In the literature, the term Mergers & Acquisitions (M&A) is defined in distinct
ways. There is no universally agreed-upon definition; rather, it is a communal
phrase. Takeovers and related issues of corporate restructuring, corporate
control, and changes in the ownership structure of organizations have been added
to the conventional subject of mergers and acquisitions. As a result, M&A in its
broadest definition refers to any transaction that results in a change in
The interdependence of the companies involved is a significant defining feature
of M&A. The total fusing of two or more legally and economically independent
entities into one company is referred to as a merger. At least one of the
companies loses its independence and is subordinated to the other company. In an
acquisition, however, the legal independence remains, where the target's
economic independence is limited or completely lost.
Cross-border M&A means M&A transaction between two or more companies of
different countries it is also called overseas merger and acquisition. In a
Cross-border merger, the assets and operations of two or more firms belonging to
two or more different countries are combined to establish a new legal entity. In
a Cross-border acquisition, the control of assets and operations is transferred
from local to a foreign company, the former becoming an affiliate of the latter.
Cross-border M&A supported by technological advancements, low-cost financing
arrangements and robust conditions, which have made deal- makers confident and
think more creatively about their growth strategies. It will be used as a whole
to mean the transactions where operating enterprises merge with or acquire
control of the whole or a part of the business of other enterprises, with
parties of different national origins or home countries.3 According to the flow
of transactions, Cross-border M&A could be Inbound (Foreign businesses investing
in India) or Outbound (Indian business making investment abroad.
considerations are common to Cross- border M&A such as:
- The impact of governmental regulations at all levels such as licensing, employment law, taxation, and subject matter regulation.
- The potential difficulty of complying with the laws of both countries at all stages.
- The obstacles to integration posed by different cultures and languages.
- National security concerns and attendant restrictions.
- Barriers to due diligence in differing legal and cultural environments.
- Restriction of markets or the conduct of certain types of business in some countries.
- Coordination of intellectual property rights.
In short Cross-border M&A is more difficult than domestic M&A, lot of thinks
about due diligence process, a qualified, experienced due diligence team can
help ensure that you have thoroughly considered all relevant factors, understand
the legal requirements associated with your proposed transaction.
The Indian legal system regulates and governs various aspects of a Cross border
M&A transaction by a set of laws, most importantly the Companies Act, 2013; the
Foreign Investment Policy of the government of India along with press notes and
clarificatory circulars issued by the Department of Investment Policy and
Promotion; Foreign Exchange Management Act, 1999 (FEMA) and regulations made
thereunder, including circulars and notifications issued by the RBI from time to
time (FEMA laws); the Securities and Exchange Board of India Act, 1992 and
regulations made thereunder (SEBI laws); the Income Tax Act, 1961 and the
Competition Act, 2002 etc.
REFORMS RECOMMENDED BY THE "IRANI REPORT"
The Irani Report has observed that the process of mergers and acquisitions in
India is a court driven, long and drawn-out process that is problematic. A
listed company undertaking a restructuring must undergo a tiered procedure that
involves dealing with the stock exchange, the high court, the company's
shareholders and creditors, the registrar of companies, and the regional
This entire process can take anywhere from six to eight months and
has, in some cases, taken more than a year. The Companies Act of 2013 contains
provisions of Mergers and Acquisitions and also provided compromises,
arrangements and restructurings. Other provisions of the Companies Act, however,
are also implicated in each case of a merger or acquisition; thus, the procedure
remains far from simple.
in this context, the Irani Report made the following key recommendations
pertaining to mergers and acquisitions:
- A single forum for approving schemes of mergers should be established in which,
over a period of one or two days, all the interested stakeholders (including
regulators) could meet and decide on the transaction.
- Valuation should be carried out by independent registered evaluators, rather
than by court appointed ones.
- A uniform nationwide, reasonably priced stamp-duty regime should replace the
prevailing system of each state having its own separate and differing stamp
- The law should provide an exit opportunity for the public shareholders in the
case of the merger of a listed company into an unlisted company, and vice versa,
or in the case when substantial assets are moved out of a listed company in a
de-merger. In other words, a delisting mechanism should be available when either
(A) the restructuring results in the public shareholding falling below 10% or
(B) 90% of the public shareholders opt for the exit route.
