ASSIGNMENT OF CORPORATE LAW-II 2016-17

CORPORATE LAW- II

Dr. SHAKUNTALA MISRA NATIONAL REHABILITATION UNIVERSITY,

LUCKNOW

AN ASSIGNMENT ON

SCHEME OF AMALGAMATION

UNDER THE SUPERVISION OF

SHAIL SHAKYA

SUBMITTED TO SUBMITTED BY

SHAIL SHAKYA M.B.Khan

(Asst. Prof.) B.Com LLB(Hons.)

Law Faculty VIth sem.

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TABLE OF CONTENT

Preface Pg.No.

1. Introduction……………………………………………………………… 03
2. Merger and Amalgamation……………………………………………… 04
2.1.Kinds of Merger………………………………………………………… 04
3. Key Corporate and Securities Laws Consideration…….. ………………. 06
3.1.Company Law……………………………………………………………...06
3.1.1. Procedure under the merger provisions………………………………...06
3.1.2. Applicability of merger provisions to foreign companies……………...07
3.2.Securities Laws…………………………………………………………….07
3.2.1. Takeover code…………………………………………………………07
3.2.2. Listing regulations……………………………………………………..07
4. Merger and Amalgamation of the Companies……………. ……………...08
5. Procedure of the Amalgamation……………………………………….….11
6. Amalgamation of a Company with Foreign Company……………………14
7. Conclusion………………………………………………………………....15
8. Bibliography………………………………………………....…………… 16

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1. Introduction
Merger is a restructuring tool available to Indian conglomerates aiming to expand and
diversify their businesses for various reasons whether it is to gain competitive advantage,
reduce costs or unlock values. In commercial parlance, merger essentially means an
arrangement whereby one or more existing companies merge their identity into another
existing company or form a distinct new entity. Company law in India is undergoing a
complete overhaul and a new law was finally passed in 2013. However, only 98 sections of
the new Companies Act, 2013 (“2013 Act”) have been brought into force and the provisions
relating to mergers covered in Sections 230 to 240 are yet to be notified. Until then, this court
driven process will continue to be governed by Section 391-396A of the Companies Act,
1956 and the Companies (Court) Rules, 1959 (collectively referred to as “1956 Act”).

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2. Mergers and Amalgamations

Merger: The term ‘merger’ is not defined under the Companies Act, 1956 (“CA
1956”), and under Income Tax Act, 1961 (“ITA”). However, the Companies Act,
2013 (“CA 2013”) without strictly defining the term explains the concept. 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. The possible objectives of mergers are manifold - economies
of scale, acquisition of technologies, access to sectors / markets etc. Generally, in a
merger, the merging entities would cease to be in existence and would merge into a
single surviving entity.
Amalgamation: The ITA does however defines the analogous term ‘amalgamation’:
the merger of one or more companies with another company, or the merger of two or
more companies to form one company. The ITA goes on to specify certain other
conditions that must be satisfied for an ‘amalgamation’ to benefit from beneficial tax
treatment (discussed in this Part VI of Paper). Our laws envisage mergers can occur
in more than one way, for example in a situation in which the assets and liabilities of a
company (merging company) are vested in another company (the merged company).
The merging company loses its identity and its shareholders become shareholders of
the merged company. Another method could be, when the assets and liabilities of two
or more companies (merging companies) become vested in another new company
(merged company). The merging companies lose their identity. The shareholders of
the merging companies become shareholders of the merged company.
There are following types of merger under the which are as follows :-
(a) Horizontal Mergers : Also referred to as a ‘horizontal integration’, this kind of
merger takes place between entities engaged in competing businesses which
are at the same stage of the industrial process. A horizontal merger takes a
company a step closer towards monopoly by eliminating a competitor and
establishing a stronger presence in the market. The other benefits of this form
of merger are the advantages of economies of scale and economies of scope.
These forms of merger are heavily scrutinized by the competition commission.
(b) Vertical Mergers: Vertical mergers refer to the combination of two entities at
different stages of the industrial or production process. For example, the
merger of a company engaged in the construction business with a company

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engaged in production of brick or steel would lead to vertical integration.

