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Regulatory Interventions in Merger & Acquisition - including CCI, RBI and SEBI

Given India's significance as a market for multinational corporations, M&A transactions are likely to increase in the coming years. In addition, at a time when businesses are looking to diversify and de-risk their supply chains, India is an appealing place to set up manufacturing operations and grow inorganically.

Several legislative, regulatory, and bureaucratic changes have been implemented in the last few years in order to make doing business in the country easier. As India positions itself to attract more foreign investment and boost domestic growth, this process can accelerate.

Successfully closing an M&A deal in the United Kingdom, as in other jurisdictions, necessitates experience and comprehension of regulatory criteria, as well as the ability to manage the processes efficiently. Depending on the form, structure, and method of the transaction, as well as the size and market share of the companies involved, regulatory requirements can differ.
Mergers and acquisitions in India are governed by a variety of important laws. Corporations are governed by laws.

The Indian Companies Act of 2013 (Companies Act) is the primary piece of Indian legislation that regulates the formation and management of businesses in India. It also contains mergers and acquisitions rules (sections 230 to 240) and regulations. Although the Companies Act does not define "merger" specifically, it does define it broadly as:
"the transfer of all or any part of an undertaking, properties and/or liabilities of one or more companies to another existing or new company, or the division of all or any part of an undertaking, property or liabilities of one or more companies to another existing or new company."

If a company is private or public, and whether it is listed on a stock exchange, the Companies Act applies differently.

It is backed by international capital and is subject to the oversight of each individual regulator.

These variables would have an effect on the mechanism and manner in which an M&A transaction is carried out.

Several authorities, including the Registrar of Companies (ROC), Regional Director (RD), Official Liquidator (OL), and National Company Law Tribunal (NCLT), may play a role in an M&A transaction, depending on the type of organisation and industry. Any merger would require final approval from the NCLT.

Companies who want to merge must file a petition with the NCLT (along with a detailed merger scheme) in order for the proposed merger scheme to be accepted. Before the NCLT will consider a merger, the shareholders and creditors of the companies that make up 75 percent of the equity of the creditors or representatives must vote in favour of it at meetings held in the NCLT's prescribed manner.

If the companies have affidavits of creditors with a combined value of at least 90% confirming their approval of the proposed merger scheme, the NCLT which waive the requirement of holding creditors meetings. Although there is no explicit provision for the NCLT to waive the requirement of a member meeting, if 90% or more members consent to the proposed merger by affidavit, the NCLT which waive the meeting requirement at its discretion. Only shareholders with at least 10% of the company's stock or creditors with unpaid debt equalling at least 5% of total outstanding debt as of the most recent audited financial statement will object to the merger.

The ROC, the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the OL, the respective stock exchanges, the Competition Commission of India (CCI), and other government authorities or sectoral regulators are also told of the meetings in order to receive any concerns or representations regarding the proposed merger. If no announcement is made by the regulator, it is assumed that the regulator has nothing to say about the proposals. SEBI regulations must be observed if one or more of the parties to a proposed merger are publicly listed companies.

Within 30 days of obtaining the certified copy of the NCLT's order, the scheme of merger must be submitted with the ROC for registration. The merger process could take anywhere from a few months to a few years, depending on the size of the deal, stakeholder objections, the industry in which the companies operate, and other factors.

The Companies Act provides a fast-track merger process to allow mergers between small businesses or between a holding company and its wholly owned subsidiary to take place without the NCLT's involvement. In such cases, the merger scheme is deemed agreed if no objections are filed with the RD, ROC, or OL, and it is approved by a majority of the companies' shareholders and creditors, accounting for 90% of their total number of shares and 90% of the value of their creditors.

The Companies Act also allows for cross-border mergers (i.e., a merger between a foreign company and an Indian company or vice versa).

The word "acquisition" is used in M&A transactions in addition to business mergers. According to market practise, an acquisition is normally made by exchanging existing shares or subscribing to new shares of a business.

Mergers and acquisitions affecting publicly listed companies are governed by laws in India

Additional regulatory compliances are expected in the case of a merger or acquisition of shares in a listed company under the Securities and Exchange Board of India Act 1992 (SEBI Act) and the rules and regulations framed thereunder. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (Takeover Regulations); SEBI (Issuance of Capital and Disclosure Requirements) Regulations 2018 (ICDR Regulations); SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (Listing Obligations and Disclosure Requirements) Regulations 2015 (Listing Obligations and Disclosure Requirements) Regulations 2015 (Listing Obligations and Disclosure Requirements) (LODR Regulations).

