Diversification and globalization are the keys to the future
Cross-border mergers are an increasing phenomenon in light of these
concepts. While the widespread integration of markets on a global scale
intensifies there comes about a need to assess the intricacies of the legal
framework that facilitates and authorize the same.
The Ahmedabad Bench of the National Company Law Tribunal (herein referred to
as the tribunal) on the 19th of December, 2019 passed a very controversial
ruling with regards to the Sun Pharmaceutical Industries Limited’s proposed
scheme of cross border demerger. The ruling inferred that the lack of
clarity in the legal framework implicates the exclusion of cross border
demergers as a permissible arrangement under the law.
Cross Border Mergers are primarily dealt under section 234 of the Companies
Act 2013, Rule 25A of the Companies (Compromise, Arrangements, and
Amalgamations) Rules, 2016 (herein referred to as the Compromises Rules) and
the FEMA Cross Border Merger Regulations (2018) (herein referred to
as the Merger Regulations).
The Facts Of The Sun Pharmaceuticals Case
Sun Pharmaceutical Industries Ltd had filed for a scheme of demerger to
transfer of two of its investment undertaking from Indian entity, Sun Pharma
to overseas wholly-owned subsidiaries. This would result in the
consolidation of the holding structure of these overseas subsidiaries.
The Listed company had obtained approval from the Stock Exchange Board of
India, shareholder and its creditors. It had also attained approval from
other relevant regulatory authorities such as the Income-tax authorities and
the Registrar of Companies and the deemed approval of the RBI.
The Tribunal rejected the scheme on the grounds that outbound
not fall within the ambit of section 234 of the Companies Act 2013. Adopting
a literal interpretation of the impugned provision, the tribunal observed
that the section only stipulated for merger and/or amalgamation’
did not include arrangements (which covers demergers).
The Tribunal also observed that the term arrangement was expressly used in
section 230 to 232 of the act thereby implicating that to permit a demerger
it would require its literal inclusion within the language of section 234.
The tribunal supported this interpretation with that observation that Rule
25A of the Compromises Rules 2016 was silent on demerger and dealt only
with mergers and/ or amalgamations. Moreover, the final and notified draft
of the Merger Regulations, 2018 intentionally excluded the term demerger
despite its presence in the draft regulation. [i]
The tribunal thus emphasized that the specific exclusion of the term
arrangement reflected the legislative intent to exclude cross-border demergers from the permissible arrangements.
Section 234 is relatively brief in comparison to the scheme of section
230-233 of the Act. It states that provisions of the impugned chapter XV
(which deals with Compromises, Arrangements and Amalgamations), unless
otherwise provided shall mutatis mutandis apply to the scheme of mergers and
amalgamation between and Indian Company and a foreign company.[ii]
In the 1956 Act, section 394 permitted for a foreign company to transfer its
undertaking to an Indian company. This was applicable to mergers as well as
demergers. Whereas, Section 234 of the 2013 Act broadens its scope by
permitting inbound as well as outbound mergers but it only refers only to Mergers and Amalgamations
. There express reference to demergers or
arrangement. The literal interpretation of section 234 to exclude cross
border demergers can prove to be problematic as the legislative intent
behind it was to have a progressive perception towards the law in respect to
cross border transactions. [iii]
With regards to the Merger Regulations, 2018 in dealing with the most
crucial definition, Section 2(iii) defines Cross Border Mergers to mean any
merger, amalgamation or arrangement in accordance with the Compromises Rules
and the Companies Act, 2013. It is important to note that the Draft
Regulations expressly included the word Demerger and the same is reasonably
implied within the ambit of the term arrangement in the above definition.[iv]
Nevertheless, there exists a conflict between this provision and Rule 25A
of the Compromises Rules coupled with section 234 of the Act. As seen above,
the latter only provide for Mergers and Amalgamations without any mention
of arrangement. Primacy is given to the Companies Act as it is the
governing legislation with respect to Arrangements, mergers and
Amalgamation. This dichotomy of views creates an ambiguity as to the legal
position on Cross Border Demergers as it is seen to be contemplated in the
Critique Of The Order
Merger and demergers facilitate the inorganic acquisition or transfer of
investment undertakings. A merger encompasses the acquisition of the entire
business by another entity whereas a demerger is the transfer of a specific
business undertaking. [v]
The tribunal in another ruling of Sun Pharma Global FZE passed an order
approving for a scheme of inbound demerger. The tribunal took a broader
interpretation of section 234 stating that the entire chapter would mutatis
mutandis apply to schemes between Indian and Foreign Companies. Moreover,
the Tribunal placed reliance upon regulation 9 of the Foreign Exchange
Management (Transfer or Issue of Security by a Person Resident outside
India) Regulations, 2017 which provides for demerger of Indian companies.[vi]
The ruling on the outbound demerger placed reliance on the deletion of the
expression demerger from the notified version of the Merger Regulations.
This is flawed as it fails to acknowledge that demerger would come within
the ambit of arrangement.
There is an inconsistency in the position of law in both the orders. The
exclusion of demerger from the permissible arrangements with foreign
companies is found to be a rather disputable interpretation of the impugned
To rectify the situation it is important to have in place a comprehensive
legislation that would detect and rectify any and all inconsistencies with
the laws governing cross border mergers. Moreover, there must be a removal
of exit barriers. Exit and demerging of companies is a consequence that
should be considered by the legislative scheme of the act. This will not
only provide legislative clarity but will also improve the ease of doing
business in India.
The narrow interpretation of the tribunal may act as a hindrance to the
progressive intent behind the laws governing cross border mergers. There is
a need for clarity in the position of the law with regard to these
intricacies so as to ensure the fulfillment of their objective. Till such
time the company may appeal against the order so as to get a favourable
ruling or resort to alternative modes of restructuring.
- Sun Pharmaceutical Industries Ltd. No.38/NCLT/AHM/2019
- PWC,Mergers and acquisitions: The evolving Indian landscape,
- Dr. Jamshed J. Irani, Expert Committee Report on Company Law (May
- Cross Border Merger Draft Regulations, 2017. Regulation 2(iv),
Cross border merger means any merger,
demerger, amalgamation or arrangement between Indian companies and
foreign companies in accordance with the Co. Rules.
- M. Nirmala, Corporate Restructuring And Companies Act 2013- An
Impact Analysis, 1 IJMSRR 26,
( November 2014), http://ijmsrr.com/downloads/30112014IJMSRR%204.pdf.
- Sachin Dave, Divya Rajgopal, NCLT rejects Sun Pharma’s plan to
demerge overseas subsidiary, (Jan 02, 2020) https://economictimes.indiatimes.com/markets/stocks/news/nclt-rejects-sun-pharmas-plan-to-demerge-overseas-subsidiary/articleshow/73063727.cms