Companies stand to gain on account of lower transaction costs and
synchronization of demand and supply. Moreover, vertical integration helps a
company move towards greater independence and self-sufficiency.
(c) Congeneric Mergers: These are mergers between entities engaged in the same
general industry and somewhat interrelated, but having no common customer-
supplier relationship. A company uses this type of merger in order to use the
resulting ability to use the same sales and distribution channels to reach the
customers of both businesses.
(d) Conglomerate Mergers: A conglomerate merger is a merger between two
entities in unrelated industries. The principal reason for a conglomerate
merger is utilization of financial resources, enlargement of debt capacity, and
increase in the value of outstanding shares by increased leverage and earnings
per share, and by lowering the average cost of capital. A merger with a diverse
business also helps the company to foray into varied businesses without
having to incur large start-up costs normally associated with a new business.
(e) Cash Merger: In a ‘cash merger’, also known as a ‘cash-out merger’, the
shareholders of one entity receives cash instead of shares in the merged entity.
This is effectively an exit for the cashed out shareholders.
(f) Triangular Merger: A triangular merger is often resorted to, for regulatory and
tax reasons. As the name suggests, it is a tripartite arrangement in which the
target merges with a subsidiary of the acquirer. Based on which entity is the
survivor after such merger, a triangular merger may be forward (when the
target merges into the subsidiary and the subsidiary survives), or reverse
(when the subsidiary merges into the target and the target survives).
3. Key Corporate and Securities Laws Considerations
3.1. Company Law
Section 230 to 234 of CA 2013 governs mergers and schemes of arrangements
between a company, its shareholders and/or its creditors. However,
considering that the provisions of CA 2013 have not yet been notified, the
implementation of the same remains to be tested. The currently applicable
Merger Provisions are in fact worded so widely, that they would provide for
and regulate all kinds of corporate restructuring that a company can possibly

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undertake, such as mergers, amalgamations, demergers, spin-off/hive off, and

every other compromise, settlement, agreement or arrangement between a
company and its members and/or its creditors.
3.1.1. Procedure under the Merger Provisions
Since a merger essentially involves an arrangement between the
merging companies and their respective shareholders, each of the
companies proposing to merge with the other(s) must make an
application to the Company Court having jurisdiction over such
company for calling meetings of its respective shareholders and/or
creditors. The Court may then order a meeting of the
creditors/shareholders of the company. If the majority in number
representing 3/4th in value of the creditors and shareholders present
and voting at such meeting agrees to the merger, then the merger, if
sanctioned by the Court, is binding on all creditors/shareholders of the
company. The Merger Provisions constitute a comprehensive code in
themselves, and under these provisions Courts have full power to
sanction any alterations in the corporate structure of a company. For
example, in ordinary circumstances a company must seek the approval
of the Court for effecting a reduction of its share capital. However, if a
reduction of share capital forms part of the corporate restructuring
proposed by the company under the Merger Provisions, then the Court
has the power to approve and sanction such reduction in share capital
and separate proceedings for reduction of share capital would not be
necessary.
3.1.2. Applicability of Merger Provisions to foreign companies.
Sections 230 to 234 of CA 2013 recognize and permit a
merger/reconstruction where a foreign company merges into an Indian
company. Although the Merger Provisions do not permit an Indian
company to merge into a foreign company, the merger provisions
under Section 234 of the CA 2013 do envisage this, subject to rules
made by the Government of India. However, neither is Section 234
currently in forces nor have any rules been formulated by the
Government of India.

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3.2. Securities Laws

3.2.1. Takeover Code
The Securities and Exchange Board of India (the “SEBI”) is the nodal
authority regulating entities that are listed and to be listed on stock
exchanges in India. The Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Regulations, 2011
(the “Takeover Code”) restricts and regulates the acquisition of
shares, voting rights and control in listed companies. Acquisition of
shares or voting rights of a listed company, entitling the acquirer to
exercise 25% or more of the voting rights in the target company or
acquisition of control, obligates the acquirer to make an offer to the
remaining shareholders of the target company. The offer must be to
further acquire at least 26% of the voting capital of the company.
However, this obligation is subject to the exemptions provided under
the Takeover Code. Exemptions from open offer requirement under the
Takeover Code inter alia include acquisition pursuant to a scheme of
arrangement approved by the Court.
3.2.2. Listing Regulations
Prior to December 1, 2015, the listing agreement entered into by a
company for the purpose of listing its shares with a stock exchange
prescribed certain conditions for the listed companies which they have
to follow in the case of a Court approved scheme of
merger/amalgamation/reconstruction. However, on September 2, 2015,
the SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015 (“Listing Regulations”) were notified and has been
effective from December 1, 2015. The Listing Regulations provide for
a comprehensive framework governing various types of listed
securities under the Listing Regulations, SEBI has altered the
conditions for the listed companies which they have to follow in the
case if a Court approved scheme of merger/
amalgamation/reconstruction has been altered.
4. Merger and Amalgamation of Companies

