Gain a basic understanding of compromise, arrangement, and amalgamation in the context of Indian business strategy. Explore key definitions, reasons for such corporate moves, and governing laws, including cross-border mergers. Get insights from Sudhir Halakhandi, a tax expert.
With the ever changing world dynamics and evolution of trade and ample of growth opportunities in the world markets, to achieve economies of scale and growth synergies, companies are looking at collaborating with other companies having similar or same business or forming new companies at different locations to be recognised worldwide and create a brand image.
Mergers and amalgamations are used as instruments of momentous growth and are increasingly getting recognised in India as a critical tool of business strategy. They are used in a wide business such as information technology, telecommunication and business process outsourcing as well as traditional business to grow strength, expand customer base, cut competition or enter a new market or segment.
What is a compromise?
The word compromise has not been defined under the Companies Act, 2013 or rules thereunder, the term compromise has to be taken as the settlement of conflicts by mutual consent or agreement or through a scheme of compromise under section 230-232 of the Companies Act, 2013.
What is an arrangement?
According to section 230 of the Companies Act, 2013, arrangement includes re-organisation of the company’s share capital by the consolidation of the shares of different classes or by division of shares into shares of different classes or by both these methods.
For better understanding: Here the transferee company issues shares to the shareholders of the transferor company or cancels the shares where the Transferor company is transferred by way of arrangement to the Transferee company where shareholders are the same or by both of these methods.
What is Amalgamation?
An Amalgamation is a combination of two or more companies into a new entity. Where two or more companies agree to form a new company and transfer the assets and liabilities into the new entity amalgamation is said to have taken place.
As per section 2(1B) the Income Tax Act, 1961 : Amalgamation means merger of either one or more companies with another company or merger to two or more companies to form one company in such a manner that all the assets/liabilities or the transferor company/companies becomes the property/liability of the amalgamated company.
What is merger?
Merger means where the assets and liabilities of one company are transferred to the other and only one company looses its existence the transferee company remains in existence.
Reasons for a Company to enter into a Compromise, arrangements and Amalgamations:
There are various reasons
1. For economies of scale
2. For increasing market share of the company
3. For reducing competition’
4. For increasing shareholders value
5. For minimizing tax liabilities
6. For developing a brand name etc.
Governing laws for mergers and amalgamation
There are various laws governing the compromise, arrangements and amalgamation which has to be looked into before going for the scheme.
1. Companies Act, 2013
2. Companies (Compromise, Arrangement and Amalgamations) Rules, 2020
3. Foreign Exchange Management Act, 1999
4. The Competition Act, 2002
5. Income Tax Act, 1961
6. Insolvency and Bankruptcy Code, 2016
7. Indian Stamp Duty Act, 1899
8. SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 etc.
Cross Border Mergers
Over the years there has been a number of significant developments that have taken place in terms of regulatory regime governing cross border mergers. Marking a major amendment from the erstwhile Companies Act, 1956 where only inbound mergers was taken into consideration, the provisions of the Companies Act, 2013 provides for both inbound and outbound mergers.
The Ministry of Corporate Affairs, Government of India (MCA) notified section 234 of the Companies Act, 2013 w.e.f from 17 April, 2017 which permitted cross border mergers. Further in consultation with the Reserve Bank of India(‘RBI’), the MCA also notified corresponding amendments to the (Compromise, Arrangements and Amalgamations) Rules, 2016 and Rule 25A of the Companies (Compromise, Arrangements and Amalgamations) Amendment Rules , 2017
The regulations under the CA, 2013 provides that the approval of the RBI is mandatory for cross border mergers.
One thing to note here is, Section 234 and Rule 25A of the Companies (Compromise, Arrangements and Amalgamations) Rules 2016 and the Companies (Compromise, Arrangements and Amalgamations) Amendment rules, 2018 does not provide for arrangements, hence there is no possibility of ‘Demergers’ of foreign company into Indian company.
Fast Track Merger
Under section 233 of the Companies Act, 2013 the section provides for fast track mergers between two or more small companies or between holding company and their wholly owned subsidiaries without taking approval of NCLT.
However fast track mergers are not available for cross border mergers.
Other Compromise, Amalgamations and Arrangements aspects will be discussed later in other articles.
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