India

Guide to
Mergers & Acquisitions

2005/2006
Baker & McKenzie.Wong & Leow is a member firm of Baker & McKenzie International is a Swiss Verein with member firms around the
world. In accordance with the common terminology used in professional service organizations, reference to a “partner” means a person who
is a partner, or equivalent, in such a law firm. Similarly, reference to an “office” means an office of any such law firm.

©2005 Baker & McKenzie and AZB & Partners

All rights reserved.

DISCLAIMER
It should be noted that the material in this book is designed to provide general information only. It is not offered as advice on any
particular matter, whether it be legal, procedural or other, and should not be taken as such.The authors expressly disclaim all liability
to any person in respect of the consequences of anything done or omitted to be done wholly or partly in reliance upon the whole or any
part of the contents of this book. No reader should act or refrain from acting on the basis of any matter contained in it without seeking
specific professional advice on the particular facts and circumstances at issue.
CONTENTS

INTRODUCTION .............................................................................1
TYPES OF TRANSACTIONS ...........................................................1
Mergers & Demergers ......................................................................1
Acquisition of Shares .......................................................................2
Acquisition of Assets.........................................................................2
Joint Ventures....................................................................................3

STATUTORY AND REGULATORY CONSENTS

AND APPROVALS ..........................................................................4
Regulatory Approvals ........................................................................4
Acquisitions of shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Mergers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Acquisition of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Sanctions for mergers .....................................................................6
Licenses and permits .......................................................................7
Competition issues ...........................................................................7
Securities Law issues .......................................................................9
Prospectus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Buy-back..........................................................................................10
Financial assistance for share acquisition ...................................10
Authorizations pursuant to the Companies Act............................11

NON-R
REGULATORY CONSENTS AND APPROVALS....................11
Board/shareholder/creditors consents ........................................11
Vesting of contracts........................................................................11

TAXATION ISSUES.......................................................................12
Capital gains ...................................................................................13
Transfer pricing regulations ...........................................................14
Double taxation...............................................................................14
Depreciation....................................................................................14
Carry forward and set off ...............................................................14
Deductions ......................................................................................15
Stamp duty......................................................................................15

DOCUMENTATION AND DUE DILIGENCE ..................................16

Preliminary agreement - MOU/Letter of intent.............................16
Due diligence ..................................................................................16
Documentation and agreements...................................................17
Parties to the agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Obligations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Representations and warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Identification of shares/assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
 Employee matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Indemnity clause. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Limitation of liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Other clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

PUBLIC OR LISTED COMPANY CONSIDERATIONS ...................20

SEBI ( Disclosure and Investor Protection) Guidelines,
2000 (“DIP Guidelines”) ................................................................20
The SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997 (“Takeover Code”)...........................................20
Insider trading.................................................................................21
Listing agreement...........................................................................22
 Mergers and Acquisitions: India

INTRODUCTION1
The Government ushered in liberalization with the announcement of the New
Industrial Policy Statement on July 24, 1991 which included norms authorizing
foreign direct investment (“FDI”) and technology collaborations, in specific
sectors, subject to certain limitations. Initially, FDI was permitted up to 51%
in certain specified high priority industries, requiring large investments and
advanced technology. However, these limits have been gradually relaxed over
the past two decades.
It was under this Policy Statement that the Government first decided to deal
with the problem of ailing Public Sector Units (“PSUs”) by divesting some of
its shareholding in the same.This lead to the setting up of the “Disinvestment
Commission”. So far the Government of India has successfully completed the
disinvestment process in about 36 PSUs. Pursuant to this trend several State
Governments have also started the process of disinvestment in State owned PSUs.
Post September 11, 2001, following a global trend, the Indian market too,
experienced a negative impact on its mergers and acquisitions (“M&A”)
market for the year ending, March 31, 2002.Though the number of reported
M&A deals stood at 1,344 as compared to 1,477 deals for the year ending 2001,
the FDI in India increased only marginally. Since 2003 with a fast growing
consumer market and large reserves of both natural and human resources, India
has seen strong FDI inflows. India provides substantial federal incentives for new
investors, like concessional duties on the importation of capital goods and
enhanced freedom to source external commercial loans.

TYPES OF TRANSACTIONS

Mergers & Demergers

The (Indian) Companies Act, 1956 (“Companies Act”) deals with mergers
under the head of “amalgamations” and sets out the procedure and requirements
for the same, which have been dealt with in greater detail below. Apart from an
amalgamation of Indian companies, the Companies Act also envisages an
amalgamation between an Indian company and an “unregistered company” which
may include a foreign company or a branch of a foreign company. Mergers
between branches of foreign companies in India with Indian companies have been
sanctioned in the past, pursuant to the Companies Act.
Mergers have to be sanctioned by the High Courts of the respective States in
which the companies being amalgamated are registered.The procedure for
amalgamation has been set out in a separate paragraph in this report.
Amalgamating two companies ordinarily requires around 6 months.
Amalgamations are also dealt with under the Income Tax Act, 1961 (the “Tax
Act”), which allows for certain exemptions and benefits, including waiver of
capital gains tax.To avail of these benefits however it is important that the said
amalgamation satisfies the preconditions laid down in the Tax Act, such as the

___________________
1 The information contained herein has been updated upto July 1, 2005.

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condition that, shareholders of the transferor company, who hold at least

three-fourth of its paid up share capital must become shareholders of the
transferee company i.e., the surviving entity.
The Tax Act also defines a demerger, as a transfer pursuant to a scheme of
arrangement under the Companies Act (which involves shareholder / creditor
consent and Court sanction) by one company (the “Demerged Company”)
of one or more undertakings to another company (the “Resulting Company”)
such that:
(i) All the property and liabilities of the undertaking/s in question are
transferred to the Resulting Company at the values appearing in the books
of accounts of the Demerged Company;
(ii) The Resulting Company issues shares in itself to the shareholders of the
Demerged Company in consideration for the above transfer;
(iii) Shareholders holding not less than three-fourths in value of the shares in the
Demerged Company become shareholders of the Resulting Company; and
(iv) The transfer of the undertaking/s is on a “going concern basis”.

Acquisition of Shares
An acquisition of shares could take place either by way of:
(i) Subscription to fresh equity in a company; i.e de novo allotment, or
(ii) Purchase of existing equity in a company from another shareholder,
i.e. a transfer.
Under the Companies Act, companies have been classified into two main
categories, namely:
(i) Private companies - which enjoy a more “relaxed regime” and
(ii) Public companies - which are subject to greater controls.
The Companies Act was amended in December 2000 to include a private company
which is a subsidiary of a company which is not a private company, under the
definition of a public company. As a result even if a company has been duly
incorporated as a private company, it will lose its private company status if it were
to become a subsidiary of a public company at any subsequent point of time.
Pursuant to the Companies Act, a private company is required to have provisions in
its charter documents restricting transfers of its shares and restricting invitations to
the public for accepting deposits. It is common to find blanket provisions in the
charter documents of private companies giving its board of directors the power to
refuse any transfer of shares, if it deems fit, in its sole discretion.
Shares in a public company, on the other hand, are freely transferable.The board
of directors of a public company can reject transfers only on limited grounds of
“sufficient cause” which has often been interpreted by the Courts to mean failure
to comply with legal requirements.

