident entity, the relevant foreign exchange laws (including the Foreign Exchange Management Act, 1999 and the rules and regulations framed under it) will apply. Foreign exchange laws provide for pricing and disclosure requirements, amongst other things. For instance, in the case of an acquisition by a non-resident investor of equity shares of an Indian private company from an Indian resident, the price of such equity shares cannot be lower than the price determined in accordance with any internationally accepted pricing methodology for valuation of such equity shares, as duly certified by a chartered accountant, cost accountant, or a merchant banker registered with the Securities and Exchange Board of India (SEBI).

Furthermore, there are several sector-specific federal legislations, including the Indian Telegraph Act, 1885, the Drugs and Cosmetics Act, 1940, the Insurance Act, 1938, the Air Act, 1981, the Water Act, 1974, and the Environment (Protection) Act, 1986 and multiple employment and labour related legislations, including more than 100 laws governing matters such as employment, minimum wage, sexual harassment, maternity leave, trade unions, and labour disputes. In addition, India has well-established laws and regulations safeguarding IP rights in India such as to the Patents Act, 1970, Copyright Act, 1957, and Trade Marks Act, 1999. India is also a signatory to major international conventions and treaties such as the Paris Convention for the Protection of Industrial Property, Patent Cooperation Treaty, Madrid Protocol, among others, which govern IP rights.

Additionally, where the target is engaged in providing financial services, depending on the specific financial service the target provides, regulations prescribed by specific regulators (eg, the RBI for banks and financial institutions, the SEBI and the stock exchanges for mutual funds, stock brokers, asset brokers and other intermediaries, the Insurance Regulatory and Development Authority of India (IRDAI) for insurance companies and intermediaries) are required to be adhered to for acquisitions and disposals involving the relevant companies. In some cases, an approval from the relevant regulator may be required for the consummation of the acquisition of shares, business or assets - for instance, acquisition of 26 per cent or higher shareholding of a non-banking financial company requires approval of the RBI, and a change in more than 1 per cent shareholding in an insurance company requires approval of the IRDAI.

Finally, for certain acquisitions, compliance with certain state and local laws is also required. For example, when real property is involved, permission under the relevant state laws is required for an acquisition or transfer of immovable property. Similarly, different states have very detailed labour regulations. Therefore, any transfer or retrenchment of employees is governed specifically by applicable state and local laws.

Legal title
What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?

Shares of a private company can be held by a buyer either in physical form (in which case the title to such shares is evidenced by a share certificate issued by the company for the relevant shares and the register of members) or in dematerialised form (in which case the record of the depository with whom the shares are held is the prima facie evidence of the interest of the beneficial owner of such shares). However, owing to recent amendments to company and securities regulations, shares of public companies can only be acquired in dematerialised form.

In the case of physical shares, the transfer of legal title is complete when the share certificates held by the existing shareholder are endorsed in the name of the buyer (in the case of a transfer of existing shares) along with execution of a duly filed share transfer deed, or new share certificates are issued to the buyer by the company (in the case of subscription to new shares). Following such endorsement or issuance, the register of members maintained by the company is also required to be updated to reflect the name of the buyer as a member of the company. In the case of dematerialised shares, the legal title to the shares is transferred upon the change being reflected in the records of the depository.

Under Indian law, beneficial title in shares is termed as ‘beneficial interest’ and denotes the right of the beneficial owner of the shares - that is, a person whose name is not entered in the register of members of the company as the holder of shares but who is the beneficiary of the such shareholding in the company. In cases where the legal title and beneficial interest in shares are held by different persons, the person who holds the beneficial interest is required to make a disclosure (as per the formats prescribed under the Companies Act), in this regard specifying the nature of the beneficial interest held and the particulars of the person in whose name the shares stand registered in the books of the company.

Further, pursuant to recent amendments to the Companies Act, Indian companies are required to:

identify if there are any individuals who are ‘significant beneficial owners’;
cause such individuals to make a declaration to the company in the prescribed format; and
file a return with the Registrar of Companies in this regard.
‘Significant beneficial owners’ are those individuals who acting alone or together, or through persons or trusts, possess the right over at least 10 per cent shareholding in a company in terms of shares, voting rights, or the right to participate in any distribution, or who otherwise exercise significant influence or control over the company.

