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MERGERS & AMALGAMATIONS

MERGERS & AMALGAMATIONS. Institute of Company Secretaries of India Hyderabad Chapter. The Meaning. Merger- Where Assets and Liabilities of one company are transferred to another and the first company loses its existence Amalgamation-

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MERGERS & AMALGAMATIONS

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  1. MERGERS & AMALGAMATIONS Institute of Company Secretaries of India Hyderabad Chapter

  2. The Meaning • Merger- Where Assets and Liabilities of one company are transferred to another and the first company loses its existence • Amalgamation- Where two or more companies merge into a third new company and the existing cos lose their existence

  3. The reasons • Expansion and Diversification • Optimum Economic Benefit • De-risking Strategy • Scaling up of operation for competitive advantages • Increase the Market capitalization • Cost reduction by reducing overheads • Increasing the efficiencies of operations • Tax benefits • Access foreign markets

  4. Legal Issues • The Companies Act. 1956 • The Income Tax Act • Other Laws • The procedure • Precedents

  5. The Companies Act • Section 391 to 394 -Arrangement -The Scheme -The Petition to the Court -Chairman appointed by Court -Meeting under Court’s supervision -Voting by Poll (Postal Ballot!?) -Notice to Central Govt. -No objection from Official liquidator

  6. The Income tax Act • Carry forward and set off of accumulated loss and unabsorbed Depreciation: - Sec 72A of the Income Tax Act - Available to Industrial Undertakings (Manufacture,Computer, Power, Mining construction Ship,Aircraft, rail) - 3/4th Value of Assets to be held for 5 years - Continue the business of transferor Co. for 5 Years

  7. The Income Tax Act… • Transferor company need not pay any capital gains {Sec 47 (vi)} • Amortization cost can continue in the transferee Co. • Carry forward of losses/ depreciation in the transferor company • Issue of Shares to the shareholders of shares to the transferor Co. does not attract capital gains {Not a transfer – SEC 47(vii)}

  8. Other Laws • Pass on of Modvat to the transferee company • New undertaking benefits available to the transferee company • Stamp duty- In A.P., Maharashtra, Gujarat and Karnataka stamp duty is to be paid on the Court orders

  9. Other Laws….. • Maharashtra - 0.7% of value of shares allotted or 7% of value of immovable properties in Maharashtra subject to a ceiling of 10% of the value of shares • Gujarat = Maximum 2% of value of shares allotted • Karnataka: 0.1% of value of properties in Karnataka • A.P- 2% on the market value of shares

  10. The ProcedureThe Terms used • Appointed Date • Effective Date • Record Date • Transferor Company- Can be any body Corporate • Transferee Company – Can only be company under this Act.

  11. The ProcedureThe Terms used • Compromise -- “a dispute, a sacrifice” • Arrangement – “parties agree without any dispute between them” “Compromise and arrangement covered u/s 391 are of the widest character, ranging from a simple composition or moratorium to an amalgamation of various companies, with a complete reorganisation their share and loan capital….. Sec 391 is a complete code by itself” –Navjivan Mills Co. Ltd In re.(1972) Comp. Cas.265 (Guj.)

  12. The Procedure… • To Review of Memorandum of Association -to verify that power to amalgamation is available -transferee has power to carry on the business of the transferor company. • Value the Company and determine value of shares as of appointed date • The Scheme of Merger/Amalgamation - Transfer of Licences, permits, Sanctions

  13. The Procedure… • Hold the Board Meeting of both companies and approve in principle the amalgamation • File the applications to the Court • File details of Shares of held by Non Residents with RBI (FEMA/20 Para 7) • Court appoints chairman for both the companies • Prepare Notice convening the Meeting • Court appointed chairman convenes shareholders meeting (Certificate of Posting) • Paper advertisement of the notice

  14. The Procedure… • Pass the resolution by poll • On the same day the transferee company can hold EGM to increase the authorised capital/81(1A) resolution • Get the minutes of the meeting approved by the court appointed chairman • Petition to high courts seeking approval of the scheme • High court sends copy of petition to the central Govt (R.D.) And official liquidator seeking their report that the affairs of the company have not been conducted in a manner prejudicial to the members or public interest

  15. The Procedure… • Public Notice in local dailies intimating the hearing date of the petition by the advocate • Official Liquidator on scrutiny of the books and papers of the company files his report to the Court in respect of transferor companies being wound up. • Where the Court Passes an order providing for transfer any property or liabilities then, the properties shall be transferred to and vest in, and liabilities shall become liabilities of transferee company. • --The Dept does not permit transfer of Authorised Capital….. (property includes powers of every description)

  16. The Procedure… • File the Certified copies of the Court orders with ROC within 30 days • Attach Copy of the order made by Court u/s 391(2) to every Memorandum of the company • Intimation to Stock Exchanges, and apply for in principle approval for allotment of shares • Apply to RBI for getting in principle approval to allot shares to Non Residents ( Approval from FIPB in case % increases) • Fix the Record Date • Convene Board Meeting and allot shares as per the Scheme • File the return of allotment (Which Form to be used)

  17. Post Merger • Board Meeting • Intimation to Stock Exchanges • General Intimation in news papers • Transfer of Licences, Registrations, Bank Accounts, Mutation of Title Deeds, RC Books of vehicles, Insurance policies, PF, ESI, Sales Tax • Action plan for integration in Finance and Accounts • Intimate the Auditors of the transferor company • Any pending legal cases to be in the name of transferee Co. (Obtain sufficient copies of Certified order of theCourt) • What happens to Remuneration of Directors where Appointed date is substantially larger?

  18. Precedents • Tenancy rights cannot be transferred to transferee company– General Radio & Appliances Co. Ltd. V. M.A. Khader (1986) 60 Company Cas.1013 • Employees cannot be compulsorily transferred to another under a scheme—John Wyeth (India) Ltd., In. re. (1988) In. re. (1988) 63 Comp. Cas.233 (Bom) • Who can file petition under Section 391? Creditor, member or liquidator in addition to the company only can move a petition u/s391 -- S.K. Gupta Vs. KP Jain (1979) Comp. Cas. 342 (SC)

  19. Precedents… • Rights of creditors or members of a company to make an application u/s 391 are not taken away after winding up order has been passed -- Rajdhani Grains & Jaggery Exchange Ltd., In re (1983) 54 Comp. Cas.166 (Delhi) • It is not compulsory for Court to give direction to convene a meeting contemplated under Section 391(1)– Sakamari Steel & Alloys Ltd. In re (1981) 51 Comp. Cas.266 (Bom)

  20. Precedents… • Scheme once sanctioned becomes binding and cannot be varied except with the Sanction of Court—JK (Bombay)(P) Ltd. Vs.New Kaiser-I-Hind Spg. & Wvg. Co. Ltd (1970) 40 Comp. Cas.689 (SC)

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