Acquisition of Assets
Acquisitions of movables are governed by the Sale of Goods Act, 1972 (“SGA”).
The Companies Act defines shares and debentures as movable property and lays
down the mechanism for their transfer. Acquisitions of immovable properties on
the other hand, are governed by the Transfer of Property Act, 1882.
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These statutes deal with the numerous aspects of a transfer, such as pre-requisites
for valid transfers, rights and obligations of the seller and the acquirer, implied
conditions and warranties, point of transfer of title and risk in the assets.
Acquisitions of intangible property such as copyrights, patents and trademarks
are governed by the specific statutes dealing with these intellectual property
rights. Acquisition of the same has to take place pursuant to a written
document, and in respect of registered trademarks and patents, the transfer is
effective only upon registration with the concerned registration authority.
Pursuant to the Trademarks Act, 1999, the person entered in the Register of
Trademarks as the proprietor of a registered trademark has the right to assign
the trademark. Both registered and unregistered trademarks can be assigned with
or without the goodwill of the business concerned. However where the transfer
of a trademark is without goodwill, certain additional advertising requirements have
to be complied with, in accordance with the directions of the Registrar of
Trademarks.The Trademarks Act, 1999 also restricts certain assignments which may
result in the creation of multiple exclusive rights in respect of the use of the
trademarks in relation to the same (or same description of) goods and services or
in relation to goods or services or description of goods and services, which are
associated with each other.
Transaction costs play an important role in the structuring of the mode of
acquisition of assets and documentation of asset transfers.These costs include
stamp duty and taxes such as capital gains and sales tax etc.These have been dealt
with in greater detail, under the head of “Taxation Issues”.

Joint Ventures
Where a wholly owned entity is not the preferred option for an investor, a business
may be undertaken as a joint venture. From the perspective of a foreign entity, in
certain sectors where there are foreign equity ceilings, a joint venture with an
Indian entity often becomes necessary so as to satisfy the conditions of balance
shareholding over and above the foreign investment ceiling. In other sectors, from
a new entrant's perspective, factors such as the local partner's pre-established
marketing and distribution chain, human resource availability, etc play an important
role in opting for a joint venture. In large projects involving a prolonged and often
arduous developmental phase, the acquisition of a stake after the commissioning of
the project helps avoid numerous development related problems and risks.
However, before considering this route it is advisable to examine whether the
foreign participant intends to set up an independent entity in India engaged in the
same field at any point in the future.The reason being that automatic route window
would be unavailable where the foreign entity purchasing the shares of the Indian
entity proposes to be collaborator, or proposes to acquire the shareholding of a new
Indian entity, if it has an existing (as on January 12, 2005) joint venture or
technology transfer or a trade mark (as on January 12, 2005) agreement in the same
field in which the Indian entity issuing the shares is engaged (subject to certain
exclusions i.e. (i) where the investment is to be made by venture capital funds
registered with Securities and Exchange Board of India (“SEBI”); (ii) where in
the existing joint venture, investment by either of the parties is less than 3% ;or
(iii) where the existing venture/ collaboration is defunct or sick) . In such a case,
the foreign entity would have to obtain the prior permission of the Central
Government to make an investment in such an Indian Company. However, the onus
to provide the requisite justification and proof to the satisfaction of the Central

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Government that the new proposal would not in any way jeopardize the interests
of the existing partner would lie equally on the non resident investor and the Indian
partner.This embargo under the automatic route is not applicable to:
(i) The transfer of shares of an Indian entity engaged in the information
technology sector;
(ii) Investments by certain multinational international financial institutions like
the Commonwealth Development Corporation (CDC) etc.; and
(iii) Investments in the mining sector for the same area / mineral.

STATUTORY AND REGULATORY CONSENTS

AND APPROVALS

Regulatory Approvals

Acquisitions of shares
India is an exchange controlled economy. Foreign investment is regulated
pursuant to the Foreign Exchange Management Act, 1999 (“FEMA”) and the
Government of India Policy on FDI. In most sectors upto 100% FDI is permitted
without any requirement for prior approvals - i.e., the “automatic route”.
In certain sectors however, FDI is subject to specified limits (“Sectoral caps”) and
can only be undertaken within these ceilings either through the “automatic route”,
or with prior approval of the Foreign Investment Promotion Board (“FIPB”),
depending on the applicable guidelines. Sectoral caps are usually in the range
of 26%, 49%, 51% and 74%. Some sectors also carry minimum capitalization
norms, linked to the percentage of foreign ownership e.g., in fund based
non-banking financial services, 100% FDI is allowed subject to a minimum
capitalization of US$ 50 million.
Earlier, where the foreign entity proposed to invest not through a fresh issue of
shares, but through the purchase of shares from an existing Indian shareholder,
application for approval was required to be made through the FIPB route, even if
the proposed investment was within the parameters set out under prescribed laws.
Such an acquisition also required the Reserve Bank of India (“RBI”) approval
with regard to pricing. However, the Government has dispensed with the
requirement of obtaining prior approval from the FIPB and the RBI in respect
of transfer of shares/ convertible debentures, by way of sale, from residents to
non-residents (including transfer of subscriber’s shares) of an Indian company in
sectors other than the financial service sectors (i.e. banks, non-banking financial
companies and insurance) provided the following conditions are satisfied2:
(i) The activities of the Indian company are under the automatic route under
the FDI policy and the transfer does not attract the provisions of SEBI
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997;
(ii) The non-resident shareholding, after the transfer, complies with the sectoral
limits under the FDI policy; and
(iii) The price at which the transfer takes place is in accordance with the pricing
guidelines prescribed by the SEBI/ RBI.
___________________
2 Pursuant to A.P. (Dir Series) Circular No. 16 dated October 4, 2004.

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The banker, i.e. the authorised dealer, has to obtain a declaration in the
prescribed form and ensure that the documents prescribed are on its record.
Acquisitions of shares of Indian companies can also be carried out by Foreign
Institutional Investors (“FIIs”) upon registration with the SEBI, pursuant to the
SEBI (Foreign Institutional Investor) Regulations, 1995. A FII is defined as an
institution established or incorporated outside India which proposes to make
investment in India in securities. A FII is authorized to buy and sell, among
others, shares of listed and unlisted companies. A FII can purchase shares
either on its own behalf or on behalf of its “sub-accounts” which are foreign
funds, corporate bodies, individuals etc.These sub-accounts also have to be
registered with SEBI.
Investments by FIIs in the secondary market can only be carried out through a
stock broker registered with SEBI, subject to certain exceptions.
Investments by FIIs are subject to the following ceilings:
(i) The total holding of each FII on its own behalf in one Indian company,
cannot exceed 10% of the total issued capital of the company.
(ii) The total holding of a FII on behalf of each of its sub-accounts, in one Indian
company cannot exceed 10% of paid up equity capital of the company.
However where the sub-account is a foreign corporate or individual, then
the above limit is 5%.
(iii) Aggregate holding of all FIIs, including sub accounts of FIIs, in an Indian
company, under the portfolio investment scheme, cannot exceed 24% of the
paid up equity capital of the Indian company.This limit can however be
increased by the Indian company through resolutions passed by the board of
directors and the shareholders of the Indian company (with a three fourths
majority of the members present and voting), to the FDI sectoral cap or
ceiling applicable to the Indian Company in question. Where there is an FDI
cap in any sector, it appears that the foreign investment ceiling applies
independently for FDI and FII investments carried out through the portfolio
investment scheme (provided the above resolutions for increases in FII
investments from 24% to the sectoral ceiling are in place), except for sectors
in which the FDI policy includes portfolio investment in the FDI cap e.g.,
in the broadcasting sector. However, an exception in this regard is made in the
banking sector wherein an acquisition/transfer of shares of 5 (five) per cent and
more of a private sector bank by a FII requires the acknowledgement of RBI.
(iv) The total investments in equity and equity related instruments (including fully
convertible debentures) by a FII in India (whether on its own account or on
account of its sub-accounts) cannot be less than 70% of the aggregate
investments made by the FII (whether on its own account or on account of its
sub-accounts), except with the prior approval of the SEBI, which allows 100%
debt funds subject to certain conditions being met.The SEBI has by way of a
recent notification clarified that the sub-ceilings for government securities and
for corporate debt would be separate and would not be fungible.
Acquisitions of shares of Indian companies can also be carried out through
venture funds. Ordinarily for a foreign venture capital fund to invest in India,
registration with SEBI is regarded in practice as optional. However, foreign
venture capital funds which are registered with SEBI are entitled to avail of
certain taxation and other benefits under Indian law.