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 Tribunal’s power to call meeting of creditors or members, with respect to

merger amalgamation of companies: Section 232(1) states that when an
application is made to the Tribunal under section 230 for the sanctioning of a
compromise or an arrangement proposed between a company and any such
persons as are mentioned in that section, and it is shown to the Tribunal—
(a) that the compromise or arrangement has been proposed for the purposes
of, or in connection with, a scheme for the reconstruction of the company
or companies involving merger or amalgamation of any two or more
companies; and
(b) that under the scheme, the whole or any part of the undertaking, property
or liabilities any company (hereinafter referred to as the transferor
company) is required to be transferred to another company (hereinafter
referred to as the transferee company), or is proposed to be divided
among and transferred to two or more companies, the Tribunal may on
such application, order a meeting of the creditors or class of creditors or
the members or class of members, as the case may be, to be called, held
and conducted in such manner as the Tribunal may direct and the
provisions of sub-sections (3) to (6) of section 230 shall apply mutatis
mutandis.
 Circulation of documents for members/creditors meeting:
Section 232(2) states that when an order has been made by the Tribunal under
sub-section (1), merging companies or the companies in respect of which a
division is proposed, shall also be required to circulate the following for the
meeting so ordered by the Tribunal, namely:—
(a) the draft of the proposed terms of the scheme drawn up and adopted by
the directors of the merging company;
(b) confirmation that a copy of the draft scheme has been filed with the
Registrar;
(c) a report adopted by the directors of the merging companies explaining
effect of compromise on each class of shareholders, key managerial
personnel, promoters and non-promoter shareholders laying out in
particular the share exchange ratio, specifying any special valuation
difficulties;

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(d) the report of the expert with regard to valuation, if any;

(e) a supplementary accounting statement if the last annual accounts of any
of the merging company relate to a financial year ending more than six
months before the first meeting of the company summoned for the
purposes of approving the scheme.
 Sanctioning of scheme by tribunal
Section 232(3) states that the Tribunal, after satisfying itself that the procedure
specified in sub-sections (1) and (2) has been complied with, may, by order,
sanction the compromise or arrangement or by a subsequent order, make
provision for the following matters, namely:—
(a) the transfer to the transferee company of the whole or any part of the
undertaking, property or liabilities of the transferor company from a date
to be determined by the parties unless the Tribunal, for reasons to be
recorded by it in writing, decides otherwise;
(b) the allotment or appropriation by the transferee company of any shares,
debentures, policies or other like instruments in the company which,
under the compromise or arrangement, are to be allotted or appropriated
by that company to or for any person:
No transferee company can hold shares in its own name or under any
trust
A transferee company shall not, as a result of the compromise or
arrangement, hold any shares in its own name or in the name of any trust
whether on its behalf or on behalf of any of its subsidiary or associate
companies and any such shares shall be cancelled or extinguished;

(c) the continuation by or against the transferee company of any legal

proceedings pending by or against any transferor company on the date of
transfer;

(d) dissolution, without winding-up, of any transferor company;

(e) the provision to be made for any persons who, within such time and in
such manner as the Tribunal directs, dissent from the compromise or
arrangement;

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(f) where share capital is held by any non-resident shareholder under the
foreign direct investment norms or guidelines specified by the Central
Government or in accordance with any law for the time being in force, the
allotment of shares of the transferee company to such shareholder shall be
in the manner specified in the order;

(g) the transfer of the employees of the transferor company to the transferee
company;

