Practical examples of Merger and Aquisition from India

Practical examples of Merger and Aquisition from India

1. Mergers & acquisitions regulatory considerations

2. Future and Reliance deal Future Group entered into an agreement with Reliance Retail, to sell its retail, wholesale, logistics and warehousing to the latter Future Retail will sell its supermarket chain Big Bazaar, premium food supply unit Foodhall and fashion and clothes supermart Brand Factory’s retail as well as wholesale units to Reliance Retail Future Group was under immense pressure from its lenders, led by the State Bank of India, to manage its debt, and the deal in seen as a bid by the group to cut down on the same https://indianexpress.com/article/explained/explained-why-future-group-has-taken-amazon-to-court-what-the-court-said-7113612/

3. Future and Reliance deal Before sale to Reliance, Biyani had been wooing several business groups to sell shares in several companies of Future Group in an attempt to cut down on the debt, but had not seen much success Following the nationwide lockdown in March, to contain the spread of  Covid-19 the retail business of Future Group had come under more stress Sales in many of its premium food sales arm Foodhall and Brand Factory had come to a near halt in the lockdown, which lasted more than two months https://indianexpress.com/article/explained/explained-why-future-group-has-taken-amazon-to-court-what-the-court-said-7113612/

4. Why is Amazon objecting to the Future-Reliance deal? Biyani’s Future Retail had signed another deal with global e-commerce giant Amazon As part of the deal, Amazon had acquired 49 per cent stake in Future Coupons, the promoter firm of Future Retail in a deal worth nearly Rs 2,000 crore The deal had also given Amazon a ‘call’ option, which enabled it to exercise the option of acquiring all or part of Future Coupon’s promoter, Future Retail’s shareholding in the company, within 3-10 years of the agreement https://indianexpress.com/article/explained/explained-why-future-group-has-taken-amazon-to-court-what-the-court-said-7113612/

5. Why is Amazon objecting to the Future-Reliance deal? After Future’s agreement with Reliance, Amazon said the deal was a violation of a non-compete clause and a right-of-first-refusal pact it had signed with the Future Group The deal also required Future Group to inform Amazon before entering into any sale agreement with third parties On its part, the Future Group has said that it had not sold any stake in the company, and was merely selling its assets and had therefore not violated any terms of the contract https://indianexpress.com/article/explained/explained-why-future-group-has-taken-amazon-to-court-what-the-court-said-7113612/

6. What Amazon did? Amazon also sent a letter  to the Securities and Exchange Board of India (SEBI), the Bombay Stock Exchange and the National Stock Exchange (NSE) asking them not to approve the Future-Reliance deal as there was an interim stay order on the same Asking the agencies to take note of the stay order, Amazon is learnt to have said that if the deal went ahead, it would show companies across the world that orders by reputed tribunals such as the Singapore International Arbitration Centre (SIAC) were not respected in India https://indianexpress.com/article/explained/explained-why-future-group-has-taken-amazon-to-court-what-the-court-said-7113612/

7. Why did FRL move the Delhi High Court? The company had moved a plea in the Delhi High Court seeking appropriate relief against Amazon.com’s NV Investment Holdings to stop the latter from interfering in its deal with Reliance Industries Limited’s (RIL) Reliance Retail Ventures Limited https://indianexpress.com/article/explained/explained-why-future-group-has-taken-amazon-to-court-what-the-court-said-7113612/

8. Tax issue: Vodafone and Hutch deal Vodafone-Hutch deal involved Vodafone Plc., a UK-based telecommunication company and Hucthison Essar or Hutch India The deal closed in 2007, and was followed by the Indian Revenue department Pursued Vodafone to make tax payment

9. Tax issue: Vodafone and Hutch deal This was a cross-border share transfer deal between the two groups This deal was not subject to tax liability as per Indian tax laws Transfer of shares by a non-resident company to another non-resident entity is not subject to any tax in India

10. Tax issue: Vodafone and Hutch deal The Indian Revenue Department was sure that the case involved transfer of beneficial interest of shares of an Indian entity So, tax was payable Vodafone paid partial tax of USD 0.5 billion in early 2011 Vodafone fought the case and won

11. Mergers and Acquisitions Elevate the functional performance of the entity M & A have potential to create monopolistic power Process is carried out meticulously Interests of all the stakeholders protected

