Merger and Acquisitions in India - WIRC · 2011-05-31 · Acquisitions SlumpSale Demerger AssetSale...

Executive Presentation

| May 28, 2011|

Merger and Acquisitions in

India India

Modes of M&Ain India

M&A

Amalgamations Acquisitions

© Nishith Desai Associates 2

Merger De-merger Asset Purchase

Stock Purchase/

Stock

Subscription

ItemizedSale

SlumpSale

Mergers

3

Mergers

© Nishith Desai Associates

Merger of two Indian companies

Shareholders Shareholders

Corporate Law Implications

� Sections 390 to 394 of the Companies Act

� Scheme of arrangement to be approved by High Court. Approx.

time - 4-6 months

� Shareholders / creditors approvals – 3/4th in value

Exchange Control Implications

� FIPB approval for issuance of shares to Non resident shareholders

not required if foreign shareholding is within sectoral caps

Securities Laws Implications (Listed target)

4

Indian Co.Indian Co.

Merger


� Prior stock exchange approval for the scheme under Listing

Agreement

� Issuance of shares to shareholders of merged entity to require

stock exchange approval

Stamp duty Implications

� High Court order liable to stamp duty

Income Tax Implications

� Capital gains exemption and carry forward of depreciation / loss

of foreign company subject to certain conditions


Merger of foreign co. with Indianco.

Shareholders

Consideration

in the form of

shares of

Corporate Law Implications

� Corporate laws of the foreign entity must permit merger

� Scheme of arrangement to be approved by High Court. Approx.

time - 4-6 months

� Shareholders / creditors approvals – 3/4th in value

Exchange Control Implications

� FIPB approval for issuance of shares to Non resident shareholders

not required if foreign shareholding is within sectoral caps



Indian Co.Foreign Co.

Merger

shares of

Indian Co.


� Open offer under Takeover Regulations may not get triggered on

account of the merger exemption

� Insider trading guidelines to be adhered to

� Prior stock exchange approval for the scheme under Listing

Agreement

� Issuance of shares to shareholders of merged entity to require stock

exchange approval

Stamp duty Implications

� High Court order liable to stamp duty

Income Tax Implications

� Capital gains exemption and carry forward of depreciation / loss of

foreign company subject to certain conditions

Asset Purchase

6

Asset Purchase


Acquisitions

Slump Sale Demerger Asset Sale Definition Transfer of an

undertaking for a lumpsum considerationwithout values beingassigned to the individualassets and liabilities insuch sales.

Transfer of an undertaking on a going concern basis under a court approved scheme of arrangement under sections 391 to 394 of the Companies Act, 1956 in such a manner that inter-alia:

• all the property and liabilities of the undertaking, become the property, assets, liabilities of the resulting company by virtue of the demerger

The sale of the whole or part of the assets of the target to the acquirer with individual values assigned for each asset.

• the resulting company issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis

• the shareholders holding not less than three-fourths in value of the shares in the demerged company become share-holders of the resulting company by virtue of the demerger,

• the property and the liabilities of the undertaking being transferred by the demerged company are transferred at values appearing in its books of account immediately before the demerger

7© Nishith Desai Associates

Acquisitions

Slump Sale Demerger Asset Sal e

Pro’s No Value Added Tax liability No capital gains tax implications, if conditions are met

No Value Added Tax liability

Possible to carry forward accumulated losses

No successor liability issues for the acquirer

Step up basis available for claiming depreciation

Cherry picking of assets possible

Con’s Issue surrounding availability of depreciation on goodwill

No step up basis available in respect of the acquired assets for depreciation purposes

Successor liability issue in respect of direct and indirect taxes for the acquirer

Time line for undertaking a de-merger – may extend upto 6 months

Successor liability issue in respect of direct and indirect taxes for the acquirer

Value Added Tax liability in respect of the individual assets being transferred

Higher capital gains tax incidence on the transaction for the seller


Stock Purchase/Subscription

9

Stock Purchase/Subscription


Income tax Act

Key Regulations

10

Exchange

Control

laws

Private Equity

Investments


�Foreign Direct Investment (FDI)

� Foreign Venture Capital Investment (FVCI)

� Foreign Institutional Investment (FII)

Investment Regimes

� Foreign Institutional Investment (FII)


� FDI: FDI means foreign direct investment by way of subscription and/or purchase of securities of

an Indian company by a non-resident investor. Foreign Exchange Management (Transfer or issue of

security by a person resident outside India) Regulations, 2000 (“TISPRO”) issued by the RBI along

with Consolidated FDI Policy issued by DIPP (“FDI Regulations”) are the relevant regulations for

this purpose. Thus, ‘direct’ investments by the concerned Fund vehicle/SPV would need to comply

with the provisions and restrictions as stipulated under the FDI Regulations.