(h) when the transferor company is a listed company and the transferee
company is an unlisted company,—
i. the transferee company shall remain an unlisted company until it
becomes a listed company;
ii. if shareholders of the transferor company decide to opt out of the
transferee company, provision shall be made for payment of the
value of shares held by them and other benefits in accordance with
a pre-determined price formula or after a valuation is made, and
the arrangements under this provision may be made by the
Tribunal: The amount of payment or valuation under this clause
for any share shall not be less than what has been specified by the
Securities and Exchange Board under any regulations framed by
it;
(i) where the transferor company is dissolved, the fee, if any, paid by the
transferor company on its authorised capital shall be set-off against any
fees payable by the transferee company on its authorised capital
subsequent to the amalgamation; and

(j) such incidental, consequential and supplemental matters as are deemed

necessary to secure that the merger or amalgamation is fully and
effectively carried out:
 Auditor’s certificate as to conformity with accounting standard
No compromise or arrangement shall be sanctioned by the Tribunal unless a
certificate by the company’s auditor has been filed with the Tribunal to the effect that

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the accounting treatment, if any, proposed in the scheme of compromise or

arrangement is in conformity with the accounting standards prescribed under section
133.
 Transfer of property or liabilities
Sub-section (4) stares that an order under this section provides for the transfer of any
property or liabilities, then, by virtue of the order, that property shall be transferred to
the transferee company and the liabilities shall be transferred to and become the
liabilities of the transferee company and any property may, if the order so directs, be
freed from any charge which shall by virtue of the compromise or arrangement, cease
to have effect.
 Certified copy of the order to be filed with the registrar
Section 232(5) states that every company in relation to which the order is made shall
cause a certified copy of the order to be filed with the Registrar for registration within
thirty days of the receipt of certified copy of the order
 Effective date of the scheme
Section 232(6) states that the scheme under this section shall clearly indicate an
appointed date from which it shall be effective and the scheme shall be deemed to be
effective from such date and not at a date subsequent to the appointed date.
 Annual statement certified by CA/CS/CWA to be filed with registrar every year
until the completion of the scheme
Section 232 (7) states that every company in relation to which the order is made
shall, until the completion of the scheme, file a statement in such form and within
such time as may be prescribed with the Registrar every year duly certified by a
chartered accountant or a cost accountant or a company secretary in practice
indicating whether the scheme is being complied with in accordance with the orders
of the Tribunal or not.
 Punishment
Section 232(8) states that if a transferor company or a transferee company
contravenes the provisions of this section, the transferor company or the transferee
company, as the case may be, shall be punishable with fine which shall not be less
than one lakh rupees but which may extend to twenty-five lakh rupees and every
officer of such transferor or transferee company who is in default, shall be punishable
with imprisonment for a term which may extend to one year or with fine which shall

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not be less than one lakh rupees but which may extend to three lakh rupees, or with
both.
5. Merger and Amalgamation of Certain Companies - Fast Track
Mergers
Section 233 prescribes simplified procedure for Merger or amalgamation of
 two or more small companies or
 between a holding company and its wholly-owned subsidiary company or
 such other class or classes of companies as may be prescribed;
5.1. Merger of small companies/holding and subsidiary companies
Notwithstanding the provisions of section 230 and section 232, a scheme of
merger or amalgamation may be entered into between two or more small
companies or between a holding company and its wholly-owned subsidiary
company or such other class or classes of companies as may be prescribed,
subject to the following, namely:—
(a) a notice of the proposed scheme inviting objections or suggestions, if
any, from the Registrar and Official Liquidators where registered
office of the respective companies are situated or persons affected by
the scheme within thirty days is issued by the transferor company or
companies and the transferee company;
(b) the objections and suggestions received are considered by the
companies in their respective general meetings and the scheme is
approved by the respective members or class of members at a general
meeting holding at least ninety per cent. of the total number of shares;
(c) each of the companies involved in the merger files a declaration of
solvency, in the prescribed form, with the Registrar of the place where
the registered office of the company is situated; and
(d) the scheme is approved by majority representing nine-tenths in value
of the creditors or class of creditors of respective companies indicated
in a meeting convened by the company by giving a notice of twenty-
one days along with the scheme to its creditors for the purpose or
otherwise approved in writing.
5.2. Transferee Company to file a copy of scheme approved