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Mergers and Acquisitions: India

Mergers
In the case of amalgamations, the RBI has granted a general permission to a
merged entity to issue shares to its foreign investors subject to the foreign
shareholding in the merged entity not exceeding the prescribed sectoral caps.

Acquisition of assets
Acquisitions and transfers of assets in India by a foreign entity requires prior
approval of the RBI pursuant to the FEMA.
A foreign entity desirous of establishing a presence in India (other than through FDI
in shares of a corporate entity in India) requires prior approval from the RBI. Such
presence could be by way of a branch office, a liaison office etc. Recently, the
exchange control regulations have been liberalized to authorize foreign entities to
set up “project offices” without prior RBI approval for implementing certain
projects subject to certain conditions, including approval of the said project by the
competent authority in India, or the funding of the project from remittances from
outside India or by Indian banks and financial institutions.
A foreign entity which has established a branch office or other place of business
(other than a liaison office) in India is authorized to acquire immovable property
which is necessary for, or incidental to the activity carried on by such office in
India. However any transfers of such immovable property by the Indian branch
or other office in India require prior approval of the RBI.
Where an Indian company seeks to use any trademarks from a foreign entity,
recurring royalty payments to the foreign entity can be made only within certain
limits. Payments upto 2% and 1% of net sale proceeds of the Indian entities are
allowed for exports and domestic sales respectively, without any limit on the
duration of the royalty payments, on an automatic basis for use of trademarks
and brandname of the foreign collaborator without technology transfer. However
separate payments towards trademark royalties are not allowed, if payments are
also sought to be made by the Indian company for obtaining technical know how
from the foreign entity in question3. Further, any remittance for the purchase of
a trademark/a franchise can be made only with the prior approval of the RBI.

Sanctions for mergers

An amalgamation has to be permitted by the Memorandum of Association of
each of the companies in question. Amalgamations in India have to be sanctioned
by the High Courts of the respective States in which the registered offices of the
companies are situated.The procedure, in brief, is stated below:
• A draft scheme of amalgamation (“Scheme”) has to be prepared, including
details regarding the valuation of the shares of the respective companies and
establishing a method by which to arrive at the swap ratio.
• The Scheme will have to be approved by the board of directors of the
respective companies.
• Thereafter, an application will have to be made to the respective High
Courts seeking directions to convene meetings of shareholders and creditors

___________________
3 Royalties for technical know how are allowed upto 8% on exports and 5% on domestic sales by
companies for technology or technical assistance (with a lump sum fee of upto US$ 2 million)
under the automatic route. Any payments in excess of the prescribed limits require the prior
approval of the FIPB.

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to obtain their consent.The Scheme would have to be approved by a

majority in number representing 75% in value, of the shareholders and
creditors present and voting at such meetings.
• A petition thereafter has to be filed with the respective High Courts seeking
approval of the Scheme.
• The views of the Regional Director of the Department of Company Affairs
and in the case of the Transferor Company, the views of the Official
Liquidator are also ascertained prior to the sanction of the Scheme by the
High Courts.The Official Liquidator, is required to ascertain whether the
affairs of the Transferor Company which will be dissolved pursuant to the
merger, have not been conducted in a manner prejudicial to the interests of
the shareholders and the public. Once the relevant provisions of the
Companies (Second Amendment) Act, 2002 comes into force, the power
of the High Court to sanction a scheme of amalgamation will vest with the
National Company Law Tribunal.
Any scheme of amalgamation proposed to be filed by a listed company with
the High Court has to be submitted for the approval of the stock exchanges
where the company is listed, at least one month before it is filed with the
relevant High Court.

Licenses and permits

Most authorizations issued by the government authorities are not automatically
assignable, with the assignment of the business in question.Therefore, where
there is an asset acquisition, usually fresh authorizations / endorsements have to
be obtained from the authorities, since fresh consents are required. In respect of
a share acquisition, if any authorizations contain a restriction on change of
control or dilution of shareholding, then these will have to be sought afresh.

Competition issues
Anti-trust and competition issues in India are currently governed by the
Monopolies and Restrictive Trade Practices Act, 1969 (“MRTP Act”).The
MRTP Act is to be replaced by the Competition Act, 2002 (“Competition Act”)
which has been passed by the Indian Parliament and has been notified but the
relevant provisions of which are not yet in force. The provisions relating to the
constitution of the Competition Commission have been brought into force.
Broadly speaking, a “monopolistic trade practice” is defined under the MRTP Act
as inter alia “unreasonably preventing or lessening competition in the production,
supply or distribution of any goods or in the supply of any services” and
“maintaining the prices of goods or charges for the services at an unreasonable
level by limiting, reducing or otherwise controlling the production, supply or
distribution of goods or the supply of any services or in any other manner.”
Under the Competition Act, the Competition Commission (“Commission”)
can conduct an inquiry into any monopolistic or restrictive trade practice.
The Competition Act regulates (i) certain acquisitions of shares by dominant
undertakings; (ii) acquisitions which would result in the creation of dominant
undertakings; and (iii) transfers by dominant undertakings.
These provisions are not applicable to Government companies, corporations
established under any Central legislation and any financial institution.

