Applicable Indian legal provisions in case of

M&A

Neethu
Archana
Dinesh
Soni
Rajkumar
Harshada
Ajay P.
 Mergers and Acquisitions
Mergers can be defined to mean unification of two players into a single
entity.
Acquisitions are situations where one player buys out the other to combine
the bought entity with itself.
In all M&A refers to the aspect of corporate strategy, corporate finance
and management dealing with the buying, selling and combining of
different companies that can aid, finance, or help a growing company in a
given

 It may be in form of a purchase, where one business buys another business or a

management buys out a business from its owners.
 There is no specific process defined or cut out for carrying out mergers and
acquisitions.
 It is largely based on commercial decisions,
 Situation in India
In India, merger and acquisition activities may be classified
either in the form amalgamations3 including merger and
de-merger or as acquisitions which could be either asset
or stock purchase or both.
 Securities and Exchange Board of India Act, 1992 (SEBI)
governs acquisition of shares of an Indian listed company
by another company.
 Scheme of mergers, amalgamations etc. falls within the
jurisdiction of the Companies Act, 1956 and Indian courts.
Lastly, another important law involving M&A is Foreign
Exchange Management Act, 1999
 CLauses
The Monopolistic and Restrictive Trade Practices (MRTP) Act,
1969, MRTP commission does not play a role in mergers and acquisitions in
the same manner in which it used to.
But, it does play a role in cases where it believes that a merger or a take-over
would lead to restrictive trade practices
Regarding take-overs there were no comprehensive regulations to govern
these activities until the new clauses 40A and 40B were incorporated in May
1990 although both the companies Act (section 395) and the MRTP Act
(section 24) had provisions for corporate take-overs.
According to this clause, any person who acquires 5% or more of the shares in
a company must notify the stock exchange and when the holdings cross 10%, a
public offer to purchase shares must be made. However, this agreement was
restricted to only listed companies and was effective only when either of the
parties in an acquisition was a listed company.
 Clause 40A
The Requirements of the Takeover Code are substantially provided for
in the listing agreement between the Stock exchange and a company
listed on it.

While Clause 40A prescribes the disclosure requirements,

Clause 40A of the listing agreement entered into by a company with
the stock exchange on which its shares are listed, requires the
company to maintain a public shareholding of at least 25% or 10%, as
the case may be, on a continuous basis.
 Clause 40A….contd

 If the public shareholding falls below the minimum level

pursuant to:
 The issuance or transfer of shares
(i) in compliance with directions of any regulatory or
statutory authority, Or
(ii) in compliance with the Takeover Code, or
 Reorganization of capital by a scheme of arrangement,
 Clause 40A….contd

 If it happens below the minimum level then:

