PROJECT REPORT ON:

New provisions relating to

Mergers in Companies Act,
2013

Submitted by
GOKUL RUNGTA
Division- B Class- BA LLB

Of AMITY Law School II, NOIDA

AMITY University
NOIDA

Under the guidance of

Ms. Priyanka Dhar
Course in Charge, Amity Law School II,
NOIDA 201301

Acknowledgement
I, express my sincere gratitude to my Mergers and acquisition teacher, Ms. Priyanka
Dhar for giving me the opportunity to work under his guidance on the project on
NEW PROVISIONS RELATING TO MERGERS IN COMPANIES ACT, 2013.
Several people have been instrumental in allowing this project to be completed. Any
attempt at any level cannot be satisfactorily completed without the support and
guidance of learned people, friends and family. I have endeavoured my best to make
this project and would be grateful for any suggestions for improvement.

THANKING YOU

GOKUL RUNGTA
BA.LLB (B)
Enrollment No.
A11911112114

Introduction
The long-awaited Companies Bill 2013 got its assent in the Lok Sabha on 18
December 2012 and in the Rajya Sabha on 8 August 2013. After having obtained
the assent of the President of India on 29 August 2013, it has now become the much
awaited Companies Act, 2013 (2013 Act). An attempt has been made to reduce the
content of the substantive portion of the related law in the Companies Act, 2013 as
compared to the Companies Act, 1956 (1956 Act). In the process, much of the
aforesaid content has been left, to be prescribed, in the Rules (340+) which are yet
to be finalised and notified. As of the date of this publication, 99 sections have been
notified and a few circulars have been issued clarifying the applicability of these.
The 2013 Act introduces significant changes in the provisions related to governance,
e-management, compliance and enforcement, disclosure norms, auditors and
mergers and acquisitions. Also, new concepts such as one-person company, small
companies, dormant company, class action suits, registered valuers and corporate
social responsibility have been included.1
The Act of 2013 intends to promote self-regulation and has also introduced some
progressive concepts like One- Person Company, Small Company, Dormant
Company, E-governance, etc. The concept of Corporate Social Responsibility has
1 PwC India- Companies Act, 2013: Key highlights & analysis Significant
changes & implications, Pg-3.

also been introduced to encourage a socially, environmentally and ethically

responsible behavior by companies.2
This project brings out the significant changes proposed by the 2013 Act as
compared to the 1956 Act and our initial analysis thereon.

Need for Companies Act, 2013

The 1956 Act has been in need of a substantial revamp for quite some time now, to
make it more contemporary and relevant to corporate, regulators and other
stakeholders in India. While several unsuccessful attempts have been made in the
past to revise the existing 1956 Act, there have been quite a few changes in the
administrative portion of the 1956 Act. The most recent attempt to revise the 1956
Act was the Companies Bill, 2009 which was introduced in the Lok Sabha, one of
the two Houses of Parliament of India, on 3 August 2009. This Companies Bill,
2009 was referred to the Parliamentary Standing Committee on Finance, which
submitted its report on 31 August 2010 and was withdrawn after the introduction of
the Companies Bill, 2011.
The 1956 Act was passed in the first decade of free India, when methods of business
were different as compared to new era. Methods of business have changed radically
from last 60 years.3
Companies Act, 2013 is a vibrant step, which play a major role in attaining the
ultimate ends of social & economic policy of the government and in the
development of companies in India on healthy lines.

Incorporation of Company
The 2013 Act introduces a new form of entity one-person company and
incorporates certain new provisions in respect of memorandum and articles of
2 Grant Thornton India LLP- The Companies Act, 2013: The dawn of a
new era.
3 A.N. Gawade & CO. Presentation on new Companies Bill, 2013.