� FVCI: The SEBI (Foreign Venture Capital Investors) Regulations, 2000 (“FVCI

Regulations”) has been formulated for venture capital investments primarily in Indian unlisted

Investment Regimes

Regulations”) has been formulated for venture capital investments primarily in Indian unlisted

companies. FVCI’s registered with the SEBI are accorded a different route for investments into India

vide Schedule 6 of TISPRO (i.e. Investment in an Indian Venture Capital undertaking by a registered

Foreign Venture Capital Investor).

� FII: The SEBI (Foreign Institutional Investors) Regulations, 1995 (“SEBI FII Regulations”),

govern the registration of foreign institutional investors (“FIIs”) desirous of making portfolio

investments into listed Indian securities. The FII route as such is the preferred route for foreign

investors who want to make portfolio investments under Schedule 2 of TISPRO (i.e. Purchase/sale

of shares and/or convertible debentures of an Indian company by a registered Foreign Institutional

Investor under Portfolio Investment Scheme) and trade in Indian listed stocks on the floor of the

stock exchange


�Restriction in terms of sector

FDI Regime

Restricted sector

� Atomic Energy,� Lottery business, � Gambling and Betting� Retail trading (except single brand retailing)

Regulated Sector (few examples)

� Banking (74%) � Telecom services (49%)*� Insurance (26%)� ARCs (49%)


retailing)� ARCs (49%)� Single brand retail (51%)� NBFCs and Real Estate

�Restriction in terms of securities

- Fully paid-up equity shares (including shares with differential rights)

- Compulsorily Convertible Preference Shares (CCPSs)

- Compulsorily Convertible Debentures (CCDs)

FDI Regime (Contd.)

�Restriction in terms of price

- Entry and exit price subject to – DCF valuation.

- Fixed pricing for convertibles OR prescribing a conversion formula, subject to the FEMA /

SEBI guidelines on pricing (latter inserted by the revised Consolidated FDI Policy, 2011;

effective from April 1, 2011).

�Previous venture/tie up in India


�Previous venture/tie up in India

-ConsolidatedFDI Policy 2011 has dispensed away with the condition whereby a foreign

investor, which was already engaged in a joint venture or technical collaboration (entered

before January 12, 2005), could not make a new investment into a similar venture unless the

existing Indian partner gave its no objection and a specific prior Government approval

(FIPB) was obtained in this regard.

FVCI Regime

Over FII and FDI regime

� Free entry and exit pricing

� No lock-in post IPO, subject to compliance with minimum holding requirement

Over FDI regime� FVCIs get the status of Qualified Institutional

Buyers (QIBs)

� Benefits

� Challenges

�Investment Conditions/Restrictions

� Min 2/3rd in unlisted equity shares or equity linked instruments of VCU

� Not more than 1/3rd in IPO of a VCU, debt or debt instruments of a VCU in which VCF hasalready invested by way of equity

� Negative List for investment by FVCI

� NBFSs

� gold financing

� activities not permitted under the FDI regime

� All new FVCIs to invest only in specified 10 sectors to get FVCI benefits


� Challenges

� Portfolio Investment route for participation in the capital markets

� Requires registration with SEBI under the SEBI (FII) Regulations, 1995

�Can invest as FII or as a sub-account to a FII

� Permitted to invest in:

� Shares of listed and unlisted entities

FII Regime

� Commercial papers and corporate bonds

� units of mutual funds

� government securities

� exchange traded derivatives

� security receipts of ARCs

� Investment under the FII regime is a preferred route for investment in listed entities


Deal Structuring

17

Deal Structuring


Investment Structure

Financing Financing

ModeMode

Nature and reason why usedNature and reason why used Income streamIncome stream

EquityEquity � Equity share capital is principally used to finance a

subsidiary as it allows retaining the profits

offshore and allows structural flexibility to time

the repatriation

� Repatriation of equity-financed stake could be by way

of dividends and / or capital gains. Dividends can only

flow out from profits of the company , such

repatriation would happen without disturbing

ownership structure of the subsidiary. On the other

hand capital gains would arise upon sale of the share,

buyback of the shares or capital reduction . Further ,in

the case of a buy back or capital reduction the equitythe case of a buy back or capital reduction the equity

base of the company would stand eroded.