In terms of share acquisitions, title-related representations and warranties, backed by indemnity, are common practice. Similarly, for asset acquisitions, the title in assets passes as follows:

in the case of movable assets, title passes upon delivery of such assets;
in the case of immovable property, title passes upon execution and registration of a conveyance deed; and
in the case of certain movable assets such as receivable and payables, title passes upon execution of a deed by the seller in favour of the buyer.
Finally, upon approval of an amalgamation scheme (ie, approval of a merger or a demerger scheme) by the NCLT in terms of a final order, title in the shares or the assets, or both (as the case may be), passes to the buyer automatically.

Shares under Indian laws are considered movable property and, other than the Companies Act, their merchantability is governed by the (Indian) Sale of Goods Act, 1930. Under this Act, certain warranties are implied to be applicable to a transfer of movable property unless anything contrary is provided for in the agreement. For instance, unless it is expressly provided in the agreement, a transfer of shares is implied to be free from encumbrances under applicable Indian laws.

Multiple sellers
Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?

No, there is no compulsory requirement for all shareholders to sell their shares to the buyer. In India, minority shareholders can be squeezed out in accordance with certain processes available under applicable law or dragged along by the majority seller if they have contractually so agreed.

Drag-alongs are fairly straightforward and are contractually agreed between shareholders at the time of execution of the definitive agreements. Minority squeeze outs are more complicated, with a selective capital reduction being the most common method of minority squeeze out. The minority shareholders, however, can block such squeeze out as a capital reduction is required to be approved by a super majority (75 per cent of shareholders) and the NCLT.

In addition to a capital reduction, the Companies Act provides that the majority shareholders who own 90 per cent or more of the equity shares of a company will, subject to certain conditions, have the right to offer by notice to the remaining shareholders of the company to compulsorily acquire their shares. A similar right is also granted to the minority shareholders, for example, to require the majority shareholders to acquire all their shares on the terms of the offer.

Exclusion of assets or liabilities
Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?

There are no specific assets or liabilities that are not allowed to be excluded from an acquisition or disposal of business by agreement, and generally, in addition to extensive representations and warranties, the buyer also negotiates specific indemnities for certain known liabilities in the definitive documents. In a business transfer, ‘cherry-picking’ of assets may disqualify a transaction from being a genuine ‘slump sale’ for the purpose of availing tax benefits under the ITA, as the tax authorities can conclude that the ‘undertaking’ was not transferred as a whole. However, exclusion of any asset or liability forming part of an undertaking does not automatically disqualify such business transfer from qualifying as a ‘slump sale’ under applicable Indian law if such exclusion does not affect the ability of such undertaking to carry on as a ‘going concern’. The Indian courts have answered the question regarding the exclusion of what kind of assets may disqualify a transaction as a ‘slump sale’ on the facts of each case.

To give effect to any transfer of assets or liabilities in a business transfer, a company must obtain any necessary approvals, including corporate approvals from the board and shareholders, regulatory approvals, consents of lenders and other third parties; for example, if a company is selling its material assets (ie, any undertaking that generates 20 per cent of the total income of the company during the previous financial year), the shareholders of the company have to approve such sale by way of a three-quarters majority. The kind of corporate approvals required will depend on the nature and value of the transaction.

In some cases, regulatory approvals are also required for transfers of assets or liabilities. For instance, the Competition Act requires mandatory pre-notification of all acquisitions and mergers and amalgamations that cross specified jurisdictional asset or turnover thresholds (collectively, a combination) to the Competition Commission of India (CCI) for approval prior to consummation, unless specific exemptions apply.

Further, most financing documents in India require borrowing companies to obtain the prior consent of the lending bank or financial institution for a transfer of the business of the borrowing company or to effect any change in the capital structure or change in the ownership of the borrowing company.

Mergers and demergers
A scheme of arrangement (involving a merger, demerger or amalgamation) requires the approval of a majority comprising three fourths in number and value of the shareholders of a company that are present and voting. Creditors are also required to approve such scheme. As stated earlier, once the relevant company has obtained the requisite approval of its shareholders, the scheme of arrangement needs to be approved by the NCLT. Before approving such a scheme, the NCLT will invite objections from various government departments, such as the registrar of companies and the income tax department, and from the public at large. Once all objections have been satisfactorily resolved and the NCLT is convinced that the merger or demerger is in the best interest of the shareholders, it will pass a final order approving the scheme of arrangement.

Mergers involving public listed companies in India require, inter alia, the in-principle approval of the SEBI. Further, if a public listed company is to be merged with an unlisted company, the SEBI requires that, following consummation of the merger, the shares of the unlisted company be compulsorily listed.

Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?

Yes, there are certain legal, regulatory or governmental restrictions (including restrictions on foreign ownership) on the transfer of shares in a company, a business or assets in India.

