The Indian regulatory structure governing the corporate sector has undergone a number of changes in recent years. In order to adequately address this changed environment and to further economic growth, the Government has proposed the Companies Bill, 2012.

The Bill, passed by the Lok Sabha recently, seeks to make a number of changes to the existing framework governing mergers (including demergers), amalgamations and other similar restructuring transactions involving Indian companies.

Merger of a listed entity with an unlisted entity

The merger of a listed company with an unlisted company would not automatically result in a listed entity. This seems to provide for an indirect delisting of listed companies that merge into an unlisted company. An exit offer needs to be provided by the unlisted company to the shareholders of the listed transferor company. What remains to be seen is whether SEBI will allow companies to delist under this mechanism, bypassing the delisting regulations.

There does not appear to be a relaxation where the unlisted transferee company intends to list but is obligated to make an offer to shareholders of the listed transferor company.

Cross border mergers

A path has been cleared for Indian companies to merge with foreign companies. Currently, a foreign company can merge with an Indian company, but the reverse is not permitted. However, cross border mergers with companies incorporated in countries specified by the Government will be permitted. This reduces the flexibility that is currently available, at least for inbound mergers.

Furthermore, a requirement to obtain prior RBI approval for these mergers has been introduced.

Fast track mergers

A fast track approach for mergers between two or more small companies (as defined in the Bill), or between a parent and its wholly-owned subsidiary has been provided. Companies are required to file a declaration of solvency and the scheme must be approved by at least 90 per cent of the creditors or their classes. This is a welcome move aimed at simplifying the merger process for these classes of companies.

Treasury stock

The Bill prohibits a company from the creation of treasury stock in the name of a trust, either on its behalf or on behalf of its subsidiary. Treasury stock effectively means a company holding shares of itself through a trust or subsidiary. Using treasury stock to shore-up net worth, consolidate promoter control, and raise funds by selling such shares will no longer be permitted. Treatment of existing treasury stock of companies is not dealt with.

Mandatory compliance with accounting standards

The Bill mandates that the accounting treatment in the scheme must comply with accounting standards. Certificate from statutory auditors has to be submitted along with the scheme. Hitherto, this requirement was applicable only to listed companies.

National Company Law Tribunal

The Bill proposes moving company law matters from the jurisdiction of the High Court to the National Company Law Tribunal.

Given the challenges surrounding the roll-out of NCLT as per the Companies (Second Amendment) Act, 2002, one needs to wait and see if it will be rolled out.

In a radical move, the Bill creates a threshold entitling only persons holding minimum of 10 per cent shares or 5 per cent of the total debt to object to a scheme.

This provision will address the issue of frivolous claims of shareholders/ creditors holding a negligible stake. Further, a requirement on all companies to furnish a valuation report to shareholders and creditors has been introduced.

On a conclusive note, although the Bill is progressive in its outlook by aligning law with commercial realities, impact of proposed provisions remains to be seen.

Ganesh Raju is Executive Director – Tax & regulatory Services, PwC India

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