- Only shareholders and creditors having a significant stake, at a level to be
prescribed by law, should have the right to object to any scheme of merger.
Indian law still does not allow for an Indian company to merge into a foreign
company. Cross-border mergers and acquisitions should be recognized, and Indian
shareholders should be permitted to receive foreign securities or securities in
lieu of Indian shares (especially in listed companies), so that they become
members of the foreign company or holders of a security with a trading right in
A company should be allowed to be dissolved without winding up with court
intervention. International practices and a coordinated approach should be
adopted in amending the provisions regarding merger in the Companies Act.
Because the shareholders need to have complete information in the case of a
scheme of merger or an acquisition, especially in the case of seller-initiated
mergers, the Companies Act and rules thereunder should set out the disclosure
requirements to be included in the explanatory statements sent to the
shareholders in connection with the scheme filed with the court or other
In the case of companies required to appoint independent directors, the
Companies Act should mandate that a committee of independent directors serve as
a monitoring body to ensure the adequacy of disclosures.
A separate electronic registry should be established for filing schemes under
Sections 391-394 of the Companies Act. Filing with such an electronic registry
would replace filing with local registration offices where the properties of the
company are located.
MODE OF ACQUISITION
An acquisition may take the form of a stock acquisition, an asset acquisition,
or the acquisition of control. Generally, an acquisition involves the
acquisition of the business of a company. It is for the acquirer to identify
whether such acquisition should be an acquisition of stock or of assets.
determination is generally based on the status of the target company vis-�-vis
its liabilities. In an asset acquisition, the acquirer chooses to acquire all
assets of the target company without any liabilities; in a share acquisition, on
the other hand, the acquirer acquires the ownership of the target company and
has the benefit of its assets as well as the burden of its liabilities.
cases, it is the acquirer's due-diligence review of the target company that
enables the acquirer to decide whether to acquire assets or shares. There are
also instances of acquiring the business of a company as a going concern,
whereby the assets, liabilities, and employees are acquired for a lump-sum
CROSS-BORDER MERGERS AND ACQUISITIONS IN INDIA: THE LEGAL FRAMEWORK
In India, a plethora of laws affect and regulate cross-border mergers and
acquisitions. Chief among them are:
- the Companies Act, 2013;
- SEBI (Security and Exchange Board of India) Substantial Acquisition of
Shares & Takeovers Regulations 2011 and the Amendment Act, 2017;
- Competition Act, 2002;
- Insolvency and Bankruptcy Code, 2016;
- Income Tax Act, 1961;
- Transfer of Property Act, 1882;
- Indian Stamp Act, 1899;
- Foreign Exchange Management Act, 1999 (FEMA)
other allied laws as may be applicable based on the merger structure.
The provisions relating to "mergers" and "acquisitions" are covered under
Sections 234 to 240 of the Companies Act, 2013. Section 234 contains provisions
for the cross-border mergers of Indian and foreign companies. Further, Companies
(Compromises, Arrangements, and Amalgamation) Rules, 2016, 106 as amended by the
Companies (Compromises, Arrangements, and Amalgamation) Amendment Rules, 2017
(Co. Rules), were issued.
It is worth taking note that after the incorporation of the 2017 Rules a foreign
company is allowed to merge with a company registered under the Companies Act,
2013, or vice-versa, only with the prior approval of the Reserve Bank of India
(RBI). The RBI issued draft regulations relating to cross-border mergers for
comments from the public 108 and then issued the Foreign Exchange Management
(Cross-Border Merger) Regulations, 2018, which was to be effective from the date
of notification in the official gazette.
SEBI regulates M&A transactions concerning the entities listed on the recognized
stock exchanges of India, and, in addition to the Companies Act, 2013, the
listed public companies must comply with the applicable SEBI rules and listing
The SEBI Regulations 2011 regulate both the direct and the indirect acquisition
of shares, voting rights, and control in the listed companies that are traded on
the stock market. Under the SEBI Takeover Code, if the acquisition of shares of
a listed company exceeds 25 per cent by an acquirer, that would trigger the open
offer threshold for the public shareholders.7 Prior approval of the appropriate
stock exchanges and SEBI is required for all cases of mergers or demergers
involving a listed company before approaching the National Company Law Tribunal.
