Fast-Track Mergers and Demergers: A Simplified Guide to Navigate the Legal Landscape in India

Introduction

In today's fast-paced business environment, companies are increasingly turning to mergers and demergers as strategic tools to streamline operations, expand their reach, or restructure their business. However, the legal landscape surrounding these corporate transactions in India can be complex. This purpose herein is to simplify the intricacies of fast-track mergers and demergers in India, providing insights and step-by-step guidance to help businesses navigate the process with ease.

Understanding the Legal Framework

Mergers and demergers in India are governed by the Companies Act, 2013 ("the Act”), and the Companies (Compromises, Arrangements and Amalgamations) Rules, 2016. The Act provides a comprehensive framework for corporate restructuring, including mergers, amalgamations, and demergers. It lays down the legal requirements, procedures, and safeguards to ensure transparency and fairness in these transactions.

Under the Income-Tax Act, 1961, an amalgamation is defined as the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger), while a demerger refers to the transfer (as per the provisions of Act) of one or more undertakings from a company to another existing company or the formation of a new company. Both mergers and demergers can be undertaken through a fast-track process, which allows for expedited approvals and a streamlined procedure.

Types of Mergers and Demergers

Mergers and demergers can take various forms, depending on the objectives and structure of the transaction. The most common types of mergers are discussed below:

1.       Amalgamation: This involves the merger of two or more companies to form a new entity, with the assets, liabilities, and shareholders of the merging companies being transferred to the new entity. Further, amalgamation can be classified into the following categories for better understanding:

·         Horizontal merger: A horizontal merger is a merger between two or more companies that currently operate in the same industry and are a direct competitor of one another;

·         Vertical merger: A vertical merger is a merger whereby two or more companies, operating on different production process stages, want to combine their resources in order to form a new entity with end-to-end solutions; and

·         Conglomerate merger: In this type of merger two or more companies, working in two or more different industries, want to combine their resources in order to form a bigger and more diversified entity.

2.       Absorption: In this type of merger, one company acquires the assets, liabilities, and shareholders of another company, which is then dissolved.

3.       Consolidation: A consolidation merger occurs when two or more companies combine to form an entirely new entity, with the merging companies ceasing to exist.

We delve into the different types of demergers below:

1.       Vertical Demergers: This involves the separation of different business verticals or lines of business within a company, resulting in the creation of separate entities for each vertical.

2.       Horizontal Demergers: In a horizontal demerger, a company's business is divided into two or more separate entities, based on geographical location, product lines, or other relevant factors.

Fast-Track Merger or Demerger - Key Provisions and Regulations

When undertaking a fast-track merger or demerger in India, it is essential to be familiar with the key provisions and regulations governing these transactions. The Act provides guidelines on the process, including the following:

1.       Approval by Shareholders: The merger or demerger must be approved by the shareholders of the companies involved, through a special resolution passed at a general meeting.

2.       Approval by Creditors: If the merger or demerger affects the rights or interests of creditors, their approval must also be obtained. Creditors have the right to object to the transaction if it adversely affects their interests.

3.       Valuation and Accounting: The valuation of the merger or demerger can be evaluated through asset-based approach, income-based approach or market-based approach; depending upon the aforementioned approach selection the registered valuers on their unbiased assessment determine the price of shares and assets involved in the merger or demerger, as well as the accounting treatment of the transaction.

4.       Regulatory Approvals: Depending on the nature of the business and the entities involved, regulatory approvals from the authorities (such as the Competition Commission of India (CCI) and the Securities and Exchange Board of India (SEBI)) may be required depending upon the thresholds and criteria notified by these authorities from time to time.

Preparing for a Fast-Track Merger or Demerger

Thorough preparation is crucial to ensure a smooth and successful fast-track merger or demerger in India. Here are some key steps to keep in mind:

1.       Due Diligence: Conduct a comprehensive due diligence exercise to assess the financial, legal, and operational aspects of the companies involved. This will help identify any potential risks or liabilities that need to be addressed.

2.       Drafting the Scheme: Prepare a detailed scheme of merger or demerger, outlining the terms and conditions of the transaction, including the treatment of assets, liabilities, and shareholders.

3.       Obtaining Necessary Approvals: Seek the approval of the board of directors, shareholders, and creditors of the companies involved, as required by the Companies Act. Additionally, ensure compliance with any regulatory approvals that may be necessary.