association. For instance, the concept of including entrenchment provisions in the

articles of association has been introduced.
The 2013 Act mandates inclusion of declaration to the effect that all provisions of
the 1956 Act have been complied with, which is in line with the existing
requirement of 1956 Act. Additionally, an affidavit from the subscribers to the
memorandum and from the first directors has to be filed with the ROC, to the effect
that they are not convicted of any offence in connection with promoting, forming or
managing a company or have not been found guilty of any fraud or misfeasance,
etc., under the 2013 Act during the last five years along with the complete details of
name, address of the company, particulars of every subscriber and the persons
named as first directors. The 2013 Act further prescribes that if a person furnishes
false information, he or she, along with the company will be subject to penal
provisions as applicable in respect of fraud i.e. section 447 of 2013 Act [section 7(4)
of 2013 Act; Also refer the chapter on other areas]
Memorandum of AssociationThe 2013 Act specifies the mandatory content for the memorandum of association
which is similar to the existing provisions of the 1956 Act and refers inter-alia to the
following:
Name of the company with last word as limited or private limited as the case may
be.
State in which registered office of the company will be situated.
Liability of the members of the company.
However, as against the existing requirement of the 1956 Act, the 2013 Act does not
require the objects clause in the memorandum to be classified as the following:
(i) The main object of the company.
(ii) Objects incidental or ancillary to the attainment of the main object
(iii) Other objects of the company [section 4(1) of 2013 Act]
The basic purpose in the 1956 Act for such a classification as set out in section 149
of the 1956 Act, is to restrict a company from commencing any business to pursue
other objects of the company not incidental or ancillary to the main objects except
on satisfaction of certain requirements as prescribed in the 1956 Act like passing a
special resolution, filing of declaration with the ROC to the effect of resolution.
Reservation of name: The 2013 Act incorporates the procedural aspects for applying

for the availability of a name for a new company or an existing company in sections
4(4) and 4(5) of 2013 Act.4

Share Capitals & Debentures

The chapter on share capital and debentures introduces some key changes in the
2013 Act. To illustrate, the 2013 Act does not give any cognisance to the existing
requirement of section 90 of the 1956 Act that provided some saving grace to
private companies. Therefore, the applicability of following sections of the 2013 Act
is no longer restricted to public companies and private companies which are
subsidiaries of a public company and are now applicable to private companies also.

EQUITY SHARE CAPITALEquity share capital means all share capital which is not preference share capital.
Equity share capital may be divided into;
(i)
Equity share capital with voting right; or
(ii)
Equity share capital with differential rights.
These differential rights may have difference related to dividend, voting or
otherwise in accordance with rules. The term otherwise bring scope for innovation
with in limit of rules. It may be difference related to managing control, power to
appoint director, or power to appoint proxy and so on.

PREFERENCE SHARE CAPITALPreference share capital of the issued share capital of the company which carries or
would carry a preference right with respect to
(a) Payment of dividend, either as a fixed amount or an amount calculated at a fixed
rate. Which may be either be free of or subject to income tax; and
(b) Repayment of amount of share capital or share capital deemed to be paid up,
whether or not, there is preferential right specified in the memorandum or article of
the company.

4PwC India- Companies Act, 2013: Key highlights & analysis Significant
changes & implications, Pg-11.

This Act does not interfere in rights of preference shareholders who are entitled to
participate in the proceeds of winding up before commencement of this Act. 5

IMPORTANT CHANGES REGARDING SHARE CAPITALIssue of shares at discount is permitted u/s 79 of Companies Act, 1956 subject to
compliance with conditions but on other hand provision under Companies Act, 2013
issue of shares at discount is not allowed other than sweat equity share.
Issue of preference shares for more than 20 years was prohibited u/s 80 of old act
but preference share have to be redeemed within 20 years of issue except for the
share issued for prescribed infrastructure projects, provided a certain percentage of
share are redeemed annually at the option of shareholders.

VOTING RIGHT
The provisions of 2013 Act regarding voting rights are similar to the existing section
87 of the 1956 Act. The only change noted in the 2013 Act is the removal of
distinction provided by the 1956 Act with respect to the entitlement to vote in case
the company fails to pay dividend to its cumulative and non-cumulative preference
share holders [section 47 of 2013 Act] The
provisions regarding private placement and additional disclosures in prospectus will
also help to strengthen the capital markets. The 2013 Act proposes to re-instate the
existing concept of shares with differential voting rights. Pursuant to this section the
company may face hardship with regards to computation of proportionate voting
rights.

Merger & acquisitions

The 2013 Act features some new provisions in the area of mergers and acquisitions,
apart from making certain changes from the existing provisions. While the changes
are aimed at simplifying and rationalising the procedures involved, the new

5 Asim Gharana Law governance responsibility

(http://aishmghrana.me/2013/09/24/share-capital-companies-act-2013/)

provisions are also aimed at ensuring higher accountability for the company and
majority shareholders and increasing flexibility for corporate.
The changes proposed would require companies to consider the scale and extent of
compliance requirements while formulating their restructuring plans once the 2013
Act is enacted. These changes are quite constructive and could go a long way in
streamlining the manner in which mergers and other corporate scheme of
arrangements are structured and implemented in India.