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Section 233(2) states that the transferee company shall file a copy of the
scheme so approved in the manner as may be prescribed, with the Central
Government, Registrar and the Official Liquidator where the registered office
of the company is situated.
Rule 15.25(4) prescribes the following procedure as to section 233(2) (4)
(a) For the purposes of sub-section (2) of section 233, the transferee
company shall, within seven days after the conclusion of the
meeting(s) of members or class of members or creditors or class of
creditors, file in Form No. 15.13 a copy of the scheme as approved by
the members and creditors, along with report of the result of each of
the meetings with the Central Government, Registrar of Companies
and the Official Liquidator, of the place where the registered office of
the company is situated.
(b) Copy of the scheme shall be filed with the Registrar of Companies
along with the prescribed fee through the MCA e-filing system.
(c) Copy of the scheme shall be filed with the Central Government and
Official Liquidator, by sending them through hand delivery or
registered or speed post or through electronic filing system as may be
approved by the Central Government.
5.3. Central Government to issue confirmation order, where there are no
objections or suggestions from registrar or official liquidator:
Section 233(3) states that on the receipt of the scheme, if the Registrar or the
Official Liquidator has no objections or suggestions to the scheme, the Central
Government shall register the same and issue a confirmation thereof to the
companies.
Rule 15.25(5) states as under with respect to section 233(3)
When no objection or comment is received to the scheme from the Registrar
and Official Liquidator or where even after the receipt of objections or
comments of Registrar and Official Liquidator, the Central Government is of
the opinion that the scheme is in the public interest or in the interest of
creditors the Central Government shall issue in Form No. 15.14, a
confirmation order of such scheme of compromise, or arrangement.
5.4. Objections if any by the registrar or official liquidator to be
communicated to the central government:
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Section 233(4) If the Registrar or Official Liquidator has any objections or

suggestions, he may communicate the same in writing to the Central
Government within a period of thirty days. If no such communication is made,
it shall be presumed that he has no objection to the scheme.
5.5. Application by Central Government to the Tribunal
Section 233(5) states that if the Central Government after receiving the
objections or suggestions or for any reason is of the opinion that such a
scheme is not in public interest or in the interest of the creditors, it may file an
application before the Tribunal within a period of sixty days of the receipt of
the scheme under sub-section (2) stating its objections and requesting that the
Tribunal may consider the scheme under section 232.
5.6. Tribunal’s Action to Central Government’s application
Section 233(6) states that on receipt of an application from the Central
Government or from any person, if the Tribunal, for reasons to be recorded in
writing, is of the opinion that the scheme should be considered as per the
procedure laid down in section 232, the Tribunal may direct accordingly or it
may confirm the scheme by passing such order as it deems fit: If the Central
Government does not have any objection to the scheme or it does not file any
application under this section before the Tribunal, it shall be deemed that it has
no objection to the scheme.
5.7. Registrar having jurisdiction over transferee company has to be
communicated
Section 233(7) states that a copy of the order under sub-section (6) confirming
the scheme shall be communicated to the Registrar having jurisdiction over
the transferee company and the persons concerned and the Registrar shall
register the scheme and issue a confirmation thereof to the companies and
such confirmation shall be communicated to the Registrars where transferor
company or companies were situated.
As per Rule 15.25(7) states that for the purposes of sub-section (7) of section
233, the confirmation order of the scheme issued by the Central Government
or tribunal, shall be filed in Form 15.15 along with the prescribed fee, with
registrars having jurisdiction over transferor and transferee companies
respectively.
5.8. Effect of registration of the scheme
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Section (8) states that the registration of the scheme under subsection (3) or
sub-section (7) shall be deemed to have the effect of dissolution of the
transferor company without process of winding up.
Section 233 (9) states that the registration of the scheme shall have the
following effects, namely:—
(a) transfer of property or liabilities of the transferor company to the
transferee company so that the property becomes the property of the
transferee company and the liabilities become the liabilities of the
transferee company;
(b) the charges, if any, on the property of the transferor company shall be
applicable and enforceable as if the charges were on the property of the
transferee company;
(c) legal proceedings by or against the transferor company pending before any
court of law shall be continued by or against the transferee company; and
(d) where the scheme provides for purchase of shares held by the dissenting
shareholders or settlement of debt due to dissenting creditors, such
amount, to the extent it is unpaid, shall become the liability of the
transferee company.
5.9. Transferee Company not to hold any share in its own name or trust and
all such shares are to be cancelled or extinguished:
Section 233 (10) states that a transferee company shall not on merger or
amalgamation, hold any shares in its own name or in the name of any trust
either on its behalf or on behalf of any of its subsidiary or associate company
and all such shares shall be cancelled or extinguished on the merger or
amalgamation.
5.10. Transferee Company to file an application with Registrar along with the
scheme registered:
Section 233(11) The transferee company shall file an application with the
Registrar along with the scheme registered, indicating the revised authorised
capital and pay the prescribed fees due on revised capital. The fee, if any, paid
by the transferor company on its authorised capital prior to its merger or
amalgamation with the transferee company shall be set-off against the fees
payable by the transferee company on its authorised capital enhanced by the
merger or amalgamation.

