Scheme of Mergers and Amalgamations | Kunal Tandon & Kanika Jain

Summary: Scheme of Mergers and Amalgamations

The speakers explain how companies can structure mergers, acquisitions, demergers and joint ventures, with emphasis on the legal process, transaction design, tax treatment and scheme drafting. Their central point is that the appropriate route depends on the transaction’s objectives, ownership structure, assets and liabilities, and regulatory requirements.

Transaction structures

• Merger: One company is absorbed into another. The absorbed company ceases to exist, and the surviving company takes over its assets and obligations.
• Amalgamation: Two or more companies combine to form a new entity. The speakers describe it as a form of merger.
• Acquisition: A buyer can acquire shares, subscribe for newly issued shares, or purchase particular assets or a business. Unlike a merger, an acquisition can often be completed through contracts without a court-led scheme.
• Demerger: A business division or undertaking is separated from a company, often to improve management or pursue different business opportunities. The speakers say a conventional demerger generally preserves the existing shareholder group in the resulting company.
• Joint venture: Two or more parties establish or use an entity to run a shared business. A shareholders’ agreement typically sets out ownership, governance, decision-making, and each party’s rights and responsibilities. Relevant terms may also be reflected in the company’s articles.

Merger process and key thresholds

For a scheme-based merger under the Companies Act, 2013, the speakers describe this general sequence:

1. Design and draft the scheme. It functions as an agreement between the companies and sets out how the transaction will work.
2. Obtain board and shareholder support. Where feasible, the parties may secure shareholder consent in advance and seek an exemption from holding a formal meeting.
3. Apply to the relevant NCLT. If the companies are registered in different states, applications may be needed before the tribunals with jurisdiction over each company.
4. Address shareholder and creditor meetings. The speakers cite a 75% approval threshold for the relevant shareholder or creditor class. If the required consent has not already been obtained, the tribunal may direct a supervised meeting.
5. File the second motion. The speakers describe filing it generally within seven days of the meeting report or an exemption.
6. Respond to regulatory notices and objections. The Registrar of Companies, Official Liquidator, and tax authorities are among the bodies that may be notified. The tribunal can approve, reject, or modify the scheme.

• Appointed date vs. effective date: The appointed date determines when the transaction’s assets, liabilities, and other effects are treated as transferring. It may be retrospective. The effective date is when the required approvals are in place and the scheme becomes operative. The scheme should explain how the parties will handle the period between the two dates.
• The speakers say there is no fixed statutory rule setting the appointed date, but caution against choosing a date too far in the past. They note that practitioners often prefer a date within roughly two to four years and refer to a seven-year record-retention or tax consideration.

Fast-track route

The speakers describe a simplified process for eligible transactions, including certain small-company mergers and holding-company/subsidiary mergers:

• They cite small-company thresholds of paid-up capital below ₹10 crore or turnover below ₹100 crore.
• The process involves presenting the scheme to the Registrar of Companies and Official Liquidator, obtaining 90% shareholder approval, and applying through the Central Government’s Regional Director.
• Eligibility and thresholds should be checked against the law and rules applicable at the time of the transaction.

Structuring, diligence and regulatory checks

• Acquisition diligence: Conduct legal, financial and, where relevant, technical due diligence before agreeing on valuation and transaction terms.
• Transaction documents: Depending on the structure, these may include a share purchase or transfer agreement, subscription documents, and a shareholders’ agreement.
• Listed-company acquisitions: The speakers highlight additional SEBI and stock-exchange processes. They cite a 25% trigger for an initial acquisition under the takeover framework and a 5% threshold for a further “creeping” acquisition by an existing shareholder.
• Asset or business purchases: A sale of substantial assets or a business may require a special resolution, according to the speakers.
• Competition review: They cite an approximately ₹500 crore threshold for competition-related approval and emphasize the purpose of preventing transactions that could harm competition or consumers. The threshold and applicable tests can change, so the figure is presented as the speakers’ reference rather than a universal current rule.
• Foreign investment: The speakers distinguish the automatic route, which generally involves post-facto reporting, from sectors requiring prior government approval. They also stress that sectoral restrictions, valuation, and reporting requirements need to be checked for the specific transaction.

Scheme-drafting checklist

A well-drafted scheme should clearly specify:

• Company details, transaction rationale, definitions, and pre- and post-transaction shareholding.
• The appointed date, effective date, and treatment of the interim period.
• Assets, liabilities, contracts, employees, tax obligations, and legal proceedings being transferred or retained.
• The share-exchange ratio and supporting valuation or professional certification.
• Accounting treatment and intended tax treatment, including the relevant statutory basis.
• How meetings, approvals, and tribunal applications will be handled.
• Who pays transaction costs and what happens if approvals are not obtained.

The speakers stress that the scheme should make each party’s responsibilities and liabilities clear and should not appear designed to defeat employee, creditor, or statutory claims.

Tax considerations discussed

• A transfer of a capital asset can create a capital-gains tax liability. The speakers describe the general calculation as consideration less cost of acquisition and relevant improvement costs.
• Some reorganizations may qualify for tax-neutral treatment if statutory conditions are met. Examples discussed include qualifying amalgamations and demergers where ownership continuity and other requirements are satisfied.
• Fair market value (FMV) can affect tax treatment. The speakers warn that a transaction below FMV may still be taxed using a notional FMV, while paying above FMV may create a tax issue for the purchaser.
• A slump sale transfers an undertaking for a lump-sum price without assigning separate values to each asset. The speakers describe the undertaking’s net worth as relevant to calculating the gain.
• For cross-border transactions, they recommend reviewing applicable double-taxation treaties and transfer-pricing requirements for transactions between associated enterprises. They also distinguish the broad tax scope for residents from that for non-residents.

Other procedural point

For a company in insolvency proceedings, the speakers distinguish the resolution stage from liquidation. They say that if no resolution plan succeeds and the company enters liquidation, a scheme under section 230 may be used for a proposed takeover or acquisition, subject to the applicable process.

Presenters and source

Kunal Tandon and Kanika Jain, Tandon & Co.; hosted and moderated by Ruchika. Source: LawSikho.