Retained ProvisionsAlthough substantial changes have been incorporated in the New Act, several key
provisions remain unchanged. For example, the acceptance of a scheme or merger
or amalgamation by three-fourths of the shareholders, like in section 391(2) of the
Old Act, is still a pre-condition to a merger or amalgamation. The power of the
Central Government to order a merger or amalgamation in the interest of the nation
is untouched and is placed in Section 237. Further, the obligation to maintain
records of the mergers/amalgamations is retained in Section 239 as its importance
cannot be ignored. Other matters like convening meetings, obtaining the permission
of the regulatory authorities and the Central Government in cases of mergers or
amalgamations remain unaltered.
The Companies Act 2013 (2013 Act) has come into force, the sections related to
M&A is yet to be notified and the Ministry of Corporate Affairs (MCA) is striving
hard to notify the aforesaid sections and the rules thereon. Section 230-240 of the
2013 Act contains the provision related to M&A as compared to Section 390- 396A
of the Companies Act 1956 (1956 Act), which is still in presence. As the MCA
notifies the sections of the new Act, the 2013 Act will replace the 1956 Act. The
coming in force of the 2013 Act will help in reducing shareholders litigation and
make corporate restructuring process smooth and efficient. The new act also
promises to bring easy and efficient ways of doing business in India with better
governance and improved level of transparency. Accountability and making
corporates socially responsible is also one of the main factors to scrap out
approximately 60 years old Act.6
6 Yogesh Malhan (Singh & Associates)- Merger and Acquisition- transformed
rules of the game

The section dealing with compromises and arrangements, deals comprehensively

with all forms of compromises as well as arrangements, and extends to the reduction
of share capital, buy-back, takeovers and corporate debt restructuring as well.
Another positive inclusion within this section is that objection to any compromise or
arrangement can now be made only by persons holding not less than 10% of share
holding or having an outstanding debt amounting to not less than 5% of the total
outstanding debt as per the latest audited financial statements. [section 230 of the
2013 Act] Further, currently, under the 1956 Act, an order does not have any effect
until the same is filed with the ROC. However, such requirement has been done
away with under the 2013 Act. The 2013 Act merely requires filing of the order with
the ROC.

CROSS BORDER MERGER

The 1956 Act prohibited the merger/ demerger of Indian company with the foreign
company, however, the vice versa was possible. But as per the 2013 Act, both types
of mergers have been allowed with only those foreign entities which have been
notified by the government. RBI approval is also required to be taken for concluding
these types of deals. RBI will also notify the regulation which has to be complied to
enter into this transaction. The payment in the scheme can be done through cash or
through depository receipts or both.

SHORT FORM MERGER/FAST TRACK MERGER

This type of mergers includes merger between- (a) two or more small companies (b)
parent and wholly owned subsidiary company.
Small Company means a company, other than a public company
1) paid-up share capital of which does not exceed 50 lakh rupees or such
higher amount as may be prescribed which shall not be more than 5 crore
rupees; or
2) Turnover of which as per its last P&L account does not exceed 2 crore
rupees or such higher amount as may be prescribed which shall not be more
than 20 crore rupees3

Therefore, in this form of mergers/ demergers no prior approvals of NCLT is

required and even the approval of various other regulatory bodies is not needed.
However, the Central Government, ROC, OL approval is necessary along with the
approval of shareholders holding 9/10th portion of total shares and majority
creditors representing 9/10th in value. Moreover, the auditors certificate for
compliance with applicable accounting standards is also not required to be provided.
But the benefit of this fast track merger/ demerger is not available to small public
companies where there is merger/demerger between two or more small companies,
(Benefit only applicable to private small companies). However, in case of merger/
demerger between a parent company and its wholly owned subsidiary, these
provisions are applicable for both public and private companies.

