Nowadays mergers and amalgamations in India are increasing rapidly due to continuous changes in dynamics, increasing competition, technology adaptation, business expansion, and globalization of companies, etc.

Amalgamation and merger are used as single expressions. But in terms of company law, they are different from each other. The Companies Act 2013 (Act 2013) enacted and replaced the 1956 Act with several amendments, including those relating to mergers and acquisitions (M&A). The new bill has been praised by unions for features such as business-friendly regulation, improved reporting standards, and protection for investors and investors.

Recognizing the rights of business owners brings the law one step closer to regulating individual businesses. The 2013 Act aims to simplify the entire acquisition, merger, and restructuring process and facilitate local and cross-border mergers and acquisitions, thus making Indian companies more profitable for private investors.

Meaning Of Amalgamation

Amalgamation is the blending of two or more undertakings (companies) into one undertaking, the shareholders of each blending company substantially become the shareholders of the other company which holds blended undertakings.

Meaning Of Merger

Merger is a form of amalgamation where all the assets and liabilities of a transferor company get merged with the assets and liabilities of the transferee company leaving behind nothing for the transferee company except, its name which gets removed through the process of law.

In reality, companies don't merge, only their assets and liabilities merge [1].

Causes Of Merger And Amalgamation

The reasons why companies choose merger and amalgamation in India are:

• For economies of scale.
• For the increasing market share of companies.
• For reducing competition.
• For increasing shareholder value.
• For diversifying risk.
• For minimizing tax liabilities.
• For developing a brand name.

Types Of Merger In India

Following are the types of mergers in India:
Horizontal merger: a horizontal merger takes place between companies dealing with similar products. The purpose of such a merger is to reduce competition, acquire a dominant market position and expand market reach. Example: the merger of Brooke Bond and Lipton India, Hindustan Unilever, and Patanjali.

Vertical merger: the main aim of a vertical merger is to combine companies that deal with the same type of product. However, the stage of production at which they operate is different.

Example: the merger of Reliance Industries and FLAG telecom group

Concentric merger: the term co-centric merger means that the organization serves the same type of customers. Example: Axis Bank acquiring free charge.

Conglomerate merger: when two or more unrelated industries or companies merge with each other It is termed a conglomerate merger. Example: Voltas Limited and L&T merger.

Cash merger: when the shareholders are offered cash in place of the shares of a newly formed company it is called a cash merger.

Forward merger: when a company chooses to merge with its customers, it is called a forward merger.

Reverse Merger

A reverse merger is the opposite of a merger no clear definition has been given in the companies act nor the term has been precisely defined by the Indian court.

The reverse merger represents a case where the loss-making company or less profit-earning company extends its embracing arm to the profitable company and in turn, absorbs in its fold. The lost-making company is called a shell company.

Features of Reverse merger/test of Reverse merger:
The Gujarat High Court has given the following test to be satisfied before an arrangement can be termed as a reverse merger in the case of Bihari Mills Ltd, In re, Maneklal Harilal Spg & Mfg. Co Ltd[2]

If the value of the assets of the healthy company exceeds the value of the loss-making company or less profit-making company.

If the net profit attributable to the assets of the healthy company exceeds those of the loss-making company or less profit-making company.

If the aggregate value of the consideration being issued by the loss-making or less profit-making company exceeds the healthy company's value of the net asset.

If the equity capital of the less profit-making company for an acquisition exceeds its amount of equity share capital prior to acquisition.

If the issue of shares of the loss-making company would result in its change in control through the introduction of minority holders or groups of holders.

Features of a shell company:
A shell company, for the purpose of this project, refers to a loss-making or a less profit-making company.

A shell company for the purposes of a valid reverse merger may be:

1. a former operating company that is public or private, for some reason has ceased operations and liquidated its assets; or
2. one which never had any operations but was formed from scratch for the specific purpose of creating a shell.

In the former situation, shell promoters gain control of defunct operating companies by buying up a majority of their shares. In the latter situation, shell promoters incubate the shells - they incorporate a company, under the Companies Act. In Exchange for letting an operating company merge into a shell, the promoter charges the operating company a fee and retains an ownership interest in the shell post-merge.

Type Of Amalgamation In India

The following are the type of amalgamation in India:

Amalgamation in the nature of merger:
When the transferor and transferee company decide to combine shareholder interest along with their assets and liabilities, it is called amalgamation in the nature of merger.

Amalgamation in the nature of purchase:
When the conditions of the amalgamation in the nature of the merger are not satisfied, the same terms as amalgamation in the nature of the purchase. In this method, a transferor company acquires the transferee company and the shareholders of the transferee company do not change having any properties holding in the amalgamated company.

Effect Of Amalgamation

The true effect of and character of amalgamation largely depends on the scheme of the merger. But, when two companies amalgamate and merge into one, the transferor company loses its entity as it ceases to have its business. However, their respective rights and liabilities are determined under the scheme of amalgamation- Saraswati Industrial Syndicate Ltd. v. CIT [1991] 70 Comp. Cas. 184 (SC).

When the transferee-company takes over a property subject to charge, from the transferor-company, the transferee-company has to file the necessary form with R.O.C. for registration of charge in its name.

