CASE STUDY DOCUMENT: RELEVANT REFERENCES

I. MERGER/ACQUISITION
PART I – MERGER
1. What is a merger?
The term ‘merger’ is not defined under the Companies Act, 2013 (“CA 2013”) or under
Income Tax Act, 1961 (“ITA”). As a concept, ‘merger’ is a combination of two or more
entities into one;

The desired effect being not just the (a) accumulation of assets and liabilities of the
distinct entities, but (b) organization of such entity into one business. The possible
objectives of mergers are manifold — (a) economies of scale, (b) acquisition of
technologies, (c) access to varied sectors/ markets etc. Generally, in a merger, the
merging entities would cease to exist and would merge into a single surviving entity.

2. What is amalgamation?
The ITA does however define the analogous term ‘amalgamation’ as the merger of
one or more companies with another company, or the merger of two or more
companies to form one company. The ITA goes on to specify certain other conditions
that must be satisfied for an ‘amalgamation’ to be eligible for benefits accruing from
beneficial tax treatment.

3. What is a ‘Scheme of arrangement’ and how is it related to

mergers/amalgamations?
Sections 230-234 of CA 2013 (the “Merger Provisions”) deal with the schemes of
arrangement or compromise between a company, its shareholders and/or its
creditors. These provisions are discussed in greater detail in Part II of this Paper.
Commercially, mergers and amalgamations may be of several types, depending on the
requirements of the merging entities. Although corporate laws may be indifferent to
the different commercial forms of merger/amalgamation, the Competition Act, 2002
does pay special attention to the forms.

4. What are the different types of mergers?

(i) Horizontal (ii) Vertical (iii) Congeneric (iv) Conglomerate (v) Cash/Cash-out (vi)
Triangular.

5. What are the different legal considerations for a merger/amalgamation?

(i) Company Law; (ii) Securities Law; (iii) Competition Law; and (iv) Foreign
Exchange Control Law

Company Law
 The Merger Provisions govern schemes of arrangements between a company, its
shareholders and creditors. The Merger Provisions are in fact worded so widely that
they provide for and regulate all kinds of corporate restructuring that a company can
possibly undertake, such as mergers, amalgamations, demergers, spin-off/ hive off,
and every other compromise, settlement, agreement or arrangement between a
company and its members and/or its credit.

6. What is the procedure for a merger under the Companies Act?

Since a merger essentially involves an arrangement between companies, those
companies which intend to merge must make an application to the National Company
Law Tribunal (“NCLT”) having jurisdiction over such company for
i. convening meetings of its respective shareholders and/or creditors;
ii. or seeking dispensation of such meetings basis the consents received in writing
from the shareholders and creditors.

Basis the NCLT order, either a meeting is convened or dispensed with.

If the majority in number, representing 3/4th in value of the creditors or shareholders

present and voting at such meeting (if the meeting is held) agree to the merger, then
the merger, if sanctioned by the NCLT, is binding on all creditors and shareholders of
the company.

The Merger Provisions constitute a comprehensive code in themselves, and under

these provisions, the NCLT has full power to sanction any alterations in the corporate
structure of a company. For example, in ordinary circumstances a company must seek
the approval of the NCLT for effecting a reduction of its share capital. However, if a
reduction of share capital forms part of the corporate restructuring proposed by the
company under the Merger Provisions, then the NCLT has the power to approve and
sanction such reduction in share capital and companies will not be required to follow
a separate process for reduction of share capital as stipulated under the CA 2013.

7. What is a Fast-track Merger and what is the procedure prescribed under the
Companies Act?
The Fast Track merger covered under Section 233 of CA 2013 requires approval from
shareholders, creditors, the Registrar of Companies, the Official Liquidator and the Regional
Director. Under the fast-track merger, scheme of merger shall be entered into between the
following companies:
i. two or more small companies (private companies having paid-up capital of
less than INR 4 Crores (maximum INR 10 Crores) and turnover of less than
INR 40 Crores (maximum INR 100 Crores) per last audited financial
statements); or
ii. a holding company with its wholly owned subsidiary; or
iii. such other class of companies as may be prescribed.

The scheme, after incorporating any suggestions made by the Registrar of Companies and the
Official Liquidator, must be approved by:

a. shareholders holding at least 90% of the total number of shares; and

b. creditors representing 9/10th in value,
 before it is presented to the Regional Director and the Official Liquidator for approval.

Thereafter, if the Regional Director/ Official Liquidator has any objections, they should convey
the same to the central government. The central government upon receipt of comments can
either direct NCLT to take up the scheme under Section 232 (general process) or pass the final
order confirming the scheme under the Fast Track process.

8. What is a Cross-border Merger and what is the procedure prescribed under the
Companies Act?
Section 234 of the CA 2013 permits mergers between Indian and foreign companies with prior
approval of the Reserve Bank of India (“RBI”). A foreign company means any company or body
corporate incorporated outside India, whether having a place of business in India or not.

The following conditions must be fulfilled for a cross border merger:

i. The foreign company should be incorporated in a permitted jurisdiction which meets
certain conditions. I
ii. The transferee company is to ensure that the valuation is done by a recognized
professional body in its jurisdiction and is in accordance with internationally accepted
principles of accounting and valuation.
iii. The procedure prescribed under CA 2013 for undertaking mergers must be followed.

The RBI also issued the Foreign Exchange Management (Cross Border Merger) Regulations,
2018 (“Merger Regulations”) on March 20, 2018 which provide that any transaction
undertaken in relation to a cross-border merger in accordance with the FEMA Regulations shall
be deemed to have been approved by the RBI.

Securities Law
9. What are the compliance requirements/trigger requirements under the Takeover
Code/SEBI (Substantial Acquisition of Securities and Takeovers) Regulations,
2011?
The Securities and Exchange Board of India (the “SEBI”) is the nodal authority
regulating entities that are listed or to be listed on stock exchanges in India. The SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the “Takeover
Code”) restricts and regulates the acquisition of shares, voting rights and control in
listed companies.

A. Acquisition/Initial Mandatory Offer: Acquisition of shares or voting rights of a

listed company, entitling the acquirer to exercise 25% or more of the voting rights
in the target company or acquisition of control, obligates the acquirer to make an
offer to the remaining shareholders of the target company. The offer must be to
further acquire at least 26% of the voting capital of the company.
B. Creeping Acquisition: Regulation 3 read with Regulation 7 of the Takeover Code.
Further, if the acquirer already holds 25% or more but less than 75% of the target
company and acquires at least 5% shares or voting rights in the target company
within a financial year, it shall be obligated to make an open offer.
10. Is merger by way of a scheme of arrangement exempted from the Takeover Code?
However, this obligation is subject to the exemptions provided under the Takeover
Code. Exemptions from open offer requirement under the Takeover Code include
inter alia acquisition pursuant to a scheme of arrangement approved by the NCLT.
Further, SEBI has the power to grant exemption or relaxation from the requirements
of the open offer under the Takeover Code in the interest of investors and the securities
market. Such relaxations or exemptions can be sought by the acquirer by making an
application to SEBI.

11. What are the key considerations/compliance requirements under the Listing
Regulations/SEBI (Listing Obligations and Disclosure Requirements) Regulations,
2015?

The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“Listing
Regulations”) provides for a comprehensive framework governing various types of listed
securities. Under the Listing Regulations, SEBI has laid down conditions to be followed by a
listed company while making an application before the NCLT, for approval of a schemes of
merger/ amalgamation / reconstruction.

Certain key provisions under the Listing Regulations applicable in case of a scheme involving a
listed company are as follows:

a. Filing of scheme with stock exchanges: Any listed company undertaking or involved in a
scheme of arrangement, must file the draft scheme with the relevant stock exchanges,
prior to filing them with the NCLT (as per the process laid down under CA 2013), to seek a
no-objection letter from the relevant stock exchanges. In order to file the scheme of
arrangement with the relevant stock exchanges, all listed entities would be required to
submit valuation report, auditor’s certificate, no-objection certificates from lending
scheduled commercial banks/financial institutions.
b. Compliance with securities law: The listed companies shall ensure that the scheme does
not violate, limit or override any of the provisions of the applicable securities law or
requirements of the stock exchanges.
c. Change in shareholding pattern: The listed companies are required to file the pre and post
arrangement shareholding pattern and the capital structure with the stock exchanges as
per requirements of the listing authority or stock exchanges of the home country in which
the securities are listed.
d. Corporate actions pursuant to merger: The listed company needs to disclose to the stock
exchanges all information having a bearing on the performance/ operation of the listed
entity and/or price sensitive information.