 The stock exchange may provide additional time of 1 year (extendable
up to 2 years) to the company to comply with the minimum
requirements. In order to comply with the minimum public
shareholding requirements, the company must either, issue shares to
the public or offer shares of the promoters to the public.
 If Still company fails to comply with the minimum
requirements, then
 Its shares may be delisted by the stock exchange, and penal action
may also be taken against the company.
 Clause 40 B
Clause 40B speaks of the public offer. One important
distinction is the recognition of change of control or
management of the company irrespective of the
combined percentage of voting power of the acquirer as
a trigger point for the Public Offer. This is important as in
many widely held companies, acquisition of 10% of the
shareholding is not needed to takeover the company.
• The Company also agrees that it is a condition for
continuous listing that whenever a take over offer is
made to or by it whether voluntarily or compulsorily,
the following requirements shall be fulfilled
A public announcement of a take-over offer shall be made
both by the offerer or company and the offeree company when
—-
(a) any person in his own name or in the name of any other
person acquires, whether by a series of transactions over a period
of time or otherwise, securities which, when aggregated with
securities already held or acquired by such person, shall carry
10% or more of the total voting rights of the offeree company, or
(b) secure the control of management of a company, by
acquiring or agreeing to acquire, irrespective of the percentage
of the voting capital, the securities of the Directors or other
members, who by virtue of their shareholdings together with the
shareholdings of their relatives, nominees, family interest and
group control or manage the company, or
 If the offer is made by a person other than the ultimate
offerer the identity of such other person shall be disclosed
at the outset in the public announcement as also in the
notification to the Stock Exchange.
The offer shall be placed, in the first instance before the
Board of directors of the offeree company and shall contain
the following particulars, namely—
detailed terms of offer, identity of the offerer, details of
offerer’s existing holding in the offeree company, all conditions
to which the offer is subject, and confirmation by the auditors
of the offerer or that resources available to the offerer or are
sufficient to satisfy full acceptance of the offer.
 All the above information shall be made equally available
to all the shareholders (both
of the offerer company and the offeree company)
 SEBI Takeover Code
 The objective of the Takeover code is to regulate in an organized
manner the substantial acquisition of shares and take over of a
company whose shares are quoted on a stock exchange i.e. listed
company. In a limited sense these regulations also apply to certain
unlisted companies including a body corporate incorporated outside
India to an extent where the acquisition results in the control of a
listed company by the acquirer.
The regulator’s orders on matters regarding the application of the exception
have swung from allowance to denial.
• It is essential to analyze the circumstances that trigger the Takeover Code,
making a public announcement mandatory. This essentially happens in two
situations; when there is an acquisition of shares beyond a threshold limit,
or when there is a change in control over the management of the target
company. Regulations 10 and 11 address the issue of acquiring shares, while
Regulation 12 deals with acquiring control.
 Acquisition of shares
Acquisition of shares by the acquirer would also
include acquisition by those acting in concert, if any,
with the acquirer.
Regulation 10 and 11 provide different limits on the
acquisition of shares and, when those thresholds are
exceeded, a public announcement becomes essential.
Given the lengthy process of a public announcement
and its consequential impact on the timing of any
transaction, many companies explore the necessity of
making an announcement at all.
 Regulation 10 under SEBI
Regulation 10 describes a substantial acquisition of shares for
which a public announcement becomes a pre-requisite. Under
this regulation, any acquisition of shares by an acquirer
enabling it to exercise more than 15% voting rights in the
target company requires a prior public announcement stating
the intention to acquire shares in the target company.
i.e. acquisition of 15% or more of shares of a company listed on
stock exchanges in India would attract SEBI Takeover Code and
such investor is required to follow the route of ‘Public offer’.
Please Note :- In case of fresh acquisition under regulation 10,
a public announcement is to be made by the merchant banker
of acquirer within four working days of entering into an
agreement for acquisition of shares or deciding to acquire
shares exceeding 15% of the target company.
 Regulation 11
 Regulation 11 deals with the consolidation of holdings, and is
targeted at two situations—
 Firstly, where an acquirer holds shares between 15% and 55% and wishes
to acquire further shares in the same company and,
 Secondly, where an acquirer has acquired 55% or more but less than 75%
of a company’s shares or voting rights, and still intends to increase its
shareholding further.
 In the First Scenario, for an acquisition of more than 5% of the shares, a prior
public announcement is required. Thus, if a shareholder holds 51% of the
shares and wants to acquire another 4%, Regulation 11 will not be attracted.
 In the second scenario, an acquirer is forbidden to acquire any additional
shares in the company without a prior public announcement.
The explanation for Regulation 11 has clarified that, for
the purposes of Regulations 10 and 11, acquisition
means and includes:
(i) direct acquisition in a listed company to which the
takeover regulations apply, and
(ii) indirect acquisition by virtue of the acquisition of
companies,
whether listed or unlisted, in India or abroad.
 Acquiring control over management
Lawmakers have very clearly segregated shareholding from control
over management.
• A person with a majority stake may not necessarily have control
over the management of a company.
• The difference between the two may be found in the definition of
‘control’ in the Takeover Code itself.
• The term ‘control’ has been defined under Regulation 2(1)(c),
although the definition is not exhaustive but inclusive in nature.
It includes the “right to appoint majority of the directors or to
control management or policy decisions exercisable by a person or
persons acting individually or in concert, directly or indirectly,
including by virtue of their shareholding or management rights or
shareholders’ agreements or voting agreements or in any other
manner”.
 Regulation 12

Regulation 12 deals with gaining control over the

target company, irrespective of whether any shares or
voting rights are acquired. In such a case, unless an
acquirer makes a public announcement to acquire
shares, he cannot acquire control over the
management of the target company.
 Under this regulation, an acquirer shall be one who
acquires, directly or indirectly, control of the target
company, by virtue of the acquisition of companies,
whether listed or unlisted and whether in India or
abroad. No matter how control is acquired, it shall lead
to a public announcement resulting in an open offer to
acquire shares in accordance with the regulation.
 Regulation 12……contd
 International transactions involving merger/takeover of a
company having a substantial shareholding in an Indian listed
company requires acquirer of such company to make a public
offer to the shareholders of the Indian listed company also.
• Regulation 12 of the Takeover Code further provides that
irrespective of whether or not there has been any acquisition of
shares or voting rights in a company, no acquirer shall acquire
control over the target company, unless such person makes a
public announcement to acquire shares and acquires such shares
in accordance with the Takeover Code.
 Regulation 12……contd

• For the purpose of this Regulation, the term ‘acquisition’

includes direct or indirect acquisition of control of the target
company by virtue of acquisition of companies, whether listed
or unlisted and whether in India or abroad.

• However the requirement under Regulation 12 does not apply

to a change in control which takes place pursuant to a special
resolution passed by the shareholders in a general meeting.
• Therefore, if 3/4ths of shareholders present and voting at a
meeting approve the change of control, then the requirement to
make a public offer under Regulation 12 would not be triggered.
 Regulation 12……contd

• Under regulation 12 of takeover code, a public

announcement is made in the newspapers by
the merchant banker of the acquirer within
three months of consummation of such
merger/acquisition or change in control or
restructuring of the parent company holding
shares or control over the target company in
India and
 CONCLUSION
• Conclusion:
• The legal and financial reforms by the
government of India since the early 1990's have
resulted in substantial growth of the Indian
economy. With the liberalized policies the
practice of mergers and acquisitions has attained
considerable significance in the contemporary
corporate scenario in India which is broadly used
for reorganizing the business entities.