The Takeover Regulations apply to all direct and indirect acquisitions of shares, voting rights, or influence in a listed company in India, with the exception of companies listed on a stock exchange's institutional trading platform without having a public offering.

Both direct and indirect acquisitions of shares, voting rights, or power in an Indian publicly traded company are covered by the Takeover Regulations. An open offer for purchasing securities must be for at least 26% of the total shares in the target company.

Certain types of acquisitions, such as inter se transfers of shares among immediate relatives, promoters, and so on, are exempt from the requirement of making an open offer to shareholders under the Takeover Regulations. The cumulative shareholding after the open offer does not exceed the maximum permissible non-public shareholding (i.e., 75 per cent)

Any fee charged or agreed to be paid to the promoters for their services should be factored into the share price.

Regulations governing competition law

The Competition Act prohibits combinations that cause or are likely to cause an appreciable adverse effect on competition (AAEC) within the relevant market in India. Any such Combination would be meaningless and unusable. The CCI must approve a Combination that is subject to a notification clause before it can be completed. Until March 26, 2022, the de minimis exemption is in effect. The de minimis exemptions are excluded from the pre-notification clause under the Competition Act.

The Competition Act exempts the de minimis exemptions from the pre-notification provision. Small aim exemptions are exempted under the Act for transactions that are unlikely to harm market competition. The asset or turnover requirement for mandatory pre-Notification is set in terms of assets or turnover in India and abroad. A small target exemption will not be available until 2022, and a de minimis exemption will not be available until 2023, according to the act.

According to the Act, the maximum amount of assets that can be included in a Combination in India is 3.5 billion Indian rupees in value or less than 10 billion Indian rupees in turnover. A 'gang' is described as two or more companies that have the power to exercise 26 percent or more of the voting rights in the other company, either directly or indirectly.

Until March 3, 2021, the Indian government has exempted classes with less than 50% voting rights in other companies from the laws regulating combinations. In most mergers and acquisitions, the acquirer is responsible for notifying the CCI, although in some cases, both parties are jointly responsible for filing the notice.

A notice to the CCI outlining the details of the proposed Combination must be given within 30 days of the execution of any agreement or other document for acquisition or acquiring control. The Indian government has issued a waiver from the country's stringent reporting requirements. Extraterritorial implementation of the Competition Act means that the CCI's jurisdiction applies to transactions that take place outside of India.

Combinations involving properties or turnover in India will be scrutinised even if the purchasers, sellers, or target organisations are located outside of India. Deals involving foreign exchange in India, like cross-border M&As, are governed by the Foreign Exchange Management Act 1999 (FEMA), which is regulated by India's central bank (the RBI).

The Foreign Exchange Management (Non-debt Instruments) Regulations 2019 (NDI Regulations), Foreign Exchange Management (Debt Instruments) Regulations 2019 (DI Regulations), and Foreign Exchange Management (Cross-Border Merger) Regulations 2018 are the major regulations (Cross-Border Merger Regulations).

Furthermore, the Indian government, through the Ministry of Commerce and Industry's Department for Promotion of Industry and Internal Trade, issues policy guidelines on foreign direct investment in India from time to time (FDI Guidelines). The FDI Guidelines and the regulations stated above regulate the manner in which foreign investment can flow into and out of India, the instruments that can be used, the sectoral caps for foreign investments, and the entry conditions associated with them Norms for minimum capitalization, lock-in periods, and local sourcing, for example, are examples of such conditions.

According to the FDI Guidelines, acquiring an Indian company can be achieved either via the "automatic path" or the "approval route." The acquirer, non-resident investor, or Indian company does not need the government of India's approval for the acquisition or investment under the automatic path. The approval road' necessitates prior approval from the Indian government. The extent of the acquisition of shares and control of the Indian goal or investee company, as well as the need to follow the approval path, are largely determined by the Indian company's business activities. It also depends on the source country of the investment flowing into India in a few cases.

Regulations pertaining to cross-border mergers

The RBI has released the Cross-Border Merger Regulations, which provide the operational basis for the enabling provisions under the Companies Act regarding cross-border mergers. A cross-border merger is a combination, amalgamation, or agreement between an Indian and a foreign company. Inbound or outbound cross-border mergers are possible. An inbound merger is a cross-border merger that results in a corporation that is based in India. A cross-border merger in which the resulting entity is a foreign company is known as an outbound merger. An Indian or foreign company that takes over the assets and liabilities of the companies concerned is referred to as a resultant company.