Competition Law and Foreign Exchange Law/FDI has been dealt in detail
subsequently

PART II – ACQUISITION
1. What is an acquisition?
 An ‘acquisition’ or ‘takeover’ is the purchase by one person, of controlling interest in the (a)
share capital or (b) of all or substantially all of the assets and/or liabilities, of the target. A
takeover may be friendly or hostile and may be structured either by:
I. way of agreement between the offeror and the majority shareholders;
II. purchase of shares from the open market or
III. by making an offer for acquisition of the target’s shares to the entire body of
shareholders.

2. What are the different methods/types of carrying out an acquisition?

Acquisitions may also be made by way of (a) acquisition of shares of the target, or (b)
acquisition of assets and liabilities of the target (c) by way of demerger. In the latter case, entire
business of the target may be acquired on a going concern basis or certain assets and liabilities
may be cherry picked and purchased by the acquirer.

- Asset Sale: The transfer when a business is acquired on a going concern basis is referred
to as a ‘slump sale’ under the ITA. Section 2(42C) of the ITA defines slump sale as a
“transfer of one or more undertakings as a result of the sale for a lump sum consideration
without values being assigned to the individual assets and liabilities in such sales”.

- Demerger: Another form of acquisition may be by way of demerger. A demerger is the

opposite of a merger, involving the splitting up of one entity into two or more entities. An
entity which has more than one business, may decide to ‘hive off’ or ‘spin off’ one of its
businesses into a new entity.

The shareholders of the original entity would generally receive shares of the new entity. In
some cases, if one of the business units of a company is financially sick and the other business
unit(s) is financially sound, the sick business units may be demerged from the company,
thereby facilitating the restructuring or sale of the sick business, without affecting the assets
of the healthy business unit(s). Conversely, a demerger may also be undertaken for moving a
lucrative business into a separate entity. A demerger may be completed through a court
process under the Merger Provisions or contractually by way of a business transfer agreement.

3. What are the different legal considerations for an acquisition?

(i) Company Law (ii) Securities Law (iii) Competition Law (iv) Foreign Exchange
Control Law

Company Law
4. What are the key aspects to be considered during an acquisition under the
Company Law?
(i) Transferability of shares; and (ii) Minority squeeze-out provisions

Transferability of Shares
Broadly speaking, an Indian company can be set up as a private company or as a public
company. A restriction on transferability of shares is inherent to a private company, such
restrictions are contained in its articles of association (the byelaws of the company) and are
usually in the form of a pre-emptive right in favor of the other shareholders. With the
 introduction of CA 2013, although shares of a public company are freely transferable, share
transfer restrictions for even public companies’ shares have been granted statutory sanction.

The articles of association may prescribe certain procedures for transfer of shares that must
be adhered to in order to effect a transfer of shares. It is therefore advisable for the acquirer
of shares of a private company to ensure that the non-selling shareholders (if any) waive their
rights of pre-emption and any other preferential rights that they may have under the articles
of association. Any transfer of shares, whether of a private company or a public company,
must comply with the procedure for transfer specified under its articles of association.

5. Are there any squeeze-out provisions provided under the Companies Act?
(Page 19-20 NDA) Squeeze-outs are situations where the controller undertakes. a
transaction by which it compulsorily acquires the remaining shares. in the company
held by the minorities through one or more available methods.

a. Section 236 of CA2013

b. Section 230 of CA2013
c. Scheme of capital reduction – Section 66
d. New share issuance – Section 42 with 62
e. Issue of shares with differential voting rights
f. Limits on acquirer – Section 186
g. Asset/Business Purchase

Securities Law
6. What are the key laws to be considered during an acquisition under the Securities
Law?
(i) ICDR (ii) SAST/Takeover Regulations (iii) LODR (iv) SEBI (PIT) Regulations, 2015

ICDR
If the acquisition of an Indian listed company involves the issue of new equity shares or
securities convertible into equity shares (“Specified Securities”) by the target (issuer) to the
acquirer, the provisions of Chapter V (“Preferential Issue Regulations”) contained in ICDR
Regulations will apply (in addition to company law requirements mentioned above). We have
highlighted below some of the important provisions of the Preferential Issue Regulations.

7. How is the pricing of the issue determined under the ICDR Regulations/SEBI
(Issue of Capital and Disclosure Requirements) Regulations, 2018?
Pricing of the Issue
The Preferential Issue Regulations set a floor price for an issuance. If the equity shares of the
issuer have been listed on a recognized stock exchange for a period of 90 trading days or
more as on the relevant date, the floor price of the equity shares to be allotted pursuant to
preferential issue shall be higher of the volume weighted average prices of the stock of the
company either:
a. 90 trading days; or,
b. 10 trading days preceding the relevant date.
 If the equity shares of the issuer have been listed on a recognized stock exchange for a period
of less than 90 trading days as on the relevant date, the floor price of the shares shall be
higher of:

a. the price at which the equity shares were issued via initial public offer, or value of price
per share arrived under the scheme pursuant to which the equity shares of the issuer were
listed; or
b. the average of the volume weighted average prices of the stock of the company during the
period the stock has been listed prior to the relevant date; or
c. the average of 10 trading days volume weighted average prices of the related equity shares
quoted on a recognized stock exchange during the two weeks preceding the relevant date.

8. What is the Lock-in requirements under the SEBI ICDR?

Securities issued to the acquirer (who is not a promoter of the target) are locked-in for a period
of 6 months from the date of trading approval.

The date of trading approval is the latest date when approval for trading is granted by all stock
exchanges on which the securities of the company are listed.

Further, if the acquirer holds any equity shares of the target prior to such preferential
allotment, then such prior holding will be locked-in for a period of 90 trading days from the
date of the trading approval.

If securities are allotted on a preferential basis to promoters/ promoter group, they are locked-
in for a period of 18 months from the date of trading approval, subject to a limit of 20% of the
total capital of the company. The locked-in securities may be transferred amongst promoter/
promoter group or any person in control of the company, subject to the transferee being
subject to the remaining period of the lock-in.

9. Are schemes of arrangement exempted under the ICDR from lock-in requirements
and issue pricing guidelines under ICDR?
Regulation 158 - Yes
The Preferential Issue Regulations shall not apply in case a preferential allotment of shares is
made pursuant to a scheme of arrangement approved by the NCLT under the Merger
Provisions discussed above.

Takeover Code
10. What is the applicability of the SEBI Takeover Code during an acquisition process?
If an acquisition is contemplated by way of issue of new shares, or the acquisition of existing
shares or voting rights, of a listed company, to or by an acquirer, the provisions of the Takeover
Code are applicable. The Takeover Code regulates both direct and indirect acquisitions of (a)
shares or (b) voting rights in, and (c) control over a target company.

The key objectives of the Takeover Code are to provide the shareholders of a listed company
with adequate information about an impending change in control of the company or
substantial acquisition by an acquirer and provide them with an exit option (albeit a limited
one) in case they do not wish to retain their shareholding in the company.
11. What is the ‘mandatory offer’ requirement under the SEBI takeover code and under
what circumstances does it get triggered?
(Page 24-25 of NDA)
Mandatory offer
Under the Takeover Code, an acquirer is mandatorily required to make an offer to acquire
shares from the other shareholders in order to provide an exit opportunity to them prior to
consummating the acquisition, if the acquisition fulfils the conditions as set out in Regulations
3, 4 and 5 of the Takeover Code.

Under the Takeover Code, the obligation to make a mandatory open offer by the acquirer29 is
triggered in the following events:

a. Initial trigger
If the acquisition of shares or voting rights in a target company entitles the acquirer along
with the persons acting in concert (“PAC”) to exercise 25% or more of the voting rights in
the target company.
b. Creeping Acquisition
If the acquirer already holds 25% or more and less than 75% of the shares or voting rights
in the target, then any acquisition of additional shares or voting rights that entitles the
acquirer along with PAC to exercise more than 5% of the voting rights in the target in any
financial year. It is important to note that the 5% limit is calculated on a gross basis i.e.,
aggregating all purchases and without factoring in any reduction in shareholding or voting
rights during that year or dilutions of holding on account of fresh issuances by the target
company. If an acquirer acquires shares along with other subscribers in a new issuance by
the company, then the acquisition by the acquirer will be the difference between its
shareholding pre and post such new issuance. It should be noted that an acquirer (along
with PAC) is not permitted to make a creeping acquisition beyond the statutory limit of
non-public shareholding in a listed company i.e., 75%.
c. Acquisition of ‘Control’:
If the acquirer acquires control over the target
d. Indirect Acquisition of Shares or Voting Rights

12. What is the minimum offer size in a mandatory offer?

Open offer for acquiring shares must be for at least 26% of the shares of the target company.
It is also possible for the acquirer to provide that the offer to acquire shares is subject to a
minimum level of acceptance.