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6. Merger or amalgamation of a Company with a foreign company

Section 234(2) Subject to the provisions of any other law for the time being in force, a
foreign company, may with the prior approval of the Reserve Bank of India, merge into
a company registered under this Act or vice versa and the terms and conditions of the
scheme of merger may provide, among other things, for the payment of consideration to
the shareholders of the merging company in cash, or in Depository Receipts, or partly in
cash and partly in Depository Receipts, as the case may be, as per the scheme to be
drawn up for the purpose of sub-section (2), the expression “foreign company” means
any company or body corporate incorporated outside India whether having a place of
business in India or not.
Section 234(1) states that the provisions of this Chapter unless otherwise provided under
any other law for the time being in force, shall apply mutatis mutandis to schemes of
mergers and amalgamations between companies registered under this Act and companies
incorporated in the jurisdictions of such countries as may be notified from time to time
by the Central Government. The Central Government may make rules, in consultation
with the Reserve Bank of India, in connection with mergers and amalgamations provided
under this section.

7. Conclusion
While several noteworthy changes have been proposed, corporations could perceive the need
to get multiple approvals from different regulators as onerous. However, the thirty day time
limit imposed on the regulators will, hopefully, ensure that they respond in a time bound
manner. On the face of it, the 2013 Act offers comprehensive and better transparency
ensuring protection of stakeholders’ interest, while simultaneously avoiding frivolous
objections. The exact time frame that the entire merger process would involve will be known
once it is tested and which will happen after the Tribunal is constituted and the rules
implemented. It would be fair to say that the 2013 Act seeks to streamline and make M&A
more smooth and transparent. The new provisions should make it easier for corporations
proposing mergers as it spears to have a good system of checks & balances to prevent abuse
of these provisions. As Dale Carnegie said “Flaming enthusiasm, backed by horse sense and

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persistence, is the quality that most frequently makes for success”. A quote that holds good
for M&A in India, and a credo to which Indian companies seem to subscribe given their
successes to date in completing acquisitions. There is little to stop Indian companies that
desire to be global names for playing the merger and amalgamation game globally.
The biggest obstacle in the way of completing a merger or an amalgamation remains the
often long drawn out court procedure required for the sanction of a scheme of arrangement.
The recommendations of the JJ Irani Report are of particular significance in this regard. The
Report has recommended that legal recognition to ‘contractual merger’ (i.e., mergers without
the intervention of the court) can go a long way in eliminating the obstructions to mergers in
India. The report also recommended that the right to object to a scheme of merger should
only be available to persons holding a substantial stake in the company.

8. Bibliography
1. STATUTES
a. The Companies Act 2013
b. The Companies Act 1956
c. SEBI Act, 1992
d. ITA, 1961
2. BOOKS
a. Kapoor,G.K, Company Law (Taxmann’s, Delhi, 19th edn.,)
b. Desai, Nishith, Merger and Acquisation in India (Professional Excellence, Delhi,
2016).

3. ARTICLES
a. Kamal Preet kaur, Merger Regime under the companies act

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4. WEBSITES
a. www.pwc.com
b. www.nishithdesai.com
c. www.lawwatch.com

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