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Mergers and Acquisitions: India

The term “dominant undertaking” refers to an undertaking which (on its own or
as a group) produces, supplies, distributes or otherwise controls not less than
one-fourth of the goods produced, supplied or distributed or controls not less than
one-fourth of any services rendered in “India or any substantial part thereof ”.
Under the MRTP Act, the Central Government has the power to direct severance
of inter-connection between certain undertakings if such inter-connection would
be detrimental to inter alia the concerned industry or to public interest.
The Competition Act as and when it comes into force would inter alia regulate,
through the Commission all anti competitive agreements, or “combinations” -
including mergers, amalgamations and acquisitions that may give rise to
anti-trust issues, and the abuse of dominant position by an enterprise.
The Competition Act only seeks to regulate the abuse of dominance and not the
mere existence of a dominant position by any company, though it does not
specify what exactly would constitute such an abuse. It does however, enumerate
the instances of abuse of dominant position inter alia if an enterprise directly or
indirectly, imposes unfair or discriminatory conditions or prices, or limits or
restricts the production of goods or services or indulges in practices for denial of
market access or uses its dominant position in one relevant market to enter into
or protect another relevant market.4 The Commission to determine if there has
been abuse is required to take into consideration certain factors including,
among others, the market share and size of the enterprise, the dependence of
consumers on the enterprise, the economic power of the enterprise and the
market structure and size of market.
Further, the Competition Act also seeks to regulate certain acquisitions where any
of the parties to the transaction, or the acquirer already has control over another
company which is engaged in a similar or identical business, and the company
being acquired and the company controlled by the acquirer jointly have:
(i) In India, the assets of the value of more than approximately US$200 million
or a turnover of more than approximately US$600 million; or
(ii) In India or outside India, in aggregate, the assets of the value of more than
US$500 million or a turnover of more than US$1500 million.
The Competition Act, also seeks to regulate acquisitions by groups by laying
down certain thresholds for the total value of the assets of a group5.
Further, any acquisition where a group to which the enterprise being acquired
(including a scenario where the entity to be acquired is engaged in the
production of similar or substitutable goods) would belong after the acquisition,
has a certain value of its assets outside India, then such an acquisition shall be a
combination for the purposes of the Competition Act.

___________________
4 For the purposes of this section “dominant position” is defined inter alia, as a position of strength
enjoyed by an enterprise in the relevant market in India, which enables it to operate independently
of competitive forces prevailing in the relevant market in India or affect its competitors or
consumers or the relevant market in its favour.
5 “Group” is defined as two or more enterprises which directly or indirectly are in a position to
exercise 26% or more of the voting rights in the other enterprise or appoint more than 50%
of the board of directors of the other enterprise or control the management or affairs of the
other enterprise.

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There is a prohibition on combinations which would cause appreciable adverse

effect on competition within the relevant market in India and such a combination
would be deemed to be void. Importantly, under the Competition Act any
person or enterprise which proposes to enter into a combination can approach
the Commission for approval of the combination within a period of seven days
after the approval of the board of directors of the concerned enterprises for the
combination or after the execution of any agreement or other document for
acquisition. If the Commission is of the opinion that the combination has or is
likely to have an appreciable adverse effect on competition within India then
under the Competition Act could direct that such combination shall not take
effect. If pre-acquisition approval is not taken, the Commission has one year to
look into the matter on its own or on an application made to it by a third party
and, if it so decides, to unravel the transaction.

Securities Law issues

Securities transactions are primarily regulated by the Securities and Exchange
Board of India and the Stock Exchanges, pursuant to the Securities and Exchange
Board of India Act, 1992 (“SEBI Act”) and the Securities Contracts (Regulation)
Act, 1956 (“SCRA”).
The SEBI Act under which the SEBI was constituted, is a legislation to protect
the interests of investors in securities and promote the development of, and
regulate, the securities market.The SEBI Act also provides for registration of
investment advisers, stock brokers, banker to an issue, etc. under the provisions
of regulations framed for such purpose.
The shares of a listed company have to normally be in dematerialized form.The
Depositories Act, 1996, inter alia regulates and facilitates the establishment of
depositories and the holding of shares by them in fungible form.
The SCRA is largely applicable only to shares of public and /or listed companies.
Under the SCRA, contracts for the sale and purchase of securities, other than
those implemented on a recognized stock exchange (in compliance with the
stock exchange norms), are ordinarily allowed only on a spot delivery basis.

Prospectus
Any offer for the issuance or sale of shares to the public, or any section of the
public, requires the filing of a prospectus containing the prescribed details
pursuant to the Disclosure and Investor Protection (“DIP”) Guidelines and
the Companies Act, with the SEBI and the Registrar of Companies.
Pursuant to the Companies Act, an offer or invitation is not deemed to be made
to the public, in relation to the provisions pertaining to the prospectus, if it is
not calculated to result in the shares being available for subscription or purchase
by persons other than those receiving the offer or invitation. However,
notwithstanding the foregoing, the prospectus related provisions are applicable in
all cases where an offer or invitation is made to fifty persons or more.
Every application form for subscription to shares of the issuer company has to be
accompanied with an abridged prospectus containing the necessary particulars.
No foreign company is authorized to issue, circulate or distribute in India any
prospectus in India for subscription to its shares without filing the prospectus
with the Registrar of Companies (“ROC”) in India.

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Mergers and Acquisitions: India

A public financial institution (“PFI”) or a bank whose main object is financing is

required to file a shelf prospectus with the ROC, for one or more issues of the
securities or class of securities specified in that prospectus.The PFI is also
required to file a draft shelf prospectus with SEBI at least 21 days prior to filing
the shelf prospectus with the ROC. A shelf prospectus is valid for a period of
1 year from the date of opening of the first issue of securities under that
prospectus. In respect of the issues covered by the shelf prospectus, the PFI or
bank is not required to file a fresh prospectus with the ROC, but will have to
instead file an Information Memorandum reflecting certain changes that have
occurred in the period between the date of the shelf prospectus and the date of
the Information Memorandum. However, the PFI is required to file with SEBI the
shelf prospectus after incorporating the updations in terms of the Information
Memorandum in respect of the second or any subsequent offer of securities.

Buy-back
Companies have been recently authorized to buy-back their own shares provided
that such buy-back is within the prescribed limits and in accordance with the
statutory guidelines framed for such purpose.The buy back has to be authorized
by the shareholders of the company by a special resolution (passed with three
fourths majority of the shareholders present and voting).Where the buy back of
shares is by a listed company, such consent of the shareholders has to be taken by
postal ballot.The purchase consideration may only be sourced from its free
reserves, its securities premium account or the proceeds of any shares or other
specified securities.The Companies Act requires that a buy-back of shares by a
company should not be more than 25% of its total paid up equity capital in a
financial year and requires that the ratio of the debt owed by the company should
not be more than twice the capital and its free reserves after the buy-back.
When a company buys back its own shares, it cannot make a further issue of the
same kind of shares within a period of six months except as bonus issue or in
discharge of any subsisting obligations such as conversion of warrants, conversion
of preference shares or debentures into equity shares.

Financial assistance for share acquisition

Under Section 77 of the Companies Act, no public company is permitted to give,
whether directly or indirectly, or whether by means of a loan, guarantee, the
provision of security or otherwise, any financial assistance for the purpose of or
in connection with a purchase or subscription made or to be made by any person
of or for any shares in the company or in its holding company.
However, the lending of money by a banking company in the ordinary course of
its business is permitted.
A company can provide financial assistance under any scheme for acquisition of
fully paid up shares in either the company or its holding company by persons
holding the shares in trust for the benefit of employees of the company.
A company is also permitted to make loans, within the prescribed limits, to
some of its employees for acquiring fully paid shares in the company or its
holding company to be held by themselves by way of beneficial ownership.

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Authorizations pursuant to the Companies Act

Certain specific corporate authorization requirements under the Companies Act
are as follows:
(i) Investments of funds of a company can only be carried out by the board of
directors of a company, which power has to be exercised through a
resolution passed at a meeting of the Board;
(ii) In respect of a public company, transfer of an undertaking or substantially
the whole of an undertaking requires a shareholder resolution by majority
vote (consent of more than half the members present and voting, which
consent has to be taken by postal ballot in the case of a listed company); and
(iii) In respect of a public company (except for certain specific categories of
companies), if the aggregate of (a) loans given by the company; (b) investments
made by the company; and (c) amounts for which guarantees or security have
been provided by the company, exceed 60% of its paid up share capital and free
reserves, or 100% of its free reserves, whichever is more, any subsequent
investments, loans or guarantees/ security by a company requires (a) a prior
shareholder resolution in general meeting, passed with three fourths majority
of members present and voting; and (b) prior consent from any PFI from
whom the company has taken a term loan which is subsisting (if the company
has not committed any default in its debt servicing / repayment obligations,
then such PFI consent will not be required if the total loans and guarantees
made and security provided by a company is within the limit of 60% of its paid
up share capital and free reserves).