13. What is the ‘voluntary offer’ requirement under the SEBI takeover code and under
what circumstances does it get triggered?
An acquirer who holds between 25% and 75% of the shareholding/ voting rights in a company
is permitted to voluntarily make a public announcement of an open offer for acquiring
additional shares of the company subject to their aggregate shareholding after completion of
the open offer not exceeding 75%.

In case of a voluntary offer, the offer must be for at least 10% of the voting rights in the target
company, but the acquisition should not result in a breach of the maximum non-public
shareholding limit of 75%. As per SEBI’s Takeover Code Frequently Asked Questions, any
person holding less than 25% shareholding/voting rights can also make a voluntary open offer
 for acquiring additional shares. Any person who has been declared as a willful defaulter or is
a fugitive economic offender cannot make an open offer or enter into any transaction that
would attract obligations to make a public announcement of open offer.

14. What is the mandatory offer size in a voluntary offer?

In case of a voluntary open offer by an acquirer holding 25% or more of the shares/voting
rights, the offer must be for at least 10% of the voting rights in the target company. While there
is no maximum limit, the shareholding of the acquirer post-acquisition should not exceed 75%.
In case of a voluntary offer made by a shareholder holding less than 25% of shares or voting
rights of the target company, the minimum offer size is 26% of the total shares of the company

15. How is the ‘Pricing’ of the offer determined in an offer (voluntary/mandatory)?

Regulation 8 of the Takeover Code sets out the parameters to determine offer price to be paid
to the public shareholders, which is the same for a mandatory open offer as well as a voluntary
open offer. There are certain additional parameters prescribed for determining the offer price
when the open offer is made pursuant to an indirect acquisition. Please see Annexure 2 for
the parameters as prescribed under Regulation 8 of the Takeover Code. It is important to note
that an acquirer cannot reduce the offer price but an upward revision of offer price is
permitted, subject to certain conditions.

+ Competitive Bid/Revision of Offer/Bid + Take Private Mechanism – Included in Page 27 of

NDA

LODR
16. What are the distinct disclosure requirements under the SEBI (LODR)/Listing
Regulations?
On September 2, 2015, the Listing Regulations were notified and constitute the applicable law
in this domain. The Listing Regulations provide a comprehensive framework governing various
types of listed securities. Regulation 30 of Listing Regulations deals with disclosure of
material events by the listed entity whose equity and convertibles securities are listed. Such
entity is required to make disclosure of events specified under Schedule III of the Listing
Regulations. The Listing Regulations divide the events that need to be disclosed broadly in two
categories.
a. The events that have to be necessarily disclosed without applying any test of materiality
are indicated in Para A of Schedule III of the Listing Regulation.
b. Para B of Schedule III indicates the events that should be disclosed by the listed entity, if
considered material.
COMMONLY APPLICABLE REGULATIONS/LAWS

II. COMPETITION LAW

The Competition Act, 2002 (“Competition Act”) which replaced the Monopolies and Restrictive
Trade Practices Act, 1969 primarily covers (i) anti-competitive agreements (Section 3), (ii) abuse of
dominance (Section 4), and (iii) combinations (Section 5, 6, 20, 29, 30 and 31).

The Competition Commission of India (Procedure in regard to the Transaction of Business relating
to Combinations) Regulations, 2011 (“Combination Regulations”) govern the manner in which the
CCI will regulate combinations which have caused or are likely to cause an appreciable adverse
effect on competition (“AAEC”) in India.

1. What is ‘Anti-competitive’ Agreements? – Relevant for Merger – Horizontal/Vertical and

Joint Ventures (with an exemption under Section 3 – if it creates ‘Efficiency’)
The Competition Act essentially contemplates 2 kinds of anti-competitive agreements —
(a) Horizontal Agreements i.e., agreements between entities engaged in similar trade of
goods or provisions of services, and
(b) Vertical Agreements i.e., agreements between entities in different stages/ levels of the
chain of production, in respect of production, supply, distribution, storage, sale or price of
goods or services.

Anticompetitive agreements that cause or are likely to cause an AAEC within India are void under
the provisions of the Competition Act. A horizontal agreement that:

(i) determines purchase/sale prices, or

(ii) limits or controls production supply, markets, technical development, investment or
provision of services, or
(iii) shares the market or source of production or provision of services, by allocation of
geographical areas/type of goods or services or number of customers in the market, or
(iv) results in bid rigging / collusive bidding, is presumed to have an AAEC.

On the other hand, vertical agreements, such as tie-in arrangements, exclusive supply or
distribution agreements, etc., are examples where they can be considered to have an AAEC.

2. What is ‘Abuse of Dominant Position’? – Commonly for all

An entity is considered to be in a dominant position if it is able to operate independently of

competitive forces in India, or is able to affect its competitors or consumers or the relevant market
in India in its favor. The Competition Act prohibits an entity from abusing its dominant position.
Abuse of dominance would include imposing unfair or discriminatory conditions or prices in
purchase/sale of goods or services and predatory pricing, limiting or restricting
production/provision of goods/services, technical or scientific development, indulging in practices
resulting in denial of market access, etc.

3. What is ‘Regulation of Combinations’ under the Competition Act? – Acquisition, Merger and
Joint Ventures (with an exemption under Section 3 – if it creates ‘Efficiency’)
In terms of Section 5 of the Competition Act, a ‘combination’ involves:
a. the acquisition of control, shares, voting rights or assets of an enterprise by a person;
 b. acquisition of control of an enterprise where the acquirer already has direct or indirect
control of another enterprise engaged in identical business; or
c. a merger or amalgamation between or amongst enterprises; that cross the financial
thresholds set out in Section 5.

The financial thresholds for a combination are determined with reference to:

i) the combined asset value and the turnover of the acquirer and the target in the event of
an acquisition, and the combined asset value and the turnover of the combined resultant
company, in the event of an amalgamation or merger, and
ii) the combined asset value and the turnover of the “group” to which the target/resultant
company will belong pursuant to the proposed acquisition/merger.

Under Section 32 of the Competition Act, the CCI has been conferred with extra-territorial
jurisdiction, meaning that any acquisition where assets/turnover are in India, and exceed specified
limits, would be subject to the scrutiny of the CCI, even if the acquirer and target are located
outside India.

4. What are the different ‘Financial Thresholds’ provided under the Competition Act, for the
classification as a ‘Combination’?

The Competition Act prescribes financial thresholds linked with assets/turnover for the purposes
of determining whether a particular transaction qualifies as a ‘combination’. A transaction that
satisfies any of the following tests shall be treated as a ‘Combination’: An acquisition where the
parties to the acquisition, i.e., the acquirer and the target (in cases of acquisition/acquisition of
control/merger or amalgamation), jointly have:

a. Test 1 /India Asset Test and India Turnover Test—in India (i) assets higher than INR 1000 crore;
or (ii) turnover higher than INR 3000 crore;
b. Test 2 / Global Asset Test and Global Turnover Test — Total assets in India or outside higher
than USD 500 million of which assets in India should be higher than INR 500 crores; or (ii) total
turnover in India or outside is higher than USD 1500 million of which turnover in India should
be higher than INR 1500 crore; or

The acquirer group has:

a. Test 1 / India Asset Test and India Turnover Test — in India (i) assets higher than INR 4000
crores; or (ii) turnover higher than INR 12000 crores; or
b. Test 2 / Global Asset Test and Global Turnover Test — (i) Total assets in India or outside higher
than USD 2 billion of which assets in India are higher than INR 500 crore; or (ii) total turnover
in India or outside is higher than USD 6 billion of which turnover in India should be higher than
INR 1500 crores.

5. What is the ‘Deal Value Threshold’ provided under the Competition Act, for the classification
as a ‘Combination’?
Section 5(d): Pursuant to an amendment to the Competition Act a deal value threshold was
newly introduced which requires, any transaction in connection with acquisition of any
control, shares, voting rights or assets of an enterprise, merger or amalgamation, the deal
value of which exceeds INR 2,000 crores and if such enterprise (i.e. the enterprise being
acquired / taken control of / merged/ amalgamated) has ‘substantial business operations in
 India’, an approval from the CCI. It is expected that the CCI shall in due course issue regulations
or clarifications to help determine the what would constitute ‘substantial business operations
in India’.