REVERSE MERGER
The merger of a company with a financially weak company, in order to get various
tax exemptions is known as reverse merger. It is also a kind of merger of listed
company with an unlisted company (private or public) by which the unlisted
company gets listed in the stock exchange wherein the listed company has already
been listed earlier. In this kind of merger, as per 1956 Act, the unlisted company
automatically gets a back door entry to become a listed company without an IPO. It
means the unlisted company can enjoy all the benefits of becoming a listed
company without diluting its shares in the public. However, as per Section 232 (h),
if the transferee company is an unlisted company, it shall not automatically become
a listed company by merging with a listed company. It has to follow the process of
listing as per SEBI (ICDR) Regulation 2009 in order to become listed. During
merger the unlisted company also has to grant an exit opportunity to the existing
shareholders of the listed company. Therefore, the process of backdoor listing will
end as soon as these provisions of 2013 Act are notified.

10

MERGER OF A LISTED COMPANY INTO AN UNLISTED

ONE:
The 2013 Act specifically provides for the Tribunals order to state that the merger
of a listed company into an unlisted company will not ipso facto make the unlisted
company listed.7 It will continue to be unlisted until the applicable listing
regulations and SEBI guidelines in relation to allotment of shares to public
shareholders are complied with. Further, in case the shareholders of the listed
company decide to exit, the unlisted company would facilitate the exit with a predetermined price formula which shall be within the price specified by SEBI
regulations. The Indian securities law prescribes strict enforcement of listing
requirements by companies intending to get listed. SEBI had, however, eased these
requirements for listed companies proposing merger by granting them exemptions
from complying with the initial public offering requirements on a case to case basis.
Recently SEBI had issued guidelines stating that if the Scheme provides for listing
of shares of an unlisted company without complying with the initial public offering
requirements, then, upon court approval of the Scheme, the unlisted company has to
file a specific application seeking such exemption from SEBI. Such an application
has to be filed upon, inter-alia, allotment of equity shares to the holders of securities
of the listed company. The changes under the 2013 Act are in line with SEBI
requirements. The 1956 Act was silent on this aspect. 8

PENALTIES
The penalties for contravention of the provisions under the 1956 Act were a
maximum of INR 50,000 (approximately US$ 80617) which apply to the company
as well as officer-in default. However under the 2013 Act, separate penalties have
been levied on the company and its defaulting officer. To bring in more
accountability, quantum for companies has been increased from the aforesaid sum to
a minimum of INR 100,000 (approximately US$ 1,612) and maximum of INR
2,500,000 (approximately US$ 40,322). Defaulting officer(s) will also be
7 See Section 232(3)(h) of the 2013 Act
8 Kamal Preet Kaur , E-Newsline PSA legal- Merger Regime Under The
Companies Act, 2013 Pg-2

11

punishable with imprisonment up to one year or with a minimum fine of INR

100,000 (approximately US$ 1,612) and maximum INR 300,000 (approximately
US$ 4,838) or both.18 Such stringent penal provisions will not apply to mergers of
small companies and that of a holding company with its wholly-owned subsidiaries
unless their merger is transferred to the Tribunal and approved by it. 9

Shareholder Democracy
"The strongest dimension of democracy is the highest degree of participation and
not with the 'degree of freedom or equality'.
Shareholders are one of the vital or should say; are the supreme components in the
corporate scenario. They are theoretically empowered to influence and even frame
major corporate decisions and are the managers of their company. The aim of
legislature gets fulfilled when shareholders are free to exercise their rights in a
democratic way and the device through which shareholders influence, lies in the
voting rights, attached to ordinary shares. An ordinary share usually grants on its
holders the right to cast vote on all matters, placed in the shareholders meeting
except few provisions.
Shareholders can exercise control over the Company in several ways. The one way
to exert control over the decision making process in corporate is by utilizing their
rights attached and can explore opportunities by raising their voices. Another way to
control in today's era, rests on the market forces. The Shareholders can express their
content by reacting through market forces by way of selling or buying the shares.
The management of the Company is responsible towards involvement of
shareholders in the decision making process in order to create a "check and balance"
system. This will ensure transparency in all the acts done by the company or by the
shareholders. In shareholders Democracy everyone has equal opportunity to elect
9 Kamal Preet Kaur , E-Newsline PSA legal- Merger Regime Under The
Companies Act, 2013 Pg-5