NON-REGULATORY CONSENTS AND

APPROVALS

Board/shareholder/creditors consents
Authorizations may be required from shareholders pursuant to Shareholder /
joint venture agreements, through affirmative voting requirements at shareholder
meetings and/or board meetings is common. It is important to ensure that these
requirements are reproduced in the Articles of Association of the company,
failing which they are normally not enforced by a Court.
Financing agreements often have a requirement for prior consent of the lender
for mergers, reorganization, transfers of undertakings and substantial
investments by the borrower company.

Vesting of contracts
Under the Indian Contract Act, 1872 a party cannot assign its obligations under a
contract without the prior consent of the other party/ies.The rights or benefits
under a contract can however be assigned so long as the contract does not qualify
as a “personal services contract”.
In a merger the contractual and other obligations and liabilities (subject to
certain limited exceptions) of the transferor company are vested in the transferee
or the surviving company pursuant to the scheme of merger, which is sanctioned
by the Court.The Court order has the effect of vesting such contractual
and other obligations and liabilities in the transferee/surviving entity.
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Mergers and Acquisitions: India

Vesting of contracts entered into by a company, in the surviving company post

amalgamation is also recognized in the Specific Relief Act, 1963 (“SRA”). In terms
of the SRA when a company has entered into a contract and subsequently becomes
amalgamated with another company, specific performance6 of a contract can be
obtained by and against the new company which arises out of the amalgamation.
Similarly the right of a transferee in a transfer by operation of law is also reflected
in the Code of Civil Procedure, 1908 which inter alia specifies that where the
interest in a decree is transferred by assignment in writing or by operation of law,
the transferee may apply for execution of the decree to the Court which passed it;
and the decree may be executed in the same manner and subject to the same
conditions as if the application were made by such decree-holder.

TAXATION ISSUES
The key taxes and duties in mergers and acquisitions are capital gains taxes, sales
taxes and stamp duty.
A person resident in India is taxed on worldwide income. An Indian company
pays tax at 30% with a surcharge of 10% (on the amount of income tax payable)
and an education cess of 2% (on the income tax and surcharge payable) resulting
in an effective tax rate of 33.66%. A foreign company pays tax on income arising
or accrued in India at the corporate tax rate of 40% with a surcharge of 2.5%
(on the amount of income tax payable) and an education cess of 2% (on the
income tax and surcharge payable) resulting in an effective tax rate of 41.82%.
Certain specific heads of income such as long term capital gains, royalties etc are
taxed on a stand alone basis at different rates.
In an asset transfer, a tax efficient mechanism commonly adopted is that of a
“slump sale”. A slump sale is defined under the Tax Act as the transfer of one or
more undertakings for a lump sum consideration without values being assigned to
the individual assets and liabilities in such sale.The parties can ordinarily
contractually decide whether and the extent to which the liabilities in respect of the
undertaking in question are to be assumed by the acquirer. As opposed to sales of
individual assets, a “slump sale” is more tax efficient because it does not attract sales
tax/ Value Added Tax, which is otherwise levied on sales of individual assets.
Sales tax is also levied for transfers of “goods” within the territory of India.
Where assets are acquired from a foreign entity, it is common for the parties to
provide for a transfer of title in the goods when in transit, outside Indian
territorial limits, for avoiding sales tax implications in India.

___________________
6 However it may be noted that the remedy of specific performance can only be obtained at the
discretion of the Court.The remedy is available only in respect of certain specified contracts and is
not available inter alia in respect of: (i) a contract for the breach of which compensation in money
would be adequate relief; (ii) contract which is so dependant on the personal qualification or
volition of the parties or otherwise from its nature is such, that the court cannot enforce specific
performance of its material terms; (iii) a contract which is by its nature determinable; and (iv) a
contract the performance of which involves the performance of a continuous duty which the court
cannot supervise (section 14, SRA).

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Capital gains
Gains arising from transfers of capital assets including shares, attract capital gains
taxes.The rate of taxation depends upon the period of holding of the asset which
determines whether the resulting gain is in the nature of a long term capital gain
or a short term capital gain.
Ordinarily, long term capital gains arising to a company, i.e., capital gains
arising from transfers of capital assets held for a period of more than 36 months
(12 months in the case of shares or any other listed securities) are taxable at 20%
with a surcharge of 2.5% (on the amount of income tax payable) and an
education cess of 2% (on the income tax and surcharge payable) resulting in an
effective tax of 20.91%. However, in respect of an FII long term capital gains
arising from the transfer of securities are taxable at a concessional rate of 10%
with a surcharge of 2.5% (on the amount of income tax payable) and an
education cess of 2% (on the income tax and surcharge payable) resulting in an
effective tax rate of 10.455% . Further, gains on the sale of listed securities,
when transacted on the stock exchange, are not subject to capital gains tax in
India even though a securities transaction tax of 0.1% on the transaction value
will be payable each by the buyer and the seller.
Short term capital gains are ordinarily taxed as part of the total taxable income
of the assessee. Short term capital gains arise from transfers of capital assets
within a period of 36 months (within 12 months in the case of shares or any
other listed securities) from the date of acquisition thereof. However, short
term capital gains arising from transfers of securities by FIIs are taxable at
30% with a surcharge of 2.5% resulting in an effective tax rate of 30.75%
(Section 115AD of the Tax Act). Therefore, for unlisted securities, the period of
holding would have to be at least 12 months to qualify as long term capital gains.
Short term capital gains of listed securities transacted through a stock exchange
attracts a concessional rate of capital gains tax of 10.455%. However, securities
transaction tax of 0.1% would be payable each by the buyer and the seller in
the transaction.
Transfers of assets in amalgamations and demergers which fulfill the
requirements set forth in the Tax Act, do not attract capital gains tax. In such
amalgamations, the shareholders of the Transferor Company will also not be
liable to capital gains tax if the transfer is made for the consideration of
allotment of shares in the amalgamated company and the Transferee Company
is an Indian Company.
Where the transfer is by way sale of any individual capital assets, the sale price is
adjusted against the written down value of the block of assets of which the
individual asset comprises a part. In the event that the sale price is greater than
the written down value of the block of assets, the excess sale consideration is
taxable as short term capital gains.
The company selling its assets is liable to pay capital gains tax on the difference
between the sale price and the cost of acquisition (together with cost of
improvement, if any) of the asset in question.Where the assets are depreciable,
the capital gains would be charged on the difference between the sale price and
the written down value of the assets in question.
In case of slump sales, capital gains tax is levied on the difference of the sale
price and the net worth of the undertaking.

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Mergers and Acquisitions: India

Transfer pricing regulations

Income arising from an “international transaction” between two associated
enterprises, one or both of whom are non-residents, is computed in accordance
with the arm’s length price of the transaction.
An “international transactions” includes any purchase, sale or lease of any tangible
or intangible property, or provision of services or any other transaction having a
bearing on the profits, income, losses or assets of such enterprises.