6. Small Company Exemption – Assets of the merged entity less than INR 3.5 billion in India or
Turnover less than INR 10 billion (Page 36 of NDA)

7. If the acquisition/merger/JV is being classified as a ‘Combination’ as per the criteria laid

down, what are the requirements to be fulfilled?
a. Pre-filing consultation
Any enterprise which proposes to enter into a combination may submit a request in
writing to the CCI, for an informal and verbal consultation with the officials of the CCI
about filing such proposed ‘combination’. However, advice provided by the CCI during such
pre-filing consultation is not binding on the CCI.

b. Mandatory Reporting before the Consummation of the Combination

Section 6 makes void any combination which causes or is likely to cause an AAEC within
India. Accordingly, Section 6 of the Competition Act requires every acquirer to notify the
CCI of a combination. The CCI must form a prima facie opinion on whether a combination
has caused or is likely to cause an AAEC within the relevant market in India, within 30 days
of filing. The combination can be consummated only after the expiry of 150 days from the
date on which notice is given to the CCI, or after the CCI has passed an order approving
the combination.

c. If there is a possibility of being classified as a ‘combination’ indirectly, because of the

transaction in multiple small tranches, then also it can be classified as a ‘Combination’. –
(Page 37 of NDA)

d. Green Channel Exemption

Qualifying criteria: (i) produce/provide similar or identical or substitutable product or
service or; (ii) engage in any activity relating to production, supply, distribution, storage,
sale and service or trade in product or service which are at different stage or level of
production chain or; (iii) engage in any activity relating to production, supply distribution,
storage, sale and service or trade in product or service which are complementary to each
other.

Check if falling under the criteria for green channel – if yes, Page 37 of NDA

e. Check the exceptions to filing provided in Schedule I of the Act – Refer Page 38 of NDA

Section 29 of the Competition Act: Procedure for investigation of combinations -

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data?actid=AC_CEN_22_29_00005_200312_1517807324781&orderno=30

Section 30 of the Competition Act: Procedure in case of notice under sub-section (2) of section 6 -
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data?actid=AC_CEN_22_29_00005_200312_1517807324781&orderno=31
Section 31 of the Competition Act: Orders of Commission in certain combinations -
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data?actid=AC_CEN_22_29_00005_200312_1517807324781&orderno=32

III. SEBI (PIT) REGULATIONS

Applicable to both – Merger and Acquisition (Regardless of the transaction – the threshold is – UPSI +
Trade)

1. What is the general threshold for the applicability of ‘PIT’?

The PIT Regulations prohibit the following in case of a listed company (or a company that is
proposed to be listed):
i) an insider from communicating unpublished price sensitive information (“UPSI”);
ii) any person from procuring UPSI from an insider; and,
iii) an insider from trading in securities when in possession of UPSI.

Therefore, the PIT prohibits the dissemination as well as the receipt of UPSI.

2. Who is an ‘Insider’?
- Insider: Under the PIT Regulations, an ‘insider’ is a person who is (i) a connected person;
or (ii) in possession of or having access to UPSI.
- Connected Person: A connected person is one who is directly or indirectly associated with
the company (i) by reason of frequent communication with its officers; or (ii) by being in
a contractual, fiduciary or employment relationship; or (iii) by holding any position
including a professional or business relationship with the company whether temporary or
permanent that allows such person, directly or indirectly, access to UPSI or is reasonably
expected to allow such access.

Therefore, any person who has any connection with the company that is expected to put him
in possession of UPSI is considered to be a connected person. Persons who do not seemingly
occupy any position in a company but are in regular touch with the company will also be
covered. Certain categories of persons are all deemed to be connected, such as ‘immediate
relatives’, a holding, associate or subsidiary company, etc.

3. What is a UPSI/Unpublished Price Sensitive Information?

UPSI means any information relating to a company or its securities, directly or indirectly, that
is not generally available, and which upon becoming available islikely to materially affect the
price of the securities. It includes: financial results; dividends; change in capital structure;
mergers, demergers, acquisitions, de-listing, disposals and expansion of business and such
other transactions; and changes in key managerial personnel. The term ‘generally available’
means information that is accessible to the public on a non-discriminatory basis.

4. What are the general defences/exceptions available for the communication/trade on UPSI?
The communication of UPSI by an insider and the procurement of UPSI by a person from an
insider is permitted if such communication, procurement is in furtherance of legitimate
 purposes, performance of duties or discharge of legal obligations. The following are valid
defenses available to a person who trades in securities when in possession of UPSI:

General
i) An off-market transaction or a block deal between persons who
a. were in possession of the same UPSI (without being in breach of Regulation 3 and
the UPSI was not obtained under Regulation 3(3)); and
b. both counterparties made a conscious and informed trade decision.
ii) The transaction was carried out pursuant to a statutory or a regulatory obligation to
carry out a bona fide trade.
iii) The transaction was undertaken pursuant to exercise of stock options in respect of
which the exercise price was pre-determined in compliance of applicable regulations.

For non-individual investors

i) Individuals who executed the trade were different from individuals in possession of
UPSI and were not in possession of such UPSI; or
ii) Chinese wall arrangements were in place and there was no leakage of information and
the PIT Regulations were not violated; or
iii) Trades were made pursuant a trading plan.

Therefore, as long as the board is of the informed opinion that the transaction is in the best
interest of the company, due diligence may be lawfully conducted. In case a particular
transaction does not entail making an open offer to the public shareholders, the board of
directors would be required to cause public disclosures of the UPSI prior to the proposed
transaction to rule out any information asymmetry in the market. Additionally, a duty has been
cast on the board of the company to cause the parties to execute confidentiality and non-
disclosure agreements for the purpose of this provision. Therefore, introduction of Regulation
3(3) under the PIT Regulations has amply clarified that the communication or procurement of
UPSI for the purpose of due diligence shall be permitted, subject to the conditions set out in
the PIT Regulations.

5. What are Trading Plans and how do they work?

A key change in the framework of PIT Regulations is the introduction of trading plans. Typically,
‘insiders’ who are liable to possess UPSI round the year are permitted to formulate trading
plans with appropriate safeguards. Every trading plan must cover a period of at least a year,
must be reviewed and approved by the compliance officer of the company and then publicly
disclosed. Trading cannot begin for a period of 6 months after the plan is publicly disclosed.
Trading plans are a defense and do not provide absolute immunity from investigation under
the PIT Regulations.

6. Can communications for due diligence during a merger/acquisition be carved out as an

exception for the UPSI?
The PIT Regulations contain a specific carveout for communication and procurement of
information (conduct of due-diligence) in connection with transactions involving mergers and
acquisitions. Therefore, based on whether or not a transaction entails making an open offer
under Takeover Code, information may be communicated, provided, allowed access to or
procured.
7. What are other requirements under the SEBI PIT Regulations?
(i) Disclosures; (ii) Code of Conduct and Fair Disclosures; (iii) Compliance officer; (iv) Pre-
clearance of trades; (v) Notional trading windows; (vi) Chinese walls.

IV. FOREIGN EXCHANGE CONTROL

Introduction – Foreign Direct Investment

India’s story with respect to exchange control is one of a gradual, deliberate and carefully
monitored advance towards full capital account convertibility. Though significant controls have
been removed and foreign companies can freely acquire Indian companies across most sectors,
these are subject to strict pricing and reporting requirements imposed by the Central Government
and the RBI. Investments in, and acquisitions (complete and partial) of, Indian companies by non-
resident entities and individuals, are governed by the terms of the Foreign Exchange Management
(Non-Debt Instruments) Rules, 2019 (“Non-Debt Instruments Rules”), issued in supersession of
Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India)
Regulations, 2000 (the “FI Regulations”) and the press notes issued by the Department of
Industrial Policy and Promotion, Government of India.

The Ministry of Finance notified Sections 139, 143 and 144 of the Finance Act, 2015 which had
proposed amendments to certain sections of the Foreign Exchange Management Act, 1999
(“FEMA”), being Section 6 (Capital Account Transactions), Section 46 (Power of Central
Government to make rules) and Section 47 (Power of RBI to make regulations) respectively. These
amendments resulted in a shift of power from the RBI to the Central Government and a bifurcation
of instruments into debt instruments and non-debt instruments. The Central Government (in
consultation with the RBI) was entrusted with powers to frame rules on non-debt instruments
while the RBI (in consultation with the Central Government) is entrusted with the power to draft
regulations for debt instruments.