12. M & A It is inevitable to understand the legal aspects that regulate the process How to legally complete a M & A procedure How to regulate hostile takeover How to regulate monopoly power created by acquisitions How to avail tax advantages

13. Some of the large M & A activities Walmart’s USD 16 billion acquisition of Flipkart (2018) the USD 13 billion acquisition of Essar Oil by a Rosneft -led Russian consortium (2017) Adani Transmission’s USD 3 billion acquisition of Reliance Infrastructure’s integrated Mumbai power distribution business (2018 ) Reliance and Future group deal (2020 ) HDFC ltd. And HDFC Bank (2022)

14. M & A regulatory framework Company law compliance Licenses and permits involved in business operations Intellectual property rights Financing regulation requirement such as foreign equity, foreign currency loans, external commercial borrowings, bonds etc.

15. M & A regulatory framework Tax laws and compliance Import and export licenses and permits, breach if any Shareholding pattern and valid issuance of securities Special provisions in articles of association, giving room inn M & A

16. M & A regulatory framework Contracts entered with directors, promoters, key managerial personnel etc. The validity, enforceability, and authorization involved in the contracts entered with different parties Evaluation of employment contracts (general) and special employment contracts of key personnel, union, etc. Insurance coverage taken and terms involved

17. M & A regulatory framework Loan contract terms and compliance with obligations, pledge, collateral, and hypothesis of assets and guarantees Litigation involved and defense taken

18. M & A: Indian regulatory system Mergers & Acquisitions Companies Act 1956/2013 Income Tax Act 1961 Absorption Foreign entity SEBI Takeover Competition Act 2002 FEMA guidelines (RBI) FDI guidelines (FIPB & DIPP) Domestic Amalgamation Consolidation Insolvency and bankruptcy code 2016

19. M & A: Indian regulatory system Merger/ Amalgamation In India, M&A is either amalgamation or takeover The word merger is not defined under Indian Companies Act 1956 or Income Tax 1961 The CA 2013 attempts to explain the word as

20. M & A: Indian regulatory system “A merger is a combination of two or more entities into one: the desired effect being not just the accumulation of assets and liabilities of the distinct entities, but organization of such entity into one business” However, it is the word amalgamation that describes merger in India It is defined by ITA 1961

21. M & A: Indian regulatory system Merger implies that two firms merging to form a new entity or one in which an acquirer completely absorbs the target company The former is known as consolidation while the latter is termed as absorption In India, the term merger is analogous to amalgamation

22. M & A: Indian regulatory system Amalgamation is regulated by CA as it involves restructuring of participating companies It is a scheme of rearrangement of share capital with the promoters Amalgamation or scheme of rearrangement of companies involves regulatory framework provided by the CA 1956/2013, ITA 1961 and Competition Act 2002

23. The Companies Act provisions Observing MOA of transferee company Convening board meeting and preparation of valuation report and scheme document Application to High court Notice to be given to stock exchange

24. The Companies Act provisions Court approves time, date, venue of the board meeting for merger General meeting convened for passing of scheme document Results reported Court approval sought Certified copy filed with registrar of companies

25. The scheme of amalgamation is expected to consist of The particulars about the transferor (target) and the transferee (acquirer) Main terms and conditions for transfer of assets and liabilities from transferor to the transferee The proposed date for the scheme Share capital of transferor and the transferee in terms of authorized capital, issued capital, subscribed capital, and paid up capital

26. The scheme of amalgamation is expected to consist of The proposed payment in terms of cash component and exchange ratio for target shareholders. In context of exchange ratio, the target shares are extinguished and new shares are issued The proposed conditions pertaining to dividend distribution, ranking of equity, etc. The proposed conditions pertaining to provident fund, gratuity, super annuity funds of the employee of the transferor company, etc.

