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  An estimated 13-minute read

M&A Update: New Merger Provisions Notified

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More than three years ago, the Companies Act, 2013 (“2013 Act”) was passed by both Houses of Parliament and received assent of the President of India. The 2013 Act seeks to replace the Companies Act, 1956 (“1956 Act”). The different provisions of the 2013 Act are being brought into effect in phases.

On December 7, 2016, the Ministry of Corporate Affairs, Government of India (“MCA”) issued a notification (“December 7 Notification”) notifying several sections of the 2013 Act and appointing December 15, 2016 as the date on which the said provisions shall come into force. The notified sections include provisions relating to schemes of arrangements, compromises, mergers and amalgamation, and those relating to winding up.

Along with the December 7 Notification, on the same day, MCA also notified the Companies (Transfer of Pending Proceedings) Rules, 2016 and the Companies (Removal of Difficulties) Fourth Order, 2016. Pursuant thereto, all proceedings under the 1956 Act with High Courts shall stand transferred to the Benches of the National Company Law Tribunal (“NCLT”) exercising respective territorial jurisdiction with effect from December 15, 2016, other than proceedings relating to winding up which have been dealt with separately. However, proceedings which are reserved for orders for allowing or otherwise of such proceedings shall not be transferred. All cases of winding up under the 1956 Act (instituted on the ground of inability to pay debts) which are pending before the High Courts as on December 15, 2016 and wherein petitions have not been served to the respondents shall be transferred to NCLT, and such petitions shall be treated as applications under the relevant provisions of the Insolvency and Bankruptcy Code, 2016 (“Bankruptcy Code”). All other winding up petitions filed under clauses (a) and (f) of section 433 of the 1956 Act pending before a High Court and where the petition has not been served on the respondent shall be transferred to NCLT and such petitions shall be treated as petitions under the provisions of the 2013 Act.

It may be noted that the notification of the sections of the 2013 Act relating to winding up has come close on the heels of two other significant developments:

  • On November 30, 2016, MCA notified provisions of the Bankruptcy Code pertaining to corporate insolvency resolution and appointed December 1, 2016 as the date on which the said provisions will come into effect. The Bankruptcy Code is applicable to the insolvency and liquidation of all companies.

  • On November 25, 2016, the Ministry of Finance, Government of India issued a notification as a result of which the Sick Industrial Companies (Special Provisions) Act, 1985 was repealed with effect from December 1, 2016 and the Board for Industrial and Financial Reconstruction and the Appellate Authority for Industrial and Financial Reconstruction stood dissolved.

This note provides an overview of the key changes which have been introduced pursuant to the notification of sections 230 to 240 of the 2013 Act1 relating to compromises, arrangements and amalgamations. The specified sections are a comprehensive code in itself providing the manner in which compromises, arrangements and amalgamations are to take place involving members or creditors. With the aforesaid provisions coming into force, the corresponding provisions of the 1956 Act would no longer be in effect. Several of the notified provisions are subject to rules being formulated. It is expected that MCA will shortly notify such rules.

Brief overview of the notified sections

The notified sections relating to compromises, arrangements and amalgamations correspond to sections 390 to 396A of the 1956 Act. Prior to highlighting the key changes which have been brought about, a brief introduction to the provisions is provided below as a background.

If a compromise or arrangement is proposed between a company and its creditors or any class of them, or between a company and its members or any class of them, then an application can be made to NCLT in accordance with section 230 of the 2013 Act for sanctioning the same. NCLT, may, on such an application, order a meeting of the creditors or class of creditors or members or class of members, as the case may be, to be held (“Meeting”). If, at such a Meeting, majority of persons representing three-fourths in value of the creditors, or class of creditors or members or class of members, as the case may be, voting in person or by proxy or by postal ballot, agree to the compromise or arrangement, and if the compromise or arrangement is sanctioned by NCLT by an order, then the same is binding on the company, all the creditors, or class of creditors or members or class of members, as the case may be, or, in case of a company being wound up, on the liquidator and the contributories of the company.

Section 232 of the 2013 Act provides for schemes of reconstruction, mergers, amalgamations and demergers. If an application for sanctioning a compromise or arrangement is made to the NCLT under section 230 of the 2013 Act as aforesaid, and such a compromise or arrangement relates to a scheme of reconstruction, merger, amalgamation or demerger, then NCLT, may, order a meeting of the creditors or members, as the case may be, to be held as per the procedure in section 230 of the 2013 Act. If the requisite majority of persons agree to the scheme, and if the procedure specified in sub-sections (1) and (2) of section 232 of the 2013 Act is complied with, then NCLT may pass an order sanctioning the same.