As a result, the Central Government notified the Non-Debt Instruments Rules superseding the
erstwhile FI Regulations, and Foreign Exchange Management (Acquisition and Transfer of
Immovable Property in India) Regulations, 2018. RBI also notified the Foreign Exchange
Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 that
provides for reporting requirements in relation to any investment made under the Non- Debt
Instruments Rules.

The Non-Debt Instrument Rules were also modified as on December 5, 2019 (“Amendment to
Non-Debt Instruments Rules”) to incorporate the provisions of the Press Note 4 of 2019 (detailed
below) announced by the Department for Promotion of Industry and Internal Trade (“DPIIT”).
Other than the changes set forth herein, certain sector specific changes (such as in contract
manufacturing, digital media, e-commerce, single brand retail trading conditions) that were not
included in the Non-Debt Instrument Rules, have now been reflected by the Amendment to the
Non-Debt Instruments Rules.

Relevant Definitions/Key Changes

1. FDI or Foreign Direct Investment: 2(r) means investment through equity instruments by a
person resident outside India in an unlisted Indian company; or in ten per cent or more of the
post issue paid-up equity capital.

2. Foreign Portfolio Investment: 2(t) any investment made by a person resident outside India
through equity instruments where such investment is less than ten per cent of the post issue
paid-up share capital on a fully diluted basis of a listed Indian company or less than ten per
cent of the paid-up value of each series of equity instrument of a listed Indian company;

3. Group Company: 2(w) two or more enterprises which, directly or indirectly, are in a position
to (i) exercise twenty-six per cent, or more of voting rights in other enterprise; or (ii) appoint
more than fifty per cent of members of Board of Directors in the other enterprise;

4. Non-Debt Instruments: 2(ai) “non-debt instruments” means the following instruments;

namely:— (i) all investments in equity instruments in incorporated entities: public, private,
listed and unlisted; (ii) capital participation in LLP; (iii) all instruments of investment recognised
in the FDI policy notified from time to time; (iv) investment in units of Alternative Investment
Funds (AIFs), Real Estate Investment Trust (REITs) and Infrastructure Investment Trusts (InvIts);
(v) investment in units of mutual funds or Exchange-Traded Fund (ETFs) which invest more than
fifty per cent in equity; (vi) junior-most layer (i.e. equity tranche) of securitisation structure;
(vii) acquisition, sale or dealing directly in immovable property; (viii) contribution to trusts; and
(ix) depository receipts issued against equity instruments;

5. Sectoral Cap: 2(am) The definition of ‘Sectoral Cap’ has been amended under the Amendment
to the Non-Debt Instruments Rules to omit “debt” meaning the composite sectoral cap under
the Non-Debt Instruments Rules will now include only (i) foreign investment on a repatriable
basis by persons resident outside India in equity of a company or capital of an LLP; and (ii)
indirect foreign investment.

I. How is the FDI going to be governed/regulated under the NDI Rules?

Schedule I of the Non-Debt Instruments Rules contains the Foreign Direct Investment Scheme
(“FDI Scheme”) and sets out the conditions for FDI in India. Sectors in which FDI is prohibited
include lottery business, gambling and betting including casinos, chit funds, Nidhi company, trading
in transferable development rights and real estate business or construction of farm houses,
manufacturing of cigars or tobacco, sectors not open to private sectors such as atomic energy,
railway operations, foreign technology collaborations such as franchise, trademark, brand name,
management contract is also prohibited for lottery business and gambling and betting activities.

Entry routes and sectoral caps are prescribed for sectors specifically permitted under the FDI
Scheme. In sectors or activities not listed under the FDI Scheme or prohibited, foreign investment
is permitted up to 100% through the automatic route, subject to applicable laws and specified
conditionalities.

II. What are the different routes for investment under the NDI Rules? – (i) Automatic; and
(ii) Government.
Automatic route means the entry route where investment by a person resident outside India does
not require the prior approval of the RBI or the Central Government. Government route, on the
other hand, requires prior government approval and foreign investment received under this route
is subject to conditions stipulated by the government in its approval.

Earlier, the determination of automatic route or approval route was made based on the sector in
which the investee company operates. However, pursuant to Press Note 3 published on April 17,
2020, the Government of India has prescribed mandatory government approval route for all
investments made by any entity of a country that shares land border with India, i.e., Bangladesh,
China, Pakistan, Nepal, Myanmar, Bhutan and Afghanistan. Further, this requirement shall also be
applicable in case where any beneficial owner of an investment into India is situated in or is a
citizen of any such countries. Accordingly, all investments from neighbouring countries, regardless
of the sector in which the investee company operates, would require prior government approval.

III. Who has the onus of compliance with the NDI Rules?

The onus of compliance with sectoral or statutory caps on foreign investment and attendant
conditions, if any, is on the company receiving foreign investment. A foreign investor can acquire
equity shares, compulsorily convertible preference shares, share warrants or convertible
debentures in an Indian company up to the investment (or sectoral) caps for each sector provided
in the FDI Scheme.

IV. Which authority has been designated for taking of approval under the Government
route?

Subsequent to the abolition of the Foreign Investment Promotion Board (“FIPB”), which provided
prior approval as required for certain sectors, the Government of India, vide an Office
Memorandum dated June 5, 2017, has entrusted the work of granting government approval for
foreign investments to the concerned administrative ministries/departments of the Government
and for certain specific situations, to the DIPP, now renamed as DPIIT.

V. What all entities can issue equity to the PROI under the NDI Rules?
(a) Issuance by Indian company: An Indian company may issue equity instruments to a person
resident outside India subject to entry routes, sectoral caps and attendant conditionalities
prescribed in the FDI Scheme.
(b) Issuance by listed Indian company: A person resident outside India may purchase equity
instruments of a listed Indian company on a stock exchange in India, provided that the person
making the investment has already acquired control of such company in accordance with SEBI
(Substantial Acquisition of Shares and Takeover) Regulations, 2011 and continues to hold such
control and the amount of consideration may be paid as per the mode prescribed by RBI or
out of the dividend payable by the Indian investee company; provided further that such
dividend is credited to a specially designated non-interest bearing rupee account for
acquisition of shares on the recognized stock exchange.
(c) Issuance against pre-incorporation expenses: A wholly owned subsidiary set up in India by a
non-resident entity, operating in a sector where 100% foreign investment is allowed under the
automatic route and there are no FDI linked performance conditions, may issue equity
instruments to the said non-resident entity against pre-incorporation or pre-operative
expenses incurred by the non-resident entity up to a limit of 5% of its authorized capital or
USD 500,000 whichever is less.
 (d) Issuances against pre-incorporation expenses: An Indian company may issue, equity
instruments to a person resident outside India, if the Indian investee company is engaged in
an automatic sector, against —
a. swap of equity instruments; or
b. import of capital goods or machinery or equipment (excluding second-hand
machinery); or
c. pre-operative or pre-incorporation expenses (including payments of rent etc.)

In case of swap of equity instruments, valuation involved in the swap arrangement is required to
be made by a merchant banker registered with SEBI or an investment banker outside India
registered with the appropriate authority in the host country.

Foreign Portfolio Investors

Foreign portfolio investors registered with the SEBI as per the SEBI (Foreign Portfolio Investment)
Regulations, 2019 are permitted to invest in equity instruments of an Indian company listed or to
be listed on a recognized stock exchange in India subject to the conditions set forth under Schedule
II of the Non- Debt Instruments Rules. (Page 43 of NDA)

Issue of Shares under merger/amalgamation/demerger

Issue of Shares under merger/ amalgamation / demerger Atransferee company may issue sharesto
the shareholders of a transferor company under a scheme of merger or amalgamation approved
by an Indian court, provided that the sectoral caps mentioned above are not exceeded.

Pricing under the Automatic Route

Acquisition of shares of an Indian company by a person resident outside India under the automatic
route may only be made in accordance with the pricing requirements provided in the Non-Debt
Instruments Rules. The price of shares issued to non-residents cannot be less than:

a. the price worked out in accordance with the SEBI guidelines in case of a listed Indian company
or in case of a company going through a delisting process as per the SEBI (Delisting of Equity
Shares) Regulations, 2021;
b. the fair value of shares determined as per any internationally accepted pricing methodology
for valuation of shares on arm’s length basis duly certified by a chartered accountant or a
merchant banker registered with SEBI, in case or a practicing cost accountant, in case of an
unlisted Indian company.

V. UNDERSTANDING ‘PERSON RESIDENT OUTSIDE INDIA’

As per Rule 3 of Nondebt Instruments Rules save as otherwise provided in the Act or rules or
regulations made thereunder, no Person resident Outside India (‘PROI’) shall make any investment in
India.

