The Companies Act, 1956

Mergers and Demergers The law governing amalgamations (whether mergers or amalgamations) and demergers is contained in sections 390-394A of the Companies Act, 1956. Under Section 391, a court has wide powers to consider and approve (or disapprove) any type of compromise or arrangement, reconstruction by way of an amalgamation or demerger being only specific cases thereof. Section 394 deals with the powers of a court when arrangement under section 391 is of the nature of reconstruction or amalgamation involving transfer of the whole or any part of the undertaking, property or liabilities of any company (known as a transferor company) to another company (known as a transferee company). It is opined by some experts that this section is strictly applicable to the cases of amalgamation and not to those of demerger, which is not correct. In any case, the ambit of section 391 is very wide and it covers both amalgamations and demergers. SEBI does not have any power to approve or disapprove an amalgamation or a demerger even in case of listed companies. The power to approve or disapprove any amalgamation or demerger rests only with the high court. Conditions precedent to approval by the high court: a) -Approval by creditors and shareholders At both the shareholders and creditors meetings the resolution approving amalgamation or demerger has to be passed by a simple majority in terms of number and three-fourth majority in terms of value of members/ creditors present and voting in person or by proxy b) c) d) e) -Disclosure of all material facts to the high court -Disclosure of all material information to the creditors and members -Report of the official liquidator -The high court is required to satisfy itself that (i) the requirements under (a) to (d) above have been satisfactorily complied with (ii) the proposals contained in the scheme have been made in good faith and there is no mala fide intention behind them and that the scheme as a whole is just, fair and reasonable. (iii) the scheme is not violative of any law or not contrary to public policy F) -Notice to the Central Government The order passed by the High court under sections 391 and 394 approving the amalgamation or demerger does not become effective unless filed by every company involved in the amalgamation or demerger with the ROC. Section 394 (3) makes it mandatory for every such company to file the same with the ROC within thirty days of the high court passing the same.

This date on which the order is so filed is called the effective date. On the other hand, while formulating the scheme of amalgamation or demerger, the companies are required to specify an appointed date i.e., the date from which the assets and liabilities shall retrospectively be transferred from the books of the transferor company to the books of the transferee company. Section 394 (4) (b) stipulates that under section 394, a transferee company shall not include any company other than a company within the meaning of this Act, but the transferor company includes any body corporate. As per section 3 of this Act, a company within the meaning of the Act means a company incorporated in India, whereas, the word body corporate includes a company incorporated outside India as well as within. Due to this, one cannot amalgamate or demerge an Indian company into a foreign company but can do vice versa (provided the law of that country where the transferor company is registered does not prohibit the same).

Reduction of Capital Section 100 stipulates the manners in which a company can reduce its capital subject to the confirmation by the High court. In other words, without such confirmation by the High court, a company cannot reduce its capital in any manner whatsoever. The two other preconditions are: 1. A company should be authorized by its articles to effect such reduction. If not, it has to first get the articles amended. 2. A company should obtain the approval of its shareholders by passing a special resolution in the general body meeting before approaching the High court for its confirmation. Exceptions Redemption of preference share capital Forfeiture of shares Diminution of capital Purchase of shares under section 402 Buy back of capital under sections 77A, 77AA and 77B

a) b) c) d) e)

Manners in which reduction can be effected: a) By extinguishing or reducing the liability in respect of share capital not paid-up (since not called as yet) b) By writing off or cancelling the capital which is lost c) By paying off or returning excess capital that is not required by the company. Buy back of Securities Section 77A, subsection (1) stipulates that a company (subject to conditions of subsection (2) of this section and of section 77B) may buy back its own shares or other specified securities out of: a) Its free reserves b) Securities premium account c) The proceeds of any shares or other specified securities except that buy back cannot be made out of proceeds of earlier issue of the same kind of securities

 Conditions of Buy back 1) Buy back must be authorized by the articles of the company 2) The company needs to pass a special resolution in the general meeting authorizing the buy back. In case the total amount proposed to be paid/ invested under the buy back is equal to or less than 10 per cent of the total paid-up equity capital and free reserves of the company, a resolution passed by the board of directors of the company at the board meeting is adequate 3) In any financial year, a buy back of equity shares cannot exceed 25 per cent of its total paid-up equity capital in that financial year. 4) Post buy back debt: equity ratio shall not exceed 2:1 5) Shares or specified securities to be bought back must be fully paid-up 6) Listed companies have to follow the buy back regulations made by the SEBI 7) All companies other than listed companies have to follow the guidelines as may be prescribed. [Private Limited and Unlisted Public Limited Company (Buy back of Securities) Rules, 1999] 8) Buy back must be completed within 12 months of the passing of special resolution or the board resolution as the case may be 9) Securities bought back must be destroyed and extinguished within 7 days of the completion of buy back After completion of buy back of shares or any specified securities, the company cannot issue, for a period of 6 months, shares or securities of the same kind either by way of public issue, rights issue, preferential allotment or any other manner except: a) Issue by way of bonus shares b) Issue of shares or securities in discharge of subsisting obligation such as conversion of warrants, preference shares or debentures or under stock option schemes or sweat equity schemes a) b) c) d) Manners in which a buy back can be done from are: Existing security holders on a proportionate basis (i.e. tender offer) Open market Odd lots Employees, by purchasing securities issued to them under a scheme of stock option or sweat equity