After a lifetime of sky-high valuations, private equity funds, strategic buyers and other different routes of carrying out M&A transactions in India, companies will now have opportunities to invest in Indian Market at a discount in the wake of the COVID-19 crisis.After a lifetime of sky-high valuations, private equity funds, strategic buyers and other different routes of carrying out M&A transactions in India, companies will now have opportunities to invest in Indian Market at a discount in the wake of the COVID-19 crisis.
The Companies Act of 1956, consolidates the provision of Mergers and Acquisitions firm in India. A business grows over time either organically, through the utility of its products and services or inorganically, through the expansion of the workforce, customers, infrastructure and others which increases the overall revenue of the organization. Mergers & acquisitions are an avatar of the inorganic growth process. Mergers and acquisitions, today are pioneer instruments of momentum growth in businesses, especially in the Indian corporate environment. They are used in a wide spectrum of fields such as information technology, telecommunications, and business process outsourcing (BPO) as well as in traditional businesses to gain strength, expand the clients base, cut competition or enter into a upcoming market or product segment. It could prove beneficial to access the market through an established brand, to get a market share, to eliminate competition, to reduce tax liabilities or to acquire competence.
Governing Laws in M&A
If all parties (two or more) involved in an M&A are located in India, then they will be governed by Indian laws. However, in the event when one of the parties is located outside India, the parties can mutually agree to a jurisdiction offshore.Foreign Exchange Management Act 1999 and its related rules and regulations and Foreign investment policy of the Government of India notified through various press notes are most important for a non-resident party willing to invest in an acquisition finance transaction.
For acquisitions financed through debt, the applicable laws include the:
- Securitization and Reconstruction of Financial Assets and Enforcement of
- Security Act 2002 (SARFAESI Act).
- Transfer of Property Act 1882.
- Old Companies Act.
- Income Tax Act 1961.
- Financial Institutions Act 1993.
For listed companies, the applicable laws are the:For listed companies, the applicable laws are the:
- Indian Contract Act, 1872.
- Securities and Exchange Board of India Act 1992 (SEBI Act) and its related rules, regulations and guidelines.
- SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011 (Takeover Code).
- SEBI (Issue of Capital and Disclosure Requirements) Regulations 2009 (ICDR Regulations).
- SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR Regulations).
Different types of creditors defined under IBC and how they exercise control and assess the effect on borrowers.
The Insolvency and Bankruptcy Code distinctions between different type of investors while simplifying the process of resolution and liquidation of corporate debtors.
A ‘creditor’ is a person to whom the debt is owed. Debt is an obligation or a liability in respect of a claim, which is due to another person.
Under IBC, creditors are further bifurcated into ‘Financial Creditors’ and ‘Operational Creditors’, which is different from the Companies Act 2013, which does not detail on the term ‘Creditors.’Under IBC, creditors are further bifurcated into ‘Financial Creditors’ and ‘Operational Creditors’, which is different from the Companies Act 2013, which does not detail on the term ‘Creditors.’
The Section 5(7) of IBC, defines a ‘Financial Creditor’ as “a person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred.” The financial debt has been classified under Section 5(8) of IBC as a “debt along with interest if any which is disbursed against the consideration for time value of money.”
Section 5(20) of IBC, defines an ‘Operational Creditor’ as “any person to whom an operational debt is owed which has been legally assigned or transferred.” Operation debt is defined as a “debt in respect of the provision of goods and services.” This expression includes all trade creditors with whom the corporate debtor contracts as part of its operations and services.
All companies involved in mergers are required to make an application before the Company Court (a specific bench of the High Court) having jurisdiction over the companies to call a meeting with respective shareholders and/or creditors. In the meeting held with shareholders/creditors of the companies, and as per The Companies Act 2013, if more than 3/4th of the peasant shareholders/creditors vote in favour of a merger and if such a merger is sanctioned by the Court, it then becomes binding on all the shareholders and creditors of the company. The Act does not classify creditors and thus there is no distinction between unsecured and secured or financial and operational creditors. A creditor with an outstanding debt of a minimum of 5% of the total outstanding debt of the amalgamating company can object to the merger before the National Company Law Tribunal (NCLT). It is important during mergers, that the amalgamating company ensures that it passes all its assets and liabilities to the merged company which in this case should be inclusive of trade dues to the operational creditors.
Provisions provided to Creditors under the Bankruptcy Code vs. SARFAESI Act
In view of the Bankruptcy Code, 75% of the Creditors must approve of a sale of business while under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 60% of the secured creditor’s approval is required. The Bankruptcy code doesn’t distinguish between the Secured and Unsecured Creditors on voting rights in the committee.
This article is written by Amy Johnes, A legal expert at Ahlawat & Associates – Best legal firm for Setting up business in India.