Double taxation
India has entered into Double Taxation Avoidance Agreements (“DTAA”) with
several countries with the objective of minimizing dual tax levy in international
transactions between residents of India and the relevant country and for
extending certain beneficial rates of taxation.
DTAAs often have lower rates of taxation (including in respect of capital gains
taxes) than the rates in the Tax Act. The rates and the provisions vary among the
treaties which have in the past led to practices such as “treaty shopping” whereby
foreign entities wishing to invest in India structure their investments through a
country with whom India has a beneficial treaty for availing of the treaty
benefits. E.g.,The DTAA between India and Mauritius exempts taxes on capital
gains earned by a resident of Mauritius in India, subject to certain conditions.
Such methods can sometimes be controversial and the Indian tax department had
initiated steps to curb such practices. However the Supreme Court has upheld a
tax circular clarifying that the benefits under the India Mauritius DTAA will be
available to foreign institutional investors and funds who hold a Certificate of
Tax Residence issued by the Mauritian tax authorities which certificate shall
constitute sufficient evidence for accepting the status of residence of such foreign
investor in respect of income from capital gains on sale of the shares in question.
Recent amendments to the DTAA between India and Singapore are also
beneficial in a similar manner.

Depreciation
In an amalgamation, aggregate depreciation is calculated at the prescribed rates
as if the amalgamation had not taken place.The depreciated value is then
apportioned between the transferor and transferee companies in the ratio of their
usage. Depreciation is to be calculated on the written down value of the assets.
Depreciation can also be claimed on intangibles such as know-how and
intellectual property.
In the case of a slump sale or of acquisition of identifiable assets, only the
Transferee Company will be entitled to the benefit of depreciation of the assets
after the date of acquisition.

Carry forward and set off

In an amalgamation of certain enterprises, it is possible for the Transferee
Company to carry forward or set off the unabsorbed depreciation and losses
of the Transferor Company for a specified number of years if it fulfills certain
conditions stipulated in the Tax Act.Where the prescribed conditions are not
fulfilled, the Transferee Company is not entitled to carry forward or set off the
unabsorbed depreciation and losses of Transferor Company.

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In a demerger, where losses carried forward or unabsorbed depreciation are

directly relatable to the undertaking transferred to the resulting company,
then the same are allowed to be carried forward and set off in the hands of
the resulting company.
Under the Tax Act losses can be carried forward by a company for a period of
eight years. However, upon a change of control of a company in which the public
are not substantially interested, which change exceeds 51% of the voting power,
the company loses the ability to carry forward losses.
Certain Export Oriented Units (“EOU”) enjoy a tax holiday for a certain period
under the Tax Act. Due to a recent amendment, this tax holiday continues to be
available, for the residuary period, even after an amalgamation or demerger of
the EOU with another entity.

Deductions
In the case of amalgamations which fulfill the conditions set out in the Tax Act,
certain special deductions with regard to acquisitions of Patents & Copyrights,
Technical Know-how, License to operate telecommunication services, certain
Preliminary Expenses etc. which were initially available to the transferor
company, can be utilized by the transferee company for the residuary period for
which the benefit was originally available.

Stamp duty
Stamp duty payable on most instruments is regulated by the Stamp Act applicable in
the State in which the transaction takes place and the rates vary amongst the States.
However stamp duties on transfer of shares are normally levied at a uniform
rate, throughout India, at 0.25% of the value of the shares being transferred.
Both, the share purchase agreement and the share transfer deed attract stamp
duty. This 0.25% duty is levied on the deed of transfer whereas the share
purchase agreement could carry a nominal duty. However, in some States,
where the agreement pertains to a transfer of “marketable securities”, it attracts
a percentage based duty, on the value of the shares, without any ceiling.
Where the shares are held in dematerialized form, no stamp duty is payable on
transfers of such shares.
The Court order sanctioning a scheme of merger or demerger, attracts stamp
duty in many States under the head of instruments for “conveyance” of property.
In Mumbai, for example, the court order for a merger carries stamp duty,
amounting to10% of the aggregate of the market value of the shares issued or
allotted in exchange or otherwise and the amount of consideration paid for such
amalgamation; provided that the amount of duty chargeable shall not exceed:
(i) 5% of the true market value of the immovable property located within the
State of the transferor company; or
(ii) 0.7% of the aggregate of the market value of the shares issued or allotted in
exchange or otherwise and the amount of consideration paid for such
amalgamation, whichever is higher.
In respect of acquisitions of assets, stamp duty is levied on certain categories of
“instruments” and documents which vest the assets in the acquirer, at percentage
based rates (in the range of 0.5% to 10%), linked to the value of the assets in
question. This duty is usually levied under the head of “conveyance”.

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Certain categories of assets such as Immovable property and intellectual

property rights can only be sold by a written instrument, which in most States
attracts stamp duty as a specific percentage of the market value of the property,
without any ceiling. The Supreme Court7 has held that plant and machinery
which is permanently fixed to the earth, would constitute immovable property
for stamp duty purposes. In many states including Maharashtra, an agreement for
the assignment of copyrights does not attract stamp duty as a conveyance.
Other assets such as tangible movables are commonly transferred by delivery.
Where movables are to be transferred, the parties usually enter into an
agreement for sale containing the terms and conditions but which contemplates a
subsequent vesting of title in the buyer, by delivery.
In respect of certain categories of assets, however, the Stamp Acts of some
States levy stamp duty on an advalorem basis over agreements for sale of the
assets although the vesting of the title does not take place pursuant to the terms
of such agreement.

DOCUMENTATION AND DUE DILIGENCE

Preliminary agreement - MOU/Letter of intent

Pending negotiation, but upon settlement of the basic terms of understanding,
the parties to an M&A transaction in India usually execute a term sheet.The
term sheet may be a substitute for a memorandum of understanding /letter of
intent.This is essential to define the basic and preliminary understanding
between the parties and lay down certain ground rules for the start of the
negotiation.The term sheet is usually a non binding document. It is in
furtherance of the term sheet that the parties formulate the scope of the due
diligence exercise to be conducted. But before the signing of the term sheet, it is
always advisable for the buyer to conduct an informal and preliminary due
diligence of the company in question.This would enable the buyer to take a call
on whether or not to proceed to the next level of discussions.

Due diligence
A comprehensive due diligence pertaining to the seller and the assets is a
pre-requisite to making a decision to go ahead with the transaction of acquisition
of shares and/or assets.This is to determine the extent of liabilities which would
be attached to the shares/assets, if any. Although a share or asset acquisition
agreement would contain exhaustive representations and warranties by the
purchaser, enforcing the same even in arbitration proceedings would prove to
be expensive and time consuming.
A confidentiality agreement between the seller/the target company and the
proposed buyer usually precedes the due diligence exercise.
The practice in India is that a legal, technical (in respect of the plant and
machinery) and a financial due diligence is conducted. Depending on the scope
and extent of the due diligence exercise, the due diligence requisition list is
prepared and sent out to the target company.