DebtDebt � Interest receipts allow for periodic and steady

income flow

� Interest payments can be offset against operating

profits, and accordingly, the borrower’s taxable income

reduces


Hybrid Hybrid

instrumentsinstruments� Combination of debt and equity features in

varying degree merging the economic benefits of

the two. The choice is linked with the nature of

the transaction being undertaken and exchange

control regime

� The tax treatment of the instrument would be

dependent on the jurisdiction – usually treated as debt

in one jurisdiction and equity in other jurisdiction

Types of Instruments

Equity

Fully / Compulsorily Convertible

Voting

Non-voting

Typesof Instruments

Typesof Instruments

Preference

Shares

Partly / Optionally Convertible

Redeemable

Debentures

Debt

Other External Commercial Borrowings

Fully / Compulsorily Convertible

Partly / Optionally Convertible

Non-convertible

Typesof Instruments

Typesof Instruments


Strategizing Shareholding Patterns

Shareholding % Rights under Companies Act, 1956

>10 % Right to institute action against the Company for oppression andmismanagement and all other rights as a minority shareholders such asrights against variation, to call for a general meeting etc.

20

>25% Right to block resolutions on special matters (requiring the consent of atleast 75% of the shareholders present and voting in any shareholders’meeting)

>50% Right to block resolutions on ordinary matters (requiring the consent ofat least a simple majority of the shareholders present and voting in anyshareholders’ meeting)

>75 % All the rights of a majority shareholder


� Structuring of Investment Instruments

� From June 08, 2007, any security that is not compulsorily convertible into equity is treated as

debt under exchange control regulations

� Equity shares and securities compulsorily convertible into equity such as compulsorily

convertible preference shares and compulsorily convertible debentures are thus preferred

instruments of investment – any other security considered an “External Commercial Borrowing”

Deal Structuring- Issues

� Structuring transfer of shares and purchase consideration:

� Lump Sum payment for transfer of all the shares

� Staggered payment/ Payment linked to achieving certain milestones or business plan for the

transfer of shares in tranches.

� Payment subject to the escrow arrangement; (Circular 58 permits AD Category-I banks to open

and maintain escrow accounts on behalf of residents and / or non-residents for the purpose of

keeping shares or purchase or subscription money / consideration in an escrow for a maximum

period of 6 months)


� Restriction on yield

� Dividends

• only out of profits, mandatory transfer of upto 10% of profits to general reserve

• Capped at SBI PLR + 300 basis points (approx. 14-15%) for CCPS

� Interest - amount paid to non-residents on CCDs may be capped

Deal Structuring- Issues

� Structuring distribution waterfall

� Shares with differential rights difficult in a public company or a private company whichis a subsidiary of a public company

� New Company Law Bill proposes to do away with shares carrying differential votingrights

� Other Investor Protection Rights such as Anti-Dilution, Veto Rights, Pre-emptive Rights etc. – Enforceability?

� Is it necessary to reproduce these rights in the Articles of the Company?


� Exits� IPO

• All outstanding convertible instruments to be converted prior to filing ofProspectus with RoC

• lock in of shares

� Buy Back

Deal Structuring - Issues

• Buy back offer to be made to all shareholders

• buy back permitted only out of free reserves / profits or fresh issue of shares

• capped at 25% of the outstanding capital and 25% of the net worth in a year

� Tag Along/Drag Along and Put Options• Sale to a resident may attract the pricing restrictions

� Liquidation/Liquidity Event• Winding Up: Long drawn process – could take up to one year or more