For instance, foreign investment in India, both direct and indirect, is regulated by the government and the RBI. Such investments can be divided into two categories - those under the automatic route (such as investments in the services sector or manufacturing of consumer goods) and those under the approval route (such as investments in the print media sector). There are also certain sectors, such as the lottery, where foreign investment is prohibited.

Investments under the automatic route, as long as such investments are within the sectoral caps prescribed under the foreign exchange regulations, do not require prior approval from the government. While not common, there may be situations when transactions are subject to public or national interest considerations, such as transactions in the defence sector, or applications involving investments from ‘countries of concern,’ which require security clearance and are processed by the Ministry of Home Affairs.

Until June 2017, certain FDI in India under the approval route required the approval of the Foreign Investment Promotion Board (FIPB). However, to facilitate single window clearance, the government abolished the FIPB and replaced it with the Foreign Investment Facilitation Portal (FIFP). The FIFP is being administered by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, and government approval for foreign investments are granted by the concerned administrative ministries and departments (eg, all applicable mining investments requiring approval shall be handled by the Ministry of Mines, and will be facilitated through the FIFP) other than in cases of certain high-value foreign investments that are considered for approval by the cabinet committee on economic affairs. The FIFP is a single point interface facilitating the clearance of applications filed for foreign direct investment in sectors falling under the approval route. Upon receipt of the application, it is forwarded to the concerned ministry or authority, which reviews and processes such application.

Are any other third-party consents commonly required?

Yes, third-party consents, in the form of consents from, inter alia, lenders, counterparties to contracts (large customers, suppliers, etc), and local governmental authorities may also be required for transactions involving a change in control or management of a company.

Sometimes, such consents may also be required for minor changes in shareholding, depending upon the terms of agreements executed by the company with its lenders, customers, suppliers and so on, or the terms of the licences and approvals granted to the company to conduct its business.

While the consent of other shareholders is not required for a transfer of shares by a shareholder (unless such other shareholder has been granted certain contractual rights, such as a right of first offer or refusal), such shareholder consent is required in the case of a transfer of a business undertaking by a company.

Regulatory filings
Must regulatory filings be made or registration (or other official) fees paid to acquire shares in a company, a business or assets in your jurisdiction?

Yes, there are certain required regulatory filings that need to be made if specific conditions are met.

For example, the Competition Act requires mandatory pre-notification of all acquisitions (of shares, voting rights, assets or control) and mergers and amalgamations that cross specified jurisdictional asset or turnover thresholds (collectively, a combination) to the CCI for approval prior to consummation, unless specific exemptions apply. Generally, this is the responsibility of the buyer or acquirer, but in cases involving mergers, it is a joint responsibility of all the concerned parties. The merger control regime in India is suspensory in nature, and therefore a combination subject to notification requirement cannot be consummated until merger clearance has been obtained, or a review period of 210 calendar days from the date on which the application for CCI clearance is made, whichever is earlier.

Further, there are certain regulatory filings that are required to be made with the registrar of companies under the Companies Act in the case of an issuance of new shares by a company.

All transfers of shares in physical form are subject to a stamp duty of 0.25 per cent to be paid on the value of shares being transferred, and the transaction documents also need to be stamped at the rate applicable in the state in which the transaction is executed or if brought into a state to which the subject matter relates to (see question 12). Further, recent amendments to the Indian Stamp Act, make transfer of shares in dematerialised form also subject to payment of stamp duty. However, these amendments are yet to be notified, and therefore, are not presently in effect.

Separately, it should be noted that transfers of a business undertaking or assets entail additional costs. For example, transfers of immovable property pursuant to a slump sale require the execution of a conveyance deed that needs to be stamped and registered in terms of the duty payable in the relevant state; this quantum of duty could range anywhere between 3 and 12 per cent (depending on the state where the conveyance is being executed and relates to) of the value of the immovable property being sold. In the case of a business transfer, stamp duty needs to be paid on the business transfer agreement: this could range from a nominal amount to up to 1 per cent of the value of the consideration being paid for the acquisition of the business undertaking.

Under the foreign exchange laws, there are certain reporting requirements in the case of an acquisition (either by subscription or purchase) by a non-resident buyer in prescribed forms. The RBI has, with an intention to simplify reporting under foreign exchange laws, recently introduced the ‘single master form,’ which is a consolidated form to be used by Indian entities for reporting foreign investment.

Finally, certain regulatory filings may be required to be made in connection with the acquisition of shares, a business or assets if the terms of the licences and approvals granted to the company so require.

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