1. Who is a PROI?
Section 2 (w), “‘person resident outside India’ (PROI) means a person who is not resident in India”

According to the above definition a person who is not resident in India shall be considered as PROI.
Therefore, it is essential to understand the two terms herein one- ‘person’ and another ‘non-
resident in India i.e. person resident in India’.

2. Who is a ‘Person’ under FEMA?

In accordance with the provisions of FEMA, 1999, as contained in Section 2 (u), ‘person’ includes:
(i) An Individual (ii) A Hindu Undivided Family (HUF), (iii) A Company, (iv) A firm, (v) An Association
of Persons or a Body of Individuals, whether incorporated or note, (vi) Every artificial juridical
person, not falling within any of the preceding sub-clause, and (vii) Any agency, office or branch
owned or controlled by such person.

3. What is a ‘Person Resident in India’?

Section 2(v): 1. A person residing in India for more than 182 days during the course of the
preceding financial year but does not include–

a. person who has gone out of India or who stays outside India, in either case-
(i) For or on taking up employment outside India, or
(ii) For carrying on outside India a business or vocation outside India, or
(iii) For any other purpose, in such circumstances as would indicate his intention to stay
outside India for an uncertain period;
b. A person who has come to or stays in India, in either case, otherwise than:
(i) For or on taking up employment in India, or
(ii) For carrying on in India a business or vocation in India, or
(iii) For any other purpose, in such circumstances as would indicate his intention to stay
in India for an uncertain period.
2. Any person or body corporate registered or incorporated in India.
3. An office, branch or agency in India owned or controlled by a person resident outside India.
4. An office, branch or agency outside India owned or controlled by a person resident in India.

VI. JOINT VENTURE

1. What is a Joint Venture?
A joint venture is the coming together of two or more businesses for a specific purpose, which
may or may not be for a (a) particular duration or (b) particular project.

The purpose of the joint venture may be an (a) entry into a new business, or (b) an entry into
a new market (which requires specific skills, expertise or the investment by each of the joint
venture parties).

2. How can a joint venture be carried out?

a. By way of an agreement: This is the simplest form of JV. Where the scope of the JV is
narrow and they are being established for specific purposes, it does not make sense
 to establish a company or an LLP. - The parties typically enter into an agreement to set
out the rights and obligations of each joint venture party.
b. Pure partnership agreement

c. By way of setting up an entity:

i. Use an existing entity
ii. LLP as per the LLP Act
iii. Company under the Companies Act, 2013

Parties can either set up a new company or use an existing entity, through which the proposed
business will be conducted. The parties typically enter into an agreement to set out the rights
and obligations of each joint venture party and the broad framework for the management of
the company, and such terms are then incorporated in the by-laws of the company for
strengthening the enforceability.

3. What are the contents of a JV Agreement?

(i) Representations and warranties (ii) Ownership structure (iii) Duties of management and
directors (iv) IP Rights (v) Confidentiality (vi) Restrictions on shareholders (vii) Profit-sharing
(viii) Termination clause

4. Who/What Parties can form Joint Ventures?

JVs can be entered into by either foreign or domestic companies.
If foreign, there are two ways of regulation:
a. Automatic route: FDI in these sectors do not require the prior approval of the RBI. The RBI
must be notified by the recipient within 30 days of receipt of the remittances and must
file required documents within 30 days of issue of shares.
b. Government approval route: Prior approval of the government is a must, and the FIPB is
the appropriate authority to be approached.

5. What is a JV in the form of a company?

When a JV company exists, there are various advantages that flow therefrom. It gives legal
identity to the structure that is separate from the JVs, and the members would have limited
liability. Incorporated JVs, and companies in particular, are preferable since these ventures are
usually taken on for a period of 40-50 years. There are three broad possibilities of going about
this:
a. The Joint Venturers come together to form a new company and subscribe to the shares in
a mutually agreed proportion.
b. Transfer of Business by one of the venturers, and then the others subscribe to the shares
of the business on some agreed terms.
c. Collaboration with the Promoters of an existing company by a joint venturer(s). Therefore,
the MOA and AOA would be amended accordingly.

6. How would a Company JV work – Key Considerations?

Here the parties to the JV would create a joint venture company (“JV Co”), under the
Companies Act, 2013 (“Act”) and would hold the shares of such company in an agreed
proportion. This arrangement can also be termed as Equity/Corporate JV. The advantages of
using a corporate vehicle are:
a. It is a universally recognized medium which gives an independent legal identity to the JV;
 b. It puts in place a better management and employee structure;
c. participants have the benefit of limited liability and the flexibility to raise finance; and
d. The company will survive as the same entity despite a change in its ownership. The three
most common ways of creating of joint venture companies may be described as follows:
a. Parties Subscribe to Shares on Agreed Terms
Parties to the JV incorporate a new company and subscribe to the shares of the
company in mutually agreed proportion and terms, and commence a new
business. The benefit of this route is that it allows structural flexibility in terms of
creating an entity which is tailor-made to suit the specifications of both the
parties. The documents of incorporation, i.e. the Memorandum of Association
(the “MoA”) and Articles of Association (the “AoA”) of the JV Co. would be suitably
drafted so as to reflect the rights, intentions and obligations of the parties.

b. Transfer of Business or Technology by one Party and Share Subscription by the

Other
A variation of the above model, would be where parties to the JV incorporate a
new company. One of the parties transfers its business or technology to the newly
incorporated company in lieu of shares issued by the company. The other party
subscribes to the shares of the company for cash consideration.

c. Collaboration with the Promoters of an Existing Company

A proposed JV partner can acquire shares of the existing company either by
subscribing to new shares or acquiring shares of the existing shareholder(s). The
MoA and the AoA of the existing company would be amended accordingly to
incorporate the JVA into it.

7. How would a Partnership JV work – Key Considerations?

A partnership firm created under the Partnership Act, 1932, is in many respects simpler than
a company, and may perhaps be regarded as a halfway house between a corporate joint
venture and a purely contractual arrangement.

A partnership represents a relationship between persons who have agreed to share the profits
of business carried on by all or any of them acting for all. A partnership JV or hybrid models
are unincorporated forms of JV which represent the business relationship between the
parties with a profit motive.

This is reflected in the tax regime, whereby partners are separately assessed even though the
profits are computed as if the partnership were a separate entity. This JV has inherent
disadvantages including unlimited liability, limited capital, no separate identity etc. Whilst
tax and commercial factors may sometimes lead to the use of such unincorporated vehicles,
the majority of business ventures tend to use a corporate vehicle for establishing a JV, the
share capital of which is divided between the parties to the JV. As a result, partnerships are
not normally used for major businesses except by professionals such as solicitors and
accountants or where there are specific tax advantages.

8. How would an LLP JV work – Key Considerations?

In 2008, the Limited Liability Partnership Act, 2008 (“LLP Act”) introduced limited liability
partnerships (“LLPs”) in India. An LLP is a beneficial business vehicle as it provides the benefits
 of limited liability to its partners and allows its members the flexibility of organizing their
internal structure as a partnership based on an agreement. At the same time a LLP has the
basic features of a corporation including separate legal identity.

The LLP Act permits the conversion of a partnership firm, a private company and an unlisted
public company into an LLP, in accordance with specified rules. As a consequence of the
conversion, all assets, interests, rights, privileges, liabilities and obligations of the firm or the
company may be transferred to the resulting LLP and would continue to vest in such LLP.

9. How would an unincorporated JV/Cooperation Agreements/Strategic Alliances Work?

The most basic form of association is to conclude a purely contractual arrangement like a
cooperation agreement or a strategic alliance wherein the parties agree to collaborate as
independent contractors rather than shareholders in a company or partners in a legal
partnership. What qualifies such business relationships as an unincorporated joint venture is
when such business relationship between two or more parties is in furtherance of a common
purpose or action for a profitable venture, proceeds of which are to be shared in an agreed
ratio.

This type of agreement is ideal where the parties intend not to be bound by the formality
and permanence of a corporate vehicle. Such alliances are highly functional constructs that
allow companies to acquire products, technology & working capital to increase production
capacity and improve productivity. Strategic alliances provide companies an opportunity to
establish a de facto geographical presence and aid in accessing new markets, increase market
penetration, sales & market share.

Cooperation agreements / strategic alliances can be employed for the following types of
business activities: (a) Technology transfer agreements (b) Joint product development (c)
Purchasing agreements (d) Distribution agreements (e) Marketing and promotional
collaboration (f) Intellectual advice.