4.       Drafting and Filing of Documents: Prepare the necessary documentation, including the scheme of merger or demerger, notices, resolutions, and agreements. These documents must be filed with the concerned Registrar of Companies (RoC) and other relevant authorities.

5.       Communication and Employee Engagement: Communicate the details of the merger or demerger to employees, ensuring transparency and addressing any concerns they may have. Engage with key stakeholders throughout the process to maintain goodwill and minimize disruptions.

Procedure for Fast-Track Mergers and Demergers

The procedure for fast-track mergers and demergers in India involves several stages and requires compliance with various legal requirements. Here is a step-by-step overview of the process:

1.       Approval of the Board of Directors: The board of directors of each company involved must approve the scheme of merger or demerger, along with any related agreements or documents.

2.       Approval of Shareholders and Creditors: The scheme must be approved by the shareholders and creditors of each company, through a special resolution passed at a general meeting.

3.       Application to the National Company Law Tribunal (NCLT): A joint application must be made to the NCLT for its approval of the scheme. The application must include the scheme, along with the necessary documents and affidavits.

4.       Approval by the NCLT: The NCLT will examine the application and may seek clarifications or modifications to the scheme. Once satisfied, it will pass an order approving the scheme.

5.       Filing of Order with the RoC: The order passed by the NCLT must be filed with the RoC within 30 days. The RoC will then issue a certificate of registration, confirming the merger or demerger.

6.       Post-Merger or Demerger Compliance: After the merger or demerger is completed, the companies involved must comply with any post-transaction requirements, such as changes in share capital, filing of financial statements, and updating statutory records.

Challenges and Considerations

While fast-track mergers and demergers offer several advantages, there are also challenges and considerations that need to be taken into account. Some of the key challenges include:

1.       Regulatory Complexities: Fast-track mergers and demergers require compliance with various regulatory requirements, including obtaining approvals from regulatory authorities. Failure to comply with these requirements can result in delays or even rejection of the transaction.

2.       Employee Concerns: Mergers and demergers can create uncertainty and anxiety among employees, who may be concerned about job security, changes in work culture, or potential redundancies. Effective communication and employee engagement are crucial to address these concerns.

3.       Integration and Synergy Realization: After the merger or demerger, integrating the operations, systems, and cultures of the companies involved can be a complex process. It is important to have a well-thought-out integration plan to ensure a smooth transition and realize the expected synergies.

4.       Legal and Financial Due Diligence: Conducting a thorough due diligence exercise is essential to identify any potential legal or financial risks associated with the companies involved. Failure to identify and address these risks can have significant implications post-transaction.

Some Fast-Track Mergers in India

1.       Tata Chemicals and Tata Global Beverages: In 2020, Tata Chemicals and Tata Global Beverages announced a merger to create a combined entity with a focus on consumer products. The merger aimed to leverage the synergies between the two companies and strengthen their market position.

2.       Adani Ports and Special Economic Zones (SEZ) and Gangavaram Port: In 2021, Adani Ports and SEZ acquired a controlling stake in Gangavaram Port, a major port in Andhra Pradesh. The acquisition aimed to expand Adani's presence in the port sector and strengthen its position as a leading port operator in India.

3.       PVR and INOX: The merger between India's top two cinema franchises, INOX and PVR, took place in 2022, creating the largest multiplex chain in the country with a whopping 1500 screens nationwide. The film industry and theatres faced significant challenges during the COVID-19 pandemic. By combining their forces, INOX and PVR aim to reduce rental costs, advertising revenues, and convenience fees for the newly formed entity known as PVR-INOX.

4.       Tata Air India with Vistara Airlines: In another major acquisition, the Tata Group took over Air India, the nationalized airline, in 2022. Tata Group announced its plans to merge Air India with Vistara, a joint venture between Singapore Airlines and Tata Sons. Air India has been grappling with financial difficulties, exacerbated by the travel restrictions imposed during the COVID-19 pandemic. However, Tata Group is determined to revive Air India and restore it to its former glory.

Such transactions can create value, drive growth, and enhance competitiveness in the business landscape.

Conclusion

Fast-track mergers and demergers offer companies in India a strategic avenue for growth, restructuring and expansion. While the legal regimes surrounding these transactions can be complex, this article provides not just an understanding of the legal framework, but also how to prepare for the transaction and overcome challenges along with a step-by-step guidance to help businesses navigate the process with ease.

By following these guidelines, businesses can empower themselves with the knowledge and insights needed to successfully navigate fast-track mergers and demergers in India.

Ruchika Tandon, Associate Partner and Mitul Gupta, Associate