In the case of an inbound merger, the following are the steps to take:

  • Following the NDI Rules' pricing guidelines, entry routes, and sectoral caps, the resulting Indian company is allowed to issue or pass any protection to a non-resident outside India.
     
  • After a merger, a foreign company's office outside India is considered to be a branch of the resulting Indian entity, and the resulting Indian entity is free to transact in any way.
     
  • Any borrowings by the foreign company from overseas sources that become borrowings of the resultant Indian entity or are entered into the resultant Indian company's books as a result of the merger must comply with the RBI's guidelines for external commercial borrowing within two years, provided that no remittance for repayment of such liability is made from India.
A foreign company may merge with an Indian company if it is incorporated in one of the notified foreign jurisdictions. The informed foreign jurisdiction includes countries whose stock market regulator is a signatory to the International Organization of Securities Commissions' Multilateral Memorandum of Understanding or a signatory to the bilateral memorandum of understanding with SEBI. whose central bank is a member of the Bank for International Settlements; and that are not listed in the Financial Action Task Force's (FATF) public statement as a jurisdiction with strategic anti-money laundering or counter-terrorist financing deficiencies to which countermeasures apply, or as a jurisdiction that has not made sufficient progress in addressing the deficiencies, or as a jurisdiction that has not made sufficient progress in addressing the deficiencies, or as a jurisdiction that has not made sufficient progress in addressing the deficiencies, or as Any transaction involving a cross-border merger that is carried out in accordance with the above-mentioned regulations is deemed to have been authorised by the RBI.

The involvement of a court or tribunal

In India, the merger process, including cross-border mergers, is governed by the courts, and must be approved by the NCLT. An agreement between the parties could start the process, but that would not be enough to give the transaction legal validity.

When supervising mergers, the NCLT considers a number of factors, including:

  • Deciding the class of creditors or members who must attend meetings to discuss the proposed merger; Determining the values of the creditors or members who must attend meetings.
  • Determining the quorum, process, and voting method to be used at shareholder and creditor meetings; and
  • Sending notifications to the central government, the ROC, the IRS, the RBI, SEBI, the CCI, and stock exchanges, as necessary.

The NCLT also has the authority to guide provisions relating to dissenting parties and employee treatment to the transaction.

When the NCLT approves the merger arrangement, it becomes legally binding on all creditors, shareholders, and companies participating in the merger.

Acquisition of distressed properties through the insolvency phase of a corporation

The IBC's main goal is to establish a unified legal structure for corporate reorganisation and insolvency resolution. Although the IBC does not specifically address mergers and acquisitions, the insolvency process provides an incentive for potential acquirers to acquire assets from troubled firms at a lower price than under normal circumstances.

Under the IBC, the procedure of acquiring a corporation (corporate debtor) starts with the prospective acquirer (resolution applicant) submitting a resolution plan to the resolution professional proposing the purchase, accompanied by acceptance of the resolution plan by the corporate debtor's committee of creditors, and finally authorization of the resolution plan by the NCLT.

Other regulatory considerations

Regulations that apply to particular industries

There are several industry-specific rules and regulators in place to oversee acquisitions in these industries. As a result, additional approvals from certain regulators may be needed before an M&A transaction can be completed. Approval from the Insurance Regulatory and Development Authority of India, for example, is needed in the case of an insurance business acquisition. Acquisitions of banking companies and non-banking financial companies need RBI approval (NBFCs).

Insurance firms are subject to sector-specific regulations that are triggered based on the acquirer's shareholding percentage that include provisions such as lock-in periods, capital infusions at regular intervals, and so on.

Similarly, the Reserve Bank of India's Master Direction Amalgamation of Private Sector Banks, Directions 2016 provides guidelines for merging two banking companies, merging an NBFC with a banking company, and merging a banking company with an NBFC.
Employment-related regulations

When the ownership or management of an undertaking is transferred to a new employer, a qualified employee is entitled to notice and retrenchment compensation from the employer of such undertaking, according to section 25FF of the Industrial Disputes Act 1947.

However, such reimbursement is not available if the employee's service is terminated: has not been disrupted by such transition; the current terms and conditions of service available to the employee following such transfer are not less favourable to the employee; and the new employer is legally obligated to compensate the employee in the case of retrenchment under the terms of such transfer.

Employees cannot be compelled to operate under a new management without their permission, according to the Supreme Court, and if they do not consent to such a move, they are entitled to retrenchment compensation. Although sanctioning a scheme of amalgamation, the NCLT is also empowered to issue appropriate directions on the care of the workforce.

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