In such a JV the rights, duties and obligations of the parties as between themselves and third
parties and the duration of their legal relationship will be mutually agreed by the parties under
the contract. The contract will be binding on the parties and breach of it will entitle the other
party to seek legal recourse against the defaulter. Even though no corporate vehicle is
involved and the parties to the agreement are not partners in a legal sense, it is possible for
them to be exposed to claims and liabilities because of the activities of their coparticipants on
a contractual or quasi-contractual basis. Therefore, an indemnity should be included in the
agreement under which one party will indemnify the other for any losses that are caused
through the actions of the co-participants.

DOCUMENTS IN A JV
Establishing a JV involves a series of steps and selection of the best partner after proper due diligence
is the most significant of all. Once a partner is identified, a memorandum of understanding (“MoU”)
or a letter of intent (“LoI”) is signed by the parties expressing the intention to enter into definitive
agreements. JV transactions demand efficient, clear and foolproof documentation. Depending upon
the nature of the JV structure, definitive agreements would be drafted.

1. What is a JVA and what all aspects need to be included?

Essentially a JVA/SHA provides for the method of formation of the JV company and sets out the
mutual rights and obligations of parties for the purposes of conducting the JV and the manner in
which the parties will conduct themselves in operating and managing the JV.

A further purpose is to prescribe, as far as possible, for what will happen if difficulties occur. In
the case of non-corporate joint venture structures, the basic objectives of any formal arrangement
between the participants will be substantially similar to that of a shareholders’ agreement. The
arrangement generally reflects, where appropriate, the absence of a separate legal vehicle and
the fact that the joint venture may relate to a project of finite duration.

The JVA/SHA or other agreements related to the JV necessarily requires proficient legal drafting
and should clearly incorporate all the relevant clauses that specify the mutual understanding
arrived at between both parties as to the formation and operations of the JV. The successful
implementation and smooth functioning of the JV depends on the definitive agreements and
hence it is critical to draft it in the best possible manner without any room for ambiguity. A
convoluted and vague documentation can be fatal to the JV and hamper the interest of the
parties.

The following are the most significant clauses that are to be carefully incorporated into the JVA:
a. Object and scope of the joint venture;
b. Equity participation by local and foreign investors and agreement to future issue of capital;
c. Financial arrangements;
d. Composition of the board and management arrangements;
e. Specific obligations;
f. Provisions for distribution of profits;
g. Transferability of shares in different circumstances;
h. Remedying a deadlock;
 i. Termination;
j. Restrictive covenants on the company and the participants;
k. Casting vote provisions;
l. Appointment of CEO/MD;
m. Change of control/exit clauses;
n. Anti-compete clauses;
o. Confidentiality;
p. Indemnity clauses;
q. Assignment;
r. Dispute Resolution;
s. Applicable law
t. Force Majeure etc

2. What is MoA/AoA, in reference to a JV?

The Companies Act, 2013 requires every company to have a MoA and AoA. The MoA and AoA are
the charter documents of the company. The JV agreement is between partners and does not
bind the JV company unless its terms are included in the AoA of the JV company. Therefore it is
necessary to specifically incorporate the terms of the JVA / SHA into the AoA of the JV company.
In India, the AoA and MoA prevail over the JV agreement and the Act prevails over the MoA
and AoA. In the light of principles laid down by the courts in number of cases, and the statutory
provisions contained in sections 7 and 14 of the Act it could be said that anything contained in
any document which is inconsistent with the provisions of the Act or the MoA or AoA of the
company, is ineffective and cannot be enforced.

In order to avoid conflicts arising between the agreement and the AoA, it is usual to include a
provision in the JV agreement to the effect that if the AoA is inconsistent with the provisions of
the JV agreement, then the parties will amend the MoA and AoA accordingly. The main
requirement in the MoA will be to make the main object clause sufficiently wide to cover the
company’s proposed activities.

The Memorandum of Association is in a way a flexible document and can be altered by the
shareholders in accordance with the provisions of the Act. The objects specified in it, as required
by the Act, cannot be overstepped. Any ultra vires activity has serious consequences. A contract
by a company on a matter not included in the Memorandum of Association is, therefore, ultra
vires. Therefore, the parties to the JV should ensure that the current main objects of the company
are vide enough to cover the proposed activity of the JV Company. Articles of Association are
regulations for internal management of the company. They are the rules or bye-laws for the
conduct of Board & Shareholders meetings, issue and transfer of Shares, Powers & duties of
Directors, Managing Director etc. The AoA will contain such of the basic rules of the company as
are not set out in the agreement and will set out the different class rights (if any) of shareholders.

REGULATORY ISSUES
1. Strategizing Shareholding – How will shareholdings be determined in a JV?
Before examining the regulatory and other restrictions applicable to JV Companies, it is
important to understand the effect of shareholding restrictions and thresholds on the control
and management of a company under the Act. While the extent of a JV Partner’s shareholding
 may be subject to regulatory restrictions, the strategic imperatives behind the JV will generally
determine the shareholding of each JV Partner. For instance, a JV Partner contributing only
intellectual property to a JV Company may prefer a smaller shareholding and profit by way of
royalties or fees instead of dividends or a beneficial exit. Similarly, a JV Partner with a larger
stake may prefer to have full control of the Company’s management and operations.

Shareholder rights in relation to any Indian JV Company can be classified into two categories
– statutory rights and contractual rights, which are independent of each other. Statutory rights
are derived purely on the basis of shareholding (and the extent of shareholding) as per the
provisions of the Act, while contractual rights are derived from the terms and conditions of a
shareholders’ agreement, irrespective of the extent of each shareholder’s shareholding in the
JV Company. Contractual rights cannot supersede statutory rights.

From a statutory perspective, it is important to understand that any matter to be decided by the
shareholders of a JV Company may either be (i) ordinary matters – requiring the consent of at
least a simple majority of the shareholders present and voting in any shareholders’ meeting;
or (ii) special matters – requiring the consent of at least 75% of the shareholders present and
voting in any shareholders’ meeting. Any JV Partner holding more than 25% in the JV Company
would be able to exercise a certain amount of control as such a shareholding would endow the
JV Partner with the right to block resolutions on special matters. Even as a minority shareholder
a JV Partner holding 10% or more of the issued and paid up share capital of the JV Company, can
exercise certain statutory rights. Apart from instituting action against the JV Company for
oppression and mismanagement, a 10% shareholder is also entitled to:
(Page 11 of the NDA JV)
a. Rights against variation
b. Derivative rights
c. Other Rights
• General meeting requisition
• Preventing holding of meeting at shorter notice by withholding consent
• Demand a poll in voting
• Notice to move a resolution – can request the JV company

FDI – FOREIGN EXCHANGE CONTROL LAW (PHARMA PERSPECTIVE)

As per Schedule 1 of NDI Rules, 100% FDI is permissible for Pharmaceutical sector in Greenfield and
Brownfield. Entry route for Greenfield is 100% under automatic route, but for Brownfield up-to 74%
FDI is under automatic route and beyond that under government route subject to applicable laws,
regulations, security and other conditionalities.

1. What is ‘Greenfield’?
Means construction of new production and operational facilities from the ground up,
including industrial licenses.

2. What is ‘Brownfield’?
Means an investment into the addition/updation of the existing plants.

Problem revolving around Greenfield v. Brownfield - Though definition of Brownfield and Greenfield
is clear but practical problems are visible, requiring Government to come out with further
clarifications. Let’s consider a case where significant expansion is required in existing JV and Indian
Partners have limited ability to fund the expansion, but Foreign Partners are willing to extend their
contribution. Technically, it would fall in Brownfield, but one can work around the model of SPV for
expansion to avoid government route.

3. What are the common conditions applicable to both – Greenfield and Brownfield?
a. Non-compete clause would be allowed only under exceptional/special circumstances
with government approval.
b. Certificate, in specified format, to be furnished by prospective investor & investee
providing complete list of agreements entered into and attaching the copies thereof.

4. What are the specific conditions applicable to Brownfield only?

a. Government may, at the time of granting approval for Brownfield, incorporate/impose
appropriate conditions for FDI in Brownfield cases.
b. Maintenance of Production and Supply of National List of Essential Medicines (NLEM)
Drugs: Production level of NLEM drugs and their supply to domestic market should be
maintained over the next five years at an absolute quantitative level. Benchmark for this
level would be highest level of yearly production of NLEM drugs in last three financial
years, preceding the induction of Foreign Investment.
c. Maintenance of Research and Development Expenses: In value terms, it should be
maintained for 5 years at an absolute quantitative level. The benchmark for this would be
highest level of R&D expenses incurred in any of last three financial years immediately
preceding the year of Foreign Investment.
d. In case of transfer of technology, complete information along with induction of Foreign
Investment to be provided to Administrative Ministry.
e. Administrative Ministry (s) i.e. Ministry of Health and Family Welfare, Department of
Pharmaceuticals or any other regulatory Agency/Development as notified by Central
Government from time to time, shall monitor the compliance of conditionalities.