___________________
7 In Duncans Industries Limited v. State of U.P., (2000) 1 SCC 633

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In a legal due diligence, apart from a review of the documents and information
made available in respect of the target company, certain independent searches
are also conducted. A search at the office of the ROC where the company is
registered is conducted. Although the records at the ROC are seldom current,
the search is nevertheless useful for ascertaining information from the statutory
filings made by the company, including details of any charges that have been
created on any of the assets of the company. Copies of the annual returns and the
balance sheets would normally also be on record. A basic idea of the shareholding
pattern can also be determined. It is also possible to trace the history of directors
of the company.
Depending on the business of the company, the sector specific approvals,
consents and documents for establishment of the undertaking and operation of
the undertaking are to be examined.
In the case of Real Estate, apart from the basic title documents, a search at the
Office of the Sub-Registrar of Assurances is also conducted for determining if
there are any encumbrances on the property. A title search that traces the history
of the immovable property could also be conducted.
A company/factory is required to maintain several registers under various
legislations. It is important to verify if these are in order.The registers are
also a valuable source of information and the presumption is that they are
accurately maintained.
Searches in Court registries have to be manually carried out and is often a
laborious and inaccurate process.These searches are usually carried out to
ascertain if any petitions for winding up the target company have been initiated
as any transfer of property made upto one year prior to the filing of a petition
seeking a winding up of a company, can be set aside if the company were to be
finally wound up.
In respect of Intellectual Property Rights, verification of the title, if required,
may be carried out from the concerned registry.
It is also advisable to conduct a limited due diligence on the subsidiaries of the
target company. Related party transactions are also examined with special
attention especially where such transactions involve the seller.
While the exercise of due diligence is essential, it cannot be relied upon
completely.The buyer would have to ensure the protection of its rights under the
transaction specific agreements as well.
Upon completion of the transaction, the buyer could consider having a
post-acquisition due diligence conducted to chart the progress of
implementation of the terms and conditions of the transaction documents.
In a listed company due diligence raises further issues under the Securities and
Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 which
prohibits, among other things, any dealings in securities of listed companies,
by persons who are in possession of unpublished price sensitive information.

Documentation and agreements

The documentation in respect of M&A transactions (apart from the scheme of
amalgamation prepared pursuant to the Companies Act) is similar to the formats
used in international transactions.

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Although the manner of each transaction is different, terms and conditions

concerning the following issues are usually recorded in the documentation:

Parties to the agreement

It is important to identify all relevant persons (including corporates) who are to
be made parties to the agreement. Certain persons could be made confirming
parties depending on their connection with the transaction. This is important in
view of the applicability of the doctrine of privity in India whereby a person who
is not a party to an agreement can neither be sued nor claim any benefit
thereunder (subject to certain limited exceptions).

Obligations
The obligations of all the parties concerned should be mentioned in detail, as
well as the consequences of not meeting the same.These include clauses relating
to the mode of payment of consideration as well as the manner of transfer of
shares and/or assets in question.

Closing
The time and place for closing the transaction is stated. It would also be
necessary to determine the conditions precedent upon fulfillment of which
closing could be achieved.This would normally include specifying all the
obligations to be completed by each of the parties such as obtaining statutory
approvals, providing undertakings, delivering necessary statutory forms, handing
over the consideration for the transaction, etc.This is important as there
invariably is a gap between the execution of the agreement and completion.

Representations and warranties

Representations and Warranties are usually based on disclosures made by the
parties as well as the outcome of the due diligence exercise and are usually used
by the purchaser to ensure that his interest in the property being purchased is
protected.The more important clauses are those relating to incorporation and
standing of the companies, proper authorization, consents and approvals having
been obtained by the parties thereto to enter into the agreement, the shares and
assets being free from any kind of encumbrances whatsoever, no litigation
pending against any of the companies, etc.The sellers would also have to
represent and warrant that they are in compliance with all applicable laws, rules
and regulations. Another important clause is to state that the transaction has been
proceeded with relying upon the representations and warranties made by the
sellers in terms of the agreement and that no investigation, review or analysis,
whether prior to or after the date thereof, shall detract from the validity or
enforceability of the sellers’ representations and warranties.
In a share acquisition, the warranties will generally cover the target’s accounts,
taxation, corporate matters, title to assets, trading, properties, intellectual
property rights, plant and equipment, stock and work in progress, vehicles,
insurances, goodwill, employment matters, environmental matters, banking and
finance, regulatory compliance, litigation and the accuracy and completeness of
information provided by the sellers and/or the warrantors.
In an acquisition of assets, the warranties may be less extensive as opposed to
a share sale, and would focus more on the business being acquired.They will
generally include representations on the ownership and conditions of assets,
accounts of the business, trading activities, employees, liabilities, authorizations
and other specific issues regarding the business to be transferred.

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Identification of shares/assets
If any specific shares or assets are being purchased, these could be suitably defined.
If valuation is required, then the method of valuation could be mentioned. In the
case certain assets are excluded, those should also be specified.

Employee matters
The agreement could contain clauses dealing with employee treatment.This
would depend entirely on the terms of the transaction.There would be instances
where the employees would also be transferred. In other cases, it would be
advisable to specifically negate responsibility for the employees of the other party.

Indemnity clause
It is important to have an indemnity clause especially from the point of view of
the purchaser. A purchaser usually relies on the disclosures and representations
and warranties made by the seller. A default in the terms of the agreement,
especially of the Representations and Warranties, triggers the indemnity clause.
By virtue of an indemnity clause, the defaulter would have to make good the loss
of the other party. Payments pursuant to an indemnity to a foreign entity, require
prior RBI approval.The issuance of guarantees by an Indian entity in favour of a
foreign entity also requires prior RBI approval, except in certain circumstances.
The RBI has recently approved the issuance of corporate guarantees by an Indian
entity for securing performance of indemnification obligations under a share
purchase agreement with a foreign entity.

Limitation of liability
From a sellers point of view, limitations of liability on a per incident basis, on a
basket of claims and a limitation on the aggregate liability is important.

Other clauses
The boilerplate clauses such as confidentiality, publicity, waiver, governing law
and dispute resolution clauses would have to be incorporated. Alternate dispute
resolution could be in the form of negotiation, conciliation or arbitration. In case
of arbitration it would be necessary to determine the number of arbitrators,
the venue of arbitration and the rules that would govern the arbitration
proceedings. If one of the parties to a transaction is a foreign party, an offshore
arbitration clause is often negotiated to take advantage of the New York
Convention. A survival clause is always important for ensuring that obligations
pursuant to clauses such as the indemnities, limitations of liability, confidentiality
etc., survive termination of the agreement.

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PUBLIC OR LISTED COMPANY

CONSIDERATIONS

SEBI ( Disclosure and Investor Protection) Guidelines,

2000 (“DIP Guidelines”)
The DIP Guidelines are applicable to public issues or offers for sale of securities.
However, in certain cases, they are also applicable to preferential allotments of
shares by listed companies. In most cases of preferential allotment of shares, the
pricing for the preferential allotment of shares by the target in favour of the
purchaser would as per the DIP Guidelines have to be made at a price not less
than the higher of the following:
(i) The average of the weekly high and low of the closing prices of the related
shares quoted on the stock exchange during the six months preceding the
relevant date8; or
(ii) The average of the weekly high and low of the closing prices of the related
shares quoted on a stock exchange during the two weeks preceding the
relevant date.
The DIP Guidelines would not be applicable inter alia in the case of a scheme
of amalgamation that has been sanctioned by a High Court.