12

and constitute a board to manage and conduct the affairs of the company and to
decide the future course of events of the company.
The central issue of shareholders participation in Corporate Governance is that of
disclosure and information flow to the shareholders. Informed participant can
actively participate in company's affairs, contribute effectively in the discussions
and help the management in decisions and the participation of the shareholders has
been increased, by way of proxies.
The new right which allows them to take part in meeting without attending it is
passing of resolution by postal ballot system. The need for proxies and postal ballot
systems arises as companies in various instances hold their meetings in the remote
places of the country and it is very troublesome for the members to access those
meetings. No one can challenge the corporate as they hold their meetings as per the
laws.
The net effect is that a minute number of shareholders are really able to access those
meetings and exercise their voting rights. Thus, where a resolution has been passed
by them at a general meeting which has been attended by say, hardly 2% of the total
number of shareholders holding say 5% of the voting power, it cannot be said that
the shareholders' democracy has been established in true spirit although there is no
contravention of law .
To overpower the aforesaid situation that has been in existence for decades in India,
the inauguration of the concept of postal ballot in the law books is really welcome.
It provides for true shareholders' democracy. The listing agreement has also
provided for companies passing certain resolutions through postal ballot. Through
the postal ballot system, every member can make his/her contribution in the
important decisions of the company without attending any meeting.
The justification behind proxies is that, it is not suitable for every member to attend
meeting every time when it is called but they may be very interested in the proposed
resolutions which have to be passed in the proposed meeting and wants to take part

13

in itby empowering and appointing any person on their behalf to vote on the
concerned matter. This approach enables the participation indirectly.
The Shareholders have limited access to the information on the policies and
practices and also have very limited access to corporate proxy machinery. This is the
limitation of the proxy system that shareholders are not aware about their rights and
lack of information availability is also the main hurdle in implementing the law in
true letter and spirit10.

Buy-Back of Share
Under the 1956 Act, companies could do multiple buy-backs of shares in the same
financial year except in certain specific facts where there was a cooling off period of
one year. However, now the 2013 Act requires a mandatory one-year time period
between any type of buy-back, even if the buy-back was achieved through a scheme
approved by an Indian court. The 2013 Act also stipulates that a buy-back is not
possible if the company has made any default in the repayment of deposits or
interest, or redemption of debentures, or preference shares, or payment of dividend,
or in the repayment of a term loan to a bank or financial institution. However, the
buy-back may be possible if the defect is remedied, and a three-year time period has
elapsed.
The earlier common practice of a back-to-back shareholder-approved buy-back
following a board mandated buy-back is no longer possible under the 2013 Act, and
this is likely to significantly delay and adversely impact investor exit options. It is
noteworthy that with the introduction of a non-creditable tax on buy-back
distributions under tax law, this route had already become less attractive.

10 Hemant Goyal & Sandhya Aggarwal , Global Jurix, Advocates &

Solicitors- Supremacy Of Shareholders & Their Democracy In Line With
New Act, 2013

14

Decision Making power of the Board

Unlike under the Indian Companies Act 1956 (1956 Act), where an ordinary
resolution (requiring a simple majority of shareholders) was sufficient, under the
2013 Act, certain powers of the board of directors can now only be exercised subject
to a favourable special resolution (requiring a three-fourth majority of shareholders)
being passed. These include important subjects such as the right to sell a substantial
part of the undertaking or borrow money above certain specified thresholds. Special
resolutions may also include conditions and the applicability of the provision has
been extended to private companies as well. Further, there have been several
important additions to the list of powers which are to be exercised by board of
directors only at a meeting of the board, and cannot therefore be delegated. These
include things such as the approval of financial statements, diversification of
business and the approval of mergers and takeovers. Additionally, although the 2013
Act recognises and permits board meetings to be conducted via video conference,
certain decisions, including those relating to the approval of financial statements and
mergers, cannot be made via video conference. Foreign investors ought to be wary
of these changes, as they significantly curtail the decision-making power of the
board and require increased shareholder support for positive company outcomes.

BIBLIOGRAPHY

1.
2.
3.
4.

PwC India- Companies Act, 2013: Key highlights & analysis.

A.N. Gawade & CO. Presentation on new Companies Bill, 2013.
Rishi Shroff, Forbes India- Key implementation in CA 2013.
Kamal Preet Kaur , E-Newsline PSA legal- Merger Regime Under The Companies
Act, 2013.

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5. Vastala Singh (Singh & Associates)- One Person Company- A Concept For New Age
Business Ownership.
6. Anup Koushik Karavadi- Changing contours of mergers and acquisitions under
Companies Act, 2013.
7. Yogesh Malhan (Singh & Associates)- Merger and Acquisition- transformed rules of
the game.

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