M&A Transactions and Takeover Code

24

M&A Transactions and Takeover Code


Applicability of theTakeover Code

“control” shall include:

a. the right to appoint majority of the directors

or

b. to control the management or policy

decisions exercisable by a person or persons

acting individually or in concert, directly or

Person (Acquirer) Persons Acting in Concert (PAC)+

Shares, Voting Rights, Control

XYZ“Shares” means shares in the share

capital of the company & carrying

voting rights

Any security which would entitle the

holder to receive shares with voting indirectly including by virtue of their

shareholding or management rights ,

shareholders agreement or voting agreement

or in any other manner

c. in case of joint control , if one person ceases

to be in control then it is not change in

control

Target Company

An “acquirer” means any person who directly or indirectly

acquires or agrees to acquire:

a. shares

b. voting rights

c. control

in a company either by himself or with Persons acting in concert

(“PAC”)

“ Target Company ” means a listed

company whose shares or voting rights or

control is directly or indirectly acquired or

is being acquired.

holder to receive shares with voting

rights

Excludes preference shares


Disclosures – Trigger Events

The acquirer should make necessary disclosures to the target company AND to each of the stock exchanges

on which the target company’s shares are listed within 2 days of: (a) receipt of allotment intimation; or (b)

acquisition of shares / voting rights, when such acquisition exceeds the following thresholds:

74%

55% Every purchase or sale of 2% or more of the target company’s share capital by an

5%

14%

10%

54%55%

acquirer holding between 15% and 55% requires disclosure

15%Anyacquisition entitling the acquirer to more than 5 %, 10%, 14%,

54% or 74% shares or voting rights in the target company requires

disclosure


Public Announcement – Trigger Events

Creeping Acquisition: can acquire upto 5% every

FY without making a PA Any acquisition of 5% or more of voting rights through

open market purchases (other than block and bulk deals)

Public Announcement to purchase shares = minimum 20% of the voting capital of the company

PA also required for any acquisition of

“control” irrespective of whether there has

been any acquisition of shares or voting

rights – unless pursuant to a special

resolution

Any acquisition entitling the acquirer to 15% or more of the voting

rights in a company

Any acquisition of 5% or more of the voting rights in a company

open market purchases (other than block and bulk deals)


M&A Transactions and Competition Act

28

M&A Transactions and Competition Act


Combinations

Combination includes:

a) an acquisition of control, shares or voting rights or assets by a person;

b) an acquisition of control of an enterprise where the acquirer already has direct or

indirect control of another engaged in identical business; or

c) a merger or amalgamation between or among enterprises;

that cross the financial thresholds as set out in the next slide.

29

Acquisition

Directly or indirectly acquiring or agreeing to acquire (a) shares, voting rights of an enterprise; or

(b) control over management or control over assets of any enterprise’.

Merger or Amalgamation

Not specifically defined under the Act and may need to be interpreted as understood in the

Indian parlance. The Act refers to transactions involving (i) a merging entity dissolving into the

merged entity; or (ii) two merging entities merging to form a new entity.


Thresholds For Combinations

• The thresholds for a combination pertain to the asset value and the turnover.

• In case of the an acquisition, the thresholds relate asset value / turnover to of the acquirer and the target,

on an aggregate basis.

• In case of a merger or amalgamation, the thresholds pertain to the enterprise remaining / created pursuant

to the merger or amalgamation.

For Parties in India For Parties world-wide For the Group in India For the Group world-wide

Assets Assets Assets Assets

30

AssetsINR 15 billion(approx. USD 333million)

OR

TurnoverINR 45 billion(approx. USD 1billion)

AssetsUSD 750 millionORTurnoverUSD 2,250 million

AND

In India

AssetsINR 7.5 billion (approx. USD 167 million)ORTurnoverINR 22.5 billion (approx. USD 500 million)

AssetsINR 60 billion (approx.USD 1.3 billion)

OR

TurnoverINR 180 billion (approx.USD 4 billion)

AssetsUSD 3 billionORTurnoverUSD 9 billion

AND

In India

AssetsINR 7.5 billion (approx. USD167 million)ORTurnoverINR 22.5 billion (approx.USD 500 million)


Computation of Turnover / Asset Value

• For determining whether or not the prescribed thresholds have been triggered, the value of the

assets / turnover of the entities forming part of the ‘group’ to be computed on a consolidated

basis.