The SEBI (Substantial Acquisition of Shares and Takeovers)

Regulations, 1997 (“Takeover Code”)
The Takeover Code deals with acquisitions of listed Indian securities. Any
acquirer (meaning a person who, directly or indirectly, acquires or agrees to
acquire shares or voting rights in, or control of, a company, either by himself
or with any person acting in concert) who acquires shares or voting rights that
would entitle the acquirer to more than 5%, 10%, 14%, 54% or 74% of the
shares or voting rights, respectively, in a company is required to disclose the
aggregate of his shareholding or voting rights in that company to the company
and to each of the stock exchanges on which the company’s shares are listed
at every stage within two days of (i) the receipt of allotment information,
or (ii) the acquisition of shares or voting rights, as the case may be.
A person who holds 15% or more of the shares or voting rights in any company
is required to make annual disclosure of his holdings to that company within
21 days of the financial year ending 31 March (which in turn is required to
disclose the same to each of the stock exchanges on which the company’s shares
are listed). Further, such person who holds 15% or more but less than 55% of
the shares or voting rights in any company is required to disclose any purchase
or sale of shares aggregating 2% or more of the share capital of the company, to
the company and to each of the stock exchanges where the shares of the
company are listed within two days of (i) the receipt of allotment information,
or (ii) the sale or acquisition of shares or voting rights, as the case may be.
An acquirer who, along with persons acting in concert, acquires or agrees to
acquire 15% or more of the shares or voting rights in a company is required to
make a public announcement to acquire a further minimum 20% of the shares
___________________
8 The “relevant date” would be thirty days prior to the date on which the meeting of the general
body of shareholders is held, in terms of Section 81(1A) of the Companies Act to consider the
proposed issue of shares.

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of the company. However, no acquirer may acquire shares or voting rights

through market purchases or preferential allotment which taken together with
the shares held by such acquirer, entitle him to exercise more than 55% of the
voting rights in the company. Any acquisition of shares or voting rights in the
aforesaid manner beyond 55% is required to be divested within one year in the
manner provided in the Takeover Code.
An acquirer who, together with persons acting in concert with him, holds 15%
or more but less than 55% of the shares or voting rights in a company cannot
acquire additional shares or voting rights that would entitle him to exercise more
than 5% of the voting rights in any financial year unless such acquirer makes a
public announcement offering to acquire a further minimum 20% of the shares
of the company. Any further acquisition of shares or voting rights by an acquirer
who holds 55% or more but less than 75% of the shares or voting rights also
requires the making of an open offer to acquire such number of shares as would
not result in the public shareholding being reduced to below the minimum
specified in the listing agreement.
In addition, regardless of whether there has been any acquisition of shares or
voting rights in a company, an acquirer cannot directly or indirectly acquire
control over a company (for example, by way of acquiring the right to appoint a
majority of the directors or to control the management or the policy decisions of
the company) unless such acquirer makes a public announcement offering to
acquire a minimum of 20% of the shares of the company.
Unless otherwise provided in the Takeover Code, an acquirer who seeks to
acquire any shares or voting rights whereby the public shareholding in a company
may be reduced to a level below the limit specified in the listing agreement with
the stock exchange(s) for the purpose of continuous listing may acquire such
shares or voting rights only in accordance with the regulations prescribed by
SEBI for delisting of securities.
In the event that that acquirer is desirous of delisting by buying out the
outstanding shares of the public shareholders then as per the delisting guidelines
this may result in potentially high costs, since in such case the delisting has to
take place on the basis of what is termed as the ‘Reverse Book Building Process’
wherein the final offer price is determined on the basis of the price at which the
maximum number of shares are offered for sale.
Competitive bids are permitted under the Takeover Code, which can be made
only within 21 days of the first public announcement, but a bidder may make, in
certain circumstances, an upward revision of the offer price.
Bail-out takeovers are also permitted under the Takeover Code and apply to the
substantial acquisition of shares in a financially weak company (not being a sick
industrial company), in pursuance to a scheme of rehabilitation approved by a
public financial institution or a scheduled bank.

Insider trading
The Securities and Exchange Board of India (Insider Trading) Regulations, 1992
(the “Insider Trading Regulations”) aim to prevent “insiders” from trading in
securities of a listed company while in possession of any “unpublished price
sensitive” information. Insiders are persons who, are or were connected with the
company or are deemed to have been connected with the company, and who are
reasonably expected to have access, to unpublished price sensitive information in
respect of securities of a company, or who have received or have had access to
such unpublished price sensitive information.
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Mergers and Acquisitions: India

The Insider Trading Regulations restrict an insider from, either on his own
behalf or on behalf of any person, dealing in securities of a company listed on
any stock exchange when such person is in possession of unpublished price
sensitive information. Insiders passing on such information are also covered
by these regulations.
Further, the Insider Trading Regulations provides that no company shall deal in
the securities of another company or associate of that other company while in
possession of any unpublished price sensitive information (Regulation 3A).
However, pursuant to the recent amendments the Insider Trading Regulations
specify certain defenses under Regulation 3A. It lays down that in case of a
proceeding against a company in respect of Regulation 3A it shall be a valid
defence to prove that the company entered into a transaction in the securities of
a listed company when the unpublished price sensitive information was in the
possession of an officer or employee of the company, if:
(i) The decision to enter into the transaction or agreement was taken on its
behalf by a person or persons other than that officer or employee;
(ii) Such company has put in place such systems and procedures which
demarcate the activities of the company in such a way that the person who
enters into transaction in securities on behalf of the company cannot have
access to information which is in possession of other officer or employee
of the company;
(iii) It had in operation at that time, arrangements that could reasonably be
expected to ensure that the information was not communicated to the
person or persons who made the decision and that no advice with respect to
the transactions or agreement was given to that person or any of those
persons by that officer or employee; and
(iv) The information was not so communicated and no such advice was so given.
Additionally, in a proceeding pursuant to Regulation 3A of the Insider Trading
Regulations, against a company which is in possession of unpublished price
sensitive information, it shall be defence to prove that acquisition of shares of a
listed company was as per the Takeover Code. Perhaps the intention here was to
prevent companies from being “insiders” if they make the mandatory bid under
the Takeover Code as in such case the public shareholders would get an exit at
the same price the company is willing to pay the seller and there would be no
advantage gained by the company due to inside information to the exclusion of
the public shareholders.
Regulation 4 of the Insider Trading Regulations provides that any person in
violation of Regulation 3 and Regulation 3A would be guilty of the offence
of insider trading.

Listing agreement
Even if the substantial interest or control in a listed company were acquired by
another company, the acquirer cannot establish complete control over the Board
since pursuant to the Listing Agreement with the stock exchange, at least one
third of the board of directors has to comprise of independent directors where
the chairman is a non executive chairman.Where the chairman is an executive
chairman, at least one half of the board has to comprise of independent
directors. An independent director is defined as any director of the company

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who apart from receiving director’s remuneration, does not have any material
pecuniary relationship or transactions with the company, its promoters, its
management or its subsidiaries which in the judgment of the board may affect
independence of judgment of the director.
Except in the case of government companies, institutional directors on the
boards of companies are deemed as independent directors whether the
institution is an investing institution or a lending institution.
A wide range of disclosures are required to be made on a prompt basis, to the
stock exchanges where the shares of a company are listed, in respect of decisions
to transfer or acquire any business, assets or shares. A strict code of corporate
governance is also imposed through the Listing Agreement.

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