27. Key changes made under Companies Act 2013 Notice of meeting Treasury shares Approval of scheme through postal ballot Valuation of target Compliance with accounting standards

28. Key changes made under Companies Act 2013 Objective to merger scheme Merger with foreign company Merger of listed company into unlisted company Fast track merger

29. The Income Tax Act provisions Normally, ITA levies tax on capital gain, which is realized on transfer of capital assets Capital assets are fixed assets, generally property of any kind ITA levies capital gain tax on capital gains arising on transfer of capital assets

30. The Income Tax Act provisions Normal business transactions other than amalgamation involving transfer of assets, immovable property of any kind is subject to capital gain tax Capital assets may be short-term and long-term Held for 36 months or more are long term and held for less than 36 months are short term capital assets

31. The Income Tax Act provisions Condition 1: All the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation Condition 2: All the liabilities of the amalgamating company or companies immediately before the amalgamation becomes the liabilities of the amalgamated company by virtue of the amalgamation Condition 3: Shareholders holding not less than 75% in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation

32. The Income Tax Act provisions Section 47 states that where capital gain arises due to transfer of shares held in Indian company by amalgamating foreign company to amalgamated foreign company, the tax is exempted if: 25% of the shareholders of amalgamating foreign company continue to remain shareholders of the amalgamated foreign company Such a transfer is not subject to any tax on capital gain in the country where the amalgamated company is incorporated

33. The Income Tax Act provisions Section 72A of the ITA states that when sick and poorly performing companies merge with a healthy company The amalgamated company can avail the benefit of carrying forward the loss and the unabsorbed depreciation of the amalgamating company.

34. Competition Act provisions To encourage healthy competition and discouraging creation of monopoly The MRTP Act was abolished and Competition Act 2002 came in existence Become operational in May 2009 CCI regulates the law and Competition Appelate (CA) tribunal that operates the law are operational since 2011

35. Competition Act provisions CA regulates anti-competitive agreements Abuse of domination position in the market Consolidation leading to monopoly creation Any agreement between companies regarding activities related to procurement, production, distribution of goods and services Acquisition or control of knowledge and information

36. Acquisition/Takeover Regulated by SEBI Act 1992 Through substantial acquisition of shares and takeover regulation 1997 When an entity or a person acquires the control of the target company, it is termed as takeover Control means substantial acquisition of shares or voting rights of the target company

37. Acquisition/Takeover: control Substantial acquisition or voting right is explained in two context Threshold limit of disclosure Threshold limit for open offer

38. Acquisition/Takeover: control Threshold limit of disclosure When an acquirer acquires shares or voting rights that increase his shareholding to 5%, 10% or 24.99% in the target company Required to disclose at every stage the aggregate of his shareholding to the concerned target firm To the stock exchange where shares of the target company are listed within two days of acquisition

39. Acquisition/Takeover: control Threshold limit of disclosure When a person holds shares or voting rights of about 25% or more but less than 55% engages in the trading of the shares of about 2% or more Required to disclose his cumulative shareholding every year to the target company and concerned stock exchange

40. Acquisition/Takeover: control Threshold limit of disclosure Any person holding 25% or more shares or voting rights of about of a target company Required to disclose his ownership to the target company within 21 days from financial year ending 31 st March for the purpose of dividend declaration The target company needs to submit every year, to concerned stock exchanges

41. Acquisition/Takeover: control Threshold limit for making an open offer When an acquirer acquires shares that increase his ownership to 25% or more of shares or voting rights in the target company Required to make a minimum public offer of additional 26% of the remaining shareholders of the target company

42. Acquisition/Takeover: control Threshold limit for making an open offer When an acquirer holds more than 25% but less than 55% of the shares or voting rights in a target company, then for any additional purchase of more than 5% shares or voting rights One is entitled to make an open offer of additional 26% of the remaining shareholders of the target company

43. Acquisition/Takeover: control Threshold limit for making an open offer When an acquirer holds more than 55% but less than 75% of the shares or voting rights in a target company, then for any additional purchase shares One is entitled to make an open offer of additional 26% of the remaining shareholders of the target company

44. Cross border M&A In case a foreign entity is involved, then M&A is also regulated by Foreign Exchange Management Act 1999 (FEMA) FEMA is governed by RBI A foreign entity can invest in India through FDI route or FPI route

45. M & A: Indian regulatory system Foreign Investment Automatic route Government route NRIs, PIOs Foreign venture capital investment SEBI Regd. FIIs Restricted route Foreign direct investment Foreign portfolio investment https://www.moneycontrol.com/news/business/economy/explained-how-did-india-get-record-fdi-in-fy21-despite-the-pandemic-6619301.html

46. Foreign investment in India FDI can be done by a foreign entity in the form of wholly owned subsidiary formed in India under CA 1956 or as a joint venture firm A foreign company can also setup a liaison office, project office, or branch office in India Certain activities are permitted under FEMA regulations 2000

47. Foreign investment in India Foreign Investment Liaison office Branch office Project office Indian company Wholly owned subsidiary Joint venture