• Where an entity is in a position to (a) exercise 50% or more of the voting rights in the other

enterprise, or (b) appoint more than 50% of the members of the board of directors of the

other enterprise, or (c) control the management or affairs of the other enterprise, such

enterprises are considered to be part of the same group.

31

enterprises are considered to be part of the same group.

• The book value of assets of the enterprise and the turnover of the enterprise as provided in

the audited books of accounts of the enterprise in the financial year immediately preceding

year in which the date of the proposed combination to be considered.


Filing Requirements

• Any proposed combination requires filing to be made regarding such combination to the CCI

in a prescribed format.

• In case of an acquisition, the acquirer is required to file necessary information to the CCI,

within 30 days from the date on which the agreements for acquisition have been entered into.

• In case of a merger or amalgamation, the parties to the merger or amalgamation are required

to jointly file all necessary information to the CCI within 30 days from the date of the

32

to jointly file all necessary information to the CCI within 30 days from the date of the

resolution of the board of directors of the parties approving the said merger or amalgamation

.

• The Combination Regulations provide for two separate forms (Form I and Form III) for filing

of information regarding a proposed combination to the CCI. Form I is a simple form

requiring basic information regarding the combination while Form II appears to be a much

more exhaustive.


Filing Requirements (contd)

• Transactions may be notified to the CCI in either Form I or Form II. Form I is a simple form

requiring basic information and is accompanied by a filing fee of INR 50,000. Form II is an

exhaustive form requiring detailed information is accompanied by a filing fee of INR 1 million

(approx USD 22,000). The Combination Regulations only prescribe an inclusive list of

transactions that would necessarily require to be notified in Form I with the CCI. For other

transactions the onus lies on the acquirer. CCI has the power to seek information to be filed in

Form II in the event the parties have filed information in Form I. Time taken for filing of the

additional information in Form II is excluded from the 210 day limit.

33

additional information in Form II is excluded from the 210 day limit.

• CCI also has powers to require further information, irrespective of whether Form I or Form II

has been filed and the time taken for filing this additional information is again excluded from

the 210 day limit.

• Penalty for not complying with the filing requirement under the Act may extend to the higher

of 1% of the total turnover, or 1% of the assets value, involved in such combination.

• Penalty for making false statements or omitting to furnish material information may range

between INR 5 million ( approx. USD 110,000) to INR 10 million (approx. USD 220,000).


Filing Procedure

Filing of notice with the CCI within 30 days from the date of (a) board resolution approving the merger / amalgamation, or (b) execution of agreements

for acquisition have been entered into, as the came may be

Scrutiny of the notice by the CCI. CCI may require additional information or remove defects, if

any

CCI to form prima facie opinion on whether the combination has caused / likely to cause AAE on competition within 30 days of

filing (excluding the time taken for filing of additional information)

Determine whether transaction is a combination

Parties to the combination to inform the CCI of change in information provided in the notice. After assessment of changes in notice, CCI may treat it as valid or not

Proceed with the

combination

Yes

No

34

CCI to issue show cause notice to the parties calling upon them to respond as to why investigation should not be taken + CCI may call for report of director general

Secretary to intimate the parties to publish the details of the combination within 10 working days of such direction

CCI, if it deems it necessary, to give an opportunity of being heard to the parties. Secretary to convey direction to appear

CCI to pass an

order

cancelling the

transaction

Order of the CCI within 210 days of filing or deemed approval

CCI to pass an

order

approving the

transaction

CCI to propose appropriate modifications to the transaction

Parties to accept the modifications or CCI

accepts the parties modifications.

Order of the CCI approving the transaction

Parties fail to accept the modifications.

CCI to issue appropriate directions

Yes


Disclaimer

The information provided in this presentation is for informational purposes only, and should notbe construed as legal advice on any subject matter. No recipients of this presentation, clients orotherwise, should act or refrain from acting on the basis of any content included in thispresentation without seeking the appropriate legal or other professional advice on the particularfacts and circumstances at issue from an attorney licensed in the recipient's state. The content ofthis presentation contains general information and may not be accurate or reflect current legaldevelopments, verdicts or settlements. Nishith Desai Associates expressly disclaims all liability inthis presentation contains general information and may not be accurate or reflect current legaldevelopments, verdicts or settlements. Nishith Desai Associates expressly disclaims all liability inrespect to actions taken or not taken based on any or all the contents of this presentation.

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