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Legal Aspects For Merger and Acquisition

The document outlines the legal framework governing mergers and takeovers in India, primarily through the Competition Act, Companies Act, SEBI regulations, Income Tax Act, and FEMA. Key provisions include the regulation of combinations to prevent adverse competition effects, procedural requirements for mergers, disclosure obligations for share acquisitions, tax implications, and conditions for cross-border transactions. Companies must adhere to these laws to ensure compliance in M&A activities.

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VATSAL CHANGOIWALA
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28 views2 pages

Legal Aspects For Merger and Acquisition

The document outlines the legal framework governing mergers and takeovers in India, primarily through the Competition Act, Companies Act, SEBI regulations, Income Tax Act, and FEMA. Key provisions include the regulation of combinations to prevent adverse competition effects, procedural requirements for mergers, disclosure obligations for share acquisitions, tax implications, and conditions for cross-border transactions. Companies must adhere to these laws to ensure compliance in M&A activities.

Uploaded by

VATSAL CHANGOIWALA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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For mergers and takeovers in India, the primary legal provisions are governed by the following

acts and regulations:


1. Competition Act, 2002 (as amended in 2023):
●​ Regulation of Combinations: This act regulates "combinations," which include mergers,
acquisitions, and amalgamations, to prevent adverse effects on competition in the Indian
market.
●​ Notification Thresholds: Any M&A deal exceeding specific thresholds based on assets
or turnover (in India and worldwide) must be notified to the Competition Commission of
India (CCI) for prior approval.
○​ The recent amendment introduced a deal value threshold of INR 20 billion, which
also necessitates CCI scrutiny if the entity being acquired has substantial business
operations in India.
●​ CCI Review Process: The CCI assesses whether the combination could lead to an
"appreciable adverse effect on competition (AAEC)." It can approve, approve with
modifications, or reject the combination. A "deemed approval" is possible if the CCI
doesn't complete its review within a specified timeframe.
●​ Exemptions: Certain transactions, such as intra-group mergers or acquisitions of small
target companies below defined financial thresholds, may be exempt from notification.
2. Companies Act, 2013:
●​ Procedural Framework: Sections 230 to 240 outline the procedures for mergers and
amalgamations of Indian companies.
●​ Board Approval: The boards of directors of the companies involved must approve the
scheme of merger.
●​ Shareholder Approval: A majority of shareholders (often a special majority of 75%) of
each company must approve the scheme.
●​ Creditor Approval: In some cases, approval from creditors might be required.
●​ National Company Law Tribunal (NCLT) Approval: The merger scheme needs to be
presented to and sanctioned by the NCLT.
●​ Valuation and Minority Rights: The Act includes provisions for the valuation of shares
and the protection of minority shareholders, who may have the right to have their shares
valued and purchased if they object to the merger.
●​ Cross-Border Mergers: Section 234 allows for mergers between Indian companies and
companies incorporated in permitted foreign jurisdictions, subject to the approval of the
Reserve Bank of India (RBI).
3. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (Takeover
Code):
●​ Applicability: These regulations apply to the acquisition of shares, voting rights, or
control in listed companies in India.
●​ Disclosure Requirements: Any acquisition of 5% or more of the shares or voting rights
in a listed company triggers disclosure obligations to the stock exchanges and the target
company. Further changes of 2% or more also require disclosure.
●​ Mandatory Open Offer: An acquirer who gains "control" of a listed company or acquires
25% or more of its voting rights must make an open offer to the remaining public
shareholders to buy a certain percentage of their shares at a specified price.
●​ Creeping Acquisition: Regulations also govern gradual increases in shareholding
beyond certain limits.
●​ Protection of Minority Shareholders: The Takeover Code aims to ensure fair treatment
and provide an exit opportunity for public shareholders during substantial acquisitions or
changes in control.
4. Income Tax Act, 1961:
●​ Tax Implications: This act governs the tax consequences of mergers and takeovers for
the companies and their shareholders.
●​ Definition of Amalgamation: Section 2(1B) defines "amalgamation" for tax purposes.
●​ Tax Neutrality: Section 47 outlines conditions under which certain transfers of assets and
shares during an amalgamation can be exempt from capital gains tax, particularly when
the resulting company is an Indian entity.
●​ Carry Forward of Losses: Section 72A allows the amalgamated company to carry
forward and set off the accumulated losses and unabsorbed depreciation of the
amalgamating company under specific conditions.
●​ Capital Gains Tax on Shareholders: Shareholders exchanging shares during a merger
may be subject to capital gains tax on any profit, unless the transaction meets the
conditions for exemption under Section 47.
5. Foreign Exchange Management Act, 1999 (FEMA) and related regulations:
●​ Cross-Border Transactions: FEMA and its regulations govern mergers and takeovers
involving foreign entities or cross-border elements.
●​ RBI Approval: Cross-border mergers often require the prior approval of the Reserve
Bank of India (RBI).
●​ FEMA Cross Border Merger Regulations, 2018: These regulations specifically address
mergers and amalgamations between Indian and foreign companies.
●​ Inbound and Outbound Mergers: FEMA regulations lay down specific conditions for the
issue or transfer of securities, holding of assets, and repatriation of funds in both inbound
(foreign company merging with an Indian company) and outbound (Indian company
merging with a foreign company) mergers.
●​ Valuation: The valuation of the Indian and foreign companies involved in a cross-border
merger must be conducted according to the prescribed rules.
These legal provisions collectively establish the framework for mergers and takeovers in India,
addressing competition concerns, corporate procedures, shareholder rights, tax implications,
and foreign exchange considerations. Companies involved in M&A activities in India must
comply with all the applicable laws and regulations.

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