Merger and Amalgamation Companies Act 1956 and 2013

What is merger?

In merger two or more existing companies combine into one company. The transferor company merges its identity into the transferee company by the transfer of its business (assets and liabilities). The shareholders of the transferor company receive shares in the merged company in exchange for the shares held by them in the transferor company as per the agreed exchange ratio.

What is Amalgamation?
In amalgamation two or more existing transferor companies merge together to form a new company, whereby all the transferor companies lose their existence and their shareholders become the shareholders of the new company.

Who can object the scheme of merger.

As per the newly introduced Companies Act 2013 an objection to scheme of merger can be raised only by persons holding not less than 10% of the shareholding or persons holding outstanding debt amounting to not less than 5% of the total outstanding debt as per the latest audited financial statement. These provisions are intended to ensure that insignificant minority interest do not hold the majority at ransom. This will also enable a faster approval of scheme with the reduction of number of objections.

The Merger and Amalgamation [M&A] is allowed under the Companies Act [CA] 1956 vide section 391 to 394. The Companies Act 2013 contains 10 clauses i.e. from 230 to 240 regarding M&A whereas Companies Act,  1956 contained  only  7  sections  of  which  only  4  particularly  dealt  with  M&A.

Types of Mergers

Horizontal merger is the merger of firms engaged in the same line of business. 

Vertical Merger is backward or forward expansion. In a Conglomerate, there is a merger of firms engaged in unrelated businesses.

Process

High court of respective state where the registered offices of the companies are located has the jurisdiction to sanction the scheme. 

Merger of Foreign company

By virtue of Sec. 584 of Companies Act 1956 a foreign company having a place of business in India, is eligible to be merged with an Indian Co. U/s 394(4)(b) a foreign incorporated company could be a transferor company in the scheme of merger.

The Companies Act 2013 has opened doors for cross- border mergers by  allowing both ways merger subject to certain  conditions. Permission of Reserve Bank of India shall also be a pre-requisite in cross-border Mergers. The RBI is empowered in to analyze cross border mergers.

It is necessary that the law under which the foreign company is incorporated allow the foreign company to merge with an Indian Company. Merger can’t take place in case the foreign laws do not allow the foreign company to merge with Indian companyIn case a foreign company does not have a place in India the Indian courts have no jurisdiction to sanction the merger. However if the foreign co. has a branch office in India the respective court has the jurisdiction. Ever branch of a foreign company needs to register with ROC and submit returns to ROC at Delhi. Although the foreign company is filing the returns at Delhi ROC the High court of the state where the branch office is located shall have the jurisdiction over the M&A scheme and not the Delhi High court.

The Indian Company can carry forward the losses of the foreign company u/s 72A of the Income Tax act, after the merger of the foreign company with Indian company. 

Before issue of shares to the shareholders of the foreign company under the scheme the Indian company needs to get permission from RBI under FEMA for the issue of shares to NRI and must give declaration that the merged entity will not indulge in the business of Agriculture, plantation, Real estate etc.

Stamp Duty 

Only in the state of Maharashtra the order of the High court sanctioning the M&A attracts Stamp duty at the rate applicable on the Conveyance of Property. When the tranaferor and the transferee companies are located at two different states and if stamp duty is applicable at both the states the double payment of stamp duty can be avoided by applying for exemption in either state.

Income Tax Act 1961

It provides for not only carry forward and set off of accumulated losses but also un-absorbed depreciation allowance of the amalgamating company.