48. Foreign investment in India Option1: Operating as an Indian company Wholly owned subsidiary Joint venture with Indian partner

49. Foreign investment in India Option 2: Operating as Branch/Liaison/Project office Brach office: the financial consideration required for opening these offices in India has been categorized for each BO setup is sanctioned only when the foreign company has a consistent profitability record for preceding 5 years The parent foreign company should have a net worth of not less than USD 100,000 or it’s equivalent

50. Foreign investment in India Liaison office A liaison office setup is sanctioned only when the foreign company has a consistent profitability record for preceding 3 years The parent foreign company should have a net worth of not less than USD 50,000 or it’s equivalent Allowed to carry out liaison activities Can not carryout any business operations in India

51. Foreign investment in India Project office A project office is set up to execute activities of parent foreign company a specific project undertaken A foreign company should have secured a contract from an Indian company to execute a project in India Funding capital should be remitted by foreign parent company Project has sought a formal approval by a competent authority

52. Foreign direct investment FDI is a tool for foreign ownership restriction in India, especially in different sectoral investments FDI is governed by RBI’s regulations FEMA guidelines FDI regulations

53. Foreign direct investment Ministry of Commerce and Industry DIPP FIPB FEMA RBI Ministry of Finance FDI regulation

54. Foreign direct investment FDI allowed by Indian government by foreign companies falls under 3 categories Automatic route of investment Restricted investment Prohibited investment FDI: India's foreign direct investment inflows grew by 81 percent in November 2020 to $10 billion - The Economic Times

55. Automatic route of investment It may be 100% investment or subject to sectoral limits The foreign entity does not require any prior approval either from Government or RBI Need to comply with the RBI’s pricing guidelines

56. Automatic route of investment Pricing guidelines state about price of the shares If transferred by an Indian resident to foreign resident should be at least equal to market price of the share in case of a listed company In case of private company, the transfer price of shares of price should not be less than the fair value of the shares Will be determined by a chartered accountant according to prescribed guidelines

57. Restricted investment These may be 100% ownership or subject to sectoral cap on FDI as proposed by government Defence equipment, electronics, aerospace equipment, print media, broadcasting and courier service, tobacco substitutes, manufacture of cigars, cigarettes of tobacco and tobacco substitutes Require formal prior approval of the FIPB LIST OF RESERVED ITEMS

58. Prohibited investment The Indian government prohibits non-Indian, that is, foreign entity to invest in certain sectors Atomic energy and Railway transport (other than Mass rapid transport system) Lottery business Agriculture with some exclusion

59. Prohibited investment Housing and real estate development except township development or as specified in FEMA Trading in transferable development rights (TDRs) Retails trading (except single brand product retail trading) Business of chit fund, nidhi company Manufacturing of cigars, cigarettes of tobacco or tobacco substitutes

60. Instruments of FDI Foreign investment in Indian companies can be in form of FIIs or NRI Depository receipts and foreign currency convertible bonds and debentures Taxes levied on foreign entity investments are as follows Capital gain tax Dividend tax Stamp duty VAT Security transaction tax

61. Foreign portfolio investment FPI is done through FIIs Regulated by SEBI (FII) regulations and FEMA guidelines and required to register SEBI FPI regulation, 2014 has replaced SEBI FIIs regulations 1995 and QFI (Qualified foreign investors) framework All existing FIIs and QFIs are to be merged into FPI

62. Foreign portfolio investment FIIs include Asset management companies (AMCs) Pension funds Mutual funds Investment trusts University funds Endowment funds Charitable trusts and societies

63. Foreign portfolio investment The new FPI regulations categorize FPI under 3 categories Government and government related investors like central banks, government agencies, and sovereign wealth funds Appropriately regulated broad-based funds like MFs, investment trusts, insurance/reinsurance companies; appropriately regulated persons such as banks, AMCs, investment manager/advisors, portfolio managers, university funds and pension funds All others not eligible in category I and II, like endowments, charitable societies, charitable trusts, individual and family, offices, hedge funds etc.

64. Foreign venture capital investment All foreign venture capital investors (FVCIs) need to register FVCIs can invest through equity, equity linked and debt instruments Through IPO or private placement FVCI registered outside India can now register as FPI in India to invest in startup ventures Also allowed to invest in Indian venture capital fund or Indian unlisted company