Concerning the competition regulations, the prior approval of the Competition
Commission of India (CCI) is required for all acquisitions exceeding the
permissible financial thresholds and which are not within a common group. CCI
evaluates an acquisition as to whether the said acquisition would lead to a
dominant market position, or not, mainly to avoid unfair and anti-competitive
practices in the concerned sector.
Under stamp duty regulations, there is a provision for stamp duty on any issue
or transfer of shares at a nominal rate of 0.25 per cent. However, no stamp duty
will be leviable in case of any transfer or issue in a dematerialized form.
Further, the conveyance of business under a valid business transfer agreement in
case of a slump sale is subject to stamp duty at the same rate levied on the
conveyance of assets.
A scheme of merger or demerger attracts stamp duty at a concessional rate in
comparison to the conveyance of assets. However, the exact rates leviable depend
upon the specific heads or entries under respective state laws for stamp duty.
All transfers, issues, sale, or purchase of equity shares involving residents
and non- residents are allowed under RBI pricing guidelines and permissible
However, mergers or demergers involving any issuance of shares to non-resident
shareholders of the transferor company are not subject to prior RBI/government
approval. Issuances of any other instrument than equity shares/compulsorily
convertible preference shares/compulsorily convertible debentures to the non-
resident in the form of debt are subject to prior RBI approval.
CONCLUDING REMARKS AND SUGGESTIONS
India being a country with a vast number of laws, it is necessary for a foreign
acquirer to have the comfort of knowing to what extent the target company has
been in compliance with those laws; moreover, the acquirer will want full
disclosure of those matters as to which there has not been compliance. As for
the issue of the post-closing survival of representations and warranties, it is
typical for the parties to agree to a survival period of between three and four
As for the issue of indemnity, the concepts of de minimis liability for which
there is no recourse and of an overall cap on potential liability, as well as
requiring a minimum threshold or basket amount before the seller can be held
liable, are concepts that will likely be put forward by the seller to reduce its
exposure to a certain extent. In the negotiation of such liability limits, it is
essential for the acquirer (who, of course, will seek a blanket indemnity
without any limits or caps) to keep in mind the local laws of the relevant
country and the type and value of the claims that may arise.
Conditions precedent to closing are essential in addressing and ensuring that
all approvals and consents have been obtained to allow the transaction to be
consummated. Moreover, conditions precedent to closing that involve curing any
problems that were discovered during the due-diligence review help ensure that
the acquirer will not also acquire those problems at closing.
An acquisition can also be limited to the acquisition of a majority or minority
stake in the target business. In a transaction involving the acquisition of a
minority stake, the acquirer would seek certain rights in relation to the
management of the company. Such rights would be in the nature of having
representation on the board and having veto rights regarding certain matters
relating to the operations of the company.
Other rights that would be of concern to an acquirer of a minority stake include
a guaranteed return on investment, having a preference upon liquidation and the
distribution of dividends, anti- ratchet and anti-dilution provisions, exit
options, and non-compete and non-solicitation covenants. Also sometimes sought
are restrictions on transfers of shares, such restriction staking the form of a
right of first refusal, a right of first offer, tag-along rights, drag-along
rights, and put or call options, for example.
It should be noted that all corporate matters and rights extended to the parties
to a transaction need to be adequately reflected in the articles of association
(i.e., the bylaws of an Indian company), so as to be enforceable against the
However, since an Indian public company cannot restrict the transfer of its
shares, shareholders, in addition to a shareholders' agreement, also enter into
a non-disposal agreement, in which they agree to transfer their shares only in
the manner provided therein. An important element of merger and acquisitions
involving a foreign company and an Indian company is the status of the Indian
company, that is, whether it is a private limited company or a public limited
A private limited company is more able to provide for restrictions, and the
investment involving such a company can be structured in a more suitable manner
since a private limited company is not restricted to having only two classes of
shares (i.e., equity and preference), as is the case for a public company.
There have been cases in which an acquirer has identified a target company that
is a public company, but, for the purpose of the acquisition, has structured the
transaction so as to convert the target company into a private limited company
before proceeding with the acquisition. In short, mergers and acquisitions come
in various forms, and investors need to understand what best suits their needs.