Key Changes Introduced

Objections to a compromise or arrangement

At a Meeting called by NCLT, any objection to a scheme of compromise or arrangement (“Scheme”) can be made only by persons holding not less than 10% of the shareholding of the company or having an outstanding debt amounting to not less than 5% of the total outstanding debt, as per the latest audited financial statement2.

Notification to Regulators

The notice for Meetings alongwith all documents are required to be sent to the Central Government, income-tax authorities, Reserve Bank of India (“RBI”), Securities and Exchange Board of India (“SEBI”), Registrar of Companies (“RoC”), the respective stock exchanges, Official Liquidator, Competition Commission of India, if necessary, and other relevant sectoral regulators or authorities which are likely to be affected by the Scheme3. In case no representations are made by any of the authorities within a period of 30 (thirty) days from the date of receipt of such notice, it shall be presumed that they have no representations to make on the proposals.

Dispensing with the meetings of creditors

NCLT may dispense with the calling of a meeting of creditors/ class of creditors, if such creditors having at least 90% (ninety percent) in value, agree and confirm, by way of affidavit, to the Scheme4.

Additional Disclosures

  • Disclosures/ documents to be provided to NCLT

Certain additional disclosures to NCLT are required to be made while making an application for sanctioning a Scheme. Specifically, it has been provided that the application must disclose any scheme of corporate debt restructuring consented to by not less than 75% of the secured creditors in value, including the following5:

  1. a creditor’s responsibility statement;

  2. safeguards for the protection of other secured and unsecured creditors;

  3. a report by the auditor that the fund requirements of the company after the corporate debt restructuring as approved, shall conform to the liquidity test based upon the estimates provided to them by the board of directors;

  4. where the company proposes to adopt the corporate debt restructuring guidelines specified by RBI, a statement to that effect; and

  5. a valuation report in respect of the shares and the property and all assets, tangible and intangible, movable and immovable, of the company by a registered value.

Further, a company is required to file a certificate by the company’s auditor with the NCLT stating that the accounting treatment proposed, if any, proposed in the Scheme is in conformity with the accounting standards under 133 of the 2013 Act6.

  • Disclosures / documents to be provided to members/ creditors

The notice for a Meeting seeking approval for a Scheme should be accompanied by a statement disclosing the details of the Scheme, a copy of the valuation report, if any, and explaining their effect on creditors, key managerial personnel, promoters and non-promoter members, and the debenture-holders, and the effect of the Scheme on any material interests of the directors of the company or the debenture trustees, and such other matters as may be prescribed7.

  • Website

The notice of the Meeting convened for approving the Scheme along with other documents are required to be placed on the website of the company, if any, and in case of a listed company, the same are required to be provided to SEBI and the stock exchange where the company is listed, for placing on their website and is also required to be published in newspapers8.

Orders by the NCLT

The 2013 Act specifically enunciates certain matters which an order by NCLT sanctioning a Scheme may provide. These include the following9:

  • in case of a Scheme involving conversion of preference shares into equity shares, the preference shareholders are to be given an option to either obtain arrears of dividend in cash or accept equity shares equal to the value of the dividend payable;

  • protection of any class of creditors;

  • in case the Scheme results in variation of the shareholders’ rights, it would be given effect to under section 48 of the 2013 Act, which provides the procedure for variation of such rights;

  • in case the Scheme is approved by the requisite majority of the creditors, any proceedings pending before the Board for Industrial and Financial Reconstruction shall stand abated; and

  • other matters including exit offer to dissenting shareholders, which are necessary to effectively implement the terms of the Scheme.

Merger of a listed company with an unlisted company

If the transferor company is a listed company and the transferee company is an unlisted company, then the transferee company shall remain an unlisted company until it becomes a listed company. Further, if the shareholders of the transferor company decide to opt out of the transferee company, provision is required to be made for payment of the value of shares held by them and other benefits in accordance with a pre-determined price formula, which cannot be less than the price specified by the regulations of SEBI10.

Purchase of Minority Shareholding

An offer for buying equity shares held by minority shareholders has to be made in the event of the following11:

  • if an acquirer12 or a person acting in concert with such acquirer becomes the registered holder of 90% (ninety percent) or more of the issued equity share capital of a company; or

  • if any person or group of persons becomes 90% (ninety percent) majority or holds 90% (ninety percent) of the issued equity share capital of a company by virtue of an amalgamation, share exchange, conversion of securities or for any other reason.