Procedure Of Merger And Amalgamation

The Companies (Compromises, Arrangements, and Amalgamation) Rules, 2016, lay down the following procedure for filling petition under Section 230/232:

Application for order of meeting:
An application for compromise or arrangement by the creditors and shareholders under section 230 of the act may be made to the National Company Law Tribunal for convincing creditors meeting or shareholder meeting in the prescribed form (Form No. NCLT-1). The application needed to be a company by a notice of admission (Form No. NCLT-2) an affidavit (Form No. NCLT-6) and a copy of the schedule for compromise and arrangement.

Hearing of application by the tribunal:
At the hearing, the tribunal determines the class for the classes of creditors who are to attend the meeting to discuss the proposed compromise and arrangement, fixing the date and time of such meeting, appointing a chairman, determining the quorum and procedure of such meeting.

Notice of meeting:
Once that tribunal sees the application it issues notice for the conveyance of a meeting of the creditors and the members of the company within 21 days. An annexure with the notice is to be attached specifying details of the compromise or arrangement, a copy of the valuation report, etc. Notice shall also be sent to the central government, income tax authorities, respective stock exchange sectoral regulators or authorities, etc. Representation by the above authorities should be made within 30 days of receipt of the notice. In case of no response within the stipulated time, it shall be presumed that they have no representation to make on the proposals.

Voting and Proxies:
The notice shall also specify the person to whom the notice is sent may vote in the meeting either themselves or through proxies or by postal ballot within 1 month of the date of receipt of the notice.

Filing of the petition:
If the scheme proposed for compromise and arrangement has been approved in the meeting the company needs to present a petition (Form No. CAA 5) within 7 days after the chairman of the meeting submitted the report.

Hearing of the petition:
The tribunal shall hear the petition on the appointed day. The tribunal may grant the scheme by an order (Form No. CAA. 6). The certified copy of the order shall be filed with the ROC within 30 days of receipt of the same.

Application for a direction under section 232:
When the scheme concerning reconstruction and amalgamation of the company and the mere sanction of the scheme by the tribunal is not sufficient to implement it, an application may be filed with the tribunal for the direction with regard to the same.

Role Of Tribunal

Any person aggrieved by any assessment of compensation made by the prescribed authority under sub-section (3) may, within 30 days from the date of publication of such assessment in the Official Gazette, prefer an appeal to the Tribunal and thereupon the assessment of the compensation shall be made by the Tribunal[Section 237(4)].

The Government, before making the order, must:

1. send a draft copy of the proposed order to each of the companies concerned,
2. have considered and made such modifications in the draft order as may seem to it desirable in the light of any suggestions and objections which may be received by it from the companies concerned, or from shareholders therein, or from any creditors thereof [Section 237(5)]. The time for raising an objection, not less than two months from the date of receipt of the copy of the draft order, shall be fixed by the Central Government.

Copies of every order made under Section 237 must, after it has been made, be laid before both Houses of Parliament as soon as possible [Section 237(6)]. The provisions of Section 238 regarding disclosure and registration shall also apply to the transfer of shares under Section 237.

Cases On Amalgamation And Merger

A scheme of amalgamation between a holding and its subsidiary company, not involving any reorganization or restructuring of shares or any variation of members' rights in the transferee company, does not need the sanction of the High Court (now Tribunal) insofar as the transferee company is concerned - Nebula Motors Ltd., In re (2003). [3]

Merely because a winding up petition is pending before the company court (now Tribunal), the company cannot be barred from submitting a scheme of arrangements to the court, even for avoiding winding up - Macho Foods (P.) Ltd. v. Modiluft Ltd. (2003).[4]

Where the majority of creditors had no notice of the petition for amalgamation, their interest should be protected and the petition for sanction of amalgamation scheme should be dismissed - Kaveri Entertainment Ltd., In re (2003).[5] In this case, the transferor company obtained the court's permission for the non-holding of creditors' meetings on condition that it would issue notices to all creditors - which it did only selectively i.e. only to some unsecured creditors.

Unless the exchange ratio and scheme are unconscionable or illegal or unfair or unjust, the court (now Tribunal) would not act as a court of appeal and sit in judgment. The court (now Tribunal), in the exercise of its jurisdiction, is to satisfy that:

1. statutory provisions have been complied with
2. the class of persons who attended the meeting was fairly represented
3. the statutory majority was acting bona fide and
4. the arrangement (Scheme) was such that an intelligent and honest man, acting in respect of his interest might reasonably approve.

The concept of market value means the price that a willing purchaser will pay to a willing seller for a property having due regard to its existing conditions with all its advantages and potential possibilities - Reliance Petroleum Ltd., In re (2003).[6] Also, see German Remedies Ltd., In re (2004)[7]

Reference:

• Areva T. and D. India Ltd., In re [2008] 81 SCL 140 (Cal.).
• Bihari Mills Ltd., In re, Maneklal Harilal Spg. & Mfg. Co. Ltd. [1985] 85 Comp. Cas. 6 (Guj.).
• Nebula Motors Ltd., In re [2003] 45 SCL 143 (AP).
• Macho Foods (P.) Ltd. v. Modiluft Ltd. [2003] 45 SCL 159 (Delhi).
• Kaveri Entertainment Ltd., In re [2003] 45 SCL 294 (Bom.).
• Reli- ance Petroleum Ltd., In re [2003] 46 SCL 38 (Guj.).
• German Remedies Ltd., In re [2004] 50 SCL 77 (Bom.).
• Taxmann's Company Law And-Practice By Dr. GK-Kapoor (24th-Edition)

Written By:  Shaista Waseem, student at Unity P.G and Law College, affiliated with Lucknow University.