When a company starts incurring losses, the company becomes overcapitalized because of the presence of useless intangible assets and remaining debit balance in the profit and loss account. This brings the need for reconstruction that stands for the reorganisation of the assets of the company. What usually done in a merger process is that the liabilities are reassessed and the value of the paid-up shares is brought down by altering/varying the various rights that are attached to each of the classes of the paid-up capital shareholders. The entire capital of the company is internally re-organised, and this internal reconstruction is done without liquidating the company and forming a new one.
Therefore, in the process of internal reconstruction, only the rights of the shareholders and creditors are changed with certain reduction of capital and the rights/claims of the debenture-holders are kept outside the purview of the procedure of internal reconstruction. The process of external reconstruction is governed by the process of ‘amalgamation in the nature of merger’ under the Companies Act, 2013. In the process of external reconstruction, a new company is formed to take over the liquidated company and the newly formed company gets a fresh share capital without any reduction in the share capital.
Merger under the Companies Act, 2013
Mechanism of Approval
The Companies Act, 2013 deals with the provisions of Merger, Compromises, Arrangements and Amalgamations under Chapter XV of the Act. Under the Act, the words “Merger” and “amalgamation” have been used interchangeably. In the process of amalgamation that happens in pursuance of the Companies Act, 2013; the entire undertaking of the company comprising of property, assets and liabilities are transferred/absorbed by an existing or a new company. The Act establishes National Company Law Tribunal which is enshrined with the powers to sanction the scheme of merger. The lenders of both the transferor and transferee must approve the scheme which is followed by approval of the Board of directors. In the case of listed companies, it becomes mandatory on part of the company to take the approval of the stock exchange followed by the issuance of public notification.
The Companies Act, 1956 mandated the consent of shareholders and creditors, whereas the Companies Act, 2013 requires service of the notice of the merger along with documents inclusive of the scheme and the valuation report not only upon the shareholders and creditors, but also various regulators including the Ministry of Corporate Affairs, Reserve Bank of India, Competition Commission of India, Stock Exchanges, Income Tax authorities and other sector regulators or authorities which are likely to be affected by the merger. The valuation report should be compulsorily sent along with the notice to each of the shareholders for ready access.
Raising Objection to the Proposed Scheme
The stakeholders including persons holding not less than 10% of the shareholding or having outstanding debt not less than 5% of total outstanding debt have been given the right to object the merger scheme. The Companies Act, 1956 mandated the physical presence of the creditor/shareholder in the meetings or a proxy for the procedure of raising any kind of objection to the merger scheme. The Companies Act, 2013, however, provides the right to pose any kind of objection through a postal ballot which gives greater participation rights to the creditors or the shareholders.
Cross-border Mergers and Mergers of Small Companies
The Companies Act, 2013 categorically deals with cross-border merger and merger of small companies. Under the 2013 Act, cross border mergers are permissible between an Indian company and any other foreign company which is located within a jurisdiction that is notified by the Central Government in consultation with the Reserve Bank of India (RBI). The scheme of such a merger is also subjected to the approval of the RBI. Such mergers also provide for exit mechanism of the shareholders who do not want to be a part of the merged entity, by facilitating the payment in cash or depository receipts.
The small companies have also been provided with a fast track mechanism under the Companies Act, 2013 in which the consent of the shareholders has 90% of the shareholding in the company and creditors having 9/10th of the debt in the company is required to be taken. The scheme also needs to be approved by the Regional Director, Ministry of Corporate Affairs and the tribunal’s approval is not necessary for such mergers. The merging entities in such instances are not required to file documents, serve notice to various authorities, provide auditor’s certificate for compliance, etc. However, if the Regional Director considers that such merger is not in the interest of the shareholder, he may request the tribunal to follow the procedure of normal merger instead of the fast-track procedure. This kind of fast-track procedure is also applicable to a holding company with a wholly-owned subsidiary.
Contravention of the Provision
The Companies Act, 2013 introduces stringent and separate penal provisions on the companies that contravene the provision of merger and also makes the officer who is responsible for the merger liable for the violation of the provision of the merger. It imposes a minimum fine of Rs. 1,00,000/- which can be extended to Rs. 25,00,000/- on the companies. The officer-in-charge who is responsible for the violation can also be subjected to the fine of Rs. 1,00,000/- that can be extended to Rs. 3,00,000/- and an imprisonment of 1 year. Such penal provisions, however, are not applicable to small companies or holding companies that are merging with the wholly-owned subsidiaries.
The Companies Act, 2013 has introduced necessary procedural requirements for effective implementation of the scheme of mergers, amalgamation and restructuring. The basic framework as that of Companies Act, 1956 has been retained; however, the changes incorporated under the 2013 Act has tried to make the entire process smooth and transparent. While it takes within its purview a wide range of stakeholders’ interest by ensuring greater participation, it also ensures a mechanism to avoid frivolous objections by giving the right to pose objection only to those who have a substantial interest in the company. What is however required is to align such provisions in necessary consonance with other regulatory frameworks like the Income-Tax Act and foreign exchange laws. For example, the Companies Act, 2013 facilitates cross-border mergers but the Income-Tax Act grants exemption only to the Indian Companies and does recognise the right of the foreign transferee company to claim exemptions for the purposes of merger and restructuring.