The offer has to be made at a price determined on the basis of a valuation by a registered valuer in accordance with such rules as may be prescribed.

The minority shareholders of the company may also offer to the majority shareholders to purchase the minority equity shareholding of the company at a price determined on the basis of valuation by a registered valuer in accordance with such rules as may be prescribed.

Where the shares of minority shareholders have been acquired and as on or prior to the date of transfer following such acquisition, the shareholders holding 75% (seventy five percent) or more minority equity shareholding negotiate or reach an understanding on a higher price for any transfer, proposed or agreed upon, of the shares held by them without disclosing the fact or likelihood of transfer taking place on the basis of such negotiation, understanding or agreement, the majority shareholders shall share the additional compensation so received by them with such minority shareholders on a pro rata basis.

Private Mergers

The notified provisions have introduced a simplified procedure for the amalgamation or merger between two or more small companies13 or between a holding company and its wholly owned subsidiary14.

A snapshot of the procedure is provided below:

Holding Shares in Trust

Pursuant to a Scheme, no shares can be held by the transferee company in its own name or in the name of any trust whether on its own behalf or on behalf of any of its subsidiary or associate companies, and any such shares would be cancelled or extinguished15.

Takeover Offers

A Scheme may include a takeover offer made in such manner as may be prescribed. However, in case of listed companies, a takeover offer has to be as per the regulations framed by SEBI16.

Schemes involving a buy-back

If a Scheme involves a buy-back, then the Scheme can be sanctioned by NCLT, only if the buy-back is in accordance with section 68 of the 2013 Act.

Continual notification to the Registrar

Until completion of a Scheme, every company, in relation to which the order sanctioning the Scheme has been made by NCLT, is required to file a statement with the RoC every year, indicating whether or not the Scheme is being complied with in accordance with the orders of the NCLT, and the statement is required to be duly certified by a chartered accountant or a cost accountant or a company secretary in practice17.

Liability of officers

The notified provisions expressly provide that the liabilities of the officer in default of the transferor company prior to the merger, amalgamation or acquisition would continue after the merger, amalgamation or acquisition.


The transferee company/ transferor company would be liable to a fine of not less than Rs. 100,000, but which may extend to Rs. 2,500,000, for any violation of the procedure relating to sanctioning of a merger or amalgamation prescribed under section 232 of the 2013 Act18. Further, an officer of the transferor company/ transferee company, who is in default, can be punished with imprisonment for a term which may extend to 1 year or with fine which shall not be less than Rs. 100,000 but which may extend to Rs. 300,000 for violation of the procedure relating to sanctioning of a merger or amalgamation prescribed under section 232 of the 2013 Act.

Disclaimer:  This document is merely intended as an update and is merely for informational purposes. This document should not be construed as a legal opinion. No person should rely on the contents of this document without first obtaining advice from a qualified professional person. This document is contributed on the understanding that the Firm, its employees and consultants are not responsible for the results of any actions taken on the basis of information in this document, or for any error in or omission from this document. Further, the Firm, its employees and consultants, expressly disclaim all and any liability and responsibility to any person who reads this document in respect of anything, and of the consequences of anything, done or omitted to be done by such person in reliance, whether wholly or partially, upon the whole or any part of the content of this document. Without limiting the generality of the above, no author, consultant or the Firm shall have any responsibility for any act or omission of any other author, consultant or the Firm. This update does not and is not intended to constitute solicitation, invitation, advertisement or inducement of any sort whatsoever from us or any of our members to solicit any work, in any manner, whether directly or indirectly.


1 Sections 230(11), 230(12) and 234 have not been notified.

2 Proviso to section 230(4).

3 Section 230(5).

4 Section 230(9).

5 Section 230(2).

6 Proviso to section 230(7).

7 Section 230(3).

8 First proviso to section 230(3).

9 Section 230(7).

10 Section 232(3)(h).

11 Section 236.

12 The terms ‘acquirer’ and ‘person acting in concert’ have been given the meanings assigned to them in the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. It may be noted that the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 has been replaced by the SEBI Substantial Acquisition of Shares and Takeovers) Regulations, 2011.

13 A small company is a new category of company introduced in the 2013 Act. It is defined in section 2(85) of the 2013 Act as:

A company, other than a public company, (i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; and (ii)

  1. turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:

Provided that nothing in this clause shall apply to— (A) a holding company or a subsidiary company; (B) a company registered under section 8; or (C) a company or body corporate governed by any special Act

14 Section 233.

15 Proviso to Section 232(3)(b).

16 Section 230(11).

17 Section 232(7).

18 Section 232(8).

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