5. What are the certain FDI, which would be subject to government approval, irrespective of
the sector?
a. Any entity of a country which shares land border with India, or
b. Beneficial owner who is either situated in that country or is a Citizen of that country which
shares land border with India

6. Is there any prescribed period for the issue of securities?

Equity Instruments to Person Resident Outside India (PROI): should be issued within 60 days
from the date of receipt of consideration, failing which consideration should be remitted back,
to PROI within 15 days from the date of completion of 60 days, through banking channels or
by credit to his NRE/ FCNR (B) account.

7. What are the ‘Pricing guidelines’ to be followed?

a. Listed Company: Price worked out in accordance with SEBI guidelines.
 b. Un-listed Company: As per any Internationally accepted pricing methodology for valuation
on an arm’s length basis duly certified by a Chartered Accountant or a Merchant Banker
registered with SEBI or a practicing Cost Accountant.

Mode of payment for equity instrument and the reporting compliances are governed by Foreign
Exchange Management (Mode of Payment and Reporting of Non-debt Instruments) Regulations 2019,
issued by RBI.

8. What are the reporting requirements for the inflow of FDI, that has to be followed?
a. Form Foreign Currency – Gross Provisional Return (FC-GPR): An Indian company issuing
equity instruments to PROI, under FDI should report such issue in Form FC-GPR, within 30 days
from the date of issue of equity instruments.
b. Annual Return on Foreign Liabilities and Assets (FLA): An Indian Company, which has received
FDI or an LLP which has received Foreign Investment, shall submit form FLA to RBI by 15th July
of each year.
c. Foreign Currency – Transfer of Shares (FC-TRS): To be filed for transfer of equity instruments
in accordance with NDI rules, between:
• PROI holding equity instruments in an Indian company on a repatriable basis and PROI
holding equity instruments on a non-repatriable basis; and
• PROI holding equity instruments in an Indian company on a repatriable basis and PRI.

Onus of reporting is on resident transferor / transferee or PROI holding equity instruments on

a non-repatriable basis. Transfer of Equity Instrument of an Indian Company by/to PROI are
governed by Rule 9 &13 of NDI Rules.

a. Form LLP (I): LLP receiving amount towards capital contribution/acquisition of profit
shares from PROI, should file Form LLP (I), within 30 days from the receipt of
consideration.
b. Form LLP (II): On disinvestment / transfer of capital contribution/profit share between
PRI and PROI (or vice versa) Form LLP(II) should be filed within 60 days from the receipt
of funds. Onus of reporting is on the resident transferor / transferee.

9. LLP v. Company – What do you suggest as an SPV for this JV?

Generally – depends. Why?
- Shorter projects etc. – LLP (Lesser compliance requirements + more flexibility)
- Longer projects etc. – Company (Confidence, capital raising ability etc.)

But in the current case – Company – Why?

Because Schedule VI of the NDI Rules – Clause (a) poses a restriction on the investments in
LLPs, in the sectors where ‘Foreign Investment’ up to 100% under the automatic route is
not permitted.

The clause states: “A person resident outside India (other than a citizen of Pakistan or
Bangladesh) or an entity incorporated outside India (other than an entity incorporated in
Pakistan or Bangladesh), not being a Foreign Portfolio Investor (FPI) or a Foreign Venture
Capital Investor (FVCI), may contribute to the capital of an LLP operating in sectors or
activities where foreign investment up to 100 per cent is permitted under automatic route
and there are no FDI linked performance conditions.”
 On that foundation, since the factual matrix provide that our transaction requires – (a) foreign
investment in the JV; and the sector in which the entity is going to be involved is _____, which
only permits _____ of FDI under the automatic route. Therefore, effectively, foreign
investment would be restricted for our JV under the NDI Rules.

To avoid such complications at a later stage of the transaction, it is advisable to incorporate

the JV as a company, and have FDIs – as per the route and caps prescribed.

Outline to the JV Document

Company Law Provisions

• Formation: JVs are usually established under the Companies Act, 2013 or as Limited Liability
Partnerships under the Limited Liability Partnership Act, 2008.
• Registration Documents: Memorandum of Association (MoA), Articles of Association (AoA),
and verification of the registered office address are, inter alia, the primary registration
documents.
• Directors and Shareholders: Information on directors and shareholders, including PAN, DIN,
and evidence of identification and domicile is required.
• MCA Registration: JVs can be registered through the website of the Ministry of Corporate
Affairs.

Foreign Exchange Management Act (FEMA) Provisions

• Regulation of Foreign Investments: FEMA regulates foreign investments. The Reserve Bank of
India (RBI) and the Securities and Exchange Board of India (SEBI), along with the Department
for Promotion of Industry and Internal Trade (DPIIT) oversee foreign investment in India.
• FDI Policy: The Foreign Direct Investment (FDI) Policy under FEMA outlines the criteria for
JVs involving foreign investment.

Intellectual Property Laws

• Protection under: Laws like the Patents Act, 1970, the Trade Marks Act, 1999, the Copyright
Act, 1957, etc.
• Registration and Agreements: JV agreements should include licensing, know-how, technical
services, royalty payment, and franchise agreements.
• Compulsory Licensing: India’s intellectual property laws allow for compulsory licensing in
specific circumstances.

Regulatory Framework

• FDI Policy for Pharma: Greenfield pharmaceutical projects in India allow 100% FDI via the
automatic route, while brownfield investments permit 100% FDI, with 74% through the
automatic route and the remaining requiring government approval.
• Non-compete Clause: Both greenfield and brownfield investments typically require a non-
compete clause.
• Conditions for Brownfield Investments: Conditions include maintaining production levels of
essential medicines and R&D spending for the next five years.
• 100% FDI for Medical Devices: Full foreign direct investment is allowed for medical device
manufacturing under the automatic route.
Tax Considerations

• Tax Implications: Foreign investors must assess tax implications, considering capital gains tax
and interest payments.
• Double Taxation Treaties: Many countries have double taxation treaties (DTAAs) with India,
offering provisions for capital gains tax and interest withholding tax.

Technology Transfer and Licensing Regulations

• Applicable Laws: Regulations for technology transfer and licensing include the Patents Act,
1970, Copyright Act, 1957, Designs Act, 2000, etc,
• International Conventions: India’s participation in international intellectual property
conventions enhances protection for foreign contributors.
• Legal Responsibilities: Parties must adhere to legal responsibilities when transferring or
licensing intellectual property rights, preventing confusion or deception.

COMPETITION LAW – TO BE APPLIED AS IT IS (FOR MERGER)

Things/Requisitions to be made for the case study/from the client:

Try to understand the three (3) P’s of due diligence: We try to understand – People, policies
and procedures.

1. Constitutional documents of the company

2. Material contracts/SHAs entered into by the companies – at least for the last 5-7 years
3. Details pertaining to pending litigations
4. Organizational, capital and debt structure of the company (if not publicly available)
5. Various licenses/registrations obtained under various labour laws
6. Minutes of the board meetings/general meetings – if any resolution to the effect of
the transaction has been passed
7. Most recent annual reports and if any, valuation reports (to understand the turnover
and assets for the threshold under the competition law)
8. What are the laws and regulations that apply to the business and its industry?
(Environmental regulations – if any)
9. Company’s insurance policies + any impact on the insurance contract because of the
change of ownership
10. List of shareholders and creditors
11. What parts of the business are you interested in or you want to acquire the company
as a whole? – To understand slump sale/asset acquisition
12. Does the person ____________ hold any equity in the business and is his part of the
equity being acquired?

What are the technical experts you would approach?

1. Investment Bankers - The Investment bank’s role in mergers and acquisitions falls into
one of either two buckets: seller representation or buyer representation - One of the main
roles of investment banking in mergers and acquisitions is to establish fair value for the
 companies involved in the transaction. Banks will also source deals by studying the market
themselves and approaching companies with their own strategic ideas. One of the main
roles investment banks play is to introduce new securities to market in order to finance
M&A activity. (JP Morgan etc.)
2. Valuation experts
3. Tax Counsels
4. Title Counsels
5. IP Experts